Document:

Exhibit 10.2

 

CYANOTECH CORPORATION

 

2005 Stock Option Plan

Restated November 5, 2010

 

I.                                        PURPOSE
OF THE PLAN; DEFINITIONS

 

A.            This 2005 Stock Option Plan (the “Plan”) is intended to
promote the interests of Cyanotech Corporation, a Nevada corporation (the “Corporation”),
by providing (i) key employees (including officers) of the Corporation (or
its subsidiary corporations) and (ii) consultants and other independent
contractors who provide valuable services to the Corporation (or its subsidiary
corporations) with the opportunity to acquire, or increase their proprietary
interest in the Corporation as an incentive for them to join or remain in the
service of the Corporation (or its subsidiary corporations).

 

B.            The Plan becomes effective immediately upon approval of
the Corporation’s stockholders at the 2005 Annual Stockholders Meeting to be
held on August 22, 2005.  Such date
is hereby designated as the Effective Date of the Plan.  [revised by reverse stock
split effective November 3, 2006 (“2006 Split”); amended by stockholders
to increase amount of Stock Subject to Plan on September 9, 2008 (“2008
Amendment”)]

 

C.            For purposes of the Plan, the following definitions
apply:

 

Board:  the Corporation’s Board of Directors.

 

Committee:  The Committee of the Corporation’s Board of
Directors appointed by the Board to administer the plan.

 

Common
Stock:  shares of the Corporation’s
common stock, par value $0.02 per share. 
 [2006 Split]

 

Change
in Control:  a change in
ownership or control of the Corporation effected through either of the
following transactions:

 

(i)            any person or related group of persons (other than the
Corporation or a person that directly or indirectly controls, is controlled by,
or is under common control with, the Corporation) directly or indirectly
acquires beneficial ownership (within the meaning of Rule 13d-3 of the
Securities Exchange Act of 1934, as amended, “1934 Act”) of stock possessing
more than fifty percent (50%) of the total combined voting power of the
Corporation’s outstanding stock pursuant to a tender or exchange offer made
directly to the Corporation’s stockholders which the Board does not recommend
such stockholders accept; or

 

(ii)           there is a change in the composition of the Board over a
period of thirty-six (36) consecutive months or less such that a majority of
the Board members (rounded up to the next whole number) ceases, by reason of
one or more proxy contests for the election of Board members, to be comprised
of persons who either (A) have been Board members continuously since the
beginning of such period or (B) have been elected or nominated for
election as Board members during such period by at least a majority of the
Board members described in clause (A) who were still in office at the time
such election or nomination was approved by the Board.

 

Corporate
Transaction:  any of the
following stockholder-approved transactions to which the Corporation is a
party:

 

(i)            a merger or consolidation in which the Corporation is not
the surviving entity, except for a transaction the principal purpose of which
is to change the State in which the Corporation is incorporated,

 

(ii)           the sale, transfer or other disposition of all or
substantially all of the assets of the Corporation in complete liquidation or
dissolution of the Corporation, or

 

 

(iii)          any reverse merger in which the Corporation is the
surviving entity but in which stock possessing more than fifty percent (50%) of
the total combined voting power of the Corporation’s outstanding stock are
transferred to person or persons different from those who held such stock
immediately prior to such merger.

 

Employee:  a person who performs services while in the
employ of the Corporation or one or more subsidiary corporations, subject to
the control and direction of the employer entity not only as to the work to be
performed but also as to the manner and method of performance.

 

Market
Value:  the last reported price per
share of the Common Stock on the day in question on the NASDAQ Small-Cap
Market, or if the Common Stock is regularly traded in some other market or on
an exchange the closing selling price per share of the Common Stock on the date
in question, as such price is officially quoted by a national reporting
service.  If there is no such reported
price on the date in question, then the fair market value is the price on the
last preceding date for which such quotation exists.

 

Hostile
Take-Over:  a change in
ownership of the Corporation through the following transaction:

 

(i)            any person or related group of persons (other than the
Corporation or a person that directly or indirectly controls, is controlled by,
or is under common control with, the Corporation) directly or indirectly
acquires beneficial ownership (within the meaning of Rule 13d-3 of the
Securities Exchange Act of 1934, as swing profit restrictions of Section 16
of the 1934 Act.

 

Service: the
performance of services on a periodic basis to the Corporation (or any
subsidiary corporation) in the capacity of an Employee or from time to time as
an independent consultant, except to the extent otherwise specifically provided
in the applicable stock option agreement.

 

Take-Over
Price: the greater of (a) the Fair Market Value per share of Common
Stock on the date the option is surrendered to the Corporation in connection
with a Hostile Take-Over or (b) the highest reported price per share of
Common Stock paid by the tender offeror in effecting such Hostile
Take-Over.  However, if the surrendered
option is an Incentive Option, as defined in Section IV (C) of this Article One,
the Take-Over Price shall not exceed the clause (a) price per share.

 

D.            The following provisions shall be applicable in
determining the subsidiary corporations of the Corporation:

 

Each
corporation (other than the Corporation) in an unbroken chain of corporations beginning
with the Corporation shall be considered to be a subsidiary of the Corporation,
provided each such corporation (other than the last corporation) in the
unbroken chain owns, at the time of the determination, stock possessing fifty
percent (50%) or more of the total combined voting power of all classes of
stock in any other corporation in such chain.

 

II.                                   ADMINISTRATION
OF THE PLAN

 

A.            Except as otherwise determined by the Board, the Plan
shall be administered by the Board of Directors or by the Stock Option and
Compensation Committee of the Board (“Committee”) or other named Committee of
the Board designated by the Board of Directors subject to the requirements of
1934 Act Rule 16b-3:

 

(i)            The Committee of three (3) or more non-employee
Board members shall be appointed by the Board to administer the Plan. No Board
member is eligible to serve on the Committee unless such person qualifies as a “Non-Employee
Director” as permitted by 1934 Act Rule 16b-3.

 

(ii)           Members of the Committee serve for such term as the Board
may determine and are subject to removal by the Board at any time.

 

2

 

B.            The Committee by majority action thereof has the power
and authority (subject to the express provisions of the Plan) to establish such
rules and regulations as it may deem appropriate for the proper administration
of the Plan and to make such determinations under, and issue such
interpretations of, the provisions of the Plan and any outstanding option
grants thereunder as it may deem necessary or advisable.  All decisions of the Committee within the
scope of its administrative functions under the Plan are final and binding on
all parties.

