Employment Agreement


                                                  Exhibit
      10.1(k)

    
 

    EMPLOYMENT
      AGREEMENT 

    (this
      “Agreement”) dated
      as
      of May 26, 2006, between COVALENCE
      SPECIALTY MATERIALS CORP.,
      a
      Delaware corporation (the “Company”)
      and
LAYLE
      K. SMITH
      (the
“Executive”).

     

    WHEREAS,
      the
      Company desires to employ the Executive and the Executive desires to be employed
      by the Company effective as of the Effective Date (as defined in Section 10(l)
      of this Agreement); 

     

    NOW
      THEREFORE,
      in
      consideration of the mutual covenants contained herein and other good and
      valuable consideration, the receipt and sufficiency of which are hereby
      acknowledged, the parties hereto agree as follows:

     

    Section
      1. Employment
      Period.

     

    The
      initial term of the Executive’s employment will commence on the Effective Date
      and end on the fifth anniversary of the Effective Date (the “Initial
      Employment Period”),
      unless terminated earlier pursuant to Section 3 of this Agreement; provided,
      however, that as of the expiration date of each of (i) the Initial Employment
      Period and (ii) if applicable, any Renewal Period (as defined below), the
      Employment Period will automatically be extended for a one-year period (each,
      a
“Renewal
      Period”),
      unless either party gives at least ninety (90) days written notice prior to
      such
      expiration date of its intention not to renew the Employment Period (the Initial
      Employment Period and each subsequent Renewal Period shall constitute the
“Employment
      Period”).
      The
      Employment Period shall automatically end upon termination of the Executive’s
      employment for any reason. Upon the Executive’s termination of employment with
      the Company for any reason, he shall immediately resign all positions (including
      directorships) with the Company or any of its subsidiaries or
      affiliates.

     

    Section
      2. Terms
      of
      Employment.

     

    (a) Position.
      During
      the Employment Period, the Executive
      shall
      serve as the Chief Executive Officer of the Company reporting to the Board
      of
      Directors of the Company (the “Board”)
      and
      perform such duties and responsibilities customary to such position. The
      Executive shall also serve as a member of the Board and as a member of the
      Board
      of Directors of Covalence Specialty Materials Holding Corp. (the “Parent
      Board”). At the request of the Company, the Executive shall also serve as an
      officer of any of its subsidiaries or affiliates without additional
      compensation.

     

    (b) Duties.
      During
      the Employment Period, the Executive agrees to devote all of his business time
      to the business and affairs of the Company and to use the Executive’s reasonable
      best efforts to perform the duties of a Chief Executive Officer and his
      responsibilities and obligations hereunder faithfully, effectively and
      efficiently. Notwithstanding the foregoing, nothing herein shall prohibit the
      Executive from (i) serving on civic or charitable boards or committees, (ii)
      delivering lectures or fulfilling speaking engagements, (iii) managing personal
      investments, so long as such

     

     


    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    


    
      (c) activities
        do
        not interfere with the performance of the Executive’s responsibilities hereunder
        and (iv) serving on the boards of directors of each of Longyer Realty
        Corporation and Minnesota Steel Industries until September 30, 2006.

    

     

    (d) Compensation.

     

    (i) Base
      Salary.
      During
      the Employment Period, the Executive shall receive an initial annual base salary
      in an amount equal to $600,000 (the “Annual
      Base Salary”),
      which
      shall be paid in accordance with the customary payroll practices of the Company.
      The Base Salary will be reviewed by the Board or the Compensation Committee
      of
      the Board (the “Compensation
      Committee”)
      or its
      designee annually. The Base Salary, as then increased, will be the “Base Salary”
for all purposes of this Employment Agreement.

     

    (ii) Bonuses.
      During
      the Employment Period, the Company shall establish an annual bonus plan for
      each
      fiscal year of the Company (the “Plan”)
      pursuant to which the Executive will be eligible to receive a target annual
      bonus in an amount equal to 75 percent of the Annual Base Salary (the
“Bonus”),
      which
      Bonus may be higher or lower than this percentage based on actual performance.
      With respect to the Company’s 2006 fiscal year, the Executive will be entitled
      to a pro-rated Bonus from the Effective Date to the end of such fiscal year
      (provided that the Executive remains employed by the Company) (the “2006
      Pro-Rata Bonus Period”)
      based
      on actual performance by the Company for the entirety of such fiscal year.
      The
      Board or the Compensation Committee will administer the Plan and establish
      performance objectives for each year. The Executive’s Bonus will be determined
      based on the achievement of performance objectives for the applicable year,
      provided that the Board and/or the Compensation Committee may provide
      discretionary bonuses to the Executive under the Plan. Unless the Executive
      is
      employed on the last day of the applicable performance period, the Executive
      will not be entitled to receive the Bonus upon the Company’s achievement of the
      specified performance objectives (subject to Section 4 of this Agreement);
      provided, however, the Compensation Committee may award such bonus to Executive.
      Except as provided for in Section 4 of this Agreement, the Bonus shall become
      payable on or before March 15 following the end of the applicable fiscal year
      provided that the Board or Compensation Committee finally determines (x) that
      the Company has achieved the applicable performance objectives and (y) the
      amount of Bonus that shall be paid to the Executive for the applicable Plan
      year. 

