Document:

Class B (2012-3) Terms Document

 Exhibit 4.1 

 
  

 
 DISCOVER CARD EXECUTION NOTE
TRUST 
 Issuer 
 and 
 U.S. BANK NATIONAL ASSOCIATION 

Indenture Trustee 

CLASS B(2012-3) TERMS DOCUMENT 
 Dated as of November 19, 2012 
 to 

AMENDED AND RESTATED INDENTURE SUPPLEMENT 
 Dated as of June 4, 2010 
 for the DiscoverSeries Notes 

to 
 INDENTURE

 Dated as of July 26, 2007 
  

 
  

 
  

 

 TABLE OF CONTENTS 

 

							
	 	  	 	  	Page	 
			
		  	 ARTICLE I

 
 Definitions and
Other Provisions of General Application
  
	  			
	 Section 1.01
	  	Definitions	  	 	1	  
	 Section 1.02
	  	Representations and Warranties of Issuer	  	 	7	  
	 Section 1.03
	  	Representations and Warranties of Indenture Trustee	  	 	8	  
	 Section 1.04
	  	Limitations on Liability	  	 	8	  
	 Section 1.05
	  	Governing Law	  	 	9	  
	 Section 1.06
	  	Counterparts	  	 	9	  
	 Section 1.07
	  	Ratification of Indenture and Indenture Supplement	  	 	9	  
			
		  	 ARTICLE II

 
 The Class
B(2012-3) Notes
	  			
	 Section 2.01
	  	Creation and Designation	  	 	9	  
	 Section 2.02
	  	Adjustments to Required Subordinated Percentages and Amount	  	 	9	  
	 Section 2.03
	  	Interest Payment	  	 	10	  
	 Section 2.04
	  	Notification of LIBOR	  	 	10	  
	 Section 2.05
	  	Payments of Interest and Principal	  	 	10	  
	 Section 2.06
	  	Form of Delivery of Class B(2012-3) Notes; Depository; Denominations	  	 	11	  
	 Section 2.07
	  	Delivery and Payment for the Class B(2012-3) Notes	  	 	11	  
	 Section 2.08
	  	Targeted Deposits to the Accumulation Reserve Account	  	 	11	  
	 Section 2.09
	  	Additional Issuances of Notes	  	 	11	  
	 Section 2.10
	  	Designation of Additional Amounts to be included in the Excess Spread Amount for the DiscoverSeries Notes	  	 	12	  
	 Section 2.11
	  	Variable Accumulation Period	  	 	13	  
	 Section 2.12
	  	Permitted Investments	  	 	13	  
		  	Exhibit	  			
			
		  	Exhibit A
                                         
           Form of Class B Note	  			
		  		  			

  
  

 THIS CLASS B(2012-3) TERMS DOCUMENT (this “Terms Document”), by and between
DISCOVER CARD EXECUTION NOTE TRUST, a statutory trust created under the laws of the State of Delaware (the “Issuer”), and U.S. BANK NATIONAL ASSOCIATION, a national banking association organized and existing under the laws of the
United States of America, as Indenture Trustee (the “Indenture Trustee”), is made and entered into as of November 19, 2012. 
 Pursuant to this Terms Document, the Issuer shall create a new Tranche of Class B Notes of the DiscoverSeries and shall specify the principal terms thereof. 

ARTICLE I 

Definitions and Other Provisions of General Application 
 Section 1.01 Definitions. For all purposes of this Terms Document, except as otherwise expressly provided or unless the context otherwise requires: 

(1) the terms defined in this Article have the meanings assigned to them in this Article, and include the plural as well as the singular;

 (2) all other terms used herein which are defined in the Indenture Supplement or the Indenture, either directly or by
reference therein, have the meanings assigned to them therein; 
 (3) all accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with generally accepted accounting principles and, except as otherwise herein expressly provided, the term “generally accepted accounting principles” with respect to any computation required or
permitted hereunder means such accounting principles as are generally accepted in the United States of America at the date of such computation; 
 (4) all references in this Terms Document to designated “Articles,” “Sections” and other subdivisions are to the designated Articles, Sections and other subdivisions of this Terms
Document; the words “herein,” “hereof” and “hereunder” and other words of similar import refer to this Terms Document as a whole and not to any particular Article, Section or other subdivision; 

(5) in the event that any term or provision contained herein shall conflict with or be inconsistent with any term or provision contained
in the Indenture Supplement or the Indenture, the terms and provisions of this Terms Document shall be controlling, but solely with respect to the Class B(2012-3) Notes; 
 (6) each capitalized term defined herein shall relate only to the Class B(2012-3) Notes and no other Tranche of Notes issued by the Issuer; 

(7) “including” and words of similar import will be deemed to be followed by “without limitation”; and 

(8) for purposes of determining any amount or making any calculation hereunder, such amount or calculation, (x) if specified to be
as of the first day of any Due Period, shall (a)

 
include any Notes issued during such Due Period as if such Notes had been outstanding on the first day of such Due Period and (b) give effect to any payments, deposits or other allocations
made on the Distribution Date related to the prior Due Period, and (y) if specified to be as of the close of business on the last day of any Due Period shall give effect to any payments, deposits or other allocations made on the related
Distribution Date. 
 “Accumulation Amount” means $20,833,333.34; provided, however, if the
commencement of the Accumulation Period is delayed in accordance with Section 2.11 hereof, the Accumulation Amount shall be determined in accordance with the definition of “Accumulation Amount” in the Indenture Supplement. 

“Accumulation Commencement Date” means November 1, 2014, or such later date as the Calculation Agent on behalf of
the Issuer determines in accordance with Section 2.11 hereof. 
 “Accumulation Period” has the meaning set
forth in the Indenture Supplement. 
 “Accumulation Period Length” means 12 months; provided,
however, if the commencement of the Accumulation Period is delayed in accordance with Section 2.11 hereof, the Accumulation Period Length shall be determined in accordance with the definition of “Accumulation Period Length” in
the Indenture Supplement. 
 “Accumulation Reserve Funding Period” shall not apply if the Calculation Agent on
behalf of the Issuer notifies the Indenture Trustee that it expects the Accumulation Period Length to be adjusted to one (1) month, and otherwise shall mean a period commencing on the first Distribution Date on which a condition in the right
column of the following table was in effect on the immediately preceding Distribution Date, if the Distribution Date is a Distribution Date described in the corresponding left column of the following table, and ending on the Distribution Date
immediately preceding the earlier to occur of: 
 (x) the Expected Maturity Date for the Class B(2012-3) Notes and 

(y) the Principal Payment Date on which the Outstanding Dollar Principal Amount of the Class B(2012-3) Notes is paid in full. 

 

			
	 Distribution Date:
	  	 Condition:

	(a) The Distribution Date occurring three (3) calendar months prior to the first scheduled Distribution Date of the Accumulation Period (as adjusted in accordance with
Section 2.11 hereof) and any following Distribution Date	  	No condition.
		
	(b) The Distribution Date occurring four (4) calendar months prior to the first scheduled Distribution Date of the Accumulation Period (as adjusted in accordance with
Section 2.11 hereof) and any following Distribution Date	  	The three-month rolling average Excess Spread Percentage is less than 4%.

  
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	(c) The Distribution Date occurring six (6) calendar months prior to the first scheduled Distribution Date of the Accumulation Period (as adjusted in accordance with Section 2.11
hereof) and any following Distribution Date	  	The three-month rolling average Excess Spread Percentage is less than 3%.
		
	(d) The Distribution Date occurring twelve (12) calendar months prior to the first scheduled Distribution Date of the Accumulation Period (as adjusted in accordance with
Section 2.11 hereof) and any following Distribution Date	  	The three-month rolling average Excess Spread Percentage is less than 2%.

 provided, however, if at any point the Accumulation Reserve Funding Period has not commenced because no condition
requiring funding has occurred or the Calculation Agent has determined that the Accumulation Period Length will be shortened to one (1) month, and subsequently a condition requiring funding occurs and the Calculation Agent determines that the
Accumulation Period Length will not be so shortened, the Accumulation Reserve Funding Period shall commence on the following Distribution Date. 
 “Class B(2012-3) Adverse Event” means the occurrence of any of the following: (a) an Early Redemption Event with respect to the Class B(2012-3) Notes or (b) an Event of Default
and acceleration of the Class B(2012-3) Notes; provided, however, that if the only such event to have occurred is an Excess Spread Early Redemption Event for which an Excess Spread Early Redemption Cure has occurred, a Class B(2012-3)
Adverse Event shall not be treated as continuing from and after the date of such cure. 
 “Class B(2012-3)
Note” means any Note, in the form set forth in Exhibit A hereto, designated therein as a Class B(2012-3) Note and duly executed and authenticated in accordance with the Indenture. 

“Class B(2012-3) Noteholder” means a Person in whose name a Class B(2012-3) Note is registered in the Note Register.

 “Class B(2012-3) Termination Date” means the earliest to occur of (a) the Principal Payment Date on
which the Outstanding Dollar Principal Amount of the Class B(2012-3) Notes is paid in full, (b) the Legal Maturity Date and (c) the date on which the Indenture is discharged and satisfied pursuant to Article VI thereof. 

“Encumbered Amount” means, for the Class B(2012-3) Notes, an amount equal to 

(a) the Nominal Liquidation Amount of the Class B(2012-3) Notes, divided by 

(b) the Nominal Liquidation Amount of all Tranches of Class B Notes in the DiscoverSeries, multiplied by 

  
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 (c) the aggregate Required Subordinated Amount of Class B Notes for all Tranches of
Class A Notes in the DiscoverSeries with a Required Subordinated Amount of Class B Notes greater than zero. 

“Encumbered Required Subordinated Amount of Class C Notes” means, for the Class B(2012-3) Notes, an amount equal to the
product of 
 (a) the Encumbered Amount for the Class B(2012-3) Notes, and 

(b) the Required Subordinated Percentage of Class C Notes (Encumbered) for the Class B(2012-3) Notes. 

“Encumbered Required Subordinated Amount of Class D Notes” means, for the Class B(2012-3) Notes, an amount equal to the
product of 
 (a) the Encumbered Amount for the Class B(2012-3) Notes and 

(b) the Required Subordinated Percentage of Class D Notes (Encumbered) for the Class B(2012-3) Notes. 

“Excess Spread Percentage” for any Distribution Date means a fraction, the numerator of which is the Excess Spread
Amount for such Distribution Date multiplied by 12 and the denominator of which is the sum of the Nominal Liquidation Amounts of all Tranches of DiscoverSeries Notes as of the first day of the related Due Period. 

“Expected Maturity Date” means November 16, 2015. 

“Indenture” means the Indenture dated as of July 26, 2007 between the Issuer and Indenture Trustee, as amended by
the First Amendment to Indenture, dated as of June 4, 2010, as such agreement may be further amended, supplemented, restated, amended and restated, replaced or otherwise modified from time to time. 

“Indenture Supplement” means the Amended and Restated Indenture Supplement dated as of June 4, 2010, for the
DiscoverSeries Notes, by and between the Issuer and the Indenture Trustee, as the same may be further amended, supplemented, restated, amended and restated, replaced or otherwise modified from time to time. 

“Initial Dollar Principal Amount” means $250,000,000, or such higher amount as is specified in any Notice of Additional
Issuance under Section 2.09 hereof. 
 “Interest Accrual Period” means, with respect to any Interest
Payment Date, the period from and including the previous Interest Payment Date (or, in the case of the first Interest Payment Date for any Class B(2012-3) Note, from and including the applicable Issuance Date) to but excluding such Interest Payment
Date. 
 “Interest Payment Date” means the fifteenth day of each month commencing in December 2012, or if such
fifteenth day is not a Business Day, the next succeeding Business Day. 

  
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 “Issuance Date” means November 19, 2012 with respect to all Class
B(2012-3) Notes issued on the date hereof and, with respect to any additional Class B(2012-3) Notes issued pursuant to Section 2.09 hereof, any Issuance Date specified in the Notice of Additional Issuance delivered thereunder. 

“Legal Maturity Date” means May 15, 2018. 
 “LIBOR” means, with respect to any LIBOR Determination Date, the rate for deposits in United States dollars with a duration comparable to the relevant Interest Accrual Period which
appears on Reuters Screen LIBOR01 as of 11:00 a.m., London time, on such day. If such rate does not appear on Reuters Screen LIBOR01, the rate will be determined by the Indenture Trustee on the basis of the rates at which deposits in United States
dollars are offered by major banks in the London interbank market, selected by the Indenture Trustee, at approximately 11:00 a.m., London time, on such day to prime banks in the London interbank market with a duration comparable to the relevant
Interest Accrual Period commencing on that day. The Indenture Trustee will request the principal London office of at least four banks to provide a quotation of its rate. If at least two such quotations are provided, the rate will be the arithmetic
mean of the quotations. If fewer than two quotations are provided as requested, the rate for that day will be the arithmetic mean of the rates quoted by four major banks in New York City, selected by the Trustee, at approximately 11:00 a.m., New
York City time, on that day for loans in United States dollars to leading European banks with a duration comparable to the relevant Interest Accrual Period commencing on that day. If LIBOR with respect to a LIBOR Determination Date is not determined
pursuant to the foregoing, LIBOR with respect to such LIBOR Determination Date will be LIBOR with respect to the immediately prior LIBOR Determination Date. 
 “LIBOR Business Day,” if applicable, shall mean a day other than a Saturday or a Sunday on which banking institutions in both the City of London, England and in New York, New York are not
required or authorized by law to be closed. 
 “LIBOR Determination Date” means the second LIBOR Business Day
immediately preceding the commencement of an Interest Accrual Period. 
 “Note Interest Rate” means LIBOR +
0.45% per annum, calculated on the basis of the actual number of days elapsed and a 360-day year. 
 “Notice of
Additional Issuance” has the meaning set forth in Section 2.09 hereof. 
 “Required Daily Deposit Target
Finance Charge Amount” means, for any day in a Due Period, an amount equal to the Class B Tranche Interest Allocation for the related Distribution Date; provided, however, that for purposes of determining the Required Daily Deposit
Target Finance Charge Amount on any day on which the Class B Tranche Interest Allocation cannot be determined because the LIBOR Determination Date for the applicable Interest Accrual Period has not yet occurred, the Required Daily Deposit Target
Finance Charge Amount shall be the Class B Tranche Interest Allocation determined based on a pro forma calculation made on the assumption that LIBOR will be LIBOR for the applicable period determined on the first day of such calendar month,
multiplied by 1.25. 