 

C.            Service on the Committee is service as a Board member,
and members of the Committee [typo corrected] are
entitled to full indemnification and reimbursement as Board members for their
service on the Committee.  No member of
the Committee is liable for any act or omission made in good faith with respect
to the Plan or any option grant under the Plan.

 

III.                              ELIGIBILITY

 

A.            The persons eligible to participate in the Plan (“Optionees”)
are as follows:

 

(i)            officers and other employees of the Corporation (or its
subsidiary corporations) who render services which contribute to the
management, growth and financial success of the Corporation (or its subsidiary
corporations); and

 

(ii)           those consultants or other independent contractors who
provide valuable services to the Corporation (or its subsidiary corporations).

 

B.            Non-employee Board members are not eligible to
participate in the Plan.

 

C.            The Committee by majority action thereof has the power
and authority to determine which eligible persons are to receive option grants,
the number of shares to be covered by each such grant, the status of the
granted option as either an incentive stock option (“Incentive Option”) which
satisfies the requirements of Section 422 of the Internal Revenue Code or
a non-qualified option not intended to meet such requirements, the time or
times at which each granted option is to become exercisable, the maximum term
for which the Option may remain outstanding and the terms and provisions of the
Stock Option Agreement evidencing the Option.

 

IV.                               STOCK
SUBJECT TO THE PLAN

 

A.            Shares of the Corporation’s Common Stock available for
issuance under the Plan shall be drawn from either the Corporation’s authorized
but unissued shares of Common Stock or from reacquired shares of Common Stock,
including shares repurchased by the Corporation on the open market.  The maximum number of shares of Common Stock
which may be issued over the term of the Plan shall not exceed 700,000 shares,
subject to adjustment from time to time in accordance with the provisions of
this Section IV.  [the 2006 Split reduced maximum Plan shares to 200,000; the 2008
Amendment increased maximum Plan shares to 700,000]

 

B.            If one or more outstanding options under this Plan expire
or terminate for any reason prior to exercise in full then the shares subject
to the portion of each option not so exercised shall be available for
subsequent option grant under the Plan. 
All share issuances under the Plan reduce on a share-for-share basis the
number of shares of Common Stock available for subsequent option grants under
the Plan.  In addition, if the exercise
price of an outstanding option under the Plan is paid with shares of Common
Stock or shares of Common Stock otherwise issuable under the Plan are withheld
by the Corporation in satisfaction of the withholding taxes incurred in
connection with the exercise of an outstanding option under the Plan, then the
number of shares of Common Stock available for issuance under the Plan is
reduced by the gross number of shares for which the option is exercised, and
not by the net number of shares of Common Stock actually issued to the option
holder.

 

C.            If any change is made to the Common Stock issuable under
the Plan by reason of any stock split, stock dividend, recapitalization,
combination of shares, exchange of shares or other change affecting the
outstanding Common Stock as a class without the Corporation’s receipt of
consideration, then appropriate adjustments shall be made to (i) the
maximum number and/or class of stock issuable under the Plan and (ii) the
number and/or class of stock and price per share in effect under each option
outstanding under the Plan.  Such
adjustments to the outstanding options are to be effected in a manner which
precludes the enlargement or dilution of rights and benefits under such
options.  Such adjustments made by the
Committee are final, binding and conclusive.

 

3

 

V.                                    TERMS
AND CONDITIONS OF OPTIONS

 

Options
under the Plan are granted by action of the Committee and may, at the Committee’s
discretion, be either Incentive Options or non-qualified options. Persons who
are not Employees of the Corporation may only be granted non-qualified options.
Each granted option shall be evidenced by a Stock Option Agreement in the form
approved by the Committee; provided, however, that each such agreement complies
with the terms and conditions specified herein. Each Stock Option Agreement
evidencing an Incentive Option shall, in addition, be subject to the applicable
provisions of Section VI hereof.

 

A.            Option Price.

 

1.             The option price per share is determined by the
Committee in accordance with the following provisions:

 

(i)            The option price per share of the Common Stock subject to
an Incentive Option must in no event be less than one hundred percent (100%) of
the Market Value of such Common Stock on the grant date.

 

(ii)           The option price per share of the Common Stock subject to
a non-qualified stock option is the amount determined by the Committee at the
time of grant and may be less than, equal to or more than the Market Value of
such Common Stock on the grant date.

 

2.             The option price is immediately due upon exercise of the
option and payable in one of the alternative forms specified below;

 

(i)            full payment in cash or check made payable to the
Corporation’s order:

 

(ii)           full payment in shares of Common Stock held for the
requisite period necessary to avoid a charge to the Corporation’s earnings for
financial reporting purposes and valued at Market Value on the Exercise Date;

 

(iii)          full payment in a combination of shares of Common Stock
held for the requisite period necessary to avoid a charge to the Corporation’s
reported earnings and valued at Market Value on the Exercise Date and cash or
check payable to the Corporation’s order; or

 

(iv)          full payment through a broker-dealer sale and remittance
procedure pursuant to which the Optionee (a) provides irrevocable written
instructions to a designated brokerage firm to effect the immediate sale of the
purchased shares and remit to the Corporation, out of the sale proceeds
available on the settlement date, sufficient funds to cover the aggregate
option price payable for the purchased shares plus all applicable Federal and
State income and employment taxes required to be withheld by the Corporation in
connection with such purchase and (b) provides written directives to the
Corporation to deliver the certificates for the purchased shares directly to
such brokerage firm in order to complete the sale transaction.

 

For
purposes of this subparagraph 2, the Exercise Date is the date on which written
notice of the option exercise is delivered to the Corporation.  Except to the extent the sale and remittance
procedure is utilized in connection with the exercise of the option, payment of
the option price for the purchased shares must accompany such notice.