     

    (iii) Benefits.
      During
      the Employment Period, the Executive shall be entitled to participate in
      employee benefit plans generally made available to senior executives of the
      Company. 

     

    (iv) Expenses.
      During
      the Employment Period, the Executive shall be entitled to receive reimbursement
      for all reasonable expenses incurred by the Executive in performance of his
      duties hereunder provided that the Executive provides all necessary
      documentation in accordance with Company policy.

     

     


    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    


    
      (v)Vacation
        and
        Holidays.
        During
        the Employment Period, the Executive shall be entitled to four weeks per
        annum
        of paid vacation. 

    

     

    (vi) Relocation
      Benefits.
      In
      connection with the Executive’s commencement of employment with the Company
      hereunder and the Executive’s relocation to Princeton, New Jersey from Houston,
      Texas, the Company will reimburse the Executive in accordance with the Company’s
      standard relocation policy for all of the normal and customary relocation
      expenses the Executive incurs.

     

    (vii) Stock
      Options.
      The
      Executive and the Company acknowledge that on the Effective Date, the Parent
      shall grant the Executive stock options (the “Executive
      Options”)
      to
      purchase 91,772 shares of common stock of Covalence Specialty Materials Holding
      Corp. (the “Parent”)
      at an
      exercise price of $10.00 per share pursuant to the terms and conditions set
      forth in the Covalence Specialty Materials Holding Corp. 2006 Long-Term
      Incentive Plan (the “Long-Term
      Incentive Plan”).
      The
      Executive Options shall be subject to the terms of the Long-Term Incentive
      Plan
      and the Executive’s Non-Qualified Stock Option Agreement (attached hereto as
      Exhibit A).

     

    (viii) Investment.
      The
      Executive hereby agrees to purchase, as soon as reasonably practicable (but
      no
      later than three (3) business days) after
      the
      disposition of the portion of the Executive’s equity interests in Hexion LLC
      pursuant to the Securities Purchase Agreement by and among the Executive, Apollo
      and Hexion LLC (such date of purchase, the “Purchase
      Date”),
      61,212 shares of common stock of the Parent, par value $0.01 (the “Common
      Stock”),
      at a
      price of $10.00 per share and 1,017.097 shares of Series A Cumulative
      Non-Redeemable Perpetual Preferred Stock of the Company, liquidation preference
      $1,000 per share (the “Preferred
      Stock”),
      at a
      price of $1,038.639 per share (collectively, the “Purchased
      Shares”).
      The
      Purchased Shares shall be subject to the terms of the Long-Term Incentive Plan
      and the Executive’s Subscription Agreement (attached hereto as Exhibit B).


     

    (ix) Notwithstanding
      anything to the contrary herein, all of the Purchased Shares will be fully
      vested at the Effective Date and all Purchased Shares, all Executive Options
      and
      Common Stock held by the Executive pursuant to the exercise of the Executive
      Options will be subject to the terms and conditions of the Investor Rights
      Agreement by and among the Parent, the Executive, and other signatories thereto
      (the “Investor
      Rights Agreement”).

     

    Section
      3. Termination
      of Employment.

     

    (a) Death
      or Disability.
      The
      Executive’s employment shall terminate automatically upon the Executive’s death.
      If the Executive becomes subject to a Disability during the Employment Period
      (pursuant to the definition of Disability set forth below), the Company may
      give
      the Executive written notice in accordance with Sections 3(e) and 10(h) of
      its
      intention to terminate the Executive’s employment. For purposes of this
      Agreement, “Disability”
means
      (i) the Executive’s inability to engage in any substantial gainful activity by
      reason of any medically determinable physical or

     

     


    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    


    
      (ii)
        mental impairment which can be expected to result in death or can
        be
        expected to last for a continuous period of not less than 12 months, or (ii)
        the
        Executive is, by reason of any medically determinable physical or mental
        impairment which can be expected to last for a continuous period of not less
        than 12 months, receiving income replacement benefits for a period of not
        less
        than three months under an accident, disability or health plan covering
        employees of the Company. Whether the Executive has incurred a “Disability”
shall be determined by a physician jointly-selected by the Company or its
        insurers and the Executive (or the Executive’s legal
        representative).

