Document:

Exhibit 10.1

Monarch Community Bancorp, Inc.

Employment Agreement

          THIS
AGREEMENT entered into this 20th
day of September, 2006, by and between Monarch Community Bancorp, Inc., on its
behalf and on behalf of all of its subsidiaries and affiliated corporations or
associations (“Affiliates”), located at 375 North Willowbrook Road, Coldwater,
Michigan 49036 (collectively referred to as the “Company”), and Donald L.
Denney (“Executive”).

          WHEREAS,
pursuant to the terms of an employment agreement dated September 19, 2004 (the
“(Old Agreement”), Executive has served as President and Chief Executive
Officer of the Company and the Company’s Affiliate, Monarch Community Bank (the
“Bank”); and 

          WHEREAS,
the term of the Old Agreement expires September 5, 2006; and

          WHEREAS,
the Board of Directors of the Company believes it is in the best interests of
the Company to enter into this Agreement to replace the Old Agreement; and 

          WHEREAS,
the Board of Directors of the Company has approved and authorized the execution
of the Agreement with Executive.

          NOW,
THEREFORE, in consideration of the mutual covenants herein contained, and upon
the other terms and conditions hereinafter provided, the parties hereby agree
as follows:

          1.
Employment; Duties. During the
term of this Agreement, which is effective as of September 5, 2006 (the
“Commencement Date”), Executive shall continue to serve in the capacity of
President and Chief Executive Officer of the Company. The Company shall take
such action as is reasonably required to also cause Executive to continue to be
appointed to the position of President and Chief Executive Officer of the Bank.
Executive shall perform services and discharge the duties of the President and
Chief Executive Officer of the Company and the Bank and perform such other
reasonable services and duties of an executive, professional or administrative
nature as may from time to time be assigned to him by the Board of Directors
for the Company or the Board of Directors of the Bank, as the case may be,
(collectively the “Board of Directors” or “Board”) or Executive Committee of
the Board. Executive hereby accepts such employment for the compensation and
upon the terms and conditions provided in this Agreement. Executive agrees to
serve the Company and the Bank faithfully and competently and to devote his
full-time efforts to the promotion of the business of the Company, the Bank and
its other Affiliates and the affairs of the Company, the Bank and its other Affiliates,
excepting his reasonable leave time, periods of illness and the like.

6

          2.
Service on the Boards of Directors.
During the Term of this Agreement (as defined in Section 8 hereof), the Company
agrees to nominate Executive as a nominee to serve on the Company’s Board of
Directors. During the Term of this Agreement, the Company, in its capacity as
sole shareholder of the Bank, agrees to cause Executive to be elected as a
director of the Bank. Executive shall not be entitled to receive fees for
serving as a director. 

          3.
Base Salary. During the Term of
this Agreement, the Company agrees to pay Executive a base salary (“Base
Salary”) at the rate of $189,000 per annum, payable in accordance with the
customary payroll practices of the Company; provided, however, that the rate of
Executive’s base salary beginning in 2007 shall be reviewed by the Board of
Directors, and Executive shall be entitled to receive an increase in his 2007
base salary at such percentage or in such an amount, if any, as the Board of
Directors, in its sole discretion may decide.

          4.
Discretionary Bonus. During the
Term of this Agreement, Executive shall be entitled to receive an annual
discretionary bonus in an amount which is based on the bonus program then in
effect. No other compensation provided for in this Agreement shall be deemed a
substitute for Executive’s eligibility to receive bonuses when and as declared
by the Board of Directors or as provided for by any plan or program of the
Company.

          5.
Stock Options/Stock Awards.
Executive has been granted stock options and restricted stock awards as
provided in the Incentive Stock Option Agreement and the Restricted Stock
Agreement between the Company and Executive (the “Stock Agreements”).

          6.
Expenses. During the Term of this
Agreement, Executive shall be entitled to receive prompt reimbursement of all
reasonable expenses incurred (in accordance with the policies and procedures of
the Company and the Bank) in performing services under this Agreement, provided
that Executive properly accounts for expenses in accordance with the policies
of the Company and the Bank.

          7.
Employee Benefits.

                    (a)
Participation
in Employee Benefit Plans. During the Term of this Agreement,
Executive shall participate in such employee benefit plans or arrangements as
are otherwise made available and upon the same terms as other senior management
employees of the Company and the Bank.

                    (b)
Fringe
Benefits. Executive shall be entitled to receive any benefits
under any fringe benefit plan or policy as are otherwise made available and
upon the same terms as other senior management employees of the Company and the
Bank. Nothing paid to Executive under any plan or arrangement presently in
effect or made available in the future will be deemed to be in lieu of Base
Salary or other compensation to Executive under this Agreement.

7

                    (c)
Paid
Leave Time. Executive shall be entitled to leave time in
accordance with the standard policies or practices of the Company and the Bank
for senior management officers, but in no event less than 29 days of leave time
during each calendar year of employment. Executive shall take any leave in
excess of a two week period at a time mutually agreed upon between the Chairman
of the Board of the Company and Executive. Executive shall receive his Base
Salary and other benefits during periods of leave. Executive shall also be
entitled to paid legal holidays in accordance with the policies of the Company
and the Bank.

                    (d)
Conferences
and Continuing Education. Executive shall be permitted to attend
appropriate industry-wide and statewide banking conventions and professional
development meetings necessary to keep Executive abreast of developments in the
industry. All reasonable expenses of attending such meetings, including the
attendance by Executive’s spouse, shall be at the expense of the Company.

          8.
Term of Agreement. The term
(“Term”) of this Agreement shall be for one (1) year, beginning on the
Commencement Date and the Term will automatically renew for one (1) additional
day each day after the Commencement Date such that the Term will consistently
remain one (1) year, unless terminated earlier in accordance with Section 10. 