 

4

 

B.            Term and Exercise of Options.

 

Each
option granted hereunder is exercisable at such time or times, and excluding
all specified vesting periods during the specified term period, and for such
number of shares as is determined by the Committee and set forth in the Stock
Option Agreement evidencing such option. 
No granted option shall, however, have a term in excess of ten (10) years.  Subject to Paragraph E of this Section V,
during the lifetime of the Optionee, the option is exercisable only by the
Optionee and shall not be assignable or transferable other than by transfer of
the option effected by will or by the laws of descent and distribution
following the Optionee’s death, or pursuant to a qualified domestic relations
order as defined by the Internal Revenue Code of 1986, as amended, or Title I
of the Employment Retirement Income Security Act, or the rules thereunder.

 

C.            Termination of Service.

 

1.             If the Optionee ceases Service while holding one or more
options hereunder, each such option will not remain exercisable beyond the
limited post-Service exercise period specified by the Committee in the Stock
Option Agreement evidencing the grant, unless the Committee otherwise extends
such period in accordance with subparagraph C.5 below.

 

2.             During the post-Service exercise period, the option may
not be exercised for more than the number of option shares (if any) in which
the Optionee is vested at the time of cessation of Service.  Upon the expiration of such post-Service
exercise period or (if earlier) upon the expiration of the option term, the
option shall terminate and cease to be outstanding.  In any case, each option terminates and
ceases to be outstanding, at the time of the Optionee’s cessation of Service
with respect to any option shares for which such option is not otherwise at the
time exercisable.

 

3.             If the Optionee dies while holding one or more
outstanding options hereunder, each such option may be exercised, subject to
the limitations of subparagraph 2 above, by the personal representative of the
Optionee’s estate or by the person or persons to whom the option is transferred
pursuant to the Optionee’s will or the laws of descent and distribution or as
otherwise permitted herein.

 

4.             If (i) the Optionee’s Service is terminated for
misconduct (including, but not limited to, any act of dishonesty, willful
misconduct, fraud or embezzlement) or (ii) the Optionee makes any
unauthorized use or disclosure of confidential information or trade secrets of
the Corporation or its subsidiaries, then in any such event all outstanding
options held by the Optionee hereunder terminate immediately and cease to be
outstanding.

 

5.             Except as otherwise determined by the Board the
Committee has full power and authority to extend the period of time for which
the option is to remain exercisable following the Optionee’s cessation of
Service or death from the limited period specified in the instrument evidencing
such grant to such greater period of time as the Committee deems appropriate
under the circumstances.  In no event,
however, shall such option be exercisable after the specified expiration date
of the option term.

 

6.             The Committee has complete discretion, exercisable
either at the time the option is granted or at any time the option remains
outstanding, to permit one or more options granted hereunder to be exercised
not only for the number of shares for which each such option is exercisable at
the time of the Optionee’s cessation of Service but also for one or more
subsequent installments of purchasable shares for which the option would
otherwise have become exercisable had such cessation of Service not occurred.

 

D.            Stockholder Rights.

 

An
Optionee has none of the rights of a stockholder with respect to any option
shares until such person or its nominee, guardian or legal representative has
exercised the option and paid the option price for the purchased shares.

 

5

 

E.            Assignment; Limited Transferability of Stock Options

 

No
option granted under the Plan may be sold, transferred, pledged, assigned, or
otherwise alienated or hypothecated, otherwise than by will, by the laws of
decent and distribution or by a qualified domestic relations order as provided
in Section V, Paragraph B. 
Notwithstanding the foregoing, the Committee may, in its discretion,
authorize all or a portion of the options granted to be on terms that permit
transfer to:

 

(i)            the spouse, children or grandchildren of the Optionee (“Immediate
Family Members”);

 

(ii)           a trust or trusts for the exclusive benefit of such
Immediate Family Members, or;

 

(iii)          a partnership in which such Immediate Family Members are
the only partners, provided that:

 

(A)                               there may be no
consideration for any such transfer;

 

(B)                               the Stock
Option Agreement pursuant to which such Options are granted expressly provides
for transferability in a manner consistent with this Section V, Paragraph
E; and

 

(C)                               subsequent
transfers of transferred Options shall be prohibited except those in accordance
with this Section V, Paragraph E.

 

Following
transfer, any such options continue to be subject to the same terms and
conditions as were applicable immediately prior to transfer, provided that for
purposes of this Section V, Paragraph E the term Optionee shall be deemed
to refer to the transferee.  The
provisions of the option relating to the period of exercisability and
expiration of the Option continue to apply with respect to the original
Optionee, and the Options exercisable or received by the transferee only to the
extent, and for the periods, set forth in said option.

 

VI.                               INCENTIVE
OPTIONS

 

The
terms and conditions specified in this Section VI are applicable to all
Incentive Options granted hereunder.  The
Stock Option Agreement relating to Incentive Options must be in accordance with
Section 422(b) of the Internal Revenue Code or a succession Section thereof.  Incentive Options may only be granted to
persons who are Employees of the Corporation. 
Options which are specifically designated as “non-qualified” options when
issued under the Plan are not subject to this Section VI.

 

A.            Dollar Limitation.

 

The
aggregate Market Value (determined as of the respective date of dates of grant
of the Common Stock) [typo corrected] for
which one or more options granted to any Employee under this Plan (or any other
option Plan of the Corporation or its subsidiary corporations) may for the
first time become exercisable as incentive stock options under the Federal tax
laws during any one calendar year shall not exceed the sum of One Hundred
Thousand dollars ($100,000).  To the
extent the Employee holds two (2) or more such options which become
exercisable for the first time in the same calendar year, the foregoing
limitation on the exercisability of such options as incentive stock options
under the federal tax laws shall be applied on the basis of the order in which
such options are granted.  If the shares
of Common Stock for which any Incentive Option first becomes exercisable in any
calendar year exceed the applicable one hundred thousand dollar ($100,000)
limitation, then the option may nevertheless be exercised in that calendar year
for the excess number of shares as a non-qualified option under the Federal tax
laws.

 

B.            10% Stockholder.

 

If
any person to whom an Incentive Option is granted is the owner of stock (as
determined under Section 424(d) of the Internal Revenue Code)
possessing ten percent (10%) or more of the total combined voting power of all
classes of stock of the corporation, the option price per share must not be
less than one hundred and ten percent (110%) of the fair market value per share
of Common Stock on the grant date, and the option term must not exceed five (5) years,
measured from the grant date.

 

6

 

Except
as modified by the preceding provisions of this Section VI, the provisions
of the Plan apply to all Incentive Options granted hereunder.