    

     

    (b) Cause.
      The
      Executive’s employment may be terminated at any time by the Company for Cause.
      For purposes of this Agreement, “Cause” shall mean (i) the Executive’s
      commission of a felony or a crime of moral turpitude; (ii) the Executive’s
      willful commission of a material act of dishonesty involving the Company; (iii)
      the Executive’s material breach (which breach is not promptly cured) of his
      obligations hereunder or any other agreement entered into between the Executive
      and the Company or any of its subsidiaries or affiliates, including, without
      limitation, the Executive’s failure to purchase the Purchased Shares by the
      Purchase Date (as defined in Section 2(c)(vii) of this Agreement); (iv) the
      Executive’s willful failure to perform his duties; (v) the Executive’s material
      breach of the Company’s material policies or the material policies of the Parent
      or any of their respective subsidiaries (collectively, the “Affiliated
      Entities”
and
      each such entity an “Affiliated
      Entity”)
      or
      procedures that is not reasonably curable in the Company’s reasonable
      discretion; or (vi) any other willful misconduct by the Executive which causes
      material harm to the Company or any of the Affiliated Entities or their business
      reputation, including due to any adverse publicity. A termination will not
      be
      for “Cause” under (iii), (iv) or (v) above unless the Company shall have given
      the Executive 15 days’ prior written notice describing the alleged action(s) and
      then only if the Executive has not reasonably cured such actions (except in
      the
      case of actions that are not curable).

     

    (c) Termination
      Without Cause.
      The
      Company may terminate the Executive’s employment hereunder without Cause at any
      time upon thirty (30) days prior written notice.

     

    (d) Good
      Reason.
      The
      Executive’s employment may be terminated at any time by the Executive for Good
      Reason or without Good Reason upon thirty (30) days prior written notice. For
      purposes of this Agreement, “Good Reason” means voluntary resignation after any
      of the following actions are taken by the Company or any of its subsidiaries
      without the Executive’s consent: (i) a reduction in the Executive’s Annual Base
      Salary or Bonus potential (i.e., 75% of Base Salary) described in Section
      2(c)(ii) of this Agreement (but not including any diminution related to an
      across the board reduction applying to senior executives of the Company
      generally); (ii) the assignment to Executive by the Company of duties materially
      inconsistent with Executive’s duties as set forth in Section 2 hereof, or any
      material diminution of the Executive’s responsibilities, which for these
      purposes shall not include the failure to maintain the Executive as an officer
      of the Parent or a member of the Parent Board in the event that (x) the Company
      or any successor to the Company ceases to be owned by the

     

     

     


    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    


    Parent
      or
      any successor to the Parent or (y) the Parent or any successor to the Parent
      ceases to exist whether by merger or otherwise; or (iii) any other material
      breach by the Company of this Agreement; provided, however, that none of the
      events described in the foregoing clauses (i), (ii) or (iii) shall constitute
      Good Reason unless the Executive shall have notified the Company in writing
      describing the events which constitute Good Reason within sixty (60) days
      following the Executive’s knowledge of such events and then only if the Company
      shall have failed to cure such events within thirty (30) days after the
      Company’s receipt of such written notice.

     

    (e) Notice
      of Termination.
      Any
      termination by the Company for Cause or without Cause, or by the Executive
      for
      Good Reason or without Good Reason, shall be communicated by Notice of
      Termination to the other party hereto given in accordance with Section 10(h).
      For purposes of this Agreement, a “Notice of Termination” means a written notice
      which (i) indicates the specific termination provision in this Agreement relied
      upon, (ii) to the extent applicable, sets forth in reasonable detail the facts
      and circumstances claimed to provide a basis for termination of the Executive’s
      employment under the provision so indicated and (iii) if the Date of Termination
      (as defined below) is other than the date of receipt of such notice, specifies
      the termination date. The failure by the Executive or the Company to set forth
      in the Notice of Termination any fact or circumstance which contributes to
      a
      showing of Good Reason or Cause shall not waive any right of the Executive
      or
      the Company hereunder or preclude the Executive or the Company from asserting
      such fact or circumstance in enforcing the Executive’s or the Company’s rights
      hereunder.

     

    (f) Date
      of Termination.
“Date
      of Termination” means (i) if the Executive’s employment is terminated by the
      Company for Cause, without Cause or by reason of Disability, or by the Executive
      for Good Reason or without Good Reason, the date of receipt of the Notice of
      Termination or any later date specified therein pursuant to Section 3(e), as
      the
      case may be and (ii) if the Executive’s employment is terminated by reason of
      death, the date of death.

     

    Section
      4. Obligations
      of the Company upon Termination.

     

    (a) With
      Good Reason; Other Than for Cause.
      If
      during the Employment Period, the Company shall terminate the Executive’s
      employment other than for Cause or the Executive shall terminate his employment
      for Good Reason, then the Company will provide the Executive with the following
      severance payments and/or benefits:

     

    (i) The
      Company shall pay to the Executive in a lump sum (x) the Annual Base Salary
      through the Date of Termination to the extent not paid, and (y) to the extent
      not previously paid, the Bonus earned for any year prior to the year in which
      the Date of Termination occurs, to the extent that the Executive is employed
      on
      the last day of the applicable performance period and such Bonus shall be paid
      in accordance with the terms of the Plan (the “Accrued
      Obligations”);

     

     


    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    


     
      
