Document:

exv10w26

EXHIBIT 10.26

THE 2011 INCENTIVE COMPENSATION PLAN OF HUNTINGTON INGALLS INDUSTRIES, INC.

SECTION I

PURPOSE

The purpose of this Plan is to promote the success of the Company and render its operations
profitable to the maximum extent by providing for the Senior Executives of the Company incentives
that continue to be dependent upon the overall successful performance of the Company. The Senior
Executives, for this purpose, are only those elected corporate officers who participate in making
the basic and strategic decisions which affect the corporate-wide performance of the Company,
together with those Senior Executives who are in charge of significant operating subsidiaries. The
Plan is designed to comply with the performance-based compensation exception under Section 162(m)
of the Internal Revenue Code of 1986, as amended.

SECTION II

DEFINITIONS

	 	1.	 	CODE—The Internal Revenue Code of 1986, as amended from time to time.
	 
	 	2.	 	COMMITTEE—The Compensation Committee of the Board of Directors of Huntington Ingalls
Industries, Inc. It shall be composed of not less than three members of the Board of
Directors, no one of whom shall be an officer or employee of the Company and it shall be
constituted so as to permit this Plan to comply with the “outside director” requirement of
Code section 162(m).
	 
	 	3.	 	COMPANY—Huntington Ingalls Industries, Inc. and such of its subsidiaries as are
consolidated in its consolidated financial statements.
	 
	 	4.	 	INCENTIVE COMPENSATION—Awards payable under this Plan.
	 
	 	5.	 	PERFORMANCE CRITERIA—Economic Earnings, and for purposes of this Plan, “Economic
Earnings” shall mean income from continuing operations before federal and foreign income
taxes and the cumulative effect of accounting changes and extraordinary items, less pension
income (or plus pension expense) plus amortization and impairment of goodwill and other
purchased intangibles, plus restructuring or similar charges to the extent they are
separately disclosed in the annual report.
	 
	 	6.	 	PERFORMANCE YEAR—The Year with respect to which an award of Incentive Compensation is
calculated and paid.
	 
	 	7.	 	PLAN—This 2011 Incentive Compensation Plan of Huntington Ingalls Industries, Inc.
	 
	 	8.	 	SECTION 162(m) OFFICER—A Participant who is a “covered employee” as defined in Section
162(m) of the Code with respect to an award of Incentive Compensation under the Plan for a
Performance Year.

 

 

	 	9.	 	YEAR—The fiscal year of Huntington Ingalls Industries, Inc.

SECTION III

PARTICIPATION

	 	1.	 	The persons eligible to receive Incentive Compensation awards under this Plan are
elected corporate officers of the rank of Vice President and above and the Presidents of
those consolidated subsidiaries that the Committee determines to be significant in the
overall corporate operations who are Section 162(m) Officers.

	 	2.	 	“Participant” is a person granted or eligible to receive an Incentive Compensation
award under this Plan.

	 	3.	 	Directors, as such, shall not participate in this Plan, but the fact that an elected
corporate officer or subsidiary President is also a Director shall not prevent his
participation.

	 	4.	 	The death of a Participant shall not disqualify him for an Incentive Compensation award
for the Performance Year in which he dies or the preceding Performance Year. In the case of
a deceased Participant, the Incentive Compensation, if any, determined for him for the
Performance Year by the Committee shall be paid to his spouse, children, or legal
representatives as directed by the Committee.

SECTION IV

INCENTIVE COMPENSATION APPROPRIATIONS AND AWARDS

	 	1.	 	The amount to be appropriated to the Plan with respect to a Performance Year shall
equal two and one-half percent (2.5%) of the Performance Criteria for such Performance
Year. The amount appropriated to the Plan for a Performance Year based on the Performance
Criteria set forth in this Paragraph 1, SECTION IV shall be referred to as the “Tentative
Appropriated Incentive Compensation” for such Performance Year.

	 	2.	 	The amount of the Tentative Appropriated Incentive Compensation for a Performance Year
may be reduced (but not increased) by the Committee, in its sole discretion, after taking
into account an appraisal of individual and overall Company performance in the attainment
of such predetermined financial and non-financial objectives as are selected by the
Committee and set forth in writing within the first 90 days of a Performance Year,
at a time when it is substantially uncertain whether a Participant will earn any amount of
Incentive Compensation. The amount appropriated to the Plan for a Performance Year by the
Committee under this Paragraph 2, SECTION IV shall be referred to herein as the
“Appropriated Incentive Compensation” for such Performance Year. In no event shall Incentive
Compensation payable to Participants for a Performance Year exceed the Appropriated
Incentive Compensation under the Plan for such Performance Year. Any Tentative Appropriated
Incentive Compensation for a Performance Year, which is not actually appropriated to the
Plan for such Year, shall be forfeited.

 

 

	 	3.	 	Incentive Compensation Awards to Section 162(m) Officer:

	 	(a)	 	Notwithstanding any other provisions of this Plan, any Incentive
Compensation award for a Performance Year under this Plan payable to a Section
162(m) Officer must satisfy the requirements of this Paragraph 3, SECTION IV.
The purpose of this Paragraph 3 is to ensure compliance by the Plan with the
requirements of Section 162(m) of the Code relating to performance-based
compensation. To the extent necessary to ensure that Incentive Compensation
awards comply with the requirements of Section 162(m) of the Code relating to
performance based compensation, Incentive Compensation awards to Section 162(m)
Officers under this Plan are subject to:

	 	(i)	 	Approval of this Plan and the criteria stated in Paragraph 3(b) of
this SECTION IV by the shareholders of Huntington Ingalls Industries, Inc.
following the Company’s spin-off from Northrop Grumman Corporation no later
than the first regularly scheduled meeting of the shareholders that occurs
more than twelve (12) months after the Company’s spin off from Northrop
Grumman Corporation;
	 
	 	(ii)	 	The maximum amount that may be awarded to any Section 162(m) Officer
under the Plan for any Performance Year as stated in Paragraph 3(b) of
this SECTION IV; and
	 
	 	(iii)	 	Approval of this Plan by the Committee following the Company’s
spin-off from Northrop Grumman Corporation and at or prior to the time any
Incentive Compensation awards are made to any Section 162(m) Officers.