          9.
Noncompetition, Confidentiality and
Non-Solicitation.

                    (a)
Executive shall devote his full time and attention to the performance of his
employment under this Agreement. Upon any termination of Executive’s employment
with the Company and the Bank (other than a termination which occurs following
a Change of Control of the Company (as hereinafter defined)), Executive agrees
not to Compete (as herein defined) with the Company or the Bank or any of its
other Affiliates for the longer of (the “Restricted Period”) (i) the period
Executive continues to receive his Base Salary hereunder, or (ii) one (1) year
following such termination of employment, within Branch County, Michigan (the
“Restricted Area”), except as agreed to pursuant to a resolution duly adopted
by the Board of Directors. The term “Compete” means working in the Restricted
Area for or advising, consulting or otherwise serving, directly or indirectly,
or having a material financial interest in any entity whose business is similar
to or which materially competes with the business activities of the Company or
the Bank or any of its other Affiliates. Executive represents and acknowledges
that in the event his employment with the Company and the Bank is terminated,
Executive’s experience and capabilities are such that Executive can obtain
employment outside of the Restricted Area or in a business which does not
Compete with the Company or the Bank or its other Affiliates, and that
injunctive relief enforcing this provision will not prevent Executive from
earning a livelihood.

                    (b)
Executive recognizes and acknowledges that his knowledge of customers,
potential customers, trade secrets, business strategies, financial data, costs,
prices, other business marketing information and business activities and plans
of the Company and the Bank and its other Affiliates (“Confidential
Information”) is a valuable, special and unique asset of the business of the
Company and the Bank and its other Affiliates. Executive will not, during or
after the term of his employment, disclose any Confidential Information to any
person, firm, corporation, or other entity for any reason or purpose
whatsoever.

8

Notwithstanding the foregoing, Executive may disclose
any knowledge of banking, financial and/or economic principles, concepts or
ideas which are not solely and exclusively derived from the business plans and
activities of the Company or the Bank or its other Affiliates. Further,
Executive may disclose information regarding the business activities of the
Company and the Bank and its other Affiliates to the Federal Reserve Board, the
Office of Financial and Insurance Services of the State of Michigan, the
Federal Deposit Insurance Corporation or any other regulatory or judicial body
pursuant to a formal regulatory request or subpoena, and Executive also may
disclose Confidential Information when such disclosure, in the reasonable
judgment of Executive, is in the best interest of the Company and the Bank and
its other Affiliates and does not violate any law or regulation, including but
not limited to disclosure to business or trade associations or industry
organizations of which Company or the Bank is a member or a participant.

                    (c)
Executive shall be permitted to invest in entities which conduct business
similar to that of the Company or the Bank, solely as a passive or minority
investor and in which he does not have an ownership interest of greater than
five percent (5%).

                    (d)
During the Restricted Period, Executive will not (other than on behalf of the
Company or the Bank), directly or indirectly, offer employment to or employ any
person on his own behalf or on behalf of any other person or entity, other than
the Company or the Bank or its other Affiliates, who is employed by the Company
or the Bank or its other Affiliates or was employed by the Company or the Bank
or its other Affiliates within six (6) months of Executive’s termination of
employment. Nothing in this Agreement, however, restricts Executive from
providing to a third party an oral or written recommendation for or an
evaluation of an employee of the Company or the Bank or its other Affiliates
following termination of that employee’s employment with the Company or the
Bank or its other Affiliates.

                    (e)
Notwithstanding the requirements of Section 13 hereof, the parties hereto,
recognizing that irreparable injury will result to the Company in the event of
Executive’s breach of any provision of this Section 9, agree that in the event
of any such breach by Executive, the Company will be entitled to obtain from
the Branch County Circuit Court preliminary and permanent injunctive relief of
Executive, Executive’s partners, agents, employees and all persons acting for
or under the direction of Executive.

          10.
Termination. Executive’s
employment under this Agreement shall be terminated upon any of the following
occurrences:

                    (a)
Death.
Executive’s employment under this Agreement shall terminate upon his death.
Executive’s estate shall be entitled to receive payments of Base Salary for
sixty (60) days following Executive’s death and any other compensation accrued
as of the date of death.

9

                    (b)
Termination
of Employment by the Board of Directors Without Cause. In the
event the Board of Directors terminates Executive’s employment without “Cause”
(as defined in Section 10(d)) prior to a Change of Control (as defined in
Section 10(e)), Executive shall be entitled to his Base Salary and to continue
to participate in the Company’s health care plan for one (1) year following the
date of termination of employment. In the event, after the termination of
Executive’s employment, coverage of Executive under the Company’s health care
plan does not qualify under the federal tax laws for the same tax treatment as
coverage of active employees of the Company, or if the insurer for the health
care plan prohibits Executive’s continued participation in such plan, the
Company may, in its discretion, either provide substantially equivalent health
care coverage to Executive or pay to Executive an amount in cash equal to the
cost to the Company of Executive’s continued participation in the Company’s
health care plan.

                    (c)
Disability.

                              (i)
If, as a result of Executive’s incapacity, due to physical or mental illness
rendering him unable to perform the duties required of him under this Agreement
for a period of 90 days in a 120-day period (“Disability”), and within thirty
(30) days after written notice of potential termination is given, he shall not
have returned to the full-time performance of his duties, the Company may
terminate Executive’s employment. The determination of Disability shall be made
by a medical board certified physician mutually acceptable to the Company and
Executive (or Executive’s legal representative, if one has been appointed), and
if the parties cannot mutually agree to the selection of a physician, then each
party shall select a physician and the two physicians selected shall select a
third physician who shall make such determination.

                              (ii)
During any period of Disability, Executive shall be entitled to receive
benefits from the Company’s disability insurance policy. During the Term of
this Agreement, the Company shall continue Executive’s Base Salary during any
waiting period for disability insurance. If Executive’s disability pay during
the first ninety (90) days is less than seventy percent (70%) of his Base
Salary, the Company shall supplement such disability pay to a level not less
than seventy percent (70%) of his Base Salary.