  
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 “Required Daily Deposit Target Principal Amount” means, for any day in a
Due Period, (i) if such Due Period is in the Accumulation Period for the Class B(2012-3) Notes, the Accumulation Amount, (ii) if such day is on or after the occurrence and during the continuance of a Class B(2012-3) Adverse Event, the
Nominal Liquidation Amount of the Class B(2012-3) Notes, and (iii) in all other circumstances, zero. 
 “Required
Subordinated Amount of Class C Notes” means, for the Class B(2012-3) Notes for any date of determination, an amount equal to the sum of 
 (a) the Unencumbered Required Subordinated Amount of Class C Notes for such Class B(2012-3) Notes and 
 (b) the Encumbered Required Subordinated Amount of Class C Notes for such Class B(2012-3) Notes; 

provided, however, that for any date of determination on or after the occurrence and during the continuation of a Class B(2012-3) Adverse Event,
the Required Subordinated Amount of Class C Notes for the Class B(2012-3) Notes will be the greater of 
 (x) the amount
determined above for such date of determination and 
 (y) the amount determined above for the date immediately prior to the
date on which such Class B(2012-3) Adverse Event shall have occurred. 
 “Required Subordinated Amount of Class D
Notes” means, for the Class B(2012-3) Notes for any date of determination, an amount equal to the sum of 
 (a) the
Unencumbered Required Subordinated Amount of Class D Notes for such Class B(2012-3) Notes and 
 (b) the Encumbered Required
Subordinated Amount of Class D Notes for such Class B(2012-3) Notes; 
 provided, however, that for any date of determination on or after
the occurrence and during the continuation of a Class B(2012-3) Adverse Event, the Required Subordinated Amount of Class D Notes for the Class B(2012-3) Notes will be the greater of 

(x) the amount determined above for such date of determination and 

(y) the amount determined above for the date immediately prior to the date on which such Class B(2012-3) Adverse Event shall have
occurred. 
 “Required Subordinated Percentage of Class C Notes (Encumbered) “ means, for the Class B(2012-3)
Notes, 127.272727%, subject to adjustment in accordance with Section 2.02. 
 “Required Subordinated Percentage of
Class C Notes (Unencumbered)” means, for the Class B(2012-3) Notes, 8.641975%, subject to adjustment in accordance with Section 2.02. 

  
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 “Required Subordinated Percentage of Class D Notes (Encumbered)” means, for
the Class B(2012-3) Notes, 218.181818%, subject to adjustment in accordance with Section 2.02. 
 “Required
Subordinated Percentage of Class D Notes (Unencumbered)” means, for the Class B(2012-3) Notes, 14.814815%, subject to adjustment in accordance with Section 2.02. 
 “Reuters Screen LIBOR01” means the display page currently so designated on the Reuters Screen (or such other page as may replace that page on that service for the purpose of displaying
comparable rates or prices). 
 “Specified Rating” means, for the Class B(2012-3) Notes, A2(sf) with respect to
Moody’s, A(sf) with respect to Standard & Poor’s and Asf with respect to Fitch. 
 “Stated Principal
Amount” means $250,000,000 or such higher amount as is specified in any Notice of Additional Issuance under Section 2.09. 
 “Targeted Accumulation Reserve Subaccount Deposit” means, with respect to any Distribution Date during the Accumulation Reserve Funding Period, an amount equal to (i) 0.5% of the
Outstanding Dollar Principal Amount of the Class B(2012-3) Notes as of the close of business on the last day of the related Due Period or (ii) any other amount designated by the Calculation Agent on behalf of the Issuer. 

“Unencumbered Amount” means, for the Class B(2012-3) Notes, an amount equal to the Nominal Liquidation Amount of the
Class B(2012-3) Notes minus the Encumbered Amount for the Class B(2012-3) Notes. 
 “Unencumbered Required Subordinated
Amount of Class C Notes” means, for the Class B(2012-3) Notes, an amount equal to the product of 
 (a) the Unencumbered
Amount for the Class B(2012-3) Notes and 
 (b) the Required Subordinated Percentage of Class C Notes (Unencumbered) for the
Class B(2012-3) Notes. 
 “Unencumbered Required Subordinated Amount of Class D Notes” means, for the Class
B(2012-3) Notes, an amount equal to the product of 
 (a) the Unencumbered Amount for the Class B(2012-3) Notes and 

(b) the Required Subordinated Percentage of Class D Notes (Unencumbered) for the Class B(2012-3) Notes. 

Section 1.02 Representations and Warranties of Issuer. The Issuer represents and warrants that: 

(a) the Issuer has been duly formed and is validly existing as a statutory trust in good standing under the laws of the State of Delaware,
and has full power and authority to execute and deliver this Terms Document and to perform the terms and provisions hereof; 

  
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 (b) the execution, delivery and performance of this Terms Document by the Issuer have been
duly authorized by all necessary corporate and statutory trust proceedings of any Beneficiary and the Owner Trustee, do not require any approval or consent of any governmental agency or authority, and do not and will not conflict with any material
provision of the Certificate of Trust or the Trust Agreement of the Issuer; 
 (c) this Terms Document is the valid, binding and
enforceable obligation of the Issuer, except as the same may be limited by receivership, insolvency, reorganization, moratorium or other laws relating to the enforcement of creditors’ rights generally or by general equity principles;

 (d) to the best of the Issuer’s knowledge, this Terms Document will not conflict with any law or governmental regulation
or court decree applicable to it; 
 (e) the Issuer is not required to be registered under the Investment Company Act;

 (f) all information heretofore furnished by the Issuer in writing to the Indenture Trustee for purposes of or in connection
with this Terms Document or any transaction contemplated hereby is, and all such information hereafter furnished by the Issuer in writing to the Indenture Trustee will be, true and accurate in every material respect or based on reasonable estimates
on the date as of which such information is stated or certified; and 
 (g) to the best knowledge of the Issuer, there are no
proceedings or investigations pending against the Issuer before any court, regulatory body, administrative agency, or other tribunal or governmental instrumentality having jurisdiction over the Issuer (A) asserting the invalidity of this Terms
Document, (B) seeking to prevent the consummation of any of the transactions contemplated by this Terms Document or (C) seeking any determination or ruling which in the Issuer’s judgment would materially and adversely affect the
performance by the Issuer of its obligations under this Terms Document or the validity or enforceability of this Terms Document. 
 Section 1.03 Representations and Warranties of Indenture Trustee. The Indenture Trustee represents and warrants and any successor trustee shall represent and warrant that: 

(a) The Indenture Trustee is organized, existing and in good standing under the laws of the United States of America; 

(b) The Indenture Trustee has full power, authority and right to execute, deliver and perform this Terms Document, and has taken all
necessary action to authorize the execution, delivery and performance by it of this Terms Document; and 
 (c) This Terms
Document has been duly executed and delivered by the Indenture Trustee. 
 Section 1.04 Limitations on Liability.

 (a) It is expressly understood and agreed by the parties hereto that (i) this Terms Document is executed and delivered by
the Owner Trustee not individually or personally but 

  
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solely as Owner Trustee under the Trust Agreement, in the exercise of the powers and authority conferred and vested in it, (ii) each of the representations, undertakings and agreements
herein made on the part of the Issuer is made and intended not as a personal representation, undertaking or agreement by the Owner Trustee but is made and intended for the purpose of binding only the Issuer, (iii) nothing herein contained will
be construed as creating any liability on the Owner Trustee individually or personally, to perform any covenant of the Issuer either expressed or implied herein, all such liability, if any, being expressly waived by the parties to this Terms
Document and by any Person claiming by, through or under them and (iv) under no circumstances will the Owner Trustee be personally liable for the payment of any indebtedness or expenses of the Issuer or be liable for the breach or failure of
any obligation, representation, warranty or covenant made or undertaken by the Issuer under this Terms Document or any related documents. 
 (b) None of the Indenture Trustee, the Owner Trustee, the Calculation Agent, any Beneficiary, the Depositor, any Master Servicer or any Servicer or any of their respective officers, directors, employees,
incorporators or agents will have any liability with respect to this Terms Document, and recourse may be had solely to the Collateral pledged to secure these Class B(2012-3) Notes under the Indenture, the Indenture Supplement and this Terms
Document. 
 Section 1.05 Governing Law. THIS TERMS DOCUMENT WILL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE
LAWS OF THE STATE OF NEW YORK, INCLUDING SECTION 5-1401 OF THE GENERAL OBLIGATION LAW, WITHOUT REFERENCE TO ANY CONFLICT OF LAW PROVISIONS THAT WOULD RESULT IN THE APPLICATION OF THE LAWS OF ANY OTHER STATE. 

Section 1.06 Counterparts. This Terms Document may be executed in any number of counterparts, each of which when so executed will
be deemed to be an original, but all such counterparts will together constitute but one and the same instrument. 
 Section 1.07
Ratification of Indenture and Indenture Supplement. As supplemented by this Terms Document, each of the Indenture and the Indenture Supplement is in all respects ratified and confirmed and the Indenture as supplemented by the Indenture
Supplement and this Terms Document shall be read, taken and construed as one and the same instrument. 
 ARTICLE II 

The Class B(2012-3) Notes 
 Section 2.01 Creation and Designation. There is hereby created a Tranche of Class B Notes to be issued pursuant to this Terms Document, the Indenture and the Indenture Supplement to be known as the
“DiscoverSeries Class B(2012-3) Notes.” 
 Section 2.02 Adjustments to Required Subordinated Percentages and
Amount. 
 (a) On any date, the Issuer may, at the direction of the Beneficiary, change the Required Subordinated Percentage
of Class C Notes (Encumbered), the Required Subordinated Percentage of Class C Notes (Unencumbered), the Required Subordinated Percentage of Class D Notes (Encumbered), and the Required Subordinated Percentage of Class D Notes (Unencumbered), in

  
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each case for the Class B(2012-3) Notes, without the consent of any Noteholders; provided that the Issuer has received written confirmation from each applicable Note Rating Agency that the change
in such percentage will not result in a Ratings Effect for any Tranche of Outstanding DiscoverSeries Notes. 
 (b) On any date,
the Issuer may, at the direction of the Beneficiary, replace all or a portion of the Required Subordinated Amount of Class C Notes or the Required Subordinated Amount of Class D Notes, in each case for the Class B(2012-3) Notes with a different form
of credit enhancement (including, without limitation, a cash collateral account, a letter of credit, a reserve account, a surety bond, an insurance policy or a collateral interest, or any combination thereof) and may add such definitions and other
terms and make such additional amendments to this Terms Document as shall be necessary for such replacement without the consent of any Noteholders, provided that the Issuer has received written confirmation from each applicable Note Rating
Agency that such replacement and such other amendments will not result in a Ratings Effect for any Tranche of Outstanding DiscoverSeries Notes. 
 Section 2.03 Interest Payment. For each Interest Payment Date, the amount of interest due with respect to the Class B(2012-3) Notes shall be an amount equal to 

 

	 	(i)	(A) a fraction, the numerator of which is the actual number of days in the related Interest Accrual Period and the denominator of which is 360, times

  

	 	    	(B) the Note Interest Rate in effect with respect to such related Interest Accrual Period, times 

 

	 	(ii)	the Outstanding Dollar Principal Amount of the Class B(2012-3) Notes determined as of the first date of such related Interest Accrual Period, plus

 any Class B Tranche Interest Allocation Shortfall for such Class B(2012-3) Notes for the immediately preceding Distribution
Date, together with interest thereon at the Note Interest Rate in effect with respect to such related Interest Accrual Period, calculated on the basis of the actual number of days in the related Interest Accrual Period and a 360-day year.

 Section 2.04 Notification of LIBOR. On each LIBOR Determination Date, the Indenture Trustee shall send to the Issuer,
the Beneficiary, each applicable Master Servicer and any stock exchange on which the Class B(2012-3) Notes are then listed (if the rules of such exchange so require), by facsimile transmission or electronic transmission, notification of LIBOR for
the following Interest Accrual Period. 
 Section 2.05 Payments of Interest and Principal. 

(a) The Issuer will cause interest to be paid on each Interest Payment Date and principal to be paid on the Expected Maturity Date;
provided, however, that it shall not be an Event of Default if principal is not paid in full on such Expected Maturity Date unless funds for such payment have been allocated in accordance with Section 3.01 of the Indenture
Supplement; and provided, further, that if a Class B(2012-3) Adverse Event has occurred and is continuing, 

  
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principal will instead be payable in monthly installments on each Principal Payment Date for the Class B(2012-3) Notes in accordance with Sections 3.01 and 3.05 of the Indenture Supplement. All
payments of interest and principal on the Class B(2012-3) Notes shall be made as set forth in Section 1102 of the Indenture. 
 (b) The right of the Class B(2012-3) Noteholders to receive payments from the Issuer will terminate on the Class B(2012-3) Termination Date. 

(c) All payments of principal, interest or other amounts to the Class B(2012-3) Noteholders will be made pro rata based on the
Stated Principal Amount of their Class B(2012-3) Notes. 
 Section 2.06 Form of Delivery of Class B(2012-3) Notes;
Depository; Denominations. 
 (a) The Class B(2012-3) Notes shall be delivered in the form of a Global Note which shall be a
Registered Note as provided in Section 204 of the Indenture. The form of the Class B(2012-3) Notes is attached hereto as Exhibit A. 
 (b) The Depository for the Class B(2012-3) Notes shall be The Depository Trust Company, and the Class B(2012-3) Notes shall initially be registered in the name of Cede & Co., its nominee.

 (d) The Class B(2012-3) Notes will be issued in minimum denominations of $200,000 and integral multiples of $1,000 in excess
of that amount. 
 Section 2.07 Delivery and Payment for the Class B(2012-3) Notes. The Issuer shall execute and deliver
the Class B(2012-3) Notes to the Indenture Trustee for authentication, and the Indenture Trustee shall deliver the Class B(2012-3) Notes when authenticated, each in accordance with Sections 203 and 303 of the Indenture. 

Section 2.08 Targeted Deposits to the Accumulation Reserve Account. The deposit targeted to be made to the Accumulation Reserve
Subaccount for the Class B(2012-3) Notes for any Due Period during the Accumulation Reserve Funding Period will be an amount equal to the Targeted Accumulation Reserve Subaccount Deposit minus any amount on deposit in the Accumulation Reserve
Subaccount for the Class B(2012-3) Notes. 
 Section 2.09 Additional Issuances of Notes. Subject to clauses (ii), (iii),
(iv) and (v) of Sections 2.02 and Section 2.03 of the Indenture Supplement, the Issuer may issue additional Class B(2012-3) Notes, so long as the following conditions precedent are satisfied: 

(a) the Issuer shall have given the Indenture Trustee written notice of such issuance of additional Class B(2012-3) Notes (the
“Notice of Additional Issuance”) at least one (1) Business Day in advance of the Issuance Date thereof, which notice shall include: 
  

	 	(i)	the Issuance Date of such additional Class B(2012-3) Notes; 

  
 11 

	 	(ii)	the amount of such additional Class B(2012-3) Notes being offered and the resulting Initial Dollar Principal Amount and Stated Principal Amount of Class B(2012-3)
Notes; 

  

	 	(iii)	the date from which interest on such additional Class B(2012-3) Notes will accrue (which may be a date prior to the date of issuance thereof); 

 

	 	(iv)	the first Interest Payment Date on which interest will be paid on such additional Class B(2012-3) Notes; and 

 

	 	(v)	any other terms that the Issuer set forth in such notice of issuance of additional Class B(2012-3) Notes to clarify the rights of Holders of such additional Class
B(2012-3) Notes or the effect of such issuance of additional Class B(2012-3) Notes on any calculations to be made with respect to the Class B(2012-3) Notes, Class B, or the Issuer. 