 

VII.                          CORPORATE
TRANSACTIONS / CHANGES IN CONTROL

 

A.            Each option outstanding at the time of a Corporate
Transaction automatically accelerates so that each such option shall,
immediately prior to the specified effective date for such Corporate
Transaction, become fully exercisable with respect to the total number of
shares of Common Stock at the time subject to such option and may be exercised
for all or any portion of such shares. 
However, an outstanding option does [typo corrected] not
so accelerate if and to the extent: 
(i) such option is, in connection with the Corporate Transaction,
either to be assumed by the successor corporation or parent thereof or to be
replaced with a comparable option to purchase shares of the capital stock of
the successor corporation or parent thereof, (ii) such option is to be
replaced with a cash incentive program of the successor corporation which
preserves the option spread existing at the time of the Corporate Transaction
and provides for subsequent payout in accordance with the same exercise
schedule applicable to such option, or (iii) the acceleration of such
option is subject to other limitations imposed by the Committee, at the time of
the option grant. The determination of option comparability by the Committee
under clause (i) above is final, binding and conclusive.  The Committee also has full power and
authority to grant options under the Plan which are to automatically accelerate
in whole or in part immediately prior to the Corporate Transaction or upon the
subsequent termination of the Optionee’s Service, whether or not those options
are otherwise to be assumed or replaced in connection with the consummation of
such Corporate Transaction.

 

B.            Upon the consummation of the Corporate Transaction, all
outstanding options shall terminate and cease to be outstanding, except to the
extent assumed by the successor corporation or its parent company.

 

C.            Each outstanding option which is assumed in connection
with the Corporate Transaction or is otherwise to continue in effect shall be
appropriately adjusted, immediately after such Corporate Transaction, to apply
and pertain to the number and class of stock which would have been issued to
the option holder, in consummation of such Corporate Transaction, had such
person exercised the option immediately prior to such Corporate
Transaction.  Appropriate adjustments shall
also be made to the Option price payable per share, provided the aggregate
option price payable for such stock shall remain the same.  In addition, the class and number of stock
available for issuance under the Plan following the consummation of the Corporate
Transaction shall be appropriately adjusted.

 

D.            The grant of options shall in no way affects the right of
the Corporation to adjust, reclassify, reorganize or otherwise change its
capital or business structure or to merge, consolidate, dissolve, liquidate or
sell or transfer all or any part of its business or assets.

 

E.            Except as otherwise determined by the Board, the
Committee has the discretionary authority, exercisable either in advance of any
actually-anticipated Change in Control or at the time of an actual Change in
Control, to provide for the automatic acceleration of one or more outstanding
options upon the occurrence of the Change in Control and to condition any such
option acceleration upon the subsequent termination of the Optionee’s Service
within a specified period following the Change in Control.

 

F.             Any options accelerated in connection with the Change in
Control remain fully exercisable until the expiration of the option term.

 

G.            The exercisability as incentive stock options under the
Federal tax laws of any options accelerated under this Section VII in
connection with a Corporate Transaction or Change in Control remain subject to
the dollar limitation of Section VI, Paragraph A.

 

7

 

VIII.                     CANCELLATION
AND RE-GRANT OF OPTIONS

 

Except
as otherwise determined by the Board, the Committee has the authority to
effect, at any time and from time to time, with the consent of the affected
Optionees, the cancellation of any or all outstanding options hereunder and to
grant in substitution new options under the Plan covering the same or different
numbers of shares of Common Stock but with an option price per share based upon
the Market Value of the Common Stock on the new grant date.

 

IX.                              AMENDMENT
OF THE PLAN AND AWARDS

 

The
Board has complete and exclusive power and authority to amend or modify the
Plan in any or all respects, provided that no such amendment or modification
shall adversely affect rights and obligations with respect to options at the
time outstanding under the Plan, unless the Optionee consents to such
amendment.  In addition, the Board may
not, without the approval of the Corporation’s stockholders, amend the Plan to (i) materially
increase the maximum number of shares issuable under the Plan, except for
permissible adjustments under Section IV Paragraph C, (ii) materially
modify the eligibility requirements for the Plan participation or (iii) materially
increase the benefits accruing to Optionees.

 

X.                                   TAX
WITHHOLDING

 

A.            The Corporation’s obligation to deliver shares of Common
Stock upon exercise of stock options or the vesting of shares acquired upon
exercise of such options under the Plan is subject to the satisfaction of all
applicable Federal, State and local income tax and employment tax withholding
requirements.

 

B.            The Committee may, in its discretion and in accordance
with the provisions of this Section X and such supplemental rules as
the Committee may from time to time adopt (including the applicable safe-harbor
provisions of 1934 Act Rule 16b-3), provide any or all holders of
non-qualified options under the Plan with the right to use shares of Common
Stock in satisfaction of all or part of the Federal, State and local income tax
and employment tax liabilities incurred by such holders in connection with the
exercise of their options. Such right may be provided to any such holder in
either or both of the following formats:

 

(i)            Stock Withholding: The holder of a non-qualified option
may be provided with the election to have the Corporation withhold, from the
shares of Common Stock otherwise issuable upon the exercise of such
non-qualified option, a portion of those shares with an aggregate Fair Market
Value equal to the percentage of the applicable Taxes (up to one hundred
(100%)) as specified by such holder.

 

(ii)           Stock Delivery: The Committee may, in its discretion,
provide the holder of a non-qualified option with the election to deliver to
the Corporation, at the time the non-qualified option is exercised, one or more
shares of Common Stock already held by such person with an aggregate Market
Value (100%) as specified by such person) of the Taxes incurred in connection
with such option exercise.

 

XI.                              TERM OF
THE PLAN

 

The
Plan terminates upon the earlier of (i) August 21, 2015 or (ii) the
date on which all shares available for issuance under the Plan have been issued
or canceled pursuant to the exercise of options granted under the Plan.  If the date of termination is determined
under clause (i) above, then all option grants and unvested stock
issuances outstanding on such date continue to have force and effect in
accordance with the provisions of the Stock Option Agreements evidencing such
grants or issuances.

 

XII.                         USE OF
PROCEEDS

 

Any
cash proceeds received by the Corporation from the sale of shares pursuant to option
grants under the Plan may be used for general corporate purposes.