                              (iii)
To the extent consistent with the terms and conditions of such insurance plans,
the Company shall cause to be continued life, medical, dental and disability
insurance coverages maintained by the Company for other senior management
employees. These coverages shall cease upon the earlier of: (A) the date
Executive attains the normal age of retirement or the commencement of benefits
under the Company’s retirement plan, (B) the date of Executive’s death or (C)
the expiration of the Term of this Agreement.

10

                    (d)
Termination
of Employment by the Board of Directors for Cause. In the event
Executive’s employment is terminated for “Cause,” no continued payments or
benefits shall be due under this Agreement. For purposes of this Agreement,
termination for “Cause” shall be defined as termination due to Executive’s
personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty
involving personal profit, intentional failure to perform stated duties or to
follow one or more specific written directives of the Board, reasonable in
nature and scope, willful violation of any law, rule or regulation (other than
traffic violations or similar offenses) or final cease-and-desist order, or
material breach of any provision of this Agreement (which is not cured within
thirty (30) days after its occurrence and notice to Executive). Any
determination of “Cause” as defined by this Section 9(d) shall be determined by
a majority vote of the Board of Directors, with Executive abstaining from
voting on the matter.

                    (e)
Termination
Following Change of Control. 

                              (i)
If, following a Change of Control, this Agreement is terminated by the Company
without Cause or by Executive for “Good Reason,” Executive shall be entitled to
his Base Salary and to continue to participate in the Company’s health care
plan for a period of two (2) years following such termination. In the event of
termination by Executive for Good Reason, Executive shall provide notice to the
Chairman of the Board of Directors specifying the facts and circumstances
surrounding his belief that “Good Reason” exists and the Company shall have the
right to cure those matters within thirty (30) days from the date of notice. 

                              (ii)
For purposes of this Agreement, “Good Reason” shall include the occurrence of
any of the following events which have not been consented to in advance by
Executive in writing: (A) if Executive would be required to move his personal
residence or perform his principal executive functions more than twenty-five
(25) miles from Executive’s primary office as of the Commencement Date; (B) if,
in the organizational structure of the Company or the Bank, Executive would be
required to report to a person or persons other than the Board of Directors;
(C) if the Company should fail to maintain Executive’s Base Salary or fail to
maintain employee benefit plans or arrangements generally comparable to those
in place at the Commencement Date, except to the extent that such reduction in
employee benefit plans is part of an overall adjustment in benefits for all
employees of the Company or the Bank; (D) if Executive would be assigned
substantial duties and responsibilities other than those normally associated
with his position as referenced in Section 1 of this Agreement; or (E) if
Executive is removed from or not re-nominated to the Board of Directors of the
Company or the Bank. The preceding events shall only provide the basis for
“Good Reason” if Executive provides notice of them within one hundred twenty
(120) days of their occurrence.

11

                              (iii)
For purposes of this Agreement, a Change in Control of the Company shall be
deemed to have occurred if and when:

	
   

  	
   

  
	
   

  	
                                (A)
  any third person, including a “group” as defined in Section 13(d)(3) of the
  Securities Exchange Act of 1934, shall become the beneficial owner of shares
  of the Company with respect to which 25% or more of the total number of votes
  for the election of the Board may be cast;

  
	
   

  	
   

  
	
   

  	
                                (B)
  there occurs a change in control of the Bank within the meaning of the Home
  Owners Loan Act of 1933 or 12 C.F.R. Part 574;

  
	
   

  	
   

  
	
   

  	
                                (C)
  as a result of, or in connection with, any merger or other business combination,
  sale of assets or contested election, wherein the persons who were directors
  of the Company before such transaction or event cease to constitute a
  majority of the Board of Directors of the Company or any successor to the
  Company; or

  
	
   

  	
   

  
	
   

  	
                                (D)
  the Company transfers substantially all of its assets to another corporation
  or entity which is not an affiliate of the Company.

  

                              (iv)
In the event it shall be determined that any payment made hereunder or pursuant
to any other plan following a Change of Control (whether paid or payable
pursuant to the terms of this Agreement) would be subject to the excise tax
imposed by Section 4999 of the Internal Revenue Code of 1986 (the “Code”), then
payments pursuant to this Agreement or payments under any other agreement or
plan that are treated as being contingent upon a Change in Control under
Section 280G of the Code shall be reduced to the maximum amount that may be
paid to Executive or for his benefit without any such payment constituting an
“parachute payment,” as defined in Section 280G of the Code. The determination
of the maximum amount payable to Executive or for his benefit shall be made by
an accounting firm mutually acceptable to Executive and the Company, and unless
Executive directs otherwise, payments that are considered to be partially
contingent upon a change in control shall be the last payments to be reduced. 

                    (f)
Termination
by Executive. If Executive terminates this Agreement prior to a
Change of Control, he shall provide at least sixty (60) days written notice to
the Board of Directors. Upon such termination, Executive shall receive only the
Base Salary, vested rights, and all employee benefits up to Executive’s
termination date.

                    (g)
Termination
Upon Mutual Agreement. This Agreement may be terminated at any
time upon the mutual written consent of Executive and the Company, acting
through its Chairman of the Board. Upon such termination, Executive’s right to
all compensation and benefits ceases.

12

                    (h)
Stock
Based Compensation. Notwithstanding anything to the contrary
contained herein, upon Executive’s termination from Employment, any rights he
has to stock based compensation, including, but not limited to, rights under
the Company’s employee stock ownership plan, its 401(k) plan or the Stock
Agreements, shall be governed exclusively by the terms of such plans and the
Stock Agreements.

                    (i)
Executive agrees that upon any termination of Executive’s Employment with the
Company and the Bank pursuant to this Section 10, he will immediately resign
from all positions he has with the Company and the Bank and any of its or their
affiliates, including all Board of Directors.