All such terms shall be incorporated into and form a part of this Terms Document on and after the effective date of such Class B(2012-3) Notes;

 (b) no Class B(2012-3) Adverse Event has occurred and is continuing; and 

(c) either (i) the issuance of such additional Class B(2012-3) Notes would be treated as part of the same issue as the outstanding
Class B(2012-3) Notes under Treasury Regulation Sections 1.1275-1(f)(1) or 1.1275-2(k), or (ii) such additional Class B(2012-3) Notes are not issued with “original issue discount” for purposes of Section 1273 of the Code.

 The Issuer shall not have to satisfy the conditions set forth in Section 310 of the Indenture in connection with an
issuance of additional Class B(2012-3) Notes so long as such conditions were satisfied or waived in connection with the initial issuance of Class B(2012-3) Notes; provided, however, that the Issuer shall have to deliver to the Indenture
Trustee a Master Trust Tax Opinion and an Issuer Tax Opinion with respect to such issuance. 
 Section 2.10 Designation of
Additional Amounts to be included in the Excess Spread Amount for the DiscoverSeries Notes. At any time that any outstanding Series of certificates issued by the Master Trust provides that the Series Principal Collections allocated to such
Series will be deposited into the Group Finance Charge Collections Reallocation Account for the Master Trust to the extent necessary for application to cover shortfalls for other Series issued by the Master Trust, an amount equal to (x) all
Series Principal Collections allocated to such Series, multiplied by (y) a fraction, the numerator of which is the sum of the Nominal Liquidation Amounts for each outstanding Tranche of the DiscoverSeries Notes (including the Class
B(2012-3) Notes and the denominator of which is (i) the Aggregate Investor Interest for the Master Trust minus (ii) the sum of the Series Investor Interests for all such Series that provide that the Series Principal Collections
allocated to such Series will be so deposited, is hereby designated to be included in the Excess Spread Amount and shall be treated as Series Finance Charge Amounts for the DiscoverSeries. 

  
 12 

 Section 2.11 Variable Accumulation Period. Notwithstanding anything to the contrary
in Section 4.02 of the Indenture Supplement, the Calculation Agent on behalf of the Issuer shall, by written notice to the Indenture Trustee, delay the commencement of the Accumulation Period for the Class B(2012-3) Notes and determine a new
Accumulation Commencement Date, subject to the conditions set forth in this Section 2.11; provided, however, that the Accumulation Period shall commence no later than the first day of the Due Period related to the Expected
Maturity Date for the Class B(2012-3) Notes. Any such delay by the Calculation Agent on behalf of the Issuer shall be made no later than the first day of the scheduled Due Period immediately preceding the first Due Period in the Accumulation Period
(after giving effect to any prior delay in the commencement of the Accumulation Period pursuant to this Section 2.11). 

The Calculation Agent on behalf of the Issuer shall cause such delay if the Calculation Agent determines in good faith that each of the
following conditions will be satisfied: (i) the Calculation Agent on behalf of the Issuer delivers to the Indenture Trustee a certificate to the effect that the Calculation Agent on behalf of the Issuer reasonably believes that, based on the
payment rate and the anticipated availability of Series Principal Amounts and Reallocated Principal Amounts, the delay in the commencement of the Accumulation Period for the Class B(2012-3) Notes will not result in any Tranche of Notes not being
paid in full on the relevant Expected Maturity Date; (ii) such delay is permitted under the Series 2007-CC Series Supplement or any other applicable agreement relating to any Additional Collateral Certificate; and (iii) the Accumulation
Amount, the Accumulation Commencement Date and the Accumulation Period Length shall have been adjusted. The Calculation Agent on behalf of the Issuer shall not be required to obtain confirmation from the applicable Note Rating Agencies that such
delay in the commencement of the Accumulation Period will not result in a Ratings Effect for any Tranche of Outstanding DiscoverSeries Notes, unless at the time of such delay there is a Tranche of Outstanding DiscoverSeries Notes, which were issued
prior to January 1, 2009 and for which the commencement of the Accumulation Period for such Tranche of Notes has already been delayed pursuant to Section 4.02 of the Indenture Supplement. If such confirmation from the applicable Note
Rating Agency is not required, the Calculation Agent on behalf of the Issuer shall provide written notice to each applicable Note Rating Agency in the event that the commencement of the Accumulation Period for the Class B(2012-3) Notes is delayed
pursuant to this Section 2.11. 
 Section 2.12 Permitted Investments. Notwithstanding anything to the contrary in the
Indenture or the Pooling and Servicing Agreement, with respect to the Class B(2012-3) Notes, for purposes of the definition of Permitted Investment, “Highest Rating” shall mean, with respect to Standard & Poor’s: 

(a) A-1 or AAA for funds on deposit in all Issuer Accounts other than Principal Funding Accounts; and 

(b) A-1+ or AAA for funds on deposit in Principal Funding Accounts. 

[Remainder of page intentionally blank; signature page follows] 

  
 13 

 IN WITNESS WHEREOF, the parties hereto have caused this Terms Document to be duly executed,
all as of the day and year first above written. 
  

			
	DISCOVER CARD EXECUTION NOTE TRUST,
    as Issuer
		
	By:	 	Wilmington Trust Company,
		 	    not in its individual capacity but solely as     Owner Trustee
		
	By:	 	  

		 	Name: Jennifer A. Luce
		 	Title: Vice President
		
		 	 U.S. BANK NATIONAL ASSOCIATION,
 as Indenture Trustee

		
	By:	 	  

		 	Name: Patricia M. Child
		 	Title: Vice President

 [Signature Page to Class B(2012-3) Terms Document] 

 FORM OF DISCOVERSERIES CLASS B(2012-3) NOTE 

UNLESS THIS NOTE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION (“DTC”),
TO THE ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY NOTE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR TO SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE
TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF,
CEDE & CO., HAS AN INTEREST HEREIN. 
 THE HOLDER OF THIS NOTE, BY ITS ACCEPTANCE HEREOF, AGREES THAT IT WILL NOT AT
ANY TIME INSTITUTE AGAINST THE ISSUER, ANY MASTER TRUST OR ANY SPECIAL PURPOSE ENTITY THAT ACTS AS A DEPOSITOR WITH RESPECT TO ANY MASTER TRUST OR THE ISSUER, OR JOIN IN ANY INSTITUTION AGAINST THE ISSUER, ANY MASTER TRUST OR ANY SPECIAL PURPOSE
ENTITY THAT ACTS AS A DEPOSITOR WITH RESPECT TO ANY MASTER TRUST OR THE ISSUER, ANY RECEIVERSHIP, INSOLVENCY, BANKRUPTCY OR SIMILAR PROCEEDINGS, OR OTHER PROCEEDINGS UNDER ANY UNITED STATES FEDERAL OR STATE BANKRUPTCY OR SIMILAR LAW IN CONNECTION
WITH ANY OBLIGATIONS RELATING TO THE NOTES, THE INDENTURE, ANY DERIVATIVE AGREEMENT, ANY SUPPLEMENTAL CREDIT ENHANCEMENT AGREEMENT AND ANY SUPPLEMENTAL LIQUIDITY AGREEMENT. 
 THE HOLDER OF THIS NOTE, BY ACCEPTANCE OF THIS NOTE, AND EACH HOLDER OF A BENEFICIAL INTEREST IN THIS NOTE, BY THE ACQUISITION OF A BENEFICIAL INTEREST THEREIN, AGREE TO TREAT THE NOTES AS INDEBTEDNESS
FOR APPLICABLE FEDERAL, STATE, AND LOCAL INCOME AND FRANCHISE TAX LAW AND FOR PURPOSES OF ANY OTHER TAX IMPOSED ON OR MEASURED BY INCOME. 
 DISTRIBUTIONS OF PRINCIPAL AND INTEREST TO THE HOLDER OF THIS CLASS B NOTE ARE SUBORDINATE TO THE PAYMENT ON EACH DISTRIBUTION DATE OF PRINCIPAL OF AND INTEREST ON THE CLASS A NOTES OF THE DISCOVERSERIES
AND THE PAYMENT OF CERTAIN OTHER AMOUNTS, TO THE EXTENT AND AS DESCRIBED IN THE INDENTURE AND INDENTURE SUPPLEMENT REFERRED TO HEREIN. 

					
	 REGISTERED
	  	 	$[•] *	  
	 No. 1
	  	 	CUSIP NO. 254683AZ8	  

 DISCOVER CARD EXECUTION NOTE TRUST 
 Floating Rate 
 DISCOVERSERIES CLASS B(2012-3) NOTE 

DISCOVER CARD EXECUTION NOTE TRUST, a statutory trust created under the laws of the State of Delaware (herein referred to as the
“Issuer” or the “Note Issuance Trust”), for value received, hereby promises to pay to CEDE & CO., or registered assigns, subject to the following provisions, a principal sum of $[•] ([•] dollars)
payable on the November 16, 2015 Payment Date (the “Expected Maturity Date”), except as otherwise provided below or in the Indenture or the Indenture Supplement (as defined on the reverse hereof); provided,
however, that the entire unpaid principal amount of this Note shall be due and payable on the May 15, 2018 Payment Date (the “Legal Maturity Date”). Interest will accrue on this Note at the rate of one-month LIBOR +
0.45% per annum, as more specifically set forth in the Class B(2012-3) Terms Document dated as of November 19, 2012 (the “Terms Document”), between the Issuer and U.S. Bank National Association, as Indenture Trustee (the
“Indenture Trustee”, which term includes any successor Indenture Trustee under the Indenture), and shall be due and payable on each Interest Payment Date from and including the previous Interest Payment Date (or, in the case of the
first Interest Payment Date for any Class B(2012-3) Notes, from and including the applicable Issuance Date) to but excluding such Interest Payment Date. Interest will be computed on the basis of the actual number of days elapsed and a 360-day year.
Such principal of and interest on this Note shall be paid in the manner specified on the reverse hereof. 
 The principal and
interest may be payable monthly, and may be payable earlier or later than the Expected Maturity Date, following an Event of Default or while an Early Redemption Event has occurred and is continuing. No principal or interest will be distributed on
the Note following the distribution of proceeds of a Receivables Sale. 
 Series Principal Amounts allocated to these Class
B(2012-3) Notes will be applied first to pay shortfalls in interest on Class A Notes, then to pay any shortfalls in Series Servicing Fees allocable to the DiscoverSeries, and then to make Targeted Principal Deposits to the Principal Funding
Subaccounts for Class A Notes, including Targeted Prefunding Deposits, before being applied to make Targeted Principal Deposits to the Principal Funding Subaccounts of Subordinate Notes, including these Class B(2012-3) Notes. Principal will not
be paid on these Class B(2012-3) Notes prior to their Legal Maturity Date unless the Class A Usage of Class B Notes is zero for all Tranches of Class A Notes of the DiscoverSeries and the required level of subordination for the
Class A Notes of the DiscoverSeries is available after giving effect to such payment. 
 The principal of and interest on
this Note are payable in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts. 
 The Initial Dollar Principal Amount of the Class B(2012-3) Notes is $250,000,000. 

  
 2 

 The Stated Principal Amount of the Class B(2012-3) Notes is $250,000,000. 

Reference is made to the further provisions of this Note set forth on the reverse hereof, which shall have the same effect as though
fully set forth on the face of this Note. 
 Unless the certificate of authentication hereon has been executed by the Indenture
Trustee whose name appears below by manual signature, this Note shall not be entitled to any benefit under the Indenture, Indenture Supplement or the Terms Document referred to on the reverse hereof, or be valid or obligatory for any purpose.

  
  

	*	Denominations of $200,000 and in integral multiples of $1,000 in excess thereof. 

  
 3 

 IN WITNESS WHEREOF, the Issuer has caused this instrument to be signed, manually or in
facsimile, by its Authorized Officer. 
  

			
	 DISCOVER CARD EXECUTION NOTE TRUST,
     as Issuer

		
	 By:
	 	WILMINGTON TRUST COMPANY, not in its individual capacity, but solely as Owner Trustee
		
	 By:
	 	  

		 	Name:
		 	Title:
		
		 	Date:

  
 4 

 INDENTURE TRUSTEE’S CERTIFICATE OF AUTHENTICATION 

This is one of the Notes designated above and referred to in the within-mentioned Indenture. 

 

			
	 US BANK NATIONAL ASSOCIATION,
   not in its individual capacity but solely as
   Indenture
Trustee

		
	 By:
	 	  

		 	Name:
		 	Title:
		
		 	Date:

  
 5 

 REVERSE OF NOTE 

This Note is one of the Notes of a duly authorized issue of Notes of the Issuer, designated as its Class B(2012-3) DiscoverSeries Notes
(herein called the “Class B(2012-3) Notes”), all issued under an Indenture dated as of July 26, 2007, as amended by the First Amendment to Indenture, dated as of June 4, 2010 (such Indenture, as may be further amended,
restated, amended and restated, supplemented, replaced or otherwise modified from time to time, is herein called the “Indenture”), as supplemented by an Amended and Restated Indenture Supplement for the DiscoverSeries Notes, dated
as of June 4, 2010 (such Indenture Supplement, as may be further amended, restated, amended and restated, supplemented, replaced or otherwise modified from time to time, is herein called the “Indenture Supplement”), between the
Issuer and Indenture Trustee, to which Indenture and Indenture Supplement reference is hereby made for a statement of the respective rights and obligations thereunder of the Issuer, the Indenture Trustee and the Holders of the Notes. The Class
B(2012-3) Notes are subject to all terms of the Indenture, the Indenture Supplement and the Terms Document. All terms used in this Class B(2012-3) Note that are defined in the Indenture, the Indenture Supplement and the Terms Document shall have the
meanings assigned to them in or pursuant to the Indenture, the Indenture Supplement and the Terms Document. 
 The Class A
Notes, the Class C Notes and the Class D Notes of the DiscoverSeries and other tranches of Class B Notes of the DiscoverSeries will also be issued under the Indenture and the Indenture Supplement. 