 

8

 

XIII.                    REGULATORY
APPROVALS

 

A.            The implementation of the Plan, the granting of any
option under the Plan, and the issuance of Common Stock upon the exercise or
surrender of the option grants made hereunder is subject to the Corporation’s
procurement of all approvals and permits required by regulatory authorities
having jurisdiction over the Plan, the options granted under it, and the Common
Stock issued pursuant to it.

 

B.            No shares of Common Stock or other assets are to be
issued or delivered under the Plan unless and until there is compliance with
all applicable requirements of Federal and State securities laws, including the
filing and effectiveness of the Form S-8 registration statement for the
shares of Common Stock issuable under the Plan, and all applicable listing
requirements of any securities exchange on which the Common Stock is then
listed.

 

XIV.                     NO
EMPLOYMENT/SERVICE RIGHTS

 

Neither
the action of the Corporation in establishing the Plan, nor any action taken by
the Committee hereunder, nor any provision of the Plan is to be construed so as
to grant any person the right to remain in the employ or service of the
Corporation (or any subsidiary corporation) for any period of specific
duration, and the Corporation (or any subsidiary corporation retaining the
services of such person) may terminate such person’s employment or service at
any time and for any reason, with or without cause.

 

XV.                          MISCELLANEOUS
PROVISIONS

 

A.            The right to acquire Common Stock under the Plan may not
be assigned, encumbered or otherwise transferred by any Optionee, except as
specifically provided in the Plan.

 

B.            The provisions of the Plan relating to the exercise of
options and the vesting of shares shall be governed by the laws of the State of
Hawaii, as such laws are applied to contracts entered into.

 

C.            The provisions of the Plan shall inure to the benefit of,
and be binding upon, the Corporation and its successors or assigns, whether by
Corporate Transaction or otherwise, and the Optionees, the legal
representatives of their respective estates, their respective heirs or legatees
and their permitted assignees.

 

D.            Except to the extent that federal laws or the Nevada
Corporate Code [revised] control, the Plan and
all Stock Option Agreements hereunder are to be construed in accordance with
and governed by the law of the State of Hawaii.

 

9Exhibit 10.1

 

SEPARATION
AGREEMENT

 

This Separation Agreement (the “Agreement”)
is entered into on this 10th day of November, 2010, by and among
Morningstar Associates, LLC, a Delaware limited liability company (the “Company”),
Morningstar, Inc., an Illinois corporation and the sole member of the
Company (the “Parent”), and Patrick Reinkemeyer (the “Executive”).

 

WHEREAS, the Executive is
currently employed as the President of the Company and an executive officer of
the Parent; and

 

WHEREAS, the Company, Parent and
the Executive desire to set forth herein their mutual agreement with respect to
the matters addressed herein, including matters pertaining to the Executive’s
cessation of his employment and positions with the Company and Parent, certain
other matters pertaining to the Executive’s consulting relationship with the
Company and Parent  following the
Executive’s cessation of employment and the Executive’s release of claims, all
upon the terms set forth herein.

 

NOW, THEREFORE, in consideration
of the mutual promises and agreements contained herein, the adequacy and
sufficiency of which are hereby acknowledged, the Company, Parent and the
Executive hereby agree as follows:

 

1.  Termination of Employment and Service.  As of December 15, 2010 (the “Date of
Termination”), the Executive shall cease to be an employee and officer of
the Parent and Company.

 

2.  Payment of Accrued Amounts; Accrued
Benefits; Stock Options.  Not later
than 30 days after the Date of Termination, the Company shall pay to the
Executive all amounts, if any, due to the Executive for earned salary through
the Date of Termination. Executive’s rights to receive benefits accrued or
payable under the Company’s employee benefit plans shall be governed by the
terms of such plans. Stock options held by Executive and which have vested as
of the Date of Termination shall remain exercisable in accordance with the
terms of the Parent’s 2004 Stock Incentive Plan.  In addition, not later than 30 days after the
Date of Termination, the Company shall reimburse the Executive in accordance
with the Company’s policies and procedures for all proper expenses incurred by
the Executive in the performance of his duties through the Date of Termination.

 

3.  Post-Termination Benefits.

 

(a) 
Severance Payments.  The Company
shall pay to the Executive a cash payment in an aggregate gross amount equal to
$2.2 million, consisting of an incentive bonus equal to $250,000 and a
severance payment equal to $1,950,000 (collectively, the “Severance Benefit”).  The Severance Benefit shall be payable as
follows: (i) $1.1 million of the Severance Benefit shall be paid in a lump
sum cash payment no later than December 31, 2010; and (ii) the
remaining $1.1 million of the Severance Benefit shall be payable over the
period commencing on the first payroll date following January 1, 2011 and
ending on the last payroll date immediately preceding December 31, 2011,
with such amounts payable in substantially equal installments and in accordance
with the Company’s normal payroll practices.

 

 

(b) 
Employee Benefits.  Provided that
the Executive timely elects to receive continued coverage under the Company’s
group medical and dental plans pursuant to the Consolidated Omnibus Budget
Reconciliation Act of 1986, as amended (“COBRA”), the Company shall pay to the Executive, as an additional severance
benefit, a cash payment equal to the difference between the cost of COBRA
premiums and the cost of active employee premiums for 12 months of COBRA
coverage, as calculated by the Company as of the Date of Termination.  Such payment shall constitute taxable income
to the Executive and shall be paid in a lump sum prior to December 31,
2010. If the Executive is entitled to any benefit under the current
terms and conditions of any employee benefit plan of the Parent or Company that
is accrued and vested on the Date of Termination and that is not expressly
referred to in this Agreement, such benefit shall be provided to the Executive
in accordance with the terms and conditions of such employee benefit plan.

 

(c) 
Compliance with Agreement. 
Notwithstanding anything herein to the contrary, if the Executive
breaches the terms of this Agreement and the Executive does not cure such
breach (if curable) within 30 days after receipt of written notice from the
Company describing such breach, the Executive shall forfeit any and all rights
to the post-termination payments made or to be made pursuant to this Section 3.