          11.
Indemnification. The Company shall
provide Executive (including his heirs, executors and administrators) with
coverage under a standard directors’ and officers’ liability insurance policy
at its expense, or in lieu thereof, shall indemnify Executive (and his heirs,
executors and administrators) to the fullest extent permitted under law and
applicable regulation against all expenses and liabilities reasonably incurred
by him in connection with or arising out of any action, suit or proceeding in
which he may be involved by reason of his having been a director or officer of
the Company (whether or not he continues to be a director or officer at the
time of incurring such expenses or liabilities). Such expenses and liabilities
may include, but are not limited to, judgment, court costs and attorneys’ fees
and the cost of reasonable settlements. The Company shall pay such expenses and
liabilities in advance of a final judicial decision (hereinafter an
“advancement of expenses”); provided, however, that, an advancement of expenses
incurred by Executive in his capacity as a director or officer of the Company
(and not in any other capacity in which his service was or is rendered by
Executive including, without limitation, services to an employee benefit plan)
shall be made only upon delivery to the Company of an undertaking, by or on
behalf of Executive, to repay all amounts so advanced if it shall ultimately be
determined by final judicial decision from which there is no further right to
appeal that Executive is not entitled to be indemnified for such expenses under
this Section 16 or otherwise.

          12.
Source of Payments.
Notwithstanding any provision herein to the contrary, to the extent that
payments and benefits, as provided by this Agreement, are paid to or received
by Executive from the Bank or otherwise or from any other Affiliate of the
Company, such compensation payments and benefits paid by the Bank or such other
Affiliate will be subtracted from any amounts due to Executive under similar
provisions of this Agreement.

          13.
Arbitration.

                    (a)
In the event of dispute under this Agreement, the parties agree pursuant to
MCLA 600.5001; MSA 27A.5001, et seq., to binding arbitration in
accordance with the rules of the American Arbitration Association (“AAA”) in
effect at the time a demand for arbitration of the dispute is made, with the
place of arbitration being Coldwater, Michigan. The prevailing party in any
such arbitration shall be entitled to recover from the other party all expenses
for attorneys, fees and costs incurred by the prevailing party in conjunction
with the arbitration proceedings.

13

The decision and award of the arbitrator made under
the AAA rules shall be exclusive, final and binding on all parties, their
heirs, representatives, affiliates, successors and assigns. It is further
agreed that any arbitration award may be certified to the Branch County Circuit
Court which shall render a judgment upon the award made pursuant to said
arbitration. 

                    (b)
Limited civil discovery shall be permitted for the production of documents and
the taking of depositions, provided, however, that no party is permitted to
take the deposition of more than three witnesses except by agreement of the
other party or upon order of the arbitrator pursuant to the motion of a party.
Subject to the foregoing limitations, discovery shall be conducted in
accordance with the Michigan Court Rules with any enforcement issues resolved
by the arbitrator.

                    (c)
The arbitration and all proceedings, discovery and any award of the arbitrator,
are confidential. Neither the parties nor the arbitrator shall disclose any
information gained during the course of the arbitration or any person or entity
who is not a party to the arbitration unless permitted by law. Attendance at
the arbitration shall be limited to the parties, counsel and those called as
witnesses.

                    (d)
Executive and the Company acknowledge that each has had the opportunity to
consult with counsel of choice before signing this agreement, and Executive and
the Company each hereby knowingly and voluntarily, without coercion, WAIVES ALL
RIGHTS TO TRIAL BY JURY or all disputes between them and instead agrees to
binding arbitration.

          14.
Successors and Assigns.

                    (a)
This Agreement shall inure to the benefit of and be binding upon any corporate
or other successor of the Company which shall acquire, directly or indirectly,
by merger, consolidation, purchase or otherwise, all or substantially all of
the assets of the Company.

                    (b)
Since the Company is contracting for the unique and personal skills of
Executive, Executive shall be precluded from assigning or delegating his rights
or duties hereunder without first obtaining the written consent of the Company.

          15.
Amendments. No amendments or
additions to this Agreement shall be binding upon the parties hereto unless
made in writing and signed by both parties, except as herein otherwise
specifically provided.

          16.
Applicable Law. This Agreement
shall be governed by all respects whether as to validity, construction,
capacity, performance or otherwise, by the laws of the State of Michigan,
except to the extent that Federal law shall be deemed to apply.

          17.
Severability. 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.

14

          18.
Notices. Any notices, requests,
demands and other communications provided for or deemed necessary by this
Agreement shall be sufficient if set forth in writing and delivered in person
or sent by registered or certified mail, postage prepaid, to, in the case of
Executive, the last address filed in writing by Executive with the Company, or,
in the case of the Company, to the Company at its main office to the attention
of the Board of Directors.

          19.
Entire Agreement. This Agreement
and the Stock Agreements, together with any understanding or modifications
thereof as may be agreed to in writing by the parties, shall constitute the
entire agreement between the parties hereto and shall supersede the Old
Agreement.

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

          THIS
AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE ENFORCED BY THE
PARTIES.

	
   

  	
   

  
	
  ATTEST: 

  	
  s/Andrew J. Van Doren

  
	
   

  	
  

  

MONARCH
COMMUNITY BANCORP, INC.

	
   

  	
   

  
	
  By:

  	
  s/Stephen M. Ross

  
	
   

  	
  

  
	
   

  	
  Stephen M. Ross

  
	
  Its:

  	
  Chairman

  
	
   

  	
   

  
	
   

  	
  s/Donald L. Denney

  
	
   

  	
  

  
	
   

  	
  Donald L. Denney (“Executive”)

  

15Telecom Share Option Scheme Rules

 “Exhibit 4.1” 
  

 TELECOM SHARE OPTION SCHEME

  

 

 