The Class B(2012-3) Notes are and will be equally and ratably secured by the collateral pledged as security therefor as provided in the
Indenture and the Indenture Supplement. 
 The Class B(2012-3) Notes are subordinated in right of payment of principal and
interest to the Class A Notes and provide loss protection to the Class A Notes of the DiscoverSeries, to the extent set forth in the Indenture Supplement. Principal Amounts allocable to the Notes may be applied to pay the Class A
Interest Allocation or the Series Servicing Fees of the DiscoverSeries, to the extent set forth in the Indenture Supplement. Principal of the Class B(2012-3) Notes will be payable on the Expected Maturity Date in an amount described on the face
hereof except as otherwise provided in the Indenture or the Indenture Supplement. 
 As described above, the entire unpaid
principal amount of this Class B(2012-3) Note shall be due and payable on the Legal Maturity Date. Notwithstanding the foregoing, the entire unpaid principal amount of the Class B(2012-3) Notes shall be due and payable on the date on which an Event
of Default relating to the Class B(2012-3) Notes shall have occurred and be continuing and, except in the event of an insolvency related default, the Indenture Trustee or the Majority Holders of the applicable Series, Class or Tranche of Outstanding
Dollar Principal Amount of the Outstanding Notes have declared the Class B(2012-3) Notes to be immediately due and payable in the manner provided in Section 702 of the Indenture; provided, however, that such acceleration of
the entire unpaid principal amount of the Notes may be rescinded by the Majority Holders of such applicable Series, Class or Tranche of Notes. 
 On any day occurring on or after the date on which the aggregate Nominal Liquidation Amount of any Tranche of Notes is reduced to less than 5% of its highest Outstanding Dollar Principal Amount, the
Depositor or any Affiliate thereof has the right, but not the obligation, to redeem such Tranche of Notes in whole but not in part, pursuant to Section 1202 of the Indenture. The redemption price will be an amount equal to the
Outstanding Dollar Principal 

  
 6 

 
Amount of such Tranche, plus accrued, unpaid and additional interest or principal accreted and unpaid on such Tranche to but excluding the date of redemption. 

Subject to the terms and conditions of the Indenture, the Beneficiary, on behalf of the Note Issuance Trust, may from time to time issue,
or direct the Owner Trustee, on behalf of the Note Issuance Trust, to issue, one or more Series, Classes or Tranches of Notes. 

On each Payment Date, the Paying Agent shall distribute to each Holder of Class B(2012-3) Notes of record on the related Record Date
(except for the final distribution with respect to this Class B(2012-3) Note) such Holder’s pro rata share of the amounts held by the Paying Agent that are allocated and available on such Payment Date to pay interest and principal on the
Class B Notes. 
 Payments of interest on this Class B(2012-3) Note due and payable on each Payment Date, together with any
installment of principal, if any, to the extent not in full payment of this Class B(2012-3) Note, shall be made by check mailed to the Person whose name appears as the Registered Holder of this Class B(2012-3) Note on the Note Register as of the
close of business on each Record Date, except that with respect to Class B(2012-3) Notes registered on the Record Date in the name of the nominee of the clearing agency (initially, such nominee to be CEDE & CO.), payments will be made by
wire transfer in immediately available funds to the account designated by such nominee. Such checks shall be mailed to the Person entitled thereto at the address of such Person as it appears on the Note Register as of the applicable Record Date
without requiring that this Class B(2012-3) Note be submitted for notation of payment. Any reduction in the principal amount of this Class B(2012-3) Note (or any one or more Predecessor Notes) effected by any payments made on any Payment Date shall
be binding upon all future Holders of this Class B(2012-3) Note and of any Class B(2012-3) Note issued upon the registration of transfer hereof or in exchange hereof or in lieu hereof, whether or not noted hereon. If funds are expected to be
available, as provided in the Indenture, for payment in full of the then remaining unpaid principal amount of this Class B(2012-3) Note on a Payment Date, then the Indenture Trustee, in the name of and on behalf of the Issuer, will notify the Person
who was the Registered Holder hereof as of the Record Date preceding such Payment Date by notice mailed within five days of such Payment Date and the amount then due and payable shall be payable only upon presentation and surrender of this Class
B(2012-3) Note at the Indenture Trustee’s principal Corporate Trust Office or at the office of the Indenture Trustee’s agent appointed for such purposes located in the City of New York. On any payment of interest or principal being made,
details of such payment shall be entered by the Indenture Trustee on behalf of the Issuer in Schedule A hereto. 
 As provided
in the Indenture and subject to certain limitations set forth therein and as set forth in the first legend on the face hereof, the transfer of this Class B(2012-3) Note may be registered on the Note Register upon surrender of this Class B(2012-3)
Note for registration of transfer at the office or agency designated by the Issuer pursuant to the Indenture, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Indenture Trustee duly executed by, the
Holder hereof or his attorney duly authorized in writing, with such signature guaranteed by a commercial bank or trust company located, or having a correspondent located, in the City of New York or the city in which the Corporate Trust Office is
located, or a member firm of a national securities exchange, and such other documents as the Indenture Trustee may require, and thereupon one or more new Class B(2012-3) Notes of authorized denominations and in the same aggregate principal amount
will be issued to the designated 

  
 7 

 
transferee or transferees. No service charge will be charged for any registration of transfer or exchange of this Class B(2012-3) Note, but the transferor may be required to pay a sum sufficient
to cover any tax or other governmental charge that may be imposed in connection with any such registration of transfer or exchange. 
 To the fullest extent permitted by applicable law, each Noteholder or Note Owner, by acceptance of a Class B(2012-3) Note or, in the case of a Note Owner, a beneficial interest in a Class B(2012-3) Note,
covenants and agrees that by accepting the benefits of the Indenture it will not at any time institute against the Issuer, any Master Trust or any special purpose entity that acts as a depositor with respect to any Master Trust or the Issuer, or
join in any institution against the Issuer, any Master Trust or any special purpose entity that acts as a depositor with respect to any Master Trust or the Issuer of, any receivership, insolvency, bankruptcy or other similar proceedings, or other
proceedings under any United States federal or state bankruptcy or similar law in connection with any obligations relating to the Notes, the Indenture, any Derivative Agreement, any Supplemental Credit Enhancement Agreement and any Supplemental
Liquidity Agreement. 
 Prior to the due presentment for registration of transfer of this Class B(2012-3) Note, the Issuer, the
Indenture Trustee and any agent of the Issuer or the Indenture Trustee may treat the Person in whose name this Class B(2012-3) Note (as of the day of determination or as of such other date as may be specified in the Indenture) is registered as the
owner hereof for all purposes, whether or not this Class B(2012-3) Note be overdue, and neither the Issuer, the Indenture Trustee nor any such agent shall be affected by notice to the contrary. 

The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and
obligations of the Issuer and the rights of the Holders of the Notes under the Indenture at any time by the Issuer with the consent of the Holders of Notes representing not less than 66 2/3% of the Outstanding Dollar Principal Amount of each
adversely affected Series, Class or Tranche of Notes. The Indenture also contains provisions permitting the Holders of Notes representing specified percentages of the Outstanding Dollar Principal Amount of the Notes, on behalf of the Holders of all
the Notes, to waive compliance by the Issuer with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Class B(2012-3) Note shall be conclusive and
binding upon such Holder and upon all future Holders of this Class B(2012-3) Note and of any Note issued upon the registration of transfer hereof or in exchange hereof or in lieu hereof whether or not notation of such consent or waiver is made upon
this Class B(2012-3) Note. The Indenture also permits the Indenture Trustee to amend or waive certain terms and conditions set forth in the Indenture without the consent of Holders of the Notes issued thereunder. 

The term “Issuer” as used in this Class B(2012-3) Note includes any successor to the Issuer under the Indenture.

 The Issuer is permitted by the Indenture, under certain circumstances, to merge or consolidate, subject to the rights of the
Indenture Trustee and the Holders of Notes under the Indenture. 
 The Class B(2012-3) Notes are issuable only in registered
form in denominations as provided in the Indenture, subject to certain limitations therein set forth. 

  
 8 

 THIS CLASS B(2012-3) NOTE AND THE INDENTURE WILL BE CONSTRUED IN ACCORDANCE WITH AND
GOVERNED BY THE LAWS OF THE STATE OF NEW YORK, INCLUDING SECTION 5-1401 OF THE GENERAL OBLIGATION LAW, WITHOUT REFERENCE TO ANY CONFLICT OF LAW PROVISIONS THAT WOULD RESULT IN THE APPLICATION OF THE LAWS OF ANY OTHER STATE. 

No reference herein to the Indenture and no provision of this Class B(2012-3) Note or of the Indenture shall alter or impair the
obligation of the Issuer, which is absolute and unconditional, to pay the principal of and interest on this Class B(2012-3) Note at the times, place, and rate, and in the coin or currency herein prescribed. 

No recourse may be taken, directly or indirectly, with respect to the obligations of the Issuer on the Notes or under the Indenture or
any certificate or other writing delivered in connection therewith, against (i) the Owner Trustee in its individual capacity, (ii) any owner of a beneficial interest in the Issuer or (iii) any partner, owner, beneficiary, agent,
officer, director or employee of the Owner Trustee in its individual capacity, any holder of a beneficial interest in the Issuer or any successor or assign of the Owner Trustee in its individual capacity, except as any such Person may have expressly
agreed (it being understood that the Owner Trustee has no such obligations in its individual capacity). The Holder of this Class B(2012-3) Note by the acceptance hereof agrees that, except as expressly provided in the Indenture and the Indenture
Supplement in the case of an Event of Default under the Indenture, the Holder shall have no claim against any of the foregoing for any deficiency, loss or claim therefrom; provided, however, that nothing contained herein shall be taken
to prevent recourse to, and enforcement against, the assets of the Issuer for any and all liabilities, obligations and undertakings contained in the Indenture or in this Class B(2012-3) Note. 

  
 9 

 ASSIGNMENT 
 Social Security or taxpayer I.D. or other identifying number of assignee 
  

 
 FOR VALUE RECEIVED, the undersigned
hereby sells, assigns and transfers unto 
 (name and address of assignee) 
 the within Note and all rights thereunder, and hereby irrevocably constitutes and appoints attorney, to transfer said Note on the books kept for registration thereof, with full power of substitution in
the premises. 
  

					
	Dated:
                                         
                           	  	  
	  	*
		  	Signature Guaranteed:	  	

  

	*	NOTE: The signature to this assignment must correspond with the name of the registered owner as it appears on the face of the within Note in every particular, without
alteration, enlargement or any change whatsoever. 

  
 10 

 SCHEDULE A 
 PART I 
 INTEREST PAYMENTS 

 

									
	 Interest

Payment Date
	 	 Date of
Payment
	 	 Total Amount
of Interest

Payable
	 	 Amount of
Interest Paid
	 	 Confirmation of
payment by or
on
behalf of the Note Issuance
Trust

					
	 1.
	 		 		 		 	
					
	 2.
	 		 		 		 	
					
	 3.
	 		 		 		 	
					
	 4.
	 		 		 		 	
					
	 5.
	 		 		 		 	
					
	 6.
	 		 		 		 	
					
	 7.
	 		 		 		 	
					
	 8.
	 		 		 		 	
					
	 9.
	 		 		 		 	
					
	 10.
	 		 		 		 	
					
	 11.
	 		 		 		 	
					
	 12.
	 		 		 		 	
					
	 13.
	 		 		 		 	
					
	 14.
	 		 		 		 	
					
	 15.
	 		 		 		 	
					
	 16.
	 		 		 		 	
					
	 17.
	 		 		 		 	
					
	 18.
	 		 		 		 	
					
	 19.
	 		 		 		 	
					
	 20.
	 		 		 		 	
					
	 21.
	 		 		 		 	
					
	 22.
	 		 		 		 	
					
	 23.
	 		 		 		 	
					
	 24.
	 		 		 		 	
					
	 25.
	 		 		 		 	
					
	 26.
	 		 		 		 	
					
	 27.
	 		 		 		 	
					
	 28.
	 		 		 		 	
					
	 29.
	 		 		 		 	
					
	 30.
	 		 		 		 	
					
	 31.
	 		 		 		 	
					
	 32.
	 		 		 		 	
					
	 33.
	 		 		 		 	
					
	 34.
	 		 		 		 	
					
	 35.
	 		 		 		 	
					
	 36.
	 		 		 		 	

  

  
 11 

 PART II 
 PRINCIPAL PAYMENTS 
  

									
	 Principal

Payment Date
	 	 Date of
Payment
	 	 Total Amount
of Principal

Payable
	 	 Total Amount

Paid
	 	 Confirmation of
payment by or
on
behalf of the Note Issuance
Trust

					
	 1.
	 		 		 		 	
					
	 2.
	 		 		 		 	
					
	 3.
	 		 		 		 	
					
	 4.
	 		 		 		 	
					
	 5.
	 		 		 		 	
					
	 6.
	 		 		 		 	
					
	 7.
	 		 		 		 	
					
	 8.
	 		 		 		 	
					
	 9.
	 		 		 		 	
					
	 10.
	 		 		 		 	
					
	 11.
	 		 		 		 	
					
	 12.
	 		 		 		 	

  
 12Employment Agreement

 Exhibit 10.1 
 EMPLOYMENT AGREEMENT 
 THIS EMPLOYMENT AGREEMENT (this
“Agreement”) is made effective as of November 14, 2012 (the “Effective Date”) by and between Targacept, Inc., a Delaware corporation (“Employer”), and Dr. Stephen A. Hill, an
individual resident of Georgia (“Employee”); 
 RECITALS: 

WHEREAS, Employer considers the availability of Employee’s services to be important to the management and conduct of Employer’s
business and desires to secure the continued availability of Employee’s services; and 
 WHEREAS, Employee is willing to
make his services available to Employer on the terms and subject to the conditions set forth herein; 
 NOW, THEREFORE, in
consideration of the mutual covenants contained herein, the parties hereto agree as follows: 
 1. Employment. For the
Term (as defined in Section 2), Employee shall be employed as President and Chief Executive Officer of Employer. Employee will be located at Employer’s principal executive offices in Winston-Salem, North Carolina or such other location as
may be approved by Employer’s Board of Directors (the “Board”). Employee hereby accepts and agrees to such employment, subject to the general supervision of the Board. Employee shall perform such duties and shall have such
powers, authority and responsibilities as are customary for one holding the position of President and Chief Executive Officer of a business similar to Employer and shall additionally render such other services and duties as may be reasonably
assigned to him from time to time by the Board. 
 2. Term of Employment. Employee’s employment with Employer shall
commence as of December 1, 2012 (the “Start Date”) and continue until terminated as provided in Section 6 or Section 7 (such period, the “Term”). Any termination of Employee’s employment with
Employer or this Agreement shall not affect the parties’ continuing obligations under Section 5, which shall survive any such termination. 
 3. Compensation. 
 (a) For all services rendered by Employee to Employer
under this Agreement, Employer shall pay to Employee, during the Term, an annual base salary of not less than $500,000 ($41,666.66 per month), payable in arrears in accordance with the customary payroll practices of Employer. During the Term,
Employee’s annual base salary shall be reviewed and subject to increase in accordance with Employer’s standard policies and procedures. 
 (b) Employee shall be eligible to earn an annual bonus during the Term of up to 50% of Employee’s annual base salary or such higher amount as may be determined by the Board (or a compensation
committee thereof) from time to time (Employee’s “Target Annual Bonus”). Eligibility for the Target Annual Bonus shall be based upon the achievement of performance objectives established by the Board (or a compensation
committee thereof) and shall be payable in the normal course after the end of each fiscal year, but in no event to exceed ninety (90) days after the end of each fiscal year. 