 

4.  Consulting Arrangement.

 

(a) 
Consulting Services. The Parent and Company hereby agree to retain the
Executive as a consultant, and the Executive hereby agrees to be retained by
the Parent and Company, upon the terms and subject to the conditions hereof for
the period commencing on the Date of Termination and ending on the date that is
twelve (12) months following the Date of Termination, unless earlier terminated
pursuant to this Section 4 (such period, the “Consulting Period”).  During the Consulting Period, the Executive
shall make himself available at mutually acceptable times to perform consulting
services with respect to the businesses conducted by the Parent and Company; provided,
however, that  such consulting
services shall not exceed 10  hours per
month.  Subject to the prior approval of
the Parent and in accordance with Section 19 of the Agreement, the Parent
shall reimburse the Executive in accordance with the Parent’s policies and
procedures for all proper expenses incurred by the Executive in the performance
of his consulting duties during the Consulting Period. In accordance with the
terms of this Agreement, the Executive shall comply with reasonable requests
for the Executive’s consulting services and shall devote his reasonable best
efforts, skill and attention to the performance of such consulting services; provided,
however, that nothing in this Section 4 shall preclude Executive
from accepting employment with or providing services to any other person or
entity (provided such employment or services are not prohibited by Section 10
hereof) and Parent and Company agree that any consulting services requested
hereunder shall not interfere with Executive’s employment or services.  The Executive shall take his direction as a
consultant solely from the Parent’s Chief Executive Officer or the President of
Parent’s Global Investment Management Division and shall not interact with any
of the Parent’s or Company’s other employees or directors in his capacity as a
consultant, except to the extent he is directed to do so by the Chief Executive
Officer.

 

2

 

(b) 
Termination.  This Section 4
may be terminated at any time (i) by the Executive on 30  days prior written notice to the Parent and (ii) by
the Parent upon written notice to the Executive.

 

5.  Federal and State Withholding.  The Company shall deduct from any
compensation payable by the Company to the Executive the amount of all taxes
required to be withheld under applicable law with respect to such
payments.  For purposes of determining
all applicable tax withholdings, any compensation recognized by the Executive
upon the exercise of the Executive’s stock options in accordance with the terms
of the Parent’s 2004 Stock Incentive Plan and the amounts to be paid to
Executive pursuant to Section 3 
hereof shall be treated as wages subject to all applicable withholding
requirements.

 

6.  Return of Parent and Company Property.  Promptly following the Termination Date (but
in no event later than three business days following such date), the Executive
shall return to the Parent all property of the Parent and Company in the
Executive’s possession or under the Executive’s control, including but not
limited to any office, computing or communications equipment; provided, however,
Parent or the Company shall take reasonable efforts to transfer to Executive
the right to continue to use the phone number for his Company-provided cellular
phone.

 

7.  Release of Claims.

 

The Executive, on behalf of
himself and anyone claiming through him, including, but not limited to, his
past, present and future spouses, family members, relatives, agents, attorneys,
representatives, heirs, executors and administrators, and the predecessors,
successors and assigns of each of them, hereby releases and agrees not to sue
the Company, Parent or any of their divisions, subsidiaries, affiliates, other
related entities (whether or not such entities are wholly owned) or the owners,
officers, directors, agents, attorneys or representatives thereof, or the
predecessors, successors or assigns of each of them (hereinafter jointly
referred to as the “Company Released Parties”), with respect to any and
all known or unknown claims which the Executive now has, has ever had, or may
in the future have, against any of the Company Released Parties for or related
in any way to anything occurring from the beginning of time up to and including
the date on which he signs this Agreement, including, without limiting the
generality of the foregoing, any and all claims which in any way result from,
arise out of, or relate to, the Executive’s employment by any of the Company
Released Parties or the termination of such employment, including, but not
limited to, any and all claims for severance or termination payments under any
agreement between the Executive and any of the Company Released Parties or any
program or arrangement of any of the Company Released Parties or any claims
that could have been asserted by the Executive or on his behalf against any of
the Company Released Parties in any federal, state or local court, commission,
department or agency under any fair employment, contract or tort law, or any
other federal, state or local law, regulation or ordinance (as in effect or
amended from time to time), including, without limitation, the Age
Discrimination in Employment Act, Title VII of the Civil Rights Act of 1964,
the Employee Retirement Income Security Act of 1974, the Americans with
Disabilities Act, the Family and Medical Leave Act, or under any compensation,
bonus, severance, retirement or other benefit plan; provided, however,
that nothing contained in this Section 7 shall apply to, or release the
Company or Parent from (i) any obligation contained in this Agreement, (ii) any

 

3

 

obligation which the Company or Parent may have to provide
benefits to the Executive under any plans or programs of the Company or Parent
which continue to be applicable to the Executive, except as otherwise expressly
provided in this Agreement, (iii) any obligation which the Parent or the
Company may have to indemnify the Executive pursuant to their articles of
incorporation, by-laws, operating agreement or other governing documents or the
2005  indemnification agreement entered
into with Executive;  or (iv) any
obligation which the Company or Parent may have to provide coverage to the Executive
pursuant to their director and officer insurance policy with respect to actions
or omissions of the Executive during his service as an officer or director of
the Company or Parent.  The Executive
expressly represents and warrants that he has not filed or had filed on his
behalf any claim against any of the Company Released Parties, and has not
transferred or assigned any rights or causes of action that he might have
against any of the Company Released Parties.

 

Executive represents that he has
had the opportunity and time to consult with his own legal counsel concerning
the provisions of this Agreement and that he has been given up to twenty-one
(21) days from the date of the Company’s signature as set forth below to
consider this Agreement and determine whether to accept and sign this
Agreement.  Following his acceptance and
signing of this Agreement, Executive has seven (7) calendar days to revoke
the Agreement by delivering notice of revocation to the Company in accordance
with Section 13.

 

8.  Authority.  The Executive expressly represents and
warrants that the Executive is the sole owner of the actual and alleged claims,
demands, rights, causes of action and other matters that are released herein;
that the same have not been transferred or assigned or caused to be transferred
or assigned to any other person, firm, corporation or other legal entity; and
that the Executive has the full right and power to grant, execute and deliver
the general release, undertakings and agreements contained herein.

 

9.
 Non-Admissions.  Nothing in this Agreement is intended to or
shall be construed as an admission by the Parent or Company or any of the other
Company Released Parties that any of them violated any law, interfered with any
right, breached any obligation or otherwise engaged in any improper or illegal
conduct.  The Company, Parent, and the
other Company Released Parties expressly deny any such illegal or wrongful
conduct.