      (ii) Starting
        as of
        the next applicable Company payroll date after the Date of Termination (provided
        that the Executive has complied with Section 4(d) of this Agreement), the
        Company will pay the Executive a monthly amount equal to (x) the Annual Base
        Salary, divided by (y) 12 (the “Severance
        Amount”),
        until
        the earlier of (A) the end of the 18th month following the Date of Termination
        (the “Severance
        Period”),
        and
        (B) the date, if any, the Executive violates the terms of this Agreement;
        provided however, that in the event that the Executive’s employment is
        terminated by the Company other than for Cause or by the Executive for Good
        Reason, in each case during the one-year period after a Change in Control
        of the
        Parent (as defined in the Long-Term Incentive Plan), the Severance Amount
        shall
        be equal to (xx) the Annual Base Salary, divided by (yy) 12, and the Severance
        Period shall be until the earlier of (AA) the end of the 24th month following
        the Date of Termination, and (BB) the date, if any, the Executive violates
        the
        terms of this Agreement;

    

     

    (iii) The
      Company will pay the Executive a prorated Bonus for the year in which
      termination occurs, based on actual performance for such year, the amount of
      which prorated Bonus, if any, shall be determined and paid on or before March
      15
      of the year immediately following the end of the year to which such Bonus
      relates and in accordance with the terms of the Plan; and

     

    (iv) During
      the Severance Period, the Company shall continue health and welfare benefits
      (excluding long-term disability coverage) to the Executive and, where
      applicable, the Executive’s dependents on the same terms that would have been
      provided to them had the Executive continued employment with the Company in
      accordance with the health and welfare benefits provided pursuant to Section
      2(c)(iii) of this Employment Agreement; provided,
      however,
      that,
      in the event the Executive becomes reemployed with another employer and is
      eligible to receive medical or other welfare benefits under any employer
      provided plan, the health and other welfare benefits described herein shall
      not
      be provided by the Company during such applicable period of eligibility.


     

    Notwithstanding
      the foregoing provisions of this Section 4(a), to the extent required in order
      to comply with Section 409A of the Code, amounts and benefits to be paid or
      provided under this Section 4(a) shall be paid or provided to the Executive
      on
      the first business day after the date that is six months following the Date
      of
      Termination. To the extent that the benefits to be provided to the Executive
      under Section 4(a)(v) are so delayed, the Executive shall be entitled to COBRA
      continuation coverage under Section 4980B of the Code (“COBRA Coverage”) during
      such period of delay, and the Company shall reimburse the Executive for any
      Company portions of such COBRA Coverage in the seventh month following the
      Date
      of Termination.

    


    (b) Death
      or Disability.
      If the
      Executive’s employment shall be terminated by reason of the Executive’s death or
      Disability, then the Company shall pay the Executive or his legal
      representatives within 30 days following such termination (A)
      the
      Accrued Obligations and (B) a lump sum payment equal to the Executive’s Annual
      Base Salary. Thereafter, the Company shall have no further obligation to the
      Executive, other than any indemnification rights he may have pursuant to Section
      9. 

     

     

     


    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    


     
      Notwithstanding the foregoing provisions of this Section 4(b), to the extent
      required in order to comply with Section 409A of the Code, amounts to be paid
      under this Section 4(b) shall be paid to the Executive on the first business
      day
      after the date that is six months following the Date of Termination.


     

    (c) Cause;
      Other than for Good Reason.
      If the
      Executive’s employment shall be terminated by the Company for Cause or by the
      Executive without Good Reason, then the Company shall have no further payment
      obligations to Executive other than for payment of the Annual Base Salary
      through the Date of Termination to the extent not paid. Thereafter, the Company
      shall have no further obligation to the Executive, other than any
      indemnification rights he may have pursuant to Section 9, provided, however,
      that the Company shall have no obligation to indemnify the Executive for any
      act
      resulting in his Termination for Cause.

     

    (d) Separation
      Agreement and General Release.
      The
      Company’s obligations to make payments under Sections 4(a) and 4(b) (other than
      the Accrued Obligations) will be conditioned on the Executive or his legal
      representatives executing and delivering a separation agreement and general
      release of the Company, and its subsidiaries and affiliated companies and their
      respective successors and assigns (and the officers and directors of such
      entities) in a form acceptable to the Company.

     

    Section
      5. Nondisclosure
      and Nonuse of Confidential Information.

     

    (a) The
      Executive shall not disclose or use at any time, either during the Employment
      Period or thereafter, any Confidential Information (as hereinafter defined)
      of
      which the Executive is or becomes aware, whether or not such information is
      developed by him, except to the extent that such disclosure or use is directly
      related to and required by the Executive’s performance in good faith of duties
      assigned to the Executive by the Company. The Executive will take all
      appropriate steps to safeguard Confidential Information in his possession and
      to
      protect it against disclosure, misuse, espionage, loss and theft. The Executive
      shall deliver to the Company upon the Date of Termination, or at any time the
      Company may request, all memoranda, notes, plans, records, reports, computer
      tapes and software and other documents and data (and copies thereof) relating
      to
      the Confidential Information or the Work Product (as hereinafter defined) of
      the
      business of the Company or any of its affiliates which the Executive may then
      possess or have under his control.