 (c) All amounts payable hereunder shall be subject to such deductions and withholdings as
shall be required by law, if any. 
 (d) On or as soon as practicable after the Start Date, Employee shall be granted a
nonqualified stock option to purchase 400,000 shares of Employer’s common stock (the “Option”) pursuant to an agreement substantially in the form attached hereto as Exhibit A (the “Option Agreement”).
The Option shall: (i) have a term of ten years; (ii) an exercise price equal to the closing price of Employer’s common stock on the NASDAQ Stock Market on the date of grant (or, if the NASDAQ Stock Market is closed for trading on the
Start Date, on the first day thereafter on which the NASDAQ Stock Market is open); (iii) vest 25% on December 31, 2013 and ratably thereafter on the last day of twelve (12) consecutive calendar quarters beginning with March 31,
2014; and (iv) otherwise be on the terms and conditions set forth in the Option Agreement. Employee shall be eligible to receive additional awards under Employer’s 2006 Stock Incentive Plan, as amended and restated from time to time (the
“2006 Plan”), or any successor plan thereto, in the discretion of the Board (or a compensation committee thereof). 
 (e) Employee shall also be entitled during the Term to holidays, sick leave and other time off and to participate in those life, health or other insurance plans and other employee retirement and welfare
benefit programs, plans, practices and benefits generally made available from time to time to similarly situated executives of Employer; provided that nothing herein shall obligate Employer to continue any of such programs, plans, practices or
benefits for Employee if discontinued for all other similarly situated executives of Employer. Without limiting the foregoing, Employee shall be entitled to paid vacation during each fiscal year of the Term of twenty (20) days. 

4. Reimbursement of Expenses. Employer shall pay or reimburse Employee for all reasonable travel and other expenses incurred by
Employee in performing the duties of his employment under this Agreement and also, to the extent consistent with Employer’s policy, for any dues and costs of membership for appropriate professional organizations and continuing professional
education, in each case subject to such reasonable documentation and substantiation as Employer shall require. 
 5.
Covenants of Employee. 
 (a) Covenant Not to Compete. Employee covenants that during the Noncompetition Period
(as defined in Section 5(g)) and within the Noncompetition Area (as defined in Section 5(h)), he shall not, directly or indirectly, as principal, agent, officer, director, shareholder, member, employee, consultant or trustee, or through
the agency of any person, firm, corporation, partnership, limited liability company, association or other entity (collectively, “Entity”), engage in the Business (as defined in Section 5(i)). Without limiting the generality of
the foregoing, Employee agrees that during the Noncompetition Period and within the Noncompetition Area, he shall not be (i) the owner of the outstanding capital stock or other equity interests of any Entity (other than Employer or its
affiliates) that, directly or indirectly, engages in the Business; or (ii) an officer, director, partner, manager, member, consultant or employee of any Entity that, directly or indirectly, engages in the Business; provided that this
Section 5(a) shall not prevent Employee from (A) being 

  
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an executive or otherwise work in the same or similar capacity for any area or division of any Entity to the extent that such area or division does not, directly or indirectly, engage in the
Business or (B) beneficially owning less than 1% of the stock of a corporation traded on a national securities exchange (including, without limitation, the NASDAQ Stock Market). 

(b) Nondisclosure Covenant. The parties acknowledge that Employer and its affiliates are enterprises the success of which is
attributable largely to the ownership, use and development of certain valuable confidential and proprietary information (“Proprietary Information”) and that Employee’s employment with Employer will involve access to and work
with Proprietary Information. Employee acknowledges that his relationship with Employer is a confidential relationship and agrees that he shall: (i) keep and maintain all Proprietary Information in strictest confidence; (ii) not, either
directly or indirectly, use any Proprietary Information for his own benefit; and (iii) not, either directly or indirectly, divulge, disclose or communicate any Proprietary Information in any manner whatsoever to any person or Entity, other than
to employees or agents of Employer having a need to know such Proprietary Information to perform their responsibilities on behalf of Employer or to other persons or Entities in the normal course of Employer’s business. This nondisclosure
obligation shall apply to all Proprietary Information, whether or not Employee participated in the development thereof. Upon termination of his employment with Employer for any reason, Employee will return to Employer all Proprietary Information in
any medium and all other documents, data, materials or property of Employer (including any copies thereof) in his possession. For purposes of this Agreement, the term “Proprietary Information” shall include any and all information related
to the business of Employer, any of its affiliates or any third party whose information Employee had access to by virtue of his employment with Employer, or to any of their respective products, services, sales or operations, that is not generally
known to the public, specifically including, but without limitation: trade secrets; processes; formulae; compounds and properties thereof; data; files; research results; computer programs or related source codes or object codes; improvements;
inventions; techniques; business, operating, marketing, partnering or merger and acquisition plans; strategies; forecasts; copyrightable material; suppliers; vendors; methods and manner of operations; information relating to the identity, needs and
location of all past, present and prospective customers; and information with respect to the internal affairs of Employer and its affiliates. Such Proprietary Information may or may not contain legends or other written notice that it is of a
confidential or proprietary nature. The parties stipulate that, as between them, the above-described matters are important and confidential and gravely affect the successful conduct of the business of Employer and its affiliates and that any breach
of the terms of this Section 5(b) shall be a material breach of this Agreement. 
 (c) Nonsolicitation Covenant.
Employee covenants that during the Noncompetition Period he shall not, directly or indirectly, on behalf of himself or any Entity, call upon any of the customers or clients of Employer or potential customers or clients of Employer for the purpose of
soliciting or providing any product or service similar to that provided by Employer, nor will he, in any way, directly or indirectly, on behalf of himself or any Entity solicit, divert or take away, or attempt to solicit, divert, or take away any of
the customers, clients, business or patrons of Employer (or potential customers or clients whose business Employee solicited on behalf of Employer or about whose needs Employee gained information during his employment with Employer); provided that
the restrictions of this Section 5(c) shall apply only to those customers, clients, patrons or prospective customers, clients or patrons that Employee solicited, called upon, or contacted on Employer’s behalf during the two (2) year
period immediately preceding the 

  
 3 

 
termination of Employee’s employment with Employer. Employee further covenants that during the Noncompetition Period he shall not, directly or indirectly, on behalf of himself or any Entity,
solicit, induce or encourage any person to leave the employ of Employer. 
 (d) Inventions. All inventions, designs,
formulae, processes, discoveries, drawings, improvements and developments made by Employee, either solely or in collaboration with others, during his employment with Employer, whether or not during working hours, and relating to any methods,
apparatus, products, compounds, services or deliverables that are made, furnished, sold, leased, used or developed by Employer or its affiliates or that pertain to the business of Employer (the “Developments”) shall become and
remain the sole property of Employer. Employee shall disclose promptly in writing to Employer all such Developments. Employee acknowledges and agrees that all Developments shall be deemed “works made for hire” within the meaning of the
United States Copyright Act, as amended. If, for any reason, such Developments are not deemed works made for hire, Employee hereby assigns to Employer all of his right, title and interest (including, but not limited to, copyright and all rights of
inventorship) in and to such Developments. At the request and expense of Employer, whether during or after employment with Employer, Employee shall make, execute and deliver all application papers, assignments or instruments, and perform or cause to
be performed such other lawful acts as Employer may deem necessary or desirable in making or prosecuting applications, domestic or foreign, for patents (including reissues, continuations and extensions thereof) and copyrights related to such
Developments or in vesting in Employer full legal title to such Developments. Employee shall assist and cooperate with Employer or its representatives in any controversy or legal proceeding relating to such Developments or any patents, copyrights or
trade secrets with respect thereto. If for any reason Employee refuses or is unable to assist Employer in obtaining or enforcing its rights with respect to such Developments, he hereby irrevocably designates and appoints Employer and its duly
authorized agents as his agents and attorneys-in-fact to execute and file any documents and to do all other lawful acts necessary to protect Employer’s rights in the Developments. Employee expressly acknowledges that the special foregoing power
of attorney is coupled with an interest and is therefore irrevocable and shall survive (i) his death or incompetency, (ii) the termination of his employment with Employer and (iii) the termination of this Agreement. 

(e) Independent Covenants. Each of the covenants on the part of Employee contained in Sections 5(a), (b), (c) and
(d) shall be construed as an agreement independent of each other such covenant. The existence of any claim or cause of action of Employee against Employer, whether predicated on this Agreement or otherwise, shall not constitute a defense to the
enforcement by Employer of any such covenant. 
 (f) Reasonableness; Injunction. Employee acknowledges that his covenants
contained in this Section 5 are reasonably necessary for the protection of Employer, its affiliates and their respective businesses and that such covenants are reasonably limited with respect to the activities prohibited, the duration thereof,
the geographic area thereof, the scope thereof and the effect thereof on Employee and the general public. Employee further acknowledges that violation of the covenants would immeasurably and irreparably damage Employer and its affiliates and, by
reason thereof, Employee agrees that for violation or threatened violation of any of the provisions of this Agreement, Employer shall, in addition to any other rights and remedies available to it at law or otherwise, be entitled to an injunction to
be issued by any court of competent jurisdiction enjoining and restraining Employee from committing any violation or threatened violation of this Agreement. 

  
 4 

 
Employee consents to the issuance of such injunction. Furthermore, Employer shall, in addition to any other rights or remedies available to it, at law or otherwise, be entitled to reimbursement
of court costs, attorneys’ fees and other expenses incurred as a result of a breach of this Agreement. Employee agrees to reimburse Employer for such expenses promptly following a final determination that he has breached this Agreement.

 (g) Noncompetition Period. “Noncompetition Period” shall mean the period commencing on the Effective
Date and continuing until one year following termination of Employee’s employment with Employer. 
 (h) Noncompetition
Area. The “Noncompetition Area” shall consist of the entire world, North America, the United States and Europe. 
 (i) Business. For the purposes of this Agreement, the “Business” shall mean the business of developing, manufacturing, marketing or selling any therapeutic product: (i) that
contains or is comprised of, in whole or in part, a chemical compound that modulates or otherwise affects any nicotinic acetylcholine receptor in humans; or (ii) that is substantially similar to, or competitive with, any product candidate in
development, or any product manufactured, marketed or sold, by Employer during Employee’s employment with Employer; provided, however, that during the portion of the Noncompetition Period after termination of Employee’s employment, no
product or product candidate will be considered competitive with the Company’s products or product candidates unless it is substantially similar to, or competitive with, a product candidate in development, or a product manufactured, marketed or
sold, by Employer during the five (5)-year period ending on the date of termination of Employee’s employment. 
 6.
Disability. Upon the “disability” of Employee, this Agreement and the employment relationship hereunder may be terminated by action of the Board upon thirty (30) days prior written notice (the “Disability
Notice”), such termination to become effective only if such disability continues. If, prior to the effective time of the Disability Notice, Employee shall recover from such disability and return to the full-time active discharge of his
duties, then the Disability Notice shall be of no further force and effect and Employee’s employment shall continue as if the same had been uninterrupted. If Employee shall not so recover from his disability and return to his duties, then his
employment with Employer and this Agreement shall terminate at the effective time of the Disability Notice. Such termination shall not prejudice any benefits payable to Employee that are fully vested as of the date of such termination. Prior to the
effective time of the Disability Notice, Employee shall continue to earn all compensation to which Employee would have been entitled as if he had not been disabled, such compensation to be paid at the time, in the amounts, and in the manner provided
in Section 3(a). A “disability” of Employee shall be deemed to exist at all times that Employee is considered by the insurer which has issued any policy of disability insurance owned by Employer or for which premiums are paid by
Employer (the “Employer Policy”) to be totally disabled under the terms of such policy. In the event there is no Employer Policy, “disability” shall mean the inability, by reason of physical or mental incapacity,
impairment or infirmity, of Employee to perform, upon request, his regular duties for six (6) consecutive months and the determination of the existence or nonexistence of disability shall be made by a medical doctor who is licensed to practice
medicine in the State of North Carolina mutually acceptable to the Board and to Employee (or, if Employee is incapacitated, his spouse).  

  
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 7. Termination. 

(a) If Employee shall die during the Term, this Agreement and the employment relationship hereunder will automatically terminate on the
date of death, which date shall be the last day of the Term; provided that such termination shall not prejudice any benefits payable to Employee or Employee’s beneficiaries that are fully vested as of the date of death. 

(b) Employer may terminate this Agreement and the employment relationship hereunder at any time, with or without Just Cause, effective at
such time as may be determined by the Board; provided that any termination with Just Cause shall require written notice to Employee. “Just Cause” shall mean: (i) Employee’s willful and material breach of this Agreement and
his continued failure to cure such breach to the reasonable satisfaction of the Board within thirty (30) days following written notice of such breach to Employee from the Board; (ii) Employee’s conviction of, or entry of a plea of
guilty or nolo contendere to a felony or a misdemeanor involving moral turpitude; (iii) Employee’s willful commission of an act of fraud, breach of trust, or dishonesty including, without limitation, embezzlement, that results in material
damage or harm to the business, financial condition or assets of Employer; (iv) Employee’s intentional damage or destruction of substantial property of Employer; (v) Employee’s violation of Employer’s policies prohibiting
employment discrimination or workplace harassment; and (vi) Employee’s commission of any act (or omission) contrary to the ethical or professional standards generally expected of Employer or Employee’s profession. Just Cause shall be
determined by the Board in its reasonable discretion and the particulars of any determination shall be provided to Employee in writing. At any time within ninety (90) days of receipt by Employee in writing of such determination, Employee may
object to such determination in writing and submit the determination to arbitration in accordance with Section 9(j). If such determination is overturned in arbitration, Employee will be treated as having been terminated without Just Cause and
shall be entitled to the benefits of Section 7(d). 
 (c) Employee may voluntarily terminate his employment with Employer
on thirty (30) days prior written notice to Employer. 
 (d) Upon any termination pursuant to this Section 7, Employee
shall be entitled to receive a lump sum equal to any salary, bonus and other compensation earned and due but not yet paid through the effective date of termination, such amount to be payable within thirty (30) days after such effective date of
termination. In addition, if this Agreement and Employee’s employment hereunder is terminated by (i) Employer (or its successor) other than for Just Cause (and other than for death) or (ii) Employee within one (1) year following
the first occurrence of Good Reason, Employee shall be entitled to the following: 
 (A)
severance, payable monthly, in an amount and for a period as follows: (1) if such termination occurs concurrent with or within twelve (12) months following, or in connection with but prior to, a Change in Control, the sum of
Employee’s then current monthly base salary plus one-twelfth (1/12th) of Employee’s Target Annual Bonus, for eighteen (18) months following such termination; or (2) if otherwise, Employee’s then current monthly base salary for twelve
(12) months following such termination (the time period in clause (1) or clause (2), whichever is applicable, the “Severance Period”); provided that, in the event the aggregate amount payable in the Severance Period based
on the foregoing would exceed the greater of: 
 (x) two times the lesser of: 

(aa) the sum of Employee’s annualized compensation based upon his annual base salary for his taxable year preceding
his taxable year in which his employment hereunder terminates (adjusted for any increase during that year that was expected to continue indefinitely if Employee’s employment had not terminated); or 

  
 6 

 (bb) the maximum amount that may be taken into account under a qualified
plan pursuant to Section 401(a)(17) of the Internal Revenue Code of 1986, as amended (the “Code”), for the year in which Employee’s employment hereunder is terminated; or 

(y) the maximum amount that would be exempt under Section 409A of the Code; 

then, Employer (or its successor) shall pay the amount of such excess to Employee in a lump sum on the date that is two and one-half months following the
end of Employer’s (or its successor’s) taxable year during which the termination of Employee’s employment occurs. 
 (B) if such termination occurs concurrent with or within twelve (12) months following, or in connection with but prior to, a Change in Control, acceleration of vesting for all unvested options to
purchase capital stock, and all restricted stock or other equity-based awards (if any), of Employer (or its successor) held by Employee and outstanding as of the effective date of termination. The terms of clause (B) shall be deemed
incorporated into any option or similar agreement evidencing an award made to Employee after the Effective Date. 