 TELECOM SHARE OPTION SCHEME 
  

 TABLE OF CONTENTS 
  

					
	1	  	NAME	  	1
	2	  	GROUNDING	  	1
	2.1	  	Alignment	  	1
	2.2	  	Corporate Objective	  	1
	3	  	KEY TERMS	  	1
	4	  	COMMITTEE	  	3
	4.1	  	Administration	  	3
	4.2	  	Delegation	  	4
	5	  	GRANTS	  	4
	6	  	REJECTION OF GRANT	  	4
	6.1	  	Opportunity	  	4
	6.2	  	Acknowledgement	  	4
	7	  	EXERCISE OF OPTIONS	  	5
	7.1	  	Qualifying Date notice	  	5
	7.2	  	Subsequent notice	  	5
	7.3	  	No further notice	  	5
	7.4	  	Date on which Options may be exercised	  	5
	8	  	PROCEDURE FOR EXERCISE	  	5
	8.1	  	Exercise Notice	  	5
	8.2	  	Payment	  	5
	8.3	  	Issue	  	6
	8.4	  	Committee’s Notice	  	6
	8.5	  	Effective Exercise	  	6
	8.6	  	Continued Breach	  	6
	9	  	RIGHTS ON EXERCISE	  	6
	10	  	ADJUSTMENTS	  	7
	10.1	  	Rights Issue	  	7
	10.2	  	Bonus Issue	  	7
	10.3	  	Reconstruction	  	7
	10.4	  	Qualifying Date acceleration	  	7
	10.5	  	Continuation of Employment	  	8
	11	  	LAPSE OF OPTIONS	  	9
	11.1	  	Rejection of Grant	  	9
	11.2	  	Leave Prior to Qualifying Date	  	9
	11.3	  	Lapse on Performance Expiry Date	  	9
	11.4	  	Leave After Qualifying Date: Involuntary Event	  	9
	11.5	  	Leave After Qualifying Date: Dismissal	  	9
	11.6	  	Leave After Qualifying Date: Other Reason	  	9
	11.7	  	Option Lapse Date	  	9
	11.8	  	Breach	  	9
	11.9	  	Variation or Waiver	  	10
	12	  	NO DIVESTMENT	  	10
	13	  	AMENDMENT AND TERMINATION	  	10
	13.1	  	Committee’s Discretion	  	10

 TELECOM SHARE OPTION SCHEME 
  

					
	13.2	  	Termination	  	10
	13.3	  	Breach	  	11
	13.4	  	Notice to Participants	  	11
	14	  	QUOTATION	  	11
	15	  	MISCELLANEOUS	  	11
	15.1	  	Spirit of the Scheme	  	11
	15.2	  	Fractions	  	11
	15.3	  	Entire Agreement	  	11
	15.4	  	Delay	  	11
	15.5	  	Disputes	  	11
	15.6	  	Notice	  	11
	15.7	  	Governing Law	  	12
	15.8	  	Construction	  	12

 TELECOM SHARE OPTION SCHEME 
  

 Date: 15 May 2006 
  

	1	NAME 

 The name of this scheme is the Telecom
Share Option Scheme. 
  

	2	GROUNDING 

 The ultimate corporate objective is to
create shareholder value (as measured by the sum of share price appreciation and dividend paid to shareholders). To do this, employees must develop and implement successful corporate and business-unit strategies. Employee incentivisation is critical
to this process in two ways: 
  

	 	(i)	by supporting the strategies, management processes, organisation approaches and culture critical to creating shareholder value; and 

  

	 	(ii)	by encouraging employees to continue into the future the same high levels of performance that they have demonstrated. 

 The Scheme: 
  

	 	2.1	Alignment 

 is intended to align the incentives for
senior employees with the interests of Telecom’s shareholders; and 
  

	 	2.2	Corporate Objective 

 forms part of a Telecom
corporate objective which seeks to build morale, retain good employees and promote decisions that will benefit Telecom shareholders by conferring on a selected group of employees a right to participate in the equity of Telecom. 
  

	3	KEY TERMS 

 Unless the context requires otherwise:

 “Breach” means a breach of: 
  

	 	(i)	Telecom’s constitution; 

  

	 	(ii)	the listing and/or other rules governing the Exchange or any other stock exchange on which Shares are quoted; and/or 

  

	 	(iii)	the Securities Amendment Act 1988, any other statute or regulation, or Telecom’s internal procedures for insiders; 

  

 1 

 TELECOM SHARE OPTION SCHEME 
  

 “Business Day” means a day on which the Exchange is open for trading; 
 “Commencement Date” means the date from and including which a Participant is entitled to participate in the Scheme, specified in the
Grant; 
 “Committee” means Telecom’s Human Resources/Compensation Committee or any other committee or person nominated
by the board of directors of Telecom; 
 “Employment” means employment with, or the provision of personal services (otherwise
than as an employee) principally to, a company in the Group; 
 “Exchange” means New Zealand Exchange Limited’s NZSX;

 “Exercise Date” means: 
  

	 	(i)	the later of the Qualifying Date and the Performance Date; or 

  

	 	(ii)	the Qualifying Date, if there are no Performance Criteria or the Qualifying Date and the Performance Date are the same, 

 subject to clauses 10.4, 10.5 and 11.3; 
 “Exercise Notice” means notice of the exercise of an Option; 
 “Exercise Price” means (subject to
clause 10) the average end of day market price of Shares on the Exchange for the Business Days in the month immediately preceding the Commencement Date; 
 “Group” means Telecom and its subsidiaries; 
 “Grant” means the grant of an
Option; 
 “Involuntary Event” means death, redundancy, unjustified dismissal, retirement at or after attaining normal
retirement age, illness, accident, mental infirmity or physical infirmity; 
 “Leave” means to suffer termination of
Employment by any means and for any reason, excluding: 
  

	 	(i)	termination primarily for the purpose of assuming further Employment; and 

  

	 	(ii)	non-permanent leave of absence with employer approval; 

  