	 	(b)	 	The maximum potential amount of Appropriated Incentive Compensation (as defined
in Paragraph 2 of this SECTION IV) payable to any Participant as an Incentive
Compensation award for any single Performance Year shall be limited to no more than
thirty percent (30%) for the CEO and seventeen and one-half percent (17.5%) for each of
the other up to four (4) Participants for such Performance Year.
	 
	 	(c)	 	The Performance Criteria established in Paragraph 5 of SECTION II on which
Incentive Compensation awards under the Plan are based shall first apply in the
Performance Year 2011.
	 
	 	(d)	 	Prior to the payment of any Incentive Compensation awards for a Performance
Year, the Committee shall make a determination and certification in writing as to
whether the Section 162(m) Officers have met the Performance Criteria, performance
goals, and any other material terms of the Plan for each Performance Year. The
Committee may, in its sole discretion, exercise negative discretion by reducing amounts
of Incentive Compensation awards to all or any of the Section 162(m) Officers from the
maximum potential awards payable by application of Paragraph 3(b) of this

 

 

	 	 	 	SECTION IV.
No such reduction shall increase the amount of the maximum award
payable to any other Section 162(m) Officer. The Committee shall determine the amount of
any reduction in a Section 162(m) Officer’s Incentive Compensation award on the basis of
such factors as it deems relevant, and it shall not be required to establish any
allocation or weighting component with respect to the factors it considers. The
Committee shall have no discretion to increase any Incentive Compensation award for a
Performance Year above the amount determined by application of Paragraph 3(b) of this
SECTION IV.

	 	4.	 	After the end of a Performance Year, in determining each Participant’s Incentive
Compensation award for such Year, the Committee may make a downward adjustment after
considering such factors as it deems relevant, which shall include but not be limited to
the following factors:

	 	(a)	 	The evaluation of the Participant’s performance during that Performance Year in
relation to the Participant’s predetermined objectives and the Participant’s
contribution during such Year to the success or profit of the Company.
	 
	 	(b)	 	The classification of the Participant’s position, relative to the position of
all Participants. The Committee shall make the final determination of each
Participant’s Incentive Compensation award for a Performance Year.

SECTION V

ADMINISTRATION OF THE PLAN

The Committee shall be responsible for the administration of the Plan. The Committee shall:

	 	1.	 	Interpret the Plan, make any rules and regulations relating to the Plan, determine
which consolidated subsidiaries are significant for the purpose of the first paragraph of
SECTION III, and determine factual questions arising in connection with the Plan, after
such investigation or hearing as the Committee may deem appropriate.

	 	2.	 	As soon as practicable after the close of each Performance Year and prior to the
payment of any Incentive Compensation for such Performance Year, review the performance of
each Participant and determine the amount of each Participant’s individual Incentive
Compensation award, if any, with respect to that Performance Year.

	 	3.	 	Have sole discretion in determining Incentive Compensation awards under the Plan,
except that in making awards the Committee may, in its discretion, request and consider the
recommendations of the Chief Executive Officer of the Company and others whom it may
designate.

Any decisions made by the Committee under the provisions of this SECTION V shall be conclusive and
binding on all parties concerned. Except as otherwise specifically provided in this Plan, the
provisions of this Plan shall be interpreted and administered by the Committee in a

 

 

manner
consistent with the requirements for exemption of Incentive Compensation awards granted to
Participants who are Section 162(m) Officers as “performance-based compensation”
under Code Section 162(m) and regulations and other interpretations issued by the Internal Revenue
Service thereunder.

SECTION VI

METHOD OF PAYMENT OF INCENTIVE COMPENSATION TO INDIVIDUALS

	 	1.	 	The amount of Incentive Compensation award determined for each Participant with respect
to a given Performance Year shall be paid in cash or in common stock of Huntington Ingalls
Industries, Inc. (“HII Common Stock”) or partly in cash and partly in HII Common Stock, as
the Committee may determine. Subject to any applicable deferred compensation election to
the contrary, payment of an Incentive Compensation award, in cash or in HII Common Stock,
with respect to a given Performance Year shall be made in a lump sum between February 15
and March 15 of the year following such Performance Year.

	 	2.	 	The Committee may impose such conditions, including forfeitures and restrictions, as
the Committee believes will best serve the interests of the Company and the purposes of the
Plan.

	 	3.	 	In making awards of HII Common Stock, the Committee shall first determine all Incentive
Compensation awards in terms of dollars. The total dollar amount of all Incentive
Compensation awards for a particular Performance Year shall not exceed the Appropriated
Incentive Compensation for that Performance Year under this Plan. In the case of Section
162(m) Officers, the total dollar amount of an Incentive Compensation award for a
particular Performance Year shall be no greater than the maximum potential awards payable
by application of Paragraph 3(b) of SECTION IV. After fixing the total amount of each
Participant’s Incentive Compensation award in terns of dollars, then if some or all of the
award is to be paid in HII Common Stock, the dollar amount of the Incentive Compensation
award so to be paid shall be converted into shares of HII Common Stock by using the fair
market value of such stock on the date such dollar amount was fixed. “Fair market value”
shall be the closing price of such stock on the New York Stock Exchange on the applicable
date, or, if no sales of such stock occurred on that date, then on the last preceding date
on which such sales occurred. No fractional share shall be issued.