(C) continuation of the health care (including medical and dental) and life insurance benefits coverage provided to
Employee at his date of termination at the same level and in the same manner as if his employment had not terminated (subject to the customary changes in such coverages if Employee reaches age 65 or similar events), for the Severance Period,
followed by COBRA election rights. Any additional coverages Employee had at termination, including dependent coverage, will also be continued for such period on the same terms. Any costs Employee was paying for such coverages at the time of
termination shall continue to be paid by Employee. If the terms of any benefit plan referred to in this section do not permit continued participation by Employee or if permitting such continued participation would result in the imposition of an
excise tax against Employer under Section 4980D (or any successor section) of the Code, then Employer will arrange for other coverage providing substantially similar benefits at the same contribution level of Employee. 

(D) outplacement counseling services selected by Employee, up to a maximum of $10,000 and provided that (1) such
expense is incurred by Employee on or before the second anniversary of December 31 of the year during which the termination of Employee’s employment occurs and (2) such amount is paid by Employer on or before the third anniversary of
December 31 of the year during which the termination of Employee’s employment occurs. 

  
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 (e) If Employer (or its successor) terminates Employee’s employment for Just Cause,
Employee shall forfeit any unexercised vested or unvested stock options (and other equity-based awards, to the extent unvested, if any) at the date of termination. If Employee terminates his employment or if Employer (or its successor) terminates
Employee’s employment without Just Cause, Employee shall have, with respect to each vested stock option, until the earlier of (i) three (3) months from the date of termination or (ii) the last day of the applicable option
period/term to exercise such vested stock option. 
 (f) For purposes of this Agreement: 

“Change in Control” shall be deemed to have occurred on the earliest of the following dates: 

(i) The date any entity or person shall have become the beneficial owner of, or shall have obtained voting control over,
more than fifty percent (50%) of the outstanding Common Stock of Employer; 
 (ii) The date of the
consummation of: (A) a merger, consolidation, reorganization or similar business transaction of Employer with or into another corporation or other business entity (each, a “corporation”), in which Employer is not the continuing
or surviving entity or pursuant to which any shares of Common Stock of Employer would be converted into cash, securities or other property of another entity, other than a transaction of Employer in which holders of Common Stock immediately prior to
the transaction continue to own at least 50% of the outstanding Common Stock, or if Employer is not the surviving entity, the common stock (or other voting securities) of the surviving entity immediately after the transaction as immediately before;
or (B) the sale or other disposition of all or substantially all of the assets of Employer; or 
 (iii) The
date on which the Continuing Directors (as defined below) do not constitute a majority of the Board (or, if applicable, the Board of Directors of a successor corporation to the Company), where the term “Continuing Director” means at
any date a member of the Board (A) who was a member of the Board on the date of this Agreement, or (B) who was nominated or elected subsequent to such date by at least a majority of the directors who were Continuing Directors at the time
of such nomination or election or whose election to the Board was recommended or endorsed by at least a majority of the directors who were Continuing Directors at the time of such nomination or election; provided, however, that there
shall be excluded from this clause (B) any individual whose initial assumption of office occurred as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened
solicitation of proxies or consents, by or on behalf of a person other than the Board. 
 (For the purposes
herein, the term “person” shall mean any individual, corporation, partnership, group, association or other person, as such term is defined in Section 13(d)(3) or Section 14(d)(2) of the Securities Exchange Act of 1934, as amended
(the “Exchange Act”), other than Employer, a subsidiary of Employer or any employee benefit plan(s) sponsored or maintained by Employer or any subsidiary thereof, and the term “beneficial owner” shall have the meaning
given the term in Rule 13d-3 under the Exchange Act.) 

  
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 The Board shall have full and final authority, in its discretion, to determine whether a
Change in Control of Employer has occurred pursuant to the above definition, the date of the occurrence of such Change in Control and any incidental matters relating thereto. 
 “Good Reason” shall mean the occurrence of any of the following events without Employee’s express written consent: 

(i) the material breach by Employer (or its successor) of any material provision of this Agreement; 

(ii) any purported termination of the employment of Employee by Employer (or its successor) that is not effected in
accordance with this Agreement; 
 (iii) any failure of Employer (or its successor) to pay Employee any amounts
of salary or bonus compensation that have become due and payable to Employee within thirty (30) days after Employee has given Employer (or its successor) notice of demand therefor; 

(iv) a reduction in Employee’s annual base salary unless the reduction is part of, and at the same percentage as, an
across-the-board salary reduction for all similarly-situated executives; 
 (v) any material diminution in
Employee’s duties, responsibilities, authority, reporting structure, status or title, unless approved in writing by Employee; or 
 (vi) being required by Employer to relocate to a location more than fifty (50) miles from Employee’s worksite as of the Start Date (Winston-Salem, North Carolina); 

provided that Good Reason pursuant to any of clauses (i), (ii), (iii), (iv), (v) or (vi) above shall be conditional on (A) Employee having
provided written notice to Employer (or its successor) of the initial existence of any or all of the foregoing events within ninety (90) days of the initial existence of such event and (B) such event continuing to exist thirty
(30) days after the date of such written notice from Employee; and provided further that, notwithstanding anything herein to the contrary, the appointment or hiring by Employer of a different President shall not constitute Good Reason if
Employee retains the office of Chief Executive Officer. 
 (g) Except as otherwise provided in this Section 7, upon
termination of this Agreement for any reason, Employee shall not be entitled to any form of severance benefits, including benefits otherwise payable under any of Employer’s regular severance plans or policies, or any other payment whatsoever.
Employee agrees that (i) the payment of any severance or other benefits pursuant to this Section 7 shall be contingent on the delivery by Employee to Employer of a release and waiver of legal claims related to the employment relationship
between Employee and Employer in a form reasonably acceptable to Employer and (ii) the payments and benefits provided hereunder, subject to the terms and conditions hereof, shall be in full satisfaction of any rights which he might otherwise
have or claim by operation of law, by implied contract or otherwise, except for 

  
 9 

 
rights which he may have under any employee benefit plan of Employer. Notwithstanding anything to the contrary in this Section 7, any release referenced in this Section 7(g) must be
executed and provided to Employer, and the period for revoking same must have expired, before the forty-fifth
(45th) day following the effective date of
termination of employment (or shall otherwise be structured in a manner so that all payments under this Section 7 are exempt from or made in compliance with Section 409A of the Code). Specifically but without limitation, if any payments
made under this Section 7 are not exempt from Section 409A of the Code and if the forty-five (45) day period described in the preceding sentence begins in one tax year and extends into a second tax year, such payments shall commence
during the second tax year. 
 (h) To the extent applicable, Employer and Employee intend that this Agreement comply with
Section 409A of the Code. The parties hereby agree that this Agreement shall at all times be construed in a manner to comply with Section 409A and that should any provision be found not in compliance with Section 409A, the parties are
hereby contractually obligated to execute any and all amendments to this Agreement deemed necessary and required by legal counsel to achieve compliance with Section 409A. In the event amendments are required to be made to this Agreement to
comply with Section 409A, Employer shall use its best efforts to provide Employee with substantially the same payments he would have been entitled to pursuant to this Agreement had Section 409A not applied, but in a manner that is
compliant with Section 409A. The manner in which the immediately preceding sentence shall be implemented shall be the subject of good faith negotiations of the parties. The parties also agree that in no event shall any payment required to be
made pursuant to this Agreement that is considered deferred compensation within the meaning of Section 409A be accelerated in violation of Code Section 409A. 
 (i) Notwithstanding anything in this Agreement to the contrary, in the event it shall be determined that (i) any payment, award, benefit or distribution (or any acceleration of any payment, award,
benefit or distribution) by Employer (or its successor) or any entity which effectuates a Change in Control (or any of its affiliated entities) to or for the benefit of Employee (whether pursuant to the terms of this Agreement or otherwise) (the
“Payments”) would be subject to the excise tax imposed by Section 4999 of the Code (the “Excise Tax”), and (ii) the reduction of the amounts payable to Employee under this Agreement to the maximum amount
that could be paid to Employee without giving rise to the Excise Tax (the “Safe Harbor Cap”) would provide Employee with a greater after-tax amount than if such amounts were not reduced, then the amounts payable to Employee under
this Agreement shall be reduced (but not below zero) to the Safe Harbor Cap. Unless Employer (or its successor) and Employee agree otherwise, the reduction of the amounts payable hereunder, if applicable, shall be made to the extent necessary in the
following order: (i) first, any such Payments that became fully vested prior to the Change in Control and that pursuant to paragraph (b) of Treas. Reg. § 1.280G-1, Q/A 24, are treated as contingent compensation payments solely by
reason of the acceleration of their originally scheduled dates of payment will be reduced, by cancellation of the acceleration of their vesting; (ii) second, any severance payments or benefits, performance-based cash or equity incentive awards,
or other contingent compensation payments the full amounts of which are treated as contingent on the Change in Control where paragraphs (b) and (c) of Treas. Reg. § 1.280G-1, Q/A 24 do not apply, will be reduced; and (iii) third,
any cash or equity incentive awards, or nonqualified deferred compensation amounts, that vest solely based on Employee’s continued service with Employer (or its successor), and that pursuant to paragraph (c) of Treas. Reg. § 1.280G-1,
Q/A 24, are treated as contingent on the Change in Control because they become vested as a result of the Change in Control, will be reduced, first by 

  
 10 

 
cancellation of any acceleration of their originally scheduled dates of payment (if payment with respect to such items is not treated as automatically occurring upon the vesting of such items for
purposes of Section 280G of the Code) and then, if necessary, by canceling the acceleration of their vesting. In each case, the amounts of the contingent compensation payments will be reduced in the inverse order of their originally scheduled
dates of payment or vesting, as applicable, and will be so reduced only to the extent necessary to achieve the required reduction. For purposes of reducing the Payments to the Safe Harbor Cap, only amounts payable under this Agreement (and no other
Payments) shall be reduced. If the reduction of the amounts payable hereunder would not result in a greater after-tax result to Employee, no amounts payable under this Agreement shall be reduced pursuant to this provision. 

(A) All determinations required to be made under this Section 7(i) shall be made by the public accounting firm that is retained by
Employer (or its successor) as of the date immediately prior to the Change in Control (the “Accounting Firm”), which shall provide detailed supporting calculations both to Employer (or its successor) and Employee within fifteen
(15) business days of the receipt of notice from Employer (or its successor) or Employee that there has been a Payment, or such earlier time as is requested by Employer (or its successor). Notwithstanding the foregoing, in the event
(i) the Board shall determine prior to the Change in Control that the Accounting Firm is precluded from performing such services under applicable auditor independence rules or (ii) the Audit Committee of the Board determines that it does
not want the Accounting Firm to perform such services because of auditor independence concerns or (iii) the Accounting Firm is serving as accountant or auditor for the person(s) effecting the Change in Control, the Board shall appoint another
nationally recognized public accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees, costs and expenses (including, but not limited to, the costs of
retaining experts) of the Accounting Firm shall be borne by Employer (or its successor). If payments are reduced to the Safe Harbor Cap or the Accounting Firm determines that no Excise Tax is payable by Employee without a reduction in payments, the
Accounting Firm shall provide a written opinion to Employee to such effect, that Employee is not required to report any Excise Tax on Employee’s federal income tax return, and that the failure to report the Excise Tax, if any, on
Employee’s applicable federal income tax return will not result in the imposition of a negligence or similar penalty. The determination by the Accounting Firm shall be binding upon Employer (or its successor) and Employee (except as provided in
Section 7(i)(B) below). 
 (B) If it is established pursuant to a final determination of a court or an Internal Revenue
Service (the “IRS”) proceeding, which has been finally and conclusively resolved, that Payments have been made to, or provided for the benefit of, Employee by Employer (or its successor), which are in excess of the limitations
provided in this Section 7(i) (referred to hereinafter as an “Excess Payment”), Employee shall repay the Excess Payment to Employer (or its successor) on demand, together with interest on the Excess Payment at the applicable
federal rate (as defined in Section 1274(d) of the Code) from the date of Employee’s receipt of such Excess Payment until the date of such repayment. As a result of the uncertainty in the application of Section 4999 of the Code at the
time of the determination, it is possible that Payments which will not have been made by Employer (or its successor) should have been made (an “Underpayment”), consistent with the calculations required to be made under this
Section 7(i). In the event that it is determined (i) by the Accounting Firm, Employer (or its successor) (which shall include the position taken by Employer (or its successor), or together with their consolidated group, on their federal
income tax returns) or 

  
 11 

 
the IRS or (ii) pursuant to a determination by a court, that an Underpayment has occurred, Employer (or its successor) shall pay an amount equal to such Underpayment to Employee within ten
(10) days of such determination together with interest on such amount at the applicable federal rate from the date such amount would have been paid to Employee until the date of payment. Employee shall cooperate, to the extent Employee’s
expenses are reimbursed by Employer (or its successor), with any reasonable requests by Employer (or its successor) in connection with any contests or disputes with the IRS in connection with the Excise Tax or the determination of the Excess
Payment. Notwithstanding the foregoing, in the event that amounts payable under this Agreement were reduced pursuant to Section 7(i) and the value of stock options is subsequently re-determined by the Accounting Firm within the context of
Treasury Regulation §1.280G-1 Q/A 33 that reduces the value of the Payments attributable to such options, Employer (or its successor) shall promptly pay to Employee any amounts payable under this Agreement that were not previously paid solely
as a result of Section 7(i), subject to the Safe Harbor Cap. 
 (j) To the extent required by law or by any policy, plan or
agreement (as each may be in effect from time to time) of Employer, Employer may require Employee to repay to Employer any bonus or other incentive-based or equity-based compensation paid to Employee and to comply with any equity retention policy,
stock ownership guidelines or similar guidelines or policies as may be established by Employer, and Employee hereby expressly agrees to comply with any such requirements. 
 8. Best Efforts of Employee. Employee agrees that he will at all times faithfully, industriously and to the best of his ability, experience and talents perform all the duties that may be required
of him pursuant to the express and implicit terms hereof to the reasonable satisfaction of Employer, commensurate with his position. Such duties shall be rendered at such place as Employer designates and Employee acknowledges that he may be required
to travel as shall reasonably be required to promote the business of Employer. To the extent reasonably required by the duties assigned to him, Employee shall devote substantially all his time, attention, knowledge and skills to the business and
interest of Employer and shall be entitled to all the benefits, profits and other issue arising from or incident to all work, service and advice of Employee. During the Term, Employee shall not be interested, directly or indirectly, in any manner as
partner, manager, officer, director, shareholder, member, adviser, consultant, employee or in any other capacity in any other business; provided, that nothing herein contained shall be deemed to prevent or limit the right of Employee to
(a) beneficially own less than 1% of the stock of a corporation traded on a national securities exchange (including, without limitation, the NASDAQ Stock Market) as long as such passive investment does not interfere with or conflict with the
performance of services to be rendered hereunder or (b) serve as chairman of the board of directors of either or both of Novelos Therapeutics, Inc. and Audeo Oncology Inc. 

