Document:

EX-10.5

 

Exhibit
10.5

REYNOLDS AMERICAN INC.

ANNUAL INCENTIVE AWARD PLAN

Effective July 30, 2004,

As Amended and Restated as of May 10, 2007

 

 

REYNOLDS AMERICAN INC.

ANNUAL INCENTIVE AWARD PLAN

Effective July 30, 2004,

As Amended and Restated as of May 10, 2007

INDEX

	 	 	 	 	 
	Section	 	Page
	  1.  Purpose 
	 	 	2	 
	  2.  Definitions 
	 	 	2	 
	  3.  Eligibility 
	 	 	2	 
	  4.  Company Performance Objectives 
	 	 	2	 
	  5.  Determination of Target Awards 
	 	 	3	 
	  6.  Determination of Employee Performance Rating Multipliers 
	 	 	3	 
	  7.  Determination of Cash Awards 
	 	 	3	 
	  8.  Determination of Cash Awards for SBC Program Participants 
	 	 	4	 
	  9.  Deferral 
	 	 	6	 
	10. Tax Withholding 
	 	 	8	 
	11. Adjustments, Amendment or Termination 
	 	 	8	 
	12. Adoption/Withdrawal by Participating Companies 
	 	 	8	 
	13. Miscellaneous 
	 	 	10	 
	14. Effective Date 
	 	 	11	 
	Exhibit A: Definitions 
	 	 	A-1	 

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REYNOLDS AMERICAN INC.

ANNUAL INCENTIVE AWARD PLAN

Effective July 30, 2004

As Amended and Restated as of May 10, 2007

	1.	 	Purpose
	 
	 	 	The Reynolds American Inc. Annual Incentive Award Plan is established to link corporate and
business priorities with individual and group performance objectives for employees of RAI
and its affiliated companies. The Plan is an amendment, restatement and continuation of the
R.J. Reynolds Tobacco Holdings, Inc. Annual Incentive Award Plan.
	 
	2.	 	Definitions
	 
	 	 	Capitalized terms have the meanings set forth in Exhibit A.
	 
	3.	 	Eligibility
	 
	 	 	To be eligible to participate in the Plan and receive an award, an employee must:

	 	(a)	 	be employed by a Participating Company in an employment classification and at
or above a job level or in a job category as designated by such Participating Company;
	 
	 	(b)	 	except as otherwise provided in Section 7, be employed by a Participating
Company for at least three months during the year; and
	 
	 	(c)	 	except as otherwise provided herein, be actively employed by a Participating
Company on the last day of the year.

	4.	 	Company Performance Objectives

	 	(a)	 	Subject to the approval of the Committee, the Chief Executive Officer of each
Participating Company may establish specific objectives (the “Company Performance
Objectives”) for each Participating Company for each year. Subject to the approval of
the Chief Executive Officer of RAI, the Chief Executive Officers of the Participating
Companies also may establish Company Performance Objectives for some or all of their
respective subsidiaries. Company Performance Objectives may be based on any financial,
operational or other criteria, such as market share.
	 
	 	(b)	 	Each of the Company Performance Objectives will be weighted for the purpose of
determining awards under the Plan. Different weights may be assigned to the objectives
for different Participants and Participating Companies. However, the aggregate weights