	 	4.	 	If an Incentive Compensation award is paid in HII Common Stock, the number of shares
shall be appropriately adjusted for any stock splits, stock dividends, recapitalizations or
other relevant changes in capitalization effective after the date the applicable number of
shares is determined and prior to the date as of which the Participant becomes the record
owner of the shares received in payment of the award. All such adjustments thereafter shall
accrue to the Participant as the record owner of the shares.

	 	5.	 	HII Common Stock issued in payment of Incentive Compensation awards may, at the option
of the Board of Directors, be either originally issued shares or treasury shares, and any
such shares so issued shall count against the applicable limits of the Company’s 2011

 

 

	 	 	 	Long-Term Incentive Stock Plan or any successor equity compensation plan of the Company, as
the case may be.

	 	6.	 	Distribution of awards shall be governed by the terms and conditions applicable to such
awards, as determined by the Committee or its delegate. An award, the payment of which is
to be deferred pursuant to the terms of an employment agreement, shall be paid as provided
by the terms of such agreement. Awards or portions thereof deferred pursuant to the
[Huntington Ingalls Industries, Inc. Deferred Compensation Plan], the [Huntington Ingalls
Industries, Inc. Savings Excess Plan], or any other deferred compensation plan or deferral
arrangement shall be paid as provided in such plan or arrangement.

	 	7.	 	The Company shall have the right to deduct from all payments under this Plan any
federal, state, or local taxes required by law to be withheld with respect to such
payments.

	 	8.	 	No Participant or any other party claiming an interest in amounts earned under the Plan
shall have any interest whatsoever in any specific asset of the Company. To the extent that
any party acquires a right to receive payments under the Plan, such right shall be
equivalent to that of an unsecured general creditor of the Company.

	 	9.	 	The Committee shall have the exclusive right to interpret the provisions of this
SECTION VI, to determine all questions arising under it or in connection with its
administration, and to issue regulations and take actions implementing its provisions.

SECTION VII

AMENDMENT OR TERMINATION OF PLAN

The Board of Directors of the Company shall have the right to terminate or amend this Plan at any
time and to discontinue further appropriations thereto, except that that no amendment to the Plan
shall be made without the approval of the shareholders of Huntington Ingalls Industries, Inc. if
shareholder approval is required to preserve the exemption of Incentive Compensation awards granted
to Participants who are Section 162(m) Officers as “performance-based compensation” under Code
Section 162(m).

SECTION VIII

EFFECTIVE DATE

This Plan was first effective for Performance Years commencing in 2011. No appropriations will be
made, and no Incentive Compensation shall be paid, under the Plan for subsequent Performance Years
if the Plan is not approved by the shareholders of Huntington Ingalls Industries, Inc. in
accordance with Paragraph 3(a) of SECTION IV.

SECTION IX

RECOUPMENT

Any payment of an Incentive Compensation award is subject to recoupment pursuant to the Company’s
Policy Regarding the Recoupment of Certain Performance-Based Compensation

 

 

Payments as in effect
from time to time, and the Participant shall promptly make any reimbursement requested by the Board
of Directors of the Company or the Committee pursuant
to such policy with respect to any Incentive Compensation award payments. Further, the Participant
agrees, by accepting an Incentive Compensation award, that the Company and its
affiliates may deduct from any amounts it may owe the Participant from time to time (such as
wages or other compensation) to the extent of any amounts the Participant is required to reimburse
the Company pursuant to such policy with respect to the award.

SECTION X

MISCELLANEOUS

	 	1.	 	Participation in the Plan shall not constitute an agreement (1) of the Participant to
remain in the employ of and to render his/her services to the Company, or (2) of the
Company to continue to employ such Participant, and the Company may terminate the
employment of a Participant at any time with or without cause.

	 	2.	 	In the event any provision of the Plan shall be held illegal or invalid for any reason,
the illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan
shall be construed and enforced as if the illegal or invalid provision had not been
included.

	 	3.	 	All costs of implementing and administering the Plan shall be borne by the Company.

	 	4.	 	All obligations of the Company under the Plan shall be binding upon and inure to the
benefit of any successor to the Company, whether the existence of such successor is the
result of a direct or indirect purchase, merger, consolidation, or otherwise, of all or
substantially all of the business and/or assets of the Company.

	 	5.	 	The Plan, and any agreements hereunder, shall be governed by and construed in
accordance with the state of Delaware.

	 	6.	 	This Plan and the Incentive Compensation awards under the Plan are intended to comply
with (or be exempt from, as the case may be) Section 409A of the Code so as to avoid any
tax, penalty or interest under Section 409A of the Code. This Plan shall be construed,
operated and administered consistent with this intent.exv10w26

Exhibit 10.26

INDEMNIFICATION AGREEMENT

          THIS AGREEMENT (“Agreement”), which provides for indemnification, expense advancement
and other rights under the terms and conditions set forth, is made and entered into between Kips
Bay Medical, Inc., a Delaware corporation (the “Company”), and Arch C. Smith (“Indemnitee”). This
Agreement shall become effective and binding on the Company and Indemnitee upon Indemnitee’s
election to the Company’s Board of Directors (the “Effective Date”).