9. Miscellaneous. 
 (a) This Agreement shall be governed by and construed in accordance with the laws of the State of North Carolina, without regard to conflicts of law principles thereof. 

(b) This Agreement, together with the Option Agreement, constitutes the entire Agreement between Employee and Employer with respect to
the subject matter hereof and supersedes in their entirety any and all prior oral or written agreements, understandings or 

  
 12 

 
arrangements between Employee and Employer or any of its affiliates relating to the terms of Employee’s employment by Employer. Any and all such agreements, understandings and arrangements
are hereby terminated and of no force or effect, and Employee hereby expressly disclaims any rights under any and all such agreements, understandings and arrangements. This Agreement may not be amended or terminated except by an agreement in writing
signed by both parties. 
 (c) This Agreement may be executed in two counterparts, each of which shall be deemed and original
and both of which, taken together, shall constitute one and the same instrument. 
 (d) Any notice or other communication
required or permitted under this Agreement shall be effective only if it is in writing and delivered in person or by nationally recognized overnight courier service or deposited in the mails, postage prepaid, return receipt requested, addressed as
follows: 
 To Employer: 
 Targacept, Inc. 
 200 East First Street, Suite 300 

Winston-Salem, North Carolina 27101 
 Attn: General Counsel 
 Attn: Chief Financial Officer 

To Employee: 

Dr. Stephen A. Hill 
 [ADDRESS] 
 Notices given in person or by overnight courier service shall be
deemed given when delivered in person or the day after delivery to the courier addressed to the address required by this Section 9(d), and notices given by mail shall be deemed given three (3) days after deposit in the mails. Either party
may designate by written notice to the other party in accordance herewith any other address to which notices addressed to such designating party shall be sent. 
 (e) The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. It is
understood and agreed that no failure or delay by Employer or Employee in exercising any right, power or privilege under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise thereof preclude any other or further
exercise thereof or the exercise of any other right, power or privilege hereunder. 
 (f) This Agreement may not be assigned by
Employee without the written consent of Employer. This Agreement shall be binding on any heirs, representatives, successors or assigns of either party. 

  
 13 

 (g) For purposes of this Agreement, employment of Employee by any affiliate of Employer
shall be deemed to be employment by Employer hereunder, and a transfer of employment of Employee from one such affiliate to another shall not be deemed to be a termination of employment of Employee by Employer or a cessation of the Term, it being
the intention of the parties hereto that employment of Employee by any affiliate of Employer shall be treated as employment by Employer and that the provisions of this Agreement shall continue to be fully applicable following any such transfer.

 (h) The respective rights and obligations of the parties hereunder shall survive any termination of the Term or
Employee’s employment with Employer to the extent necessary to preserve such rights and obligations for their stated durations. 
 (i) In the event that it shall become necessary for either party to retain the services of an attorney to enforce any terms under this Agreement, the prevailing party, in addition to all other rights and
remedies hereunder or as provided by law, shall be entitled to reasonable attorneys’ fees and costs of suit. Employer shall reimburse Employee for the reasonable fees and expenses of counsel to Employee for the original negotiation of this
Agreement. 
 (j) Except as otherwise provided in this Section 9(j), any controversy or claim arising out of or relating to
this Agreement shall be settled by arbitration in accordance with Commercial Arbitration Rules of the American Arbitration Association then in effect, and judgment upon the award rendered by the arbitration panel, which shall consist of three
members, may be entered in any court having jurisdiction. Any arbitration shall be held in Winston-Salem, North Carolina, unless otherwise agreed in writing by the parties. One arbitrator shall be selected by Employee, one arbitrator shall be
selected by Employer, and the third arbitrator shall be selected by the two arbitrators selected by Employee and Employer. Notwithstanding the foregoing, any claim or dispute with respect to or arising out of any of the covenants in Section 5
or the covenant in Section 8 related to Employee’s interest in other businesses, or any statutory or common law claim of patent infringement, misappropriation of trade secrets, unfair competition, unfair or deceptive trade practices,
interference with contract, or interference with actual or prospective economic or business relations, shall be excluded from this Section 9(j). 
 [remainder of page intentionally left blank] 

  
 14 

 IN WITNESS WHEREOF, the parties hereto have executed this Agreement effective as of the
Effective Date. 
  

							
	Targacept, Inc.	 		 	
				
	By:	 	 /s/ Mark Skaletsky
	 		 	 /s/ Dr. Stephen A. Hill

	Name:	 	Mark Skaletsky	 		 	Dr. Stephen A. Hill
	Title:	 	Chairman of the Board	 		 	
			
	Date: 11/14/2012	 		 	Date: 11/14/2012

  
 15 

 EXHIBIT A 

OPTION AGREEMENT 

 TARGACEPT, INC. 

NONQUALIFIED STOCK OPTION AGREEMENT 
 THIS NONQUALIFIED STOCK OPTION AGREEMENT (together with Schedule A, attached hereto, the “Agreement”), effective as of the date specified as the “Grant Date” on
Schedule A attached hereto, between TARGACEPT, INC., a Delaware corporation (the “Corporation”), and the individual identified on Schedule A attached hereto, an Employee of the Corporation or an Affiliate (the
“Executive”). This Agreement shall be administered by the Compensation Committee (the “Administrator”) of the Board of Directors (the “Board”) of the Corporation or, to the extent permitted by
applicable laws, rules and regulations (“Applicable Law”), a designee of the Compensation Committee. 
 R E C
I T A L S : 
 In consideration of the services of the Executive and such other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the Corporation and the Executive, intending to be legally bound, hereby agree as follows: 
 1. Nature of Award. In connection with the Corporation’s hiring of the Executive as the President and Chief Executive Officer of the Corporation as provided in the Employment Agreement between
Executive and the Corporation dated on or about the date hereof (the “Employment Agreement”), the Administrator has agreed to grant the Executive a nonqualified stock option (as defined below, the “Option”) pursuant
to the terms of the Agreement. The Option is intended to serve as an inducement grant as described under Rule 5635(c)(4) of the NASDAQ Listing Rules. For purposes of clarity, the Executive has not previously been an employee or director of the
Corporation, and the Option is intended to serve as an inducement material to the Executive’s entering into employment with the Corporation. 
 2. Grant of Option; Term of Option. The Corporation hereby grants to the Executive, as a matter of separate inducement and agreement in connection with his employment or service to the Corporation,
and not in lieu of any salary or other compensation for his services, the right and Option (the “Option”) to purchase all or any part of such aggregate number of shares (the “Shares”) of common stock of the
Corporation (the “Common Stock”) at a purchase price (the “Option Price”) as specified on Schedule A, attached hereto, and subject to such other terms and conditions as may be stated herein or on Schedule
A. The Executive expressly acknowledges that the terms of Schedule A shall be incorporated herein by reference and shall constitute part of this Agreement. The Corporation and the Executive further acknowledge and agree that the signatures of
the Corporation and the Executive on the Grant Notice contained in Schedule A shall constitute their acceptance of all of the terms of this Agreement and their agreement to be bound by the terms of this Agreement. The Option (or any portion
thereof) shall be designated as a nonqualified stock option, as stated on Schedule A, and shall not be intended to qualify as an incentive stock option under Section 422 of the Internal Revenue Code of 1986, as amended (the
“Code”). The Option is a stand-alone option and is not granted under the Corporation’s 2006 Stock Incentive Plan (as amended and restated through March 9, 2011) or any other stock incentive plan of the Corporation. Except
as otherwise provided in the Agreement, this Option will expire if not exercised in full by the Expiration Date specified on Schedule A. 

 3. Exercise of Option. Subject to the terms of the Agreement, the Option shall become
exercisable on the date or dates, and subject to such conditions, as are set forth on Schedule A attached hereto. To the extent that the Option is exercisable but is not exercised, the Option shall accumulate and be exercisable by the
Executive in whole or in part at any time prior to expiration of the Option, subject to the terms of the Agreement. The Executive expressly acknowledges that the Option may vest and be exercisable only upon such terms and conditions as are provided
in the Agreement. Upon the exercise of an Option in whole or in part and payment of the Option Price in accordance with the provisions of this Agreement, the Corporation shall, as soon thereafter as practicable, deliver to the Executive a
certificate or certificates for the Shares purchased. Payment of the Option Price may be made (a) in cash or by cash equivalent; and, unless prohibited by Applicable Law or the Administrator, payment may also be made (b) by delivery (by
either actual delivery or attestation) of shares of Common Stock owned by the Executive (subject to such terms and conditions, if any, as may be determined by the Administrator); (c) by shares of Common Stock withheld upon exercise but only if
and to the extent that payment by such method does not result in variable accounting or other accounting consequences deemed unacceptable to the Corporation; (d) as long as a Public Market for the Common Stock exists, by delivery of written
notice of exercise to the Corporation and delivery to a broker of written notice of exercise and irrevocable instructions to promptly deliver to the Corporation the amount of sale or loan proceeds to pay the Option Price; (e) by such other
payment methods as may be approved by the Administrator and which are acceptable under Applicable Law; or (f) by any combination of the foregoing methods. Shares delivered or withheld in payment of the Option Price shall be valued at their Fair
Market Value on the date of exercise, as determined in accordance with the terms of the Agreement. 
 4. No Right of
Employment or Service; Forfeiture of Option. Neither the Agreement nor any other action related to the grant of the Option shall confer upon the Executive any right to continue in the employment or service of the Corporation or an Affiliate or
interfere with the right of the Corporation or an Affiliate to terminate the Executive’s employment or service at any time. Except as otherwise expressly provided in the Agreement or as determined by the Administrator, all rights of the
Executive with respect to the Option shall terminate upon termination of the employment of the Executive with the Corporation or an Affiliate. The grant of the Option does not create any obligation of the Corporation to grant further awards.

 5. Termination of Employment. Unless the Administrator, in its sole discretion, determines otherwise, the Option shall
not be exercised unless the Executive is, at the time of exercise, an Employee and has been an Employee continuously since the date the Option was granted, subject to the following: 

 

	 	(a)	The employment relationship of the Executive shall be treated as continuing intact for any period that the Executive is on military or sick leave or other bona fide
leave of absence, provided that the period of such leave does not exceed ninety (90) days, or, if longer, as long as the Executive’s right to reemployment is guaranteed either by statute or by contract. The employment relationship of the
Executive shall also be treated as continuing intact while the Executive is not in active service because of Disability (as defined in Section 5(b)). The Administrator shall have sole authority to determine whether the Executive has terminated
employment or service, the basis for such termination and the date of the Executive’s termination of employment or service for any reason (the “Termination Date”). 

  
 2 

	 	(b)	If the employment of the Executive is terminated because of Disability or death, the Option may be exercised only to the extent vested and exercisable on the
Executive’s Termination Date, and any portion of the Option that is not vested and exercisable as of the Executive’s Termination Date shall terminate as of such date. The Option, to the extent vested and exercisable, must be exercised, if
at all, prior to the first to occur of the following, whichever shall be applicable (after which time the Option shall terminate): (i) the close of the period of one year next succeeding the Termination Date; or (ii) the close of the
Option Period. In the event of the Executive’s death, the Option shall be exercisable by such person or persons as shall have acquired the right to exercise the Option by will or by the laws of intestate succession. For purposes herein,
“Disability” shall have the meaning given in the Employment Agreement or, if the Employment Agreement ceases to be in effect, “Disability” shall mean the inability to engage in any substantial gainful activity by reason of
any medically determinable physical or mental impairment which can be expected to result in death, or which has lasted or can be expected to last for a continuous period of not less than twelve (12) months. The determination of
“Disability” shall be made by the Administrator and its determination shall be final and conclusive. 

  

	 	(c)	If the employment of the Executive is terminated for any reason other than Disability, death or for Cause, the Option may be exercised to the extent vested and
exercisable on his Termination Date, and any portion of the Option that is not vested and exercisable as of the Executive’s Termination Date shall terminate as of such date. The Option, to the extent vested and exercisable, must be exercised,
if at all, prior to the first to occur of the following, whichever shall be applicable (after which time the Option shall terminate): (i) the close of the period of three (3) months next succeeding the Termination Date; or (ii) the
close of the Option period. If the Executive dies following such termination of employment and prior to the date specified in clause (i) of this Section 5(c), the Executive shall be treated as having died while employed under
Section 5(b) immediately preceding (treating for this purpose the Executive’s date of termination of employment as the Termination Date). In the event of the Executive’s death, the Option shall be exercisable by such person or
persons as shall have acquired the right to exercise the Option by will or by the laws of intestate succession. 

  

	 	(d)	If the employment of the Executive is terminated for Cause, the Option shall lapse and no longer be exercisable as of 5:00 p.m. Eastern Standard Time on his Termination
Date, as determined by the Administrator. For the purposes herein, “Cause” shall mean the Executive’s termination of employment or service resulting from the Executive’s termination for “Just Cause” as defined in
the Employment Agreement or, if the Employment Agreement ceases to be in effect, then the Executive’s termination shall be for “Cause” if termination results due to the Executive’s: (i) dishonesty; (ii) refusal to
perform his duties for the Corporation; (iii) engaging in fraudulent conduct; or (iv) engaging in any conduct that could be materially damaging to the Corporation without a reasonable good faith belief that such conduct was in the best
interest of the Corporation. The determination of “Cause” shall be made by the Administrator and its determination shall be final and conclusive. 

  
 3 

 6. Effect of Change in Control. Subject to the terms of Section 7(d) of the
Employment Agreement, the Administrator shall (taking into account any Code Section 409A considerations) have sole discretion to determine the effect, if any, on the Option, including but not limited to the vesting, earning or exercisability of
the Option, in the event of a Change in Control (as defined in Section 22(b)). Without limiting the generality of the foregoing, in the event of a Change in Control, the Administrator’s discretion shall include, but shall not be limited
to, the discretion to determine that the Option shall vest, be earned or become exercisable in whole or in part, shall be assumed or substituted for another award, shall be cancelled without the payment of consideration or that other actions (or no
action) shall be taken with respect to the Option. The Administrator also has discretion to determine that acceleration or any other effect of a Change in Control on the Option shall be subject to both the occurrence of a Change in Control event and
termination of employment or service of the Participant. 
 7. Nontransferability of Option. The Option shall not be
transferable (including by sale, assignment, pledge or hypothecation) other than by will or the laws of intestate succession, except as may be permitted by the Administrator in its sole discretion in a manner consistent with the registration
provisions of the Securities Act of 1933, as amended (the “Securities Act”). Except as may be permitted by the preceding, the Option shall be exercisable during the Executive’s lifetime only by him or by his guardian or legal
representative. The designation of a beneficiary in accordance with procedures implemented by the Administrator or its designee does not constitute a transfer. 
 8. Superseding Agreement; Successors and Assigns. This Agreement supersedes any statements, representations or agreements of the Corporation with respect to the grant of the Option or any related
rights, and the Executive hereby waives any rights or claims related to any such statements, representations or agreements. This Agreement does not supersede or amend the Employment Agreement or any existing (or future) confidentiality agreement,
nonsolicitation agreement, noncompetition agreement or other similar agreement between the Executive and the Corporation, including, but not limited to, any restrictive covenants contained in such agreements. This Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their respective executors, administrators, heirs, successors and assigns. 