 2 

 TELECOM SHARE OPTION SCHEME 
  

 “Live Option” means an Option which has not been exercised, for which the Qualifying
Date has crystallised and which has not lapsed pursuant to clause 11; 
 “Option” means (subject to clause 10) an option to
subscribe for a Share pursuant to this Scheme; 
 “Option Lapse Date” means the first day after the expiration of the period,
specified in a Grant, from and including the Commencement Date; 
 “Participant” means an Employee to whom Options are
granted; 
 “Performance Criteria” means the performance criteria (if any) specified in a Grant; 
 “Performance Date” means the date on which the Committee notifies a Participant under clause 7 that the Performance Criteria are
satisfied; 
 “Performance Expiry Date” means the date, specified in a Grant, for the purpose of clause 7.3; 
 “Qualifying Date” means the first Business Day after the expiration of the period, specified in a Grant, from and including the
Commencement Date; 
 “Reconstruction” means any consolidation, subdivision, cancellation, redemption, acquisition by Telecom
or other rearrangement or reconstruction whatever of shares in Telecom which changes the proportionate interest in Telecom represented by a Share; 
 “Scheme” means the Telecom Share Option Scheme recorded in this document as amended from time to time; 
 “Share” means an ordinary share in Telecom; 
 “Takeover” means the acquisition by any means by any
person (excluding Telecom) or group of associated persons of a legal or beneficial interest in 20% or more of all Shares; and 
 “Telecom” means Telecom Corporation of New Zealand Limited. 
  

	4	COMMITTEE 

  

	4.1	Administration 

 The Committee will administer all
aspects of the Scheme, including the making of Grants. Any matter to be determined by the Committee will be determined as it sees fit in its sole discretion. 
  

 3 

 TELECOM SHARE OPTION SCHEME 
  

	4.2	Delegation 

 The Committee may delegate to any
person (and revoke any delegation of) all or any of its powers, discretions, rights and obligations under the Scheme from time to time as it sees fit, and reference to the “Committee” will be construed accordingly. 
  

	5	GRANTS 

 The Committee may make a Grant to an
Employee. Each Grant will: 
  

	 	(i)	specify the number of Options granted to the Employee; 

  

	 	(ii)	enclose a copy of the Scheme (unless the Employee has previously received a copy); 

  

	 	(iii)	enclose a copy of an investment statement for the offer of Shares made under the Grant (if made in New Zealand); 

  

	 	(iv)	specify the Commencement Date, the Exercise Price, the Performance Criteria (if any), the Performance Expiry Date (if any) and the periods after which the Qualifying Date and the
Option Lapse Date fall; 

  

	 	(v)	enclose an Options certificate; and 

  

	 	(vi)	specify the period during which the Employee may reject the Grant. 

  

	6	REJECTION OF GRANT 

  

	6.1	Opportunity 

 A Participant may reject a Grant by
giving the Committee notice, and returning to the Committee the Options certificate, within 40 Business Days after the Grant. 
  

	6.2	Acknowledgement 

 In retaining a Grant (and electing
not to reject the Grant pursuant to clause 6.1), a Participant acknowledges that: 
  

	 	(i)	the terms of the Scheme are binding; and 

  

	 	(ii)	participation in the Scheme does not affect the terms of the Participant’s Employment. In no event will Telecom be deemed, by making a Grant or otherwise, to have represented
that a Participant’s Employment will continue until and/or beyond the Qualifying Date or the Exercise Date. 

  

 4 

 TELECOM SHARE OPTION SCHEME 
  

	7	EXERCISE OF OPTIONS 

  

	7.1	Qualifying Date notice 

 On or prior to the
Qualifying Date, the Committee will notify a Participant whether or not the Performance Criteria are satisfied (where applicable). 
  

	7.2	Subsequent notice 

 If the Committee gives notice
under clause 7.1 that the Performance Criteria are not satisfied, the Committee will notify the Participant of satisfaction, on the next monthly anniversary of the Qualifying Date on which the Performance Criteria are satisfied (or, if that day is
not a Business Day, on the next Business Day), subject to clause 7.3. 
  

	7.3	No further notice 

 The Committee will only give
notice under clause 7.2 (if any) prior to the Performance Expiry Date. 
  

	7.4	Date on which Options may be exercised 

 Options may
be exercised on the Exercise Date or any Business Day after the Exercise Date, unless: 
  

	 	(i)	Breach 

 the Committee considers that the exercise
would give rise to a Breach; or 
  

	 	(ii)	Lapse 

 the Option has lapsed pursuant to clause 11.

  

	8	PROCEDURE FOR EXERCISE 

  

	8.1	Exercise Notice 

 A Participant may, as the
Participant sees fit from time to time (subject to clause 7.4), exercise part or all of that Participant’s Options (subject to any minimum number or multiple of a number of Options prescribed by the Committee from time to time), by giving the
Committee an Exercise Notice. 
  

	8.2	Payment 

 Any Exercise Notice must be accompanied
by: 
  

	 	(i)	payment of the aggregate Exercise Price; and 

  

	 	(ii)	(if applicable) a form requesting consent to acquire Shares, in terms of Telecom’s internal procedures for insiders. 

  

 5 

 TELECOM SHARE OPTION SCHEME 
  

	8.3	Issue 

 Within five Business Days after the date on
which the Committee receives: 
  

	 	(i)	an Exercise Notice; 

  

	 	(ii)	payment; and 

  

	 	(iii)	(if applicable) a form requesting consent to acquire Shares, in terms of Telecom’s internal procedures for insiders, 

 in accordance with this clause, Telecom will issue to the Participant Shares, unless clause 7.4 precludes the exercise of Options (if so, the Committee
will give notice to the Participant accordingly and refund the Exercise Price (without interest)). 
  

	8.4	Committee’s Notice 

 The Committee will give a
further notice to a Participant who has been precluded (pursuant to clause 7.4(i)) from exercising an Option, as soon as it considers that the exercise would no longer give rise to a Breach. 
  

	8.5	Effective Exercise 

 Notwithstanding clauses 11.4 to
11.7, but subject to clause 8.6, the Exercise Notice of a Participant precluded (pursuant to clause 7.4(i)) from exercising an Option will take effect 10 Business Days after the date on which the Committee gives its notice pursuant to clause 8.4, if
the Participant: 
  

	 	(i)	pays the aggregate Exercise Price; and 

  

	 	(ii)	(if applicable) delivers a form requesting consent to acquire Shares, in terms of Telecom’s internal procedures for insiders, 

 during that period. If the Participant fails to do so, the Exercise Notice will be deemed to have been revoked. 
  