 

10.  Noncompetition and Nonsolicitation.

 

(a) 
The Executive agrees, on behalf of himself and his affiliates, that for a
period of twelve (12) months following the Date of Termination, neither the
Executive nor any of his affiliates will directly or indirectly (whether as
principal, agent, independent contractor, partner, employee, consultant or
otherwise) perform for any of the organizations set forth in Exhibit A
attached hereto or any affiliates of such organizations, the same or
substantially the same functions or job duties, with respect to competitive
products or services, that the Executive performed for the Parent or Company; provided,
however, that nothing set forth in this Section 10(a) shall
prohibit the Executive or any of his affiliates from owning not in excess of 2%
in the aggregate of any class of capital stock of any corporation if such stock
is publicly traded and listed on any national or regional stock exchange. For
purposes of this Section 10(a), a competing product or service is a
product or service which replaces a product or service which is being provided
by the Parent or Company as of the Date of Termination.

 

4

 

(b) 
The Executive agrees, on behalf of himself and his affiliates, that for a
period of twelve (12) months following the Date of Termination, neither the
Executive nor any of his affiliates will directly or indirectly solicit,
attempt to solicit, induce or encourage any person who is in the employ or
service of the Parent, Company or any of their affiliates, or any of their
respective consultants or independent contractors, to terminate his or her
relationship with the Parent, Company or any of their affiliates (as the case
may be) or become employed by the Executive, any of his affiliates, or any
other person.

 

(c) 
It is expressly understood and agreed that the restrictions contained in this Section 10
are reasonable and necessary to protect the business of the Parent, Company and
their affiliates.  Accordingly, if a
final judicial determination is made that the time, territory, scope or any
other restriction contained in this Section 10 is unreasonable or
otherwise unenforceable, neither this Agreement nor the provisions of this Section 10
shall be rendered void, but shall be deemed amended to apply as to such maximum
scope, time and territory and to such other extent as such court may judicially
determine or indicate to be reasonable, or if the court or other governmental
authority does not so determine or indicate, to the maximum extent which any
pertinent statute or judicial decision may indicate to be a reasonable
restriction under the circumstances involved, and as so modified, the
restrictions contained in this Section shall be binding and enforceable.

 

(d) 
The Executive agrees and acknowledges that remedies at law for any breach of
his obligations under this Section 10 are inadequate and that in addition
thereto the Parent, Company and their affiliates shall be entitled to seek
equitable relief, including injunction and specific performance, in the event
of any such actual or threatened breach. 
The Executive acknowledges that the covenants set forth in this Section 10
are an essential element of this Agreement and that, but for the agreement of
the Executive to comply with these covenants, the Parent and Company would not
have entered into this Agreement.  The
Executive acknowledges that this Section 10 constitutes an independent
covenant and shall not be affected by performance or nonperformance of any
other provision of this Agreement by the Parent or Company.

 

11.  Confidentiality; Assignment of Rights.

 

(a) 
The Executive shall not disclose to anyone or make use of any trade secret or
proprietary or confidential information of the Parent, Company and their
affiliates, including such trade secret or proprietary or confidential
information of any customer or other entity to which the Parent, the Company or
one of their affiliates owes an obligation not to disclose such information,
which the Executive acquired during the term of his employment by the Company,
including but not limited to records kept in the ordinary course of business,
except (i) when required to do so by a court of law, by any governmental
agency having supervisory authority over the business of the Company or by any
administrative or legislative body (including a committee thereof) with apparent
jurisdiction to order him to divulge, disclose or make accessible such
information, or (ii) as to such confidential information that becomes
generally known to the public or trade without violation of this Section 11.

 

(b) 
The Executive hereby sells, assigns and transfers to the Company all of his
right, title and interest in and to all inventions, discoveries, improvements
and copyrightable subject matter (the “rights”) which during the term of his
employment by the Company were 

 

5

 

made or
conceived by him, alone or with others, and which are within or arise out of
any general field of the Company’s business or arise out of any work he
performs or information he received regarding the business of the Company while
employed by the Company.  The Executive
shall fully disclose to the Company as promptly as available all information
known or possessed by him concerning the rights referred to in the preceding
sentence, and upon request by the Company and without any further remuneration
in any form to him by the Company, but at the expense of the Company, execute
all applications for patents and for copyright registration, assignments
thereof and other instruments and do all things which the Company may deem necessary
to vest and maintain in it the entire right, title and interest in and to all
such rights.

 

12.  Nondisparagement.

 

(a) 
The Executive will not, nor will he cause or assist any other person to, make
any statement to a third party or take any action which is intended to or would
reasonably have the effect of disparaging or harming the Parent or Company or
the business reputation of the Parent or Company; provided, however,
that this provision shall not preclude such truthful disclosure or testimony as
may be required by a court of law, by any governmental agency having
supervisory authority over the business of the Parent or Company or by any
administrative or legislative body (including a committee thereof) with
apparent jurisdiction to order him to make such disclosure or provide such
testimony.

 

(b)  The
Parent and Company will not, nor will they cause or assist any other person to,
make any statement to a third party or take any action which is intended to or
would reasonably have the effect of disparaging or harming the Executive or his
business reputation; provided, however, that this provision shall
not preclude such truthful disclosure or testimony as may be required by a
court of law, by any governmental agency having supervisory authority over the
business of the Parent or Company or by any administrative or legislative body
(including a committee thereof) with apparent jurisdiction to order the Parent
or Company to make such disclosure or provide such testimony.

 

13.  Notices.  All notices and other communications required
or permitted hereunder shall be in writing and shall be deemed given when (a) delivered
personally or by overnight courier to the following address of the other
parties hereto (or such other address for such parties as shall be specified by
notice given pursuant to this Section) or (b) sent by facsimile to the
following facsimile number of the other parties hereto (or such other facsimile
number for such parties as shall be specified by notice given pursuant to this
Section), with the confirmatory copy delivered by overnight courier to the
address of such parties pursuant to this Section 13:

 

If to the Parent or Company, to:

 

Morningstar, Inc.