     

    (b) As
      used
      in this Agreement, the term “Confidential
      Information”
means
      information that is not generally known to the public (except for information
      known to the public because of the Executive’s violation of this Section 5) and
      that is used, developed or obtained by the Company (including its affiliates)
      in
      connection with its business, including, but not limited to, information,
      observations and data obtained by the Executive while employed by the Company
      or
      any predecessors thereof (including those obtained prior to the date of this
      Agreement) concerning (i) the business or affairs of the Company (or such
      predecessors), (ii) products or services, (iii) fees, costs and pricing
      structures, (iv) designs, (v) analyses, (vi) drawings, photographs and reports,
      (vii) computer software, including operating systems, applications
      and

     

     


    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    


     
      
      program
        listings, (viii) flow charts, manuals and documentation, (ix)
        data bases, (x) accounting and business methods, (xi) inventions, devices,
        new
        developments, methods and processes, whether patentable or unpatentable and
        whether or not reduced to practice, (xii) customers and clients and customer
        or
        client lists, (xiii) other copyrightable works, (xiv) all production methods,
        processes, technology and trade secrets, and (xv) all similar and related
        information in whatever form. Confidential Information will not include any
        information that has been published in a form generally available to the
        public
        prior to the date the Executive proposes to disclose or use such information.
        Confidential Information will not be deemed to have been published or otherwise
        disclosed merely because individual portions of the information have been
        separately published, but only if all material features comprising such
        information have been published in combination.

    

     

    (c) As
      used
      in this Agreement, the term “Work
      Product”
means
      all inventions, innovations, improvements, technical information, systems,
      software developments, methods, designs, analyses, drawings, reports, service
      marks, trademarks, trade names, logos and all similar or related information
      (whether patentable or unpatentable) which relates to the Company’s or any of
      its affiliates’ actual or anticipated business, research and development or
      existing or future products or services and which are conceived, developed
      or
      made by the Executive (whether or not during usual business hours and whether
      or
      not alone or in conjunction with any other person) while employed if and to
      the
      extent such Work Product results from any work performed for the Company, any
      use of the Company’s premises or property or any use of the Company’s
      Confidential Information) by the Company (including those conceived, developed
      or made prior to the date of this Agreement) together with all patent
      applications, letters patent, trademark, trade name and service mark
      applications or registrations, copyrights and reissues thereof that may be
      granted for or upon any of the foregoing.

     

    Section
      6. Non-Solicitation;
      Non-Compete.

     

    (a) During
      the period commencing on the Effective Date and ending on the second anniversary
      of the termination of the Executive’s employment for any reason (the
“Restricted
      Period”),
      the
      Executive shall not directly or indirectly (i) induce or attempt to induce
      any
      employee or independent contractor of the Company or any affiliate of the
      Company to leave the Company or such affiliate, or in any way interfere with
      the
      relationship between the Company or any such affiliate, on the one hand, and
      any
      employee or independent contractor thereof, on the other hand, (ii) hire any
      person who was an employee or independent contractor of the Company or any
      affiliate of the Company until twelve (12) months after such individual’s
      relationship with the Company or such affiliate has been terminated or (iii)
      induce or attempt to induce any customer (whether former or current), supplier,
      licensee or other business relation of the Company or any affiliate of the
      Company to cease doing business with the Company or such affiliate, or in any
      way interfere with the relationship between any such customer, supplier,
      licensee or business relation, on the one hand, and the Company or any
      affiliate, on the other hand.

     

     

     


    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    


    (b) The
      Executive acknowledges that, in the course of his employment with the Company
      and/or its affiliates and their predecessors, he has become familiar, or will
      become familiar, with the Company’s and its affiliates’ and their predecessors’
trade secrets and with other confidential information concerning the Company,
      its affiliates and their respective predecessors and that his services have
      been
      and will be of special, unique and extraordinary value to the Company and its
      affiliates. Therefore, the Executive agrees that, during the Restricted Period,
      the Executive shall not, directly or indirectly, own, manage, operate, control,
      be employed by (whether as an employee, consultant, independent contractor
      or
      otherwise, and whether or not for compensation) or render services to any
      person, firm, corporation or other entity, in whatever form, engaged in any
      business of the same type as any business in which the Company or any of the
      Affiliated Entities is engaged on the Date of Termination or in which they
      have
      proposed, on or prior to such date, to be engaged in on or after such date
      and
      in which the Executive has been involved to any extent (other than de minimis)
      at any time during the one (1) year period ending with the Date of Termination,
      in any locale of any country in which the Company or an Affiliated Entity
      conducts business.
      Notwithstanding
      the foregoing, it shall not be a violation of this Section 6(b) for the
      Executive to join a division or business line of a commercial enterprise with
      multiple divisions or business lines if such division or business line is not
      competitive with the businesses of the Company or any of the Affiliated
      Entities, provided that the Executive performs services solely for such
      non-competitive division or business line, and performs no functions on behalf
      of (and has no involvement with or direct or indirect responsibilities with
      respect to) businesses competitive with the businesses of the Company or any
      of
      the Affiliated Entities. Nothing herein shall prohibit the Executive from being
      a passive owner of not more than 4.9% of the outstanding equity interest in
      any
      entity which is publicly traded, so long as the Executive has no active
      participation in the business of such corporation.