	8.6	Continued Breach 

 If the exercise of Options
pursuant to clause 8.5 would give rise to a Breach, the Committee will proceed as if an Exercise Notice had been given pursuant to clause 8.1. 
  

	9	RIGHTS ON EXERCISE 

 Shares issued to Participants
will be credited as fully paid and will rank pari passu in all respects with all Shares at the date of issue, except for any dividend declared on Shares where the record date occurs prior to issue. 
  

 6 

 TELECOM SHARE OPTION SCHEME 
  

	10	ADJUSTMENTS 

  

	10.1	Rights Issue 

 If, prior to the exercise of an
Option, Telecom confers on the holders of Shares rights to acquire Shares (or other benefits or assets), the Committee may adjust the Exercise Price so that Participants receive a benefit which reflects the value of the rights to holders of Shares.
A Participant will not otherwise benefit from the rights and, in particular, may not acquire Shares (or other benefits or assets) under the rights, except to the extent the Participant becomes a holder of Shares (on the exercise of Options) before
the record date for the rights. 
  

	10.2	Bonus Issue 

 If, prior to the exercise of Options,
Telecom issues Shares to the holders of Shares in a manner that maintains the existing relative voting and distribution rights of all holders of Shares, a Participant will be entitled on exercising the Options to receive additional Shares as if the
Shares under the Grant received on exercising the Options had participated in the bonus issue. 
  

	10.3	Reconstruction 

 If, prior to the exercise of an
Option, there is a Reconstruction, the Committee will adjust the number of Shares to be received on the exercise of Options, the Exercise Price and/or any other rights under the Options, to the extent required at the time of the Reconstruction under
the applicable listing and/or other rules governing the Exchange or any other stock exchange on which Shares are quoted. 
  

	10.4	Qualifying Date acceleration 

 Notwithstanding any
other provision of the Scheme, if a Participant Leaves prior to the Qualifying Date: 
  

	 	(i)	due to death or redundancy; and 

  

	 	(ii)	on or after the date half-way through the period from the Commencement Date to the Qualifying Date, 

 the Committee may (but has no obligation whatever to) deem the Exercise Date to have occurred and may (but has no obligation whatever to), at the time of
such declaration or at any subsequent time, deem the Performance Criteria to have been met, on the day immediately prior to the date on which the Participant Leaves, for a number of the Participant’s Options based on this formula: 

 

							
	 number of Options = number of all of the Participant’s Options
	  	x	  	n
—	  	
	  	  	t	  	

  

 7 

 TELECOM SHARE OPTION SCHEME 
  

 where 
 n is the number of days from the Commencement Date to the date on which the Participant Leaves (both inclusive) 
 t is the number of days from the Commencement Date to the Qualifying Date (both inclusive). 
 Where
the Committee does so, those Options will lapse on the first day after the expiration of 12 months from and including the date on which the Participant Leaves. 
  

	10.5	Continuation of Employment 

 Where a Participant
ceases to be in Employment for the purposes of the Scheme, but continues in employment with either: 
  

	 	(i)	a company that was but has ceased to be a Group company; or 

  

	 	(ii)	an entity that has acquired that Group company or all or part of the business of Telecom or a Group company, 

 (each an “Entity”) the Committee may (but has no obligation whatever to) declare that the Participant shall be deemed to remain in Employment
for the purposes of the Scheme for so long as the Participant is employed by that Entity. Where the Committee does so declare: 
  

	 	(iii)	the Committee may (but has no obligation whatever to), at the time of such declaration or any subsequent time, determine that the Performance Criteria (if any) for any particular
Grant shall be deemed to have been satisfied on the date the Participant ceases to be in Employment (the (“Cessation Date”); 

  

	 	(iv)	the Qualifying Date for such Participant’s Options as is determined by the Committee shall be either the earlier of: 

  

	 	(a)	the Qualifying Date specified in the Grant; or 

  

	 	(b)	the date that is 12 months after the Cessation Date; or 

  

	 	(c)	another date determined by the Committee not being more than the date that is 12 months after the Cessation Date; and 

  

	 	(v)	notwithstanding clause 11, all the Participant’s Live Options (irrespective of when the Qualifying Date for the relevant Live Options occurred) will lapse on the earlier of the
date the Participant Leaves employment with the Entity, the relevant Option Lapse Date(s) and the date that is 12 months after the Qualifying Date, 

  

 8 

 TELECOM SHARE OPTION SCHEME 
  

 provided that no Participant that is declared to be deemed to remain in Employment under this clause
shall be entitled to any further Grant following the Cessation Date unless that Participant actually enters Employment. 
  

	11	LAPSE OF OPTIONS 

  

	11.1	Rejection of Grant 

 If a Participant rejects a
Grant under clause 6.1, the Options under the Grant will lapse immediately. 
  

	11.2	Leave Prior to Qualifying Date 

 If a Participant
Leaves prior to the Qualifying Date, the Participant’s Options will lapse immediately, subject to clauses 10.4 and 10.5. 
  

	11.3	Lapse on Performance Expiry Date 

 If the Exercise
Date does not precede the Performance Expiry Date (where applicable), the Participant’s Options will lapse immediately. 
  

	11.4	Leave After Qualifying Date: Involuntary Event 

 If
a Participant Leaves due to an Involuntary Event or within six months from and including the date of a Takeover, the Participant’s Live Options (if any) will lapse on the first day after the expiration of one year from and including the date on
which the Participant Leaves or on the Option Lapse Date, whichever is the earlier. 
  

	11.5	Leave After Qualifying Date: Dismissal 

 Subject to
clause 11.4, if a Participant Leaves due to dismissal, the Participant’s Live Options (if any) will lapse immediately. 
  