RECITALS

          WHEREAS, At the Effective Date, Indemnitee is serving as a director and/or officer of the
Company, and as such is performing a valuable service for the Company; and

          WHEREAS, competent and experienced persons are becoming increasingly reluctant to serve
publicly-held corporations as directors and/or officers or in other fiduciary capacities at the
request of their companies unless they are provided with adequate protection through liability
insurance and adequate company indemnification against risks of claims and actions against them
arising out of their service to the corporation; and

          WHEREAS, the Board of Directors has determined that the ability to attract and retain
qualified persons to serve as directors and/or officers is in the best interests of the Company and
its stockholders, and that the Company should act to assure such persons that there will be
adequate certainty of protection through insurance and indemnification against risks of claims and
actions against them arising out of their service to and activities on behalf of the Company; and

          WHEREAS, Section 145 of the General Corporation Law of Delaware permits the Company to
indemnify and advance expenses .to its officers and directors and to indemnify and advance expenses
to persons who serve at the request of the Company as directors, officers, employees, or agents of
other corporations or enterprises; and

          WHEREAS, the Company has adopted provisions in its Bylaws addressing indemnification and
advancement of expenses to its officers and directors, and providing that the Company may enter
into indemnification agreements which specify the rights and obligations of the Company and such
persons with respect to indemnification, advancement of expenses and related matters; and

          WHEREAS, the Company desires to have Indemnitee continue to serve in an Official Capacity (as
defined below), and Indemnitee desires to continue so to serve the Company, provided, and on the
express condition, that Indemnitee is furnished with the indemnity and other rights set forth in
this Agreement;

 

 

AGREEMENT

          Now, therefore, in consideration of Indemnitee’s service to the Company in Indemnitee’s
Official Capacity, the parties hereto agree as follows:

     1. Definitions. For purposes of this Agreement:

     (a) “Change of Control” means a change in control of the Company occurring after the Effective
Date of a nature that would be required to be reported in response to Item 5.01 of Current Report
on Form 8-K (or in response to any similar item on any similar schedule or form) promulgated under
the Securities Exchange Act of 1934 (the “Act”), whether or not the Company is then subject to such
reporting requirement; provided, however, that, without limitation, such a Change of Control shall
be deemed to have occurred if after the Effective Date (i) any “person” (as such term is used in
Sections 13(d) and 14(d) of the Act) becomes the “beneficial owner” (as defined in Rule 13d-3 under
the Act), directly or indirectly, of securities of the Company representing thirty percent (30%) or
more of the combined voting power of the Company’s then outstanding securities without the prior
approval of at least two-thirds of the members of the Board of Directors in office immediately
prior to such person attaining such percentage; (ii) the Company is a party to a merger,
consolidation, sale of assets or other reorganization, or a proxy contest, as a consequence of
which members of the Board of Directors in office immediately prior to such transaction or event
constitute less than a majority of the Board of Directors of the surviving corporation or parent
corporation (in the case of a merger in which the Company becomes a wholly-owned subsidiary of
another entity) thereafter; or (iii) during any period of two consecutive years, individuals who at
the beginning of such period constituted the Board of Directors (including for this purpose any new
director whose election or nomination for election by the Company’s shareholders was approved by a
vote of at least two-thirds of the directors then still in office who were directors at the
beginning of such period) cease for any reason to constitute at least a majority of the Board of
Directors.

     (b) “Official Capacity” means Indemnitee’s corporate status as an officer and/or director and
any other fiduciary capacity in which Indemnitee serves the Company, its subsidiaries and
affiliates, and any other entity which Indemnitee serves in such capacity at the request of the
Company’s CEO, its Board of Directors or any committee of its Board of Directors. For purposes of
this Agreement, Indemnitee’s Official Capacity shall include Indemnitee’s consent to be named as a
potential director of the Company in the Company’s Form S-l Registration Statement relating to its
initial public offering.

     (c) “Disinterested Director” means a director of the Company who is not and was not a party to
the Proceeding in respect of which indemnification or advancement of expenses is sought by
Indemnitee.

     (d) “Expenses” shall include all direct and indirect costs including, but not limited to,
reasonable attorneys’ fees, retainers, court costs, transcript costs, fees of experts, witness
fees, advisory fees, travel expenses, duplicating costs, printing and binding costs, telephone
charges, postage, delivery service fees, and all other disbursements or expenses of the types
customarily incurred in connection with investigating, prosecuting, defending (or preparing to
investigate, prosecute or defend) a Proceeding, or being or preparing to be a witness in a
Proceeding.

2

 

     (e) “Independent Counsel” means a law firm, or a member of a law firm, that is experienced in
matters of corporation law and neither presently is, nor in the past five (5) years has been,
retained to represent: (i) the Company or Indemnitee in any matter material to either such party,
or (ii) any other party to the Proceeding giving rise to a claim for indemnification hereunder.
Notwithstanding the foregoing, the term “Independent Counsel” shall not include any person who,
under the applicable standards of professional conduct then prevailing, would have a conflict of
interest in representing either the Company or Indemnitee in an action to determine Indemnitee’s
rights under this Agreement.

     (t) “Proceeding” includes any actual or threatened inquiry, investigation, action, suit,
arbitration, or any other such actual or threatened action or occurrence, whether civil, criminal,
administrative or investigative, whether or not initiated prior to the Effective Date, except a
proceeding initiated by an Indemnitee pursuant to Section 8 of this Agreement to enforce his or her
rights under this Agreement.

     2. Service by Indemnitee. Indemnitee will serve in Indemnitee’s Official Capacity faithfully
and to the best of Indemnitee’s ability so long as Indemnitee has or holds such Official Capacity.
Indemnitee may at any time and for any reason resign from Indemnitee’s Official Capacity (subject
to any other contractual obligation or any obligation imposed by operation of law).