     

    Section
      7. Severance
      Payments.

     

    In
      addition to the foregoing, and not in any way in limitation thereof, or in
      limitation of any right or remedy otherwise available to the Company, if the
      Executive violates any provision of the foregoing Sections 5 or 6, any severance
      payments then or thereafter due from the Company to the Executive shall be
      terminated immediately and the Company’s obligation to pay and the Executive’s
      right to receive such severance payments shall terminate and be of no further
      force or effect, if and when determined by a court of competent jurisdiction
      that the Executive has violated Sections 5 or 6 of this Agreement, in each
      case
      without limiting or affecting the Executive’s obligations under such Sections 5
      and 6 or the Company’s other rights and remedies available at law or equity.


     

    Section
      8. Executive’s
      Representations, Warranties and Covenants.

     

    (a) The
      Executive hereby represents and warrants to the Company that:

     

     

     


    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    


    (1)
      The
      Executive has all requisite power and authority to execute and deliver this
      Agreement and to consummate the transactions contemplated hereby, and this
      Agreement has been duly executed by the Executive;

     

    (2) the
      execution, delivery and performance of this Agreement by the Executive does
      not
      and will not, with or without notice or the passage of time, conflict with,
      breach, violate or cause a default under any agreement, contract or instrument
      to which the Executive is a party or any judgment, order or decree to which
      the
      Executive is subject;

     

    (3) The
      Executive is not a party to or bound by any employment agreement, consulting
      agreement, non-compete agreement, confidentiality agreement or similar agreement
      with any other person except for (i) the Executive’s Separation Agreement with
      Hexion Specialty Chemicals Inc. dated _________, (ii) the Executive’s
      confidentiality agreement with Longyer Realty Corporation and its related
      companies and (iii) the Executive’s agreements with Minnesota Steel
      Industries;

     

    (4) upon
      the
      execution and delivery of this Agreement by the Company and the Executive,
      this
      Agreement will be a legal, valid and binding obligation of the Executive,
      enforceable in accordance with its terms;

     

    (5) The
      Executive understands that Apollo
      Management V, LP (the “Investor”)
      and
      the Company will rely upon the accuracy and truth of the representations and
      warranties of the Executive set forth herein and the Executive consents to
      such
      reliance.

     

    (b) The
      Company hereby represents and warrants to the Executive that:

     

    (1) the
      Company has all requisite power and authority to execute and deliver this
      Agreement and to consummate the transactions contemplated hereby, and this
      Agreement has been duly executed by the Company;

     

    (2) the
      execution, delivery and performance of this Agreement by the Company does not
      and will not, with or without notice or the passage of time, conflict with,
      breach, violate or cause a default under any agreement, contract or instrument
      to which the Company is a party or any judgment, order or decree to which the
      Company is subject;

     

    (3) upon
      the
      execution and delivery of this Agreement by the Company and the Executive,
      this
      Agreement will be a legal, valid and binding obligation of the Company,
      enforceable in accordance with its terms; and

     

    (4) the
      Company understands that the Executive will rely upon the accuracy and truth
      of
      the representations and warranties of the Company set forth herein and the
      Company consents to such reliance.

     

    Section
      9. Indemnification.

     

    
      The
        Company shall indemnify the Executive to the maximum extent permitted under
        the
        General Corporate Law of Delaware for acts taken within the scope of his
        employment. To the extent that the Company obtains coverage under a director
        and
        officer indemnification policy, the Executive will be entitled to such coverage
        on a basis that is no less favorable than the coverage provided to any other
        officer or director of the Company.

    

     

     


    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    Section
      10. General
      Provisions.

     

    (a) Severability.
      It is
      the desire and intent of the parties hereto that the provisions of this
      Agreement be enforced to the fullest extent permissible under the laws and
      public policies applied in each jurisdiction in which enforcement is sought.
      Accordingly, if any particular provision of this Agreement shall be adjudicated
      by a court of competent jurisdiction to be invalid, prohibited or unenforceable
      under any present or future law, and if the rights and obligations of any party
      under this Agreement will not be materially and adversely affected thereby,
      such
      provision, as to such jurisdiction, shall be ineffective, without invalidating
      the remaining provisions of this Agreement or affecting the validity or
      enforceability of such provision in any other jurisdiction; furthermore, in
      lieu
      of such invalid or unenforceable provision there will be added automatically
      as
      a part of this Agreement, a legal, valid and enforceable provision as similar
      in
      terms to such invalid or unenforceable provision as may be possible.
      Notwithstanding the foregoing, if such provision could be more narrowly drawn
      so
      as not to be invalid, prohibited or unenforceable in such jurisdiction, it
      shall, as to such jurisdiction, be so narrowly drawn, without invalidating
      the
      remaining provisions of this Agreement or affecting the validity or
      enforceability of such provision in any other jurisdiction.