22 West Washington Street

Chicago, IL 60602

Attn:  General Counsel

Facsimile:  (312)
244-8032

 

If to Executive, to:

 

6

 

Patrick Reinkemeyer

At the most recent address on
file with the Company

 

14.  Severability.  Whenever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid
under applicable law, but if any provision of this Agreement is held to be
invalid, illegal or unenforceable in any respect under applicable law or rule in
any jurisdiction, such invalidity, illegality or unenforceability shall not
affect the validity, legality or enforceability of any other provision of this
Agreement or the validity, legality or enforceability of such provision in any
other jurisdiction, but this Agreement shall be reformed, construed and
enforced in such jurisdiction as if such invalid, illegal or unenforceable
provision had never been contained herein.

 

15.  Entire Agreement.  This Agreement shall constitute the entire
agreement and understanding between the parties with respect to the subject
matter hereof and supersedes and preempts any prior understandings, agreements
(including, without limitation, all equity award agreements between the Parent
or Company and the Executive) or representations by or between the parties,
written or oral, which may have related in any manner to the subject matter
hereof.  The Executive acknowledges that
neither the Parent nor Company has made any representations regarding the tax
consequences of payments under this Agreement and that Executive has had the
opportunity to consult Executive’s tax advisor, if any.

 

16.  Successors and Assigns.  This Agreement shall be enforceable by
Executive and Executive’s heirs, executors, administrators and legal
representatives, and by the Company and Parent and their successors and assigns.  Executive may not assign this Agreement and
any such assignment shall be null and void.

 

17.  Governing Law.  This Agreement shall be governed by and
construed and enforced in accordance with the internal laws of the State of
Illinois without regard to principles of conflict of laws.

 

18.  Amendment and Waiver.  The provisions of this Agreement may be
amended or waived only by the written agreement of the Company, Parent and
Executive, and no course of conduct or failure or delay in enforcing the provisions
of this Agreement shall affect the validity, binding effect or enforceability
of this Agreement.

 

19.  Section 409A.  This Agreement is intended to comply with the
requirements of Section 409A of the Internal Revenue Code of 1986, as
amended (the “Code”), and shall be interpreted and construed consistently with
such intent.  The payments to the
Executive pursuant to this Agreement are also intended to be exempt from Section 409A
of the Code to the maximum extent possible, under either the separation pay
exemption pursuant to Treasury regulation §1.409A-1(b)(9)(iii) or as
short-term deferrals pursuant to Treasury regulation §1.409A-1(b)(4), and for purposes of the separation pay
exemption, each installment paid to the Executive under this Agreement shall be
considered a separate payment.    In the event the terms of this Agreement
would subject the Executive to taxes or penalties under Section 409A of
the Code (“409A Penalties”), the Parent, Company and Executive shall cooperate
diligently to amend the terms of the Agreement to avoid such 409A Penalties, to
the extent possible; provided that in no event shall the Parent or Company be
responsible for any 409A Penalties that arise in 

 

7

 

connection
with any amounts payable under this Agreement. 
To the extent any amounts under this Agreement are payable by reference
to Executive’s “Date of Termination,” such term shall be deemed to refer to the
Executive’s “separation from service,” within the meaning of Section 409A
of the Code.  Notwithstanding any other
provision in this Agreement, in no event shall the level of consulting services
to be provided by the Executive pursuant to Section 4 of this Agreement
exceed more than 20% of the average of services performed by the Executive for
the Parent, Company and their affiliated “service recipients” (within the
meaning of Treasury regulation §1.409A-1(h)(3)) over the immediately preceding
36-month period.  Notwithstanding any
other provision in this Agreement, if the Executive is a “specified employee,”
as defined in Section 409A of the Code, as of the date of the Executive’s
separation from service, then to the extent any amount payable under this
Agreement (i) constitutes the payment of nonqualified deferred compensation,
within the meaning of Section 409A of the Code, (ii) is payable upon
the Executive’s separation from service and (iii) under the terms of this
Agreement would be payable prior to the six-month anniversary of the Executive’s
separation from service, such payment shall be delayed until the earlier to
occur of (a) the six-month anniversary of the separation from service or (b) the
date of the Executive’s death.  Any
reimbursement payable to the Executive pursuant to this Agreement shall be
conditioned on the submission by the Executive of all expense reports
reasonably required by the Parent or Company under any applicable expense
reimbursement policy, and shall be paid to the Executive within 30 days
following receipt of such expense reports, but in no event later than the last
day of the calendar year following the calendar year in which the Executive
incurred the reimbursable expense.  Any
amount of expenses eligible for reimbursement, or in-kind benefit provided,
during a calendar year shall not affect the amount of expenses eligible for
reimbursement, or in-kind benefit to be provided, during any other calendar
year.  The right to any reimbursement or
in-kind benefit pursuant to this Agreement shall not be subject to liquidation
or exchange for any other benefit.

 

20.  Counterparts.  This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original and all of which
together shall constitute one and the same instrument.

 

[SIGNATURE PAGE
FOLLOWS]

 

8

 

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

 

 

	
   

  	
  MORNINGSTAR, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By: 

  	
  /s/ Joe Mansueto

  
	
   

  	
  Name: Joe Mansueto

  
	
   

  	
  Its: Chairman and Chief Executive
  Officer

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  MORNINGSTAR ASSOCIATES, LLC

  
	
   

  	
   

  
	
   

  	
  By: Morningstar, Inc. (as sole
  member of Morningstar Associates, LLC)

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By: 

  	
  /s/ Joe Mansueto

  
	
   

  	
  Name: Joe Mansueto

  
	
   

  	
  Its: Chairman and Chief Executive
  Officer

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  /s/ Patrick Reinkemeyer

  
	
   

  	
  Patrick Reinkemeyer

  

 

 

[SIGNATURE PAGE TO
PATRICK REINKEMEYER SEPARATION AGREEMENT]

 

9

 

EXHIBIT A

 

AEGON

 

Ameriprise Financial, Inc.

 

Financial Engines, Inc.

 

GuidedChoice

 

ING Groep N.V.

 

Mercer LLC

 

Mesirow Financial Holdings, Inc.

 

Metropolitan Life Insurance Company

 

New York Life Insurance Company

 

TD Ameritrade, Inc.

 

The Hartford Financial Services Group

 

The Northwestern Mutual Life Insurance Company

 

Wachovia Bank, a division of Wells Fargo Bank, N.A.

 

Wilshire Associates Incorporated

 

10

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