     3. Indemnification.

     (a) General. Except as otherwise provided in this Agreement, the Company shall indemnify
Indemnitee to the fullest extent permitted by the Delaware General Corporation Law as such law may
from time to time be amended. Indemnitee shall be entitled to the indemnification provided in this
Section if, by reason of his or her Official Capacity, Indemnitee is a party or is threatened to be
made a party to any Proceeding or by reason of anything done or not done by Indemnitee in his or
her Official Capacity. The Company shall indemnify Indemnitee against all costs, judgments,
penalties, fines, liabilities, amounts paid in settlement by or on behalf of Indemnitee in any
Proceeding, and Expenses actually and reasonably incurred by Indemnitee in connection with such
Proceeding, if Indemnitee is determined to have met the standard of conduct set forth in Section
7(a).

     (b) Exceptions. Indemnitee shall receive no indemnification hereunder:

(i) to the extent such indemnification is expressly prohibited by Delaware law
or the public policies of Delaware, the United States of America or agencies of any
governmental authority in any jurisdiction governing the matter in question;

(ii) to the extent payment is actually made to Indemnitee for the amount to
which Indemnitee would otherwise have been entitled under this Agreement pursuant
to an insurance policy, or another indemnity agreement or arrangement from the
Company or other person or entity;

3

 

(iii) in connection with any Proceeding, or part thereof (including
claims and permissive counterclaims) initiated by Indemnitee, except a judicial
proceeding pursuant to Section 8 to enforce rights under this Agreement, unless the
Proceeding (or part thereof) was authorized by the Board of Directors of the
Company;

(iv) with respect to any Proceeding brought by or on behalf of the Company
against Indemnitee if Indemnitee failed to act in good faith and in a manner the
Indemnitee reasonably believed to be in or not opposed to the best interests of the
Company;

(v) with respect to any claim, issue, or matter as to which Delaware law
expressly prohibits such indemnification by reason of any adjudication of liability
of Indemnitee to the Company, unless and only to the extent that the Delaware Court
of Chancery, or the court in which such action or suit was brought, shall determine
upon application that, despite an adjudication of liability but in view of all the
circumstances of the case, Indemnitee is entitled to indemnification for such
Expenses as such court shall deem proper.

     4. Advancement of Expenses.

     (a) General. Except as otherwise provided in this Agreement, the Company shall advance
Expenses to Indemnitee to the fullest extent permitted by the Delaware General Corporation Law as
such law may from time to time be amended. Indemnitee shall be entitled to the advancement provided
in this Section if, by reason of his or her Official Capacity, Indemnitee is a party or is
threatened to be made a party to any Proceeding or by reason of anything done or not done by
Indemnitee in his or her Official Capacity. The Company shall advance to Indemnitee Expenses
actually and reasonably incurred by Indemnitee in connection with such Proceeding. Notwithstanding
the foregoing, unless otherwise determined pursuant to Section 5, the Company will not advance or
continue to advance Expenses to any person (except by reason of the fact that such person is or was
a director of the Company in which event this sentence will not apply) in any proceeding if a
determination is reasonably and promptly made (i) by the Board of Directors by a majority vote of
Disinterested Directors, even though less than a quorum (ii) if there are no Disinterested
Directors or the Disinterested Directors so direct, by Independent Counsel in a written opinion or
(iii) by a majority vote of a committee of Disinterested Directors designated by a majority vote of
Disinterested Directors, that the facts known to the decision-making party at the time such
determination is made demonstrate that such person acted in bad faith or in a manner that such
person did not believe to be in or not opposed to the best interests of the Company, or, with
respect to any criminal proceeding, that such person had reasonable cause to believe his conduct
was unlawful. To the extent it is determined that advancement of Expenses is appropriate,
advancement of expenses shall continue until it is finally determined, after all appeals by a court
of competent jurisdiction, that the indemnitee is not entitled to be indemnified
against expenses by the corporation as provided herein or otherwise; provided, however, that
in the event of a guilty plea by, or conviction of, the indemnitee, thereafter the Company may
continue, at its election, to advance expenses to indemnitee upon such terms and conditions, if
any, as the Board of Directors deems appropriate, but shall have no obligation to do so.

4

 

     (b) Undertaking In Connection With Request For Advancement. As a condition precedent to
the Company’s advancement of Expenses to Indemnitee, Indemnitee shall provide the Company with (a)
a written affirmation by such person of his or her good faith belief that he or she has met the
standard of conduct necessary for indemnification under §145 of the Delaware General
Corporation Laws, and (b) an undertaking, in substantially the form attached as Exhibit 1,
by or on behalf of Indemnitee to reimburse such amount if it is finally determined, after
all appeals by a court of competent jurisdiction that Indemnitee is not entitled to be indemnified
against such Expenses by the Company as provided by this Agreement or otherwise. Indemnitee’s
undertaking to reimburse any such amounts is not required to be secured.

     (c) Exceptions. The Company shall not be obligated to advance Expenses to Indemnitee with
respect to claims initiated or brought voluntarily by such Indemnitee and not by way of defense,
except (i) as set forth in Section 8(e); (ii) in specific cases if the Company’s Board of Directors
has approved the initiation or bringing of such a claim; or (iii) as otherwise required under
Section 145 of the DGCL.

     5. Indemnification for Expenses of Successful Party. Notwithstanding the limitations of any
other provisions of this Agreement, to the extent that Indemnitee is successful on the merits or
otherwise in defense of any Proceeding, or in defense of any claim, issue or matter therein,
including, without limitation, the dismissal of any action without prejudice, or if it is
ultimately determined that Indemnitee is otherwise entitled to be indemnified against Expenses,
Indemnitee shall be indemnified against all Expenses actually and reasonably incurred in connection
therewith. If Indemnitee is partially successful on the merits or otherwise in defense of any
Proceeding, such indemnification shall be apportioned appropriately to reflect the degree of
success.