     

    (b) Entire
      Agreement.
      This
      Agreement, the Investor Rights Agreement, the Long-Term Incentive Plan, the
      Non-Qualified Stock Option Agreement and the Subscription Agreement embody
      the
      complete agreement and understanding among the parties hereto with respect
      to
      the subject matter hereof and supersede and preempt any prior understandings,
      agreements or representations by or among the parties, written or oral, which
      may have related to the subject matter hereof. 

     

    (c) Counterparts.
      This
      Agreement may be executed in separate counterparts, each of which is deemed
      to
      be an original and all of which taken together constitute one and the same
      agreement.

     

    (d) Successors
      and Assigns.
      

     

    (i) This
      Agreement is personal to the Executive and without the prior written consent
      of
      the Company shall not be assignable by the Executive otherwise than by will
      or
      the laws of descent and distribution. This Agreement shall inure to the benefit
      of and be enforceable by the Executive’s legal representatives.

     

    (ii) This
      Agreement shall inure to the benefit of and be binding upon the Company and
      its
      successors and assigns. The Company will require any successor (whether direct
      or indirect, by purchase, merger, consolidation or otherwise) to all or
      substantially all of the business and/or assets of the Company to assume
      expressly and agree to perform this Agreement in the same manner and to the
      same
      extent that the Company would be required to perform it if no such succession
      had 

     

     


    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    taken
      place. As used in this Agreement, “Company” shall mean the Company as
      hereinbefore defined and any successor to its business and/or assets as
      aforesaid which assumes and agrees to perform this Agreement by operation of
      law, or otherwise.

     

    (e) Governing
      Law.
      THIS
      AGREEMENT WILL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF
      THE
      STATE OF DELAWARE, WITHOUT GIVING EFFECT TO ANY CHOICE OF LAW OR CONFLICTING
      PROVISION OR RULE (WHETHER OF THE STATE OF DELAWARE OR ANY OTHER JURISDICTION)
      THAT WOULD CAUSE THE LAWS OF ANY JURISDICTION OTHER THAN THE STATE OF DELAWARE
      TO BE APPLIED. IN FURTHERANCE OF THE FOREGOING, THE INTERNAL LAW OF THE STATE
      OF
      DELAWARE WILL CONTROL THE INTERPRETATION AND CONSTRUCTION OF THIS AGREEMENT,
      EVEN IF UNDER SUCH JURISDICTION’S CHOICE OF LAW OR CONFLICT OF LAW ANALYSIS, THE
      SUBSTANTIVE LAW OF SOME OTHER JURISDICTION WOULD ORDINARILY APPLY.

     

    (f) Remedies.
      Each of
      the parties to this Agreement and any such person or entity granted rights
      hereunder whether or not such person or entity is a signatory hereto (including,
      without limitation, the Investor and its affiliates) shall be entitled to
      enforce its rights under this Agreement specifically to recover damages and
      costs for any breach of any provision of this Agreement and to exercise all
      other rights existing in its favor. The
      Executive further acknowledges and agrees that (x) the Executive’s breach
      of the provisions of Sections 5 and 6 of this Agreement will cause the Company
      irreparable harm, which cannot be adequately compensated by money damages,
      and
      (y) if the Company elects to prevent the Executive from breaching such
      provisions by obtaining an injunction against the Executive, there is a
      reasonable probability of the Company’s eventual success on the merits. The
      Executive consents and agrees that if the Executive commits any such breach
      or
      threatens to commit any breach, the Company shall be entitled to temporary
      and permanent injunctive relief from a court of competent jurisdiction, without
      posting any bond or other security and without the necessity of proof of actual
      damage,
      in
      addition to,
      and not
      in lieu of,
      such
      other remedies as may be available to the Company for such breach, including
      the
      recovery of money damages.
      Each
      party shall be responsible for paying its own attorneys’ fees, costs and other
      expenses pertaining to any judgment or verdict unless the court awards
      otherwise. 

    
 

    
      (g) Amendment
        and
        Waiver.
        The
        provisions of this Agreement may be amended and waived only with the prior
        written consent of the Company and the Executive and no course of conduct
        or
        failure or delay in enforcing the provisions of this Agreement shall be
        construed as a waiver of such provisions or affect the validity, binding
        effect
        or enforceability of this Agreement or any provision hereof.