	11.6	Leave After Qualifying Date: Other Reason 

 If a
Participant Leaves due to a reason other than the reasons referred to in clauses 11.4 and 11.5, the Participant’s Live Options (if any) will lapse on the first day after the expiration of three months from and including the date on which the
Participant Leaves or on the Option Lapse Date, whichever is the earlier. 
  

	11.7	Option Lapse Date 

 A Live Option, which has not
lapsed pursuant to clauses 11.4 to 11.6 (which, for the avoidance of doubt, are subject to clause 8.5) or 11.8, lapses on the Option Lapse Date, subject to clauses 8.5 and 11.8. 
  

	11.8	Breach 

 Notwithstanding clauses 11.4 to 11.7, if,
after the period of six months from the date on which it first gives notice pursuant to clause 8.3, the Committee considers that it is still unable to give notice in respect of an Option pursuant to clause 8.4 and/or the exercise of Options pursuant
to clause 8.5 would give rise 

  

 9 

 TELECOM SHARE OPTION SCHEME 
  

 
to a Breach, then Telecom is in default under the Scheme. Where Telecom is in default under this clause, the Participant and Telecom acknowledge and agree
the following: 
  

	 	(i)	Telecom must pay the Participant liquidated damages in the sum representing the difference between the Exercise Price and the average end of day market price of Shares on the
Exchange for the Business Days in the month immediately preceding the date of the Exercise Notice given by the Participant pursuant to clause 8.1 within ten Business Days; and 

  

	 	(ii)	that the amount payable under clause 11.8(i) is a genuine pre-estimate of the damages the Participant is likely to suffer as a result of the default; and 

 

	 	(iii)	that on payment of the amount under clause 11.8(i), all rights that Participant has to specific performance, compensation for breach, loss or damages, or any other remedy are waived
and/or extinguished and that the Live Option will lapse immediately. 

  

	11.9	Variation or Waiver 

 The Committee may vary or
waive the application of clauses 11.1 to 11.8 for any one or more of the Participants. 
  

	12	NO DIVESTMENT 

 No Participant may transfer, assign,
or otherwise dispose of or create any interest (including any security, legal or equitable interest) in an Option, without the prior written consent of the Committee. 
  

	13	AMENDMENT AND TERMINATION 

  

	13.1	Committee’s Discretion 

 Subject to clause
13.3, the Committee may from time to time: 
  

	 	(i)	vary any term of a Participant’s participation in the Scheme, with the agreement of the Participant; or 

  

	 	(ii)	amend the Scheme, if the Committee considers that the interests of Participants affected are not materially prejudiced. 

  

	13.2	Termination 

 Subject to clause 13.3, the Committee
may terminate the Scheme. 
  

 10 

 TELECOM SHARE OPTION SCHEME 
  

	13.3	Breach 

 The Committee: 
  

	 	(i)	may not amend (or vary any term of a Participant’s participation in), or terminate, the Scheme if this would give rise to a Breach; but 

  

	 	(ii)	may amend or terminate the Scheme if the Committee considers that this would avoid giving rise to a Breach. 

  

	13.4	Notice to Participants 

 The Committee will give
notice of any amendment to or termination of the Scheme to all Participants affected. Similarly, the Committee will give notice of any adjustment under clause 10 to all Participants affected. 
  

	14	QUOTATION 

 Options will not be quoted on a stock
exchange. 
  

	15	MISCELLANEOUS 

  

	15.1	Spirit of the Scheme 

 If any circumstance arises
which might result in the spirit and intent of the Scheme not being fulfilled, the Committee will use all reasonable endeavours to effect any modification to the Scheme required to preserve that spirit and intent. 
  

	15.2	Fractions 

 If a calculation or adjustment under the
Scheme produces a fraction of a cent or Share, the product will be rounded to the nearest whole number favourable to the Participant. 
  

	15.3	Entire Agreement 

 The Scheme represents all of the
terms on which Options are issued and exercised and Shares issued under the Scheme, except those which the Committee reasonably implies to give effect to the Scheme. 
  

	15.4	Delay 

 No failure, delay or indulgence by the
Committee in exercising any power or right conferred on it under the Scheme will operate as a waiver of that power or right; nor will a single exercise of a power or right preclude further exercises, or the exercise of any other power or right under
the Scheme. 
  

	15.5	Disputes 

 Any dispute which arises under the Scheme
will be determined by the Committee. The Committee’s decision will be final. 
  

	15.6	Notice 

 All notices and communications required to
be given or made under the Scheme will be in writing and addressed to the recipient at the address or facsimile 

  

 11 

 TELECOM SHARE OPTION SCHEME 
  

 
number from time to time designated by the recipient. Unless any other designations are given, the addresses and facsimile numbers of Telecom and a
Participant are those (if any) set out in the relevant Grant. Any notice or communication will be deemed to have been received: 
  

	 	(i)	at the time of delivery, if delivered by hand; 

  

	 	(ii)	on the second Business Day after the date of mailing, if sent by post or airmail with postage prepaid; or 

  

	 	(iii)	on the day on which confirmation of proper transmission is received (on transmission), if sent by facsimile. 

  

	15.7	Governing Law 

 The Scheme will be governed by and
construed in accordance with New Zealand law. 
  

	15.8	Construction 

 Unless the context requires
otherwise: 
  

	 	(i)	the singular includes the plural and vice versa, and words importing any gender include the other genders; 

  

	 	(ii)	a reference to a “person” includes any individual, partnership, committee and incorporated or unincorporated body (whether or not having a separate legal personality);

  

	 	(iii)	a reference to an “amendment” includes any deletion or addition; 

  

	 	(iv)	a reference to an enactment (statute or regulation) includes enactments in New Zealand and in any other jurisdiction affecting the Scheme, and is a reference to that enactment as
amended, or any enactment substituted for that enactment; 

  

	 	(v)	where a word or expression is defined in the Scheme, other parts of speech and grammatical forms of that word or expression have a corresponding meaning; and

  

	 	(vi)	a reference to a person includes its successors and permitted assigns. 

  

 12

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