     6. Indemnification for Expenses Incurred in Serving as a Witness. Notwithstanding any other
provisions of this Agreement, Indemnitee shall be entitled to indemnification and advancement
against all Expenses reasonably incurred for serving as a witness by reason of Indemnitee’s
Official Capacity in any Proceeding with respect to which Indemnitee is not a party.

     7. Determination of Entitlement to Indemnification.

     (a) Standard of Conduct. Except as provided in Section 5 above, Indemnitee shall be entitled
to indemnification pursuant to this Agreement only upon a determination that Indemnitee acted in
good faith and in a manner Indemnitee reasonably believed to be in or not opposed to the best
interests of the Company, and with respect to any criminal action or proceeding, had no reasonable
cause to believe that Indemnitee’s conduct was unlawful.

     (b) Manner of Determining Eligibility. Upon written request of the Indemnitee for
indemnification, the entitlement of Indemnitee to such requested indemnification shall be
determined by:

(i) the Board of Directors of the Company by a majority vote of Disinterested
Directors (defined above), whether or not such majority constitutes a quorum; or

5

 

(ii) a committee of Disinterested Directors designated by majority vote of
such Disinterested Directors, whether or not such majority constitutes a quorum; or

(iii) Independent Counsel (defined above) in a written opinion to the board of
directors, or designated committee of the Board, with a copy to Indemnitee, which
Independent Counsel shall be selected by majority vote of the Company’s directors
at a meeting at which a quorum is present, or a majority vote of the Disinterested
Directors, or Committee of Disinterested Directors; or

(iv) the Company’s stockholders, by a majority vote of those in attendance at
a meeting at which a quorum is present; or

(v) in the event that a Change of Control has occurred, by Independent Counsel
(selected by Indemnitee) in a written opinion to the Board of Directors of the
Company, a copy of which shall be delivered to the Indemnitee.

     (d) Change of Control. The Company agrees that if there is a Change in Control of the Company
(other than a Change in Control which has been approved by a majority of the Company’s Board of
Directors who were directors immediately prior to such Change in Control) then with respect to all
matters thereafter arising concerning the rights of the Indemnitee to indemnification under this
Agreement or any other agreements, Company Bylaw, provision in the Certificate of Incorporation or
any other document now or hereafter in effect relating to such indemnification, the Company shall
seek legal advice only from Independent Counsel selected by Indemnitee. The Company agrees to pay
the reasonable fees of the Independent Counsel referred to above and to indemnify fully such
counsel against any and all expenses (including attorneys’ fees), claims, liabilities and damages
arising out of or relating to this Agreement or its engagement pursuant hereto.

     (e) Payment of Costs of Determining Eligibility. The Company shall pay all costs associated
with its determination of Indemnitee’s eligibility for indemnification.

     (f) Presumptions and Effect of Certain Proceedings. The Secretary of the Company shall,
promptly upon receipt of Indemnitee’s request for indemnification, advise in writing the Board of
Directors or such other person or persons empowered to make the determination requested in Section
7(b), and the Company shall thereafter promptly make such determination or initiate the appropriate
process for making such determination. The termination of any Proceeding or of any claim, issue or
matter therein, by judgment, order, settlement or conviction, or upon a plea of nolo contendere or
its equivalent, shall not (except as otherwise expressly provided in this Agreement) of itself
adversely affect the right of Indemnitee to indemnification or create a presumption that Indemnitee
did not act in good faith and in a manner which Indemnitee reasonably believed to be in or not
opposed to the best interests of the Company or, with respect to any criminal Proceeding, that
Indemnitee had reasonable cause to believe that Indemnitee’s conduct was unlawful.

     8. Remedies of Indemnitee.

     (a) In the event that (i) a determination is made pursuant to Section 7 of this Agreement that
Indemnitee is not entitled to indemnification under this Agreement, (ii)

6

 

advancement of Expenses, to the fullest extent permitted by applicable law, is not timely
made pursuant to Section 4 of this Agreement, (iii) no determination of entitlement to
indemnification shall have been made pursuant to Section 7(b) or (c) of this Agreement within sixty
(60) days after receipt by the Company of the request for indemnification, (iv) payment of
indemnification is not made pursuant to Section 5 or 6 of this Agreement within fifteen (15)
business days after receipt by the Company of written request therefor, or (v) payment of
indemnification pursuant to Section 3 of this Agreement is not made within fifteen (15) business
days after a determination has been made that Indemnitee is entitled to indemnification, Indemnitee
shall be entitled to seek an adjudication by the United States District Court, District of
Minnesota, or the Ramsey County District Court in St. Paul, Minnesota, of Indemnitee’s right to
such indemnification or advancement of Expenses. The Company shall not oppose Indemnitee’s right to
seek any such adjudication.

     (b) In the event that a determination shall have been made pursuant to Section 7 of this
Agreement that Indemnitee is not entitled to indemnification, any judicial proceeding commenced
pursuant to this Section 8 shall be conducted in all respects as a de novo trial on the merits and
Indemnitee shall not be prejudiced by reason of that adverse determination. In any judicial
proceeding commenced pursuant to this Section 8, Indemnitee shall be presumed to be entitled to
indemnification under this Agreement and the Company shall have the burden of proving Indemnitee is
not entitled to indemnification or advancement of Expenses, as the case may be, and the Company may
not refer to or introduce into evidence any determination pursuant to Section 7 of this Agreement
adverse to Indemnitee for any purpose. If Indemnitee commences a judicial proceeding pursuant to
this Section 8, Indemnitee shall not be required to reimburse the Company for any advances pursuant
to Section 4 until a final determination is made with respect to Indemnitee’s entitlement to
indemnification (as to which all rights of appeal have been exhausted or lapsed).