    

     

    (h) Notices.
      Any
      notice provided for in this Agreement must be in writing and must be either
      personally delivered, transmitted via telecopier, mailed by first class mail
      (postage prepaid and return receipt requested) or sent by reputable overnight
      courier service (charges prepaid) to the recipient at the address below
      indicated or at such other address or to the attention of such other


     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    person
      as
      the recipient party has specified by prior written notice to the sending party.
      Notices will be deemed to have been given hereunder and received when delivered
      personally, when received if transmitted via telecopier, five days after deposit
      in the U.S. mail and one day after deposit with a reputable overnight courier
      service.

     

    If
      to the
      Company, to:

     

    Covalence
      Specialty Materials Corp.

    c/o
      The
      Apollo Group

    9
      West
      57th Street

    New
      York,
      New York 10019

    Facsimile:
      (212) 515-3288

    Attention:
      Robert Seminara

     

    with
      a
      copy (which shall not constitute notice) to:

     

    The
      Apollo Group

    9
      West
      57th Street

    New
      York,
      New York 10019

    Facsimile:
      (212) 515-3288

    Attention:
      Robert Seminara

    and

    Wachtell,
      Lipton, Rosen & Katz

    51
      West
      52nd
      Street

    New
      York,
      New York 10019

    Facsimile:
      (212) 403-2269

    Attention:
      Andrew J. Nussbaum, Esq.

     

    If
      to the
      Executive, to the Executive’s address set forth on the signature page
      hereto.

     

    (i) Section
      409A.
      If any
      compensation or benefits provided by this Employment Agreement may result in
      the
      application of Section 409A of the Code, the Company shall modify this
      Employment Agreement in the least restrictive manner

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    


    necessary
      in order to comply with the provisions of Section 409A, other applicable
      provision(s) of the Code and/or any rules, regulations or other regulatory
      guidance issued under such statutory provisions and, in each case, without
      any
      material diminution in the value of the payments to the Executive.

     

    (j) Withholding.
      The
      Company may withhold from any amounts payable or benefits to be provided to
      the
      Executive under this Employment Agreement or otherwise all Federal, state,
      city
      or other taxes and other amounts that the Company may reasonably determine
      are
      required to be withheld pursuant to any applicable law or
      regulation.

     

    (k) Survival
      of Representations, Warranties and Agreements.
      All
      representations, warranties and agreements contained herein shall survive the
      consummation of the transactions contemplated hereby indefinitely.

     

    (l) Effectiveness.
      This
      Agreement shall become binding and enforceable upon both parties upon the
      Company’s acceptance of this Agreement by delivery of notice of acceptance to
      the Executive and appointment of the Executive as Chief Executive Officer on
      or
      prior to June 30, 2006 (the date of such acceptance by the Company, the
“Effective
      Date”);
      provided, however, that the Executive shall be subject to the provisions of
      the
      last sentence of this Section 10(l). In the event (i) the Company, in its
      discretion, does not accept this Agreement and appoint the Executive as Chief
      Executive Officer as provided in the immediately foregoing sentence on or prior
      to June 30, 2006 or (ii) the Executive is unable to perform his duties hereunder
      or commits an act that constitutes Cause under Section 3(b) prior to the
      Company's acceptance of this Agreement and appointment of the Executive as
      Chief
      Executive Officer, none of the Investor, the Parent and the Company shall have
      any obligations to the Executive or his beneficiaries under this Agreement
      and
      this Agreement shall be of no force and effect. The Executive shall have no
      right to void this Agreement or his obligations hereunder unless and until
      the
      Company has not accepted this Agreement or has not appointed the Executive
      as
      Chief Executive Officer on or prior to June 30, 2006, and in the event of the
      Company's acceptance and appointment of the Executive as Chief Executive Officer
      on or prior to June 30, 2006, shall be bound by this Agreement.

     

    (n) Descriptive
      Headings.
      The
      descriptive headings of this Agreement are inserted for convenience only and
      do
      not constitute a part of this Agreement.

     

    (o) Construction.
      Where
      specific language is used to clarify by example a general statement contained
      herein, such specific language shall not be deemed to modify, limit or restrict
      in any manner the construction of the general statement to which it relates.
      The
      language used in this Agreement shall be deemed to be the language chosen by
      the
      parties to express their mutual intent, and no rule of strict construction
      shall
      be applied against any party.

     

    (p) Waiver
      of Jury Trial.
      EACH OF
      THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN
      ANY
      ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS
      AGREEMENT.

     

    [signature
      page follows]

    


     


    
      
        
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    IN
      WITNESS WHEREOF,
      the
      parties hereto have executed this Agreement as of the date first written
      above.

     

    
      	
              COVALENCE
                SPECIALTY MATERIALS CORP. 

            
	
              By:

            	
              /s/
                Marvin O. Schlanger

            
	 	
              Name:
                Marvin O. Schlanger

            
	 	
              Title:
                Chairman

            
	 
	 
	
              LAYLE
                K. SMITH

            
	 
	 
	
              Signature:

            	
              /s/
                Layle K. Smith

            
	 
	 
	
              Last
                address on the records of the Company.