9. Governing Law. The Agreement shall be construed and enforced according to the laws of the State of North Carolina, without
regard to the conflict of laws provisions of any state, and in accordance with applicable federal laws of the United States. 

10. Amendment and Termination; Waiver. The Agreement may be modified or amended only by the written agreement of the parties
hereto. Notwithstanding the foregoing, the Administrator shall have unilateral authority to amend the Agreement (without Executive consent) to the extent necessary to comply with Applicable Law or changes to Applicable Law (including but in no way
limited to Code Section 409A and federal securities laws). The waiver by the Corporation of a breach of any provision of the Agreement by the Executive shall not operate or be construed as a waiver of any subsequent breach by the Executive.

 11. No Rights as Stockholder. The Executive and his or her legal representatives, legatees and distributees shall not
be deemed to be the holder of any Shares subject to the Option and shall not have any rights of a stockholder unless and until (and then only to the extent that) certificates for such Shares have been issued and delivered to him or them (or, in the
case of uncertified shares, other written evidence of ownership in accordance with Applicable Law shall have been provided). 

  
 4 

 12. Withholding; Tax Matters. 

 

	 	(a)	The Executive acknowledges that the Corporation shall require the Executive to pay the Corporation in cash the amount of any tax or other amount required by any
governmental authority to be withheld and paid over by the Corporation to such authority for the account of the Executive, and the Executive agrees, as a condition to the grant of the Option and delivery of the Shares or any other benefit, to
satisfy such obligations. Notwithstanding the foregoing, the Administrator may establish procedures to permit the Executive to satisfy such obligations in whole or in part, and any other local, state, federal, foreign or other income tax obligations
relating to the Option, by electing (the “election”) to have the Corporation withhold shares of Common Stock from the Shares to which the Executive is entitled. The number of Shares to be withheld shall have a Fair Market Value as
of the date that the amount of tax to be withheld is determined as nearly equal as possible to (but not exceeding) the amount of such obligations being satisfied. Each election must be made in writing to the Administrator in accordance with election
procedures established by the Administrator. 

  

	 	(b)	The Executive acknowledges that the Corporation has made no warranties or representations to the Executive with respect to the tax consequences (including, but not
limited to, income tax consequences) related to the transactions contemplated by this Agreement, and the Executive is in no manner relying on the Corporation or its representatives for an assessment of such tax consequences. The Executive
acknowledges that there may be adverse tax consequences upon acquisition or disposition of the Shares subject to the Option and that the Executive should consult a tax advisor prior to such exercise or disposition. The Executive acknowledges that he
has been advised that he should consult with his own attorney, accountant or tax advisor regarding the decision to enter into this Agreement and the consequences thereof. The Executive also acknowledges that the Corporation has no responsibility to
take or refrain from taking any actions in order to achieve a certain tax result for the Executive. 

 13.
Administration. The authority to construe and interpret this Agreement shall be vested in the Administrator. Any interpretation of the Agreement by the Administrator and any decision made by it with respect to the Agreement is final and
binding. 
 14. Notices. Any written notices provided for in this Agreement shall be in writing and shall be deemed
sufficiently given if either hand delivered or if sent by fax or overnight courier, or by postage paid first class mail. Notices sent by mail shall be deemed received three (3) business days after mailed but in no event later than the date of
actual receipt. Notices shall be directed, if to the Executive, at the Executive’s address indicated on Schedule A (or such other address as may be designated by the Executive in a manner acceptable to the Administrator), or, if to the
Corporation, at the Corporation’s principal office, attention Chief Financial Officer, Targacept, Inc. Notice may also be provided by electronic submission, if and to the extent permitted by the Administrator. 

15. Severability. The provisions of this Agreement are severable and if any one or more provisions may be determined to be illegal
or otherwise unenforceable, in whole or in part, the remaining provisions shall nevertheless be binding and enforceable. 

  
 5 

 16. Restrictions on Option and Shares. The Corporation may impose such restrictions
on the Option, the Shares and any other benefits underlying the Option as it may deem advisable, including without limitation restrictions under the federal securities laws, the requirements of any stock exchange or similar organization and any blue
sky, state or foreign securities laws applicable to such Option or Shares. Notwithstanding any other provision in the Agreement to the contrary, the Corporation shall not be obligated to issue, deliver or transfer shares of Common Stock, make any
other distribution of benefits, or to take any other action, unless such delivery, distribution or action is in compliance with all Applicable Law (including but not limited to the requirements of the Securities Act). The Corporation will be under
no obligation to register the Shares with the Securities and Exchange Commission (the “SEC”) or to effect compliance with the exemption, registration, qualification or listing requirements of any state securities laws, stock
exchange or similar organization, and the Corporation will have no liability for any inability or failure to do so. As a condition to the exercise of the Option, the Corporation may require the Executive or other person exercising the Option to
represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribution such Shares, if, in the opinion of legal counsel for the Corporation, such a
representation is required. The Corporation may cause a restrictive legend to be placed on any certificate for Shares issued pursuant to the exercise of the Option in such form as may be prescribed from time to time by Applicable Law or as may be
advised by legal counsel. 
 17. Effect of Changes in Status. Unless the Administrator, in its sole discretion,
determines otherwise, the Option shall not be affected by any change in the terms, conditions or status of the Executive’s employment, provided that the Executive continues to be in the employ of the Corporation or an Affiliate. Without
limiting the foregoing, the Administrator has sole discretion to determine, at the time of grant of the Option or at any time thereafter, the effect, if any, on the Option if the Executive’s status as an Employee changes, including but not
limited to a change from full-time to part-time, or vice versa, or if other similar changes in the nature or scope of the Executive’s employment occur. 
 18. Right of Offset. Notwithstanding any other provision of the Agreement, the Corporation may (subject to any Code Section 409A considerations) at any time reduce the amount of any payment
otherwise payable to or on behalf of the Executive by the amount of any obligation of the Executive to the Corporation that is or becomes due and payable and, by entering into this Agreement, the Executive shall be deemed to have consented to such
reduction. 
 19. Counterparts; Further Instruments. This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute one and the same instrument. The parties hereto agree to execute such further instruments and to take such further action as may be reasonably necessary to carry out the
purposes and intent of this Agreement. 
 20. Compliance with Recoupment, Ownership and Other Policies or Agreements. As
a condition to receiving the Option, the Executive agrees that he shall abide by all provisions of any equity retention policy, compensation recovery policy, stock ownership guidelines and other similar policies maintained by the Corporation, each
as in effect from time to time and to the extent applicable to Executive from time to time. In addition, the Executive agrees that he shall be subject to such compensation recovery, recoupment, forfeiture or other similar provisions as may apply at
any time to the Executive under Applicable Law. 

  
 6 

 21. Adjustments. If there is any change in the outstanding shares of Common Stock
because of a merger, consolidation or reorganization involving the Corporation or an Affiliate, or if the Board declares a stock dividend, stock split distributable in shares of Common Stock, reverse stock split, combination or reclassification of
the Common Stock, or if there is a similar change in the capital stock structure of the Corporation or an Affiliate affecting the Common Stock, the number of Shares of Common Stock subject to the Option (to the extent unexercised) shall be
correspondingly adjusted, and the Administrator shall make such adjustments to the Option, the Option Price and to any provisions of the Agreement as the Administrator deems equitable to prevent dilution or enlargement of the Option or as may be
otherwise advisable. 
 22. Certain Definitions. In addition to other terms defined herein, the following terms shall
have the meanings given below: 
  

	 	(a)	“Affiliate” means any business entity which is controlled by, under common control with or controls the Corporation, including but not limited to any
“parent” or “subsidiary” corporation as defined under Code Section 424. 

  

	 	(b)	“Change in Control” shall be deemed to have occurred if and as provided in the Employment Agreement (and as defined therein) or, if the Employment
Agreement ceases to be in effect, “Change in Control” shall be deemed to have occurred on the earliest of the following dates: 

  

	 	(i)	The date any entity or person shall have become the beneficial owner of, or shall have obtained voting control over, more than thirty percent (30%) of the
outstanding Common Stock of the Corporation; 

  

	 	(ii)	The date of the consummation of: (A) a merger, consolidation, reorganization or similar business transaction of the Corporation with or into another corporation or
other business entity (each, a “corporation”), in which the Corporation is not the continuing or surviving entity or pursuant to which any shares of Common Stock of the Corporation would be converted into cash, securities or other
property of another entity, other than a transaction of the Corporation in which holders of Common Stock immediately prior to the transaction continue to own at least 50% of the outstanding Common Stock, or if the Corporation is not the surviving
entity, the common stock (or other voting securities) of the surviving entity immediately after the transaction as immediately before; or (B) the sale or other disposition of all or substantially all of the assets of the Corporation; or

  

	 	(iii)	 The date on which the Continuing Directors (as defined below) do not constitute a majority of the Board (or, if applicable, the Board of Directors of a
successor corporation to the Corporation), where the term “Continuing Director” means at any date a member of the Board (A) who was a member of the Board on the date of this Agreement, or (B) who was nominated or elected
subsequent to such date by at least a majority of the directors who were Continuing Directors at the time of such nomination or election or whose election to the Board was recommended or endorsed by at least a majority of the directors who were
Continuing Directors at the time of such nomination or election; provided, however, that there shall be excluded from 

  
 7 

	 	
this clause (B) any individual whose initial assumption of office occurred as a result of an actual or threatened election contest with respect to the election or removal of directors or
other actual or threatened solicitation of proxies or consents, by or on behalf of a person other than the Board. 

(For the purposes herein, the term “person” shall mean any individual, corporation, partnership, group, association or other
person, as such term is defined in Section 13(d)(3) or Section 14(d)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), other than the Corporation, a subsidiary of the Corporation or any employee
benefit plan(s) sponsored or maintained by the Corporation or any subsidiary thereof, and the term “beneficial owner” shall have the meaning given the term in Rule 13d-3 under the Exchange Act.) 

The Administrator shall have full and final authority, in its discretion, to determine whether a Change in Control of the Corporation has
occurred pursuant to the above definition, the date of the occurrence of such Change in Control and any incidental matters relating thereto. 
  

	 	(c)	“Employee” means any person who is an employee of the Corporation or any Affiliate. For this purpose, an individual shall be considered to be an
Employee only if there exists between the individual and the Corporation or an Affiliate the legal and bona fide relationship of employer and employee. 

  

	 	(d)	“Fair Market Value” per share of the Common Stock shall be established in good faith by the Administrator and, unless otherwise determined by the
Administrator, the Fair Market Value shall be determined in accordance with the following provisions: (i) if the shares of Common Stock are listed for trading on the New York Stock Exchange, the American Stock Exchange or the NASDAQ Stock
Market, the Fair Market Value shall be the closing sales price per share of the shares on the New York Stock Exchange, the American Stock Exchange or the NASDAQ Stock Market (as applicable) on the date the Option is granted or other determination is
made (such date of determination being referred to herein as a “valuation date”), or, if there is no transaction on such date, then on the trading date nearest preceding the valuation date for which closing price information is
available, and, provided further, if the shares are not listed for trading on the New York Stock Exchange, the American Stock Exchange or the NASDAQ Stock Market, the Fair Market Value shall be the average between the highest bid and lowest asked
prices for such stock on the date of grant or other valuation date as reported on the NASDAQ OTC Bulletin Board Service or by the National Quotation Bureau, Incorporated or a comparable service; or (ii) if the shares of Common Stock are not
listed or reported in any of the foregoing, then the Fair Market Value shall be determined by the Administrator based on such valuation measures or other factors as it deems appropriate. Notwithstanding the foregoing, Fair Market Value shall be
determined in accordance with Code Section 409A if and to the extent required. 

  

	 	(e)	A “Public Market” for the Common Stock shall be deemed to exist (i) upon consummation of a firm commitment underwritten public offering of the
Common Stock pursuant to an effective registration statement under the Securities Act, or (ii) if the Administrator otherwise determines that there is an established public market for the Common Stock. 

[Signatures of the Corporation and the Executive follow on Schedule A/Grant Notice.] 

  
 8 

 TARGACEPT, INC. 

NONQUALIFIED STOCK OPTION AGREEMENT 
 Schedule A/Grant Notice 
 1. Pursuant to the terms and conditions of
that certain Nonqualified Stock Option Agreement (the “Agreement”) dated                  by and between Targacept, Inc. (the
“Corporation”) and Dr. Stephen A. Hill (the “Executive”), you, the Executive, have been granted a stock option (the “Option”) to purchase 400,000 shares (the “Shares”) of
the Common Stock as outlined below. 
  

			
	Name of Executive:	  	Dr. Stephen A. Hill
	Address:	  	 [ADDRESS]

		
	Grant Date:	  	                    , 2012
	Number of Shares Subject to Option:	  	400,000
	Option Price:	  	
	Type of Option:	  	Nonqualified Stock Option
	Expiration Date (Last day of Option Period):	  	                    , 2022
		
	Vesting Schedule/Conditions:	  	25% on December 31, 2013 and ratably thereafter on the last day of twelve (12) consecutive calendar quarters beginning with March 31, 2014

 2. By my signature below, I, the Executive, hereby acknowledge receipt of this Grant Notice and the
Agreement which is attached to this Grant Notice. I understand that the Grant Notice and other provisions of Schedule A herein are incorporated by reference into the Agreement and constitute a part of the Agreement. By my signature below,
I further agree to be bound by the terms of the Agreement, including but not limited to the terms of this Grant Notice and the other provisions of Schedule A contained herein. The Corporation reserves the right to treat the Option and the Agreement
as cancelled, void and of no effect if the Executive fails to return a signed copy of the Grant Notice within thirty (30) days of grant date stated above. 
  

											
	Signature:	 	  
	 		 	Date:	 	  

				
		 		 		 	Agreed to by:
				
		 		 		 	TARGACEPT, INC.
					
		 		 		 	By:	 	  

		 		 		 		 	Name:	 	  

		 		 		 		 	Title:	 	  

  

	
	Attest:
	
	  

	Peter A. Zorn
	Senior Vice President, Legal Affairs, General
	Counsel and Secretary

 Note: If there are any discrepancies in the name or address shown above, please make the appropriate corrections on
this form. Please retain a copy of the Agreement, including this Grant Notice, for your files.

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