     (c) Neither the failure of the Company (including by its directors or Independent Counsel) to
have made a determination prior to the commencement of any action pursuant to this Agreement that
indemnification is proper in the circumstances because Indemnitee has met the applicable standard
of conduct, nor an actual determination by the Company (including by its directors or Independent
Counsel) that Indemnitee has not met such applicable standard of conduct, shall be a defense to the
action or create a presumption that Indemnitee has not met the applicable standard of conduct. If a
determination shall have been made pursuant to Section 7 of this Agreement that Indemnitee is
entitled to indemnification, the Company shall be bound by such determination in any judicial
proceeding commenced pursuant to this Section 8, absent (i) a misstatement by Indemnitee of a
material fact, or an omission of a material fact necessary to make Indemnitee’s statement not
materially misleading, in connection with the request for indemnification, or (ii) a prohibition of
such indemnification under applicable law.

     (d) The Company shall be precluded from asserting in any judicial proceeding commenced
pursuant to this Section 8 that the procedures and presumptions of this Agreement are not valid,
binding and enforceable and shall stipulate in any such court or before any such arbitrator that
the Company is bound by all the provisions of this Agreement.

     (e) The Company shall indemnify and hold harmless Indemnitee to the fullest extent permitted
by law against all expenses (including reasonable attorneys’ fees) and, if requested by

7

 

an Indemnitee who has provided the affirmation and undertaking required by Section
4(b), shall (within ten (10) days after the Company’s receipt of such written request) advance to
Indemnitee, to the fullest extent permitted by applicable law, such expenses (including reasonable
attorneys’ fees) that are incurred by Indemnitee in connection with any judicial proceeding brought
by Indemnitee (i) to enforce Indemnitee’s rights under, or to recover damages for breach of, this
Agreement or any other indemnification agreement or provision of the Certificate of Incorporation,
or the Company’s Bylaws now or hereafter in effect; or (ii) for recovery or advances under any
insurance policy maintained by any person for the benefit of Indemnitee, to the full extent
Indemnitee ultimately is determined to be entitled to such indemnification, advance or insurance
recovery, as the case may be.

     (f) Notwithstanding anything in this Agreement to the contrary, no determination as to
entitlement to indemnification under this Agreement shall be required to be made prior to the final
disposition of the Proceeding.

     9. Continuation of Obligation of Company. All agreements and obligations of the Company
contained in this Agreement shall continue during the period of Indemnitee’s Official Capacity and
shall continue thereafter with respect to any Proceedings based on or arising out of Indemnitee’s
Official Capacity. This Agreement shall be binding upon all successors and assigns of the Company
(including any transferee of all or substantially all of its assets and any successor by merger or
operation of law) and shall inure to the benefit of Indemnitee’s heirs, personal representatives
and estate.

     10. Notification and Defense of Claim. Promptly after receipt by Indemnitee of notice of any
Proceeding, Indemnitee will notify the Company in writing of the commencement thereof; but the
omission so to notify the Company will not relieve it from any liability that it may have to
Indemnitee. Notwithstanding any other provision of this Agreement, with respect to any such
Proceeding of which Indemnitee notifies the Company:

     (a) Except as otherwise provided in Section 10(b), to the extent that it may
wish, the Company may, separately or jointly with any other indemnifying party, assume the defense
of the Proceeding. After notice from the Company to Indemnitee of its election to assume the
defense of the Proceeding, the Company shall not be liable to Indemnitee under this Agreement for
any Expenses subsequently incurred by Indemnitee except as otherwise provided below. Indemnitee
shall have the right to employ Indemnitee’s own counsel in such Proceeding, but the fees and
expenses of such counsel incurred after notice from the Company of its assumption of the defense
thereof shall be at the expense of Indemnitee unless (i) the employment of counsel by Indemnitee
has been authorized by the Company, (ii) Indemnitee shall have reasonably determined that there is
a conflict of interest between the Company and Indemnitee in the conduct of the defense of the
Proceeding, and such determination is supported by an opinion of qualified legal counsel addressed
to the Company, or (iii) the Company shall not within sixty (60) calendar days of receipt of notice
from Indemnitee in fact have employed counsel to assume the defense of the Proceeding.

     (b) The Company shall not be entitled to assume the defense of any Proceeding brought by or on
behalf of the Company, or as to which Indemnitee shall have made the determination provided for in
subparagraph (a)(ii) above.

8

 

     (c) Regardless of whether the Company has assumed the defense of a Proceeding, the
Company shall not be liable to indemnify Indemnitee under this Agreement for any amounts paid in
settlement of any Proceeding effected without the Company’s written consent, and the Company shall
not settle any Proceeding in any manner that would impose any penalty or limitation on, or require
any payment from, Indemnitee without Indemnitee’s written consent. Neither the Company nor
Indemnitee will unreasonably withhold its consent to any proposed settlement.

     (d) Until the Company receives notice of a Proceeding from Indemnitee, the Company shall have
no obligation to indemnify or advance Expenses to Indemnitee as to Expenses incurred prior to
Indemnitee’s notification of Company.

     11. Separability; Prior Indemnification Agreements. If any provision of this Agreement shall
be held to be invalid, illegal or unenforceable for any reason whatsoever (a) the validity,
legality and enforceability of the remaining provisions of this Agreement (including without
limitation, all portions of any paragraphs of this Agreement containing any such provision held to
be invalid, illegal or unenforceable, that are not by themselves invalid, illegal or unenforceable)
shall not in any way be affected or impaired thereby, and (b) to the fullest extent possible, the
provisions of this Agreement (including, without limitation, all portions of any paragraph of this
Agreement containing any such provision held to be invalid, illegal or unenforceable, that are not
themselves invalid, illegal or unenforceable) shall be construed so as to give effect to the intent
of the parties that the Company provide protection to Indemnitee to the fullest enforceable extent
provided for in this Agreement.

     12. Continuation After Cessation of Service. The indemnification provided under this Agreement
shall continue as to Indemnitee for any action such Indemnitee took or did not take while serving
in an Official Capacity even though the Indemnitee may have ceased to serve in such Official
Capacity.

     13. Non-attribution of Actions of Any Indemnitee to Any Other Indemnitee. For purposes of
determining whether Indemnitee is entitled to indemnification or advancement of Expenses by the
Company under this Agreement or otherwise, the actions or inactions of any other indemnitee or
group of indemnitees shall not be attributed to Indemnitee.

     14. Headings; References; Pronouns. The headings of the sections of this Agreement are
inserted for convenience only and shall not be deemed to constitute part of this Agreement or to
affect the construction thereof. References herein to section numbers are to sections of this
Agreement. All pronouns and any variations thereof shall be deemed to refer to the masculine,
feminine, neuter, singular or plural as appropriate.

     15. Other Provisions.

     (a) This Agreement shall be interpreted and enforced in accordance with the laws
of Delaware.

     (b) This Agreement may be executed in one or more counterparts, each of which shall for all
purposes be deemed to be an original but all of which together shall constitute one and the

9

 

same Agreement. Only one such counterpart signed by the party against whom
enforceability is sought needs to be produced as evidence of the existence of this Agreement.

     (c) This Agreement shall not be deemed an employment contract between the Company and
Indemnitee, and the Company shall not be obligated to continue Indemnitee in Indemnitee’s Official
Capacity by reason of this Agreement.

     (d) Upon a payment to Indemnitee under this Agreement, the Company shall be subrogated to the
extent of such payment to all of the rights of Indemnitee to recover against any person for such
liability, and Indemnitee shall execute all documents and instruments required and shall take such
other actions as may be necessary to secure such rights, including the execution of such documents
as may be necessary for the Company to bring suit to enforce such rights.

     (e) No supplement, modification or amendment of this Agreement shall be binding unless
executed in writing by both parties hereto. No waiver of any of the provisions of this Agreement
shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not
similar) nor shall such waiver constitute a continuing waiver.

     (f) The Company agrees to stipulate in any such court or before any such arbitrator that the
Company is bound by all the provisions of this Agreement and is precluded from making any
assertions to the contrary.

     (g) Indemnitee’s rights under this Agreement shall extend to Indemnitee’s spouse, members of
Indemnitee’s immediate family, and Indemnitee’s representative(s), guardian(s), conservator(s),
estate, executor(s), administrator(s), and trustee(s), (all of whom are referred to as “Related
Parties”), as the case may be, to the extent a Related Party or a Related Party’s property is
subject to a Proceeding by reason of Indemnitee’s Official Capacity.

     (h) Notwithstanding anything to the contrary set forth in Section 3(b)(ii) above, the Company
hereby acknowledges that Indemnitee may have certain rights to indemnification, advancement of
expenses and/or insurance provided by an investment fund with which Indemnitee may be affiliated
and certain of its affiliates (collectively, the “Fund Indemnitors”). The Company hereby agrees
that (i) it is the indemnitor of first resort (i.e., its obligations to Indemnitee are primary and
any obligation of the Fund Indemnitors to advance expenses or to provide indemnification for the
same expenses or liabilities incurred by Indemnitee are secondary), (ii) it shall be required to
advance the full amount of Expenses incurred by Indemnitee and shall be liable for the full amount
of all Expenses, judgments, penalties, fines and amounts paid in settlement to the extent legally
permitted and as required by the terms of this Agreement and the Company’s Certificate of
Incorporation or Bylaws (or any other agreement between the Company and Indemnitee), without regard
to any rights Indemnitee may have against the Fund Indemnitors, and (iii) it irrevocably waives,
relinquishes and releases the Fund Indemnitors from any and all claims against the Fund Indemnitors
for contribution, subrogation or any other recovery of any kind in respect thereof. The Company
further agrees that no advancement or payment by the Fund Indemnitors on behalf of Indemnitee with
respect to any claim for which Indemnitee has sought indemnification or advancement of Expenses
from the Company shall affect the foregoing and the Fund Indemnitors shall have a right of
contribution

10

 

and/or be subrogated to the extent of such indemnification, advancement or payment to all of
the rights of recovery of Indemnitee against the Company. The Company and Indemnitee agree that the
Fund Indemnitors are express third party beneficiaries of this Section 15(h).

[Remainder of page intentionally left blank]

11

 

     IN WITNESS WHEREOF, the parties hereto have executed this Agreement on and as of the day and
year first above written.

	 	 	 	 	 
	 	Kips Bay Medical, Inc.

 	 
	 	By:  	/s/ Manny Villafaña
 	 
	 	 	Name:  	Manny Villafaña 	 
	 	 	Title:  	Chief Executive Officer 	 
	 	 	 
	 	/s/ Arch C. Smith
 	 
	 	Indemnitee 	 

12

 

EXHIBIT 1

UNDERTAKING TO REPAY INDEMNIFICATION EXPENSES

     I,                                                             , agree to reimburse Kips Bay Medical,
Inc., a Delaware corporation (the “Company”), for
all expenses paid to me by the Company for my defense in any civil or criminal action, suit, or
Proceeding (as defined in my Indemnification Agreement with the Company), in the event, and to the
extent that it shall ultimately be determined that I am not entitled to be indemnified by the
Company for such expenses.

	 	 	 	 	 
	 	 	 
	 	Signature  	 	 
	 	 	 	 	 
	 	Typed Name  	
 	 
	 	 	 	 	 
	 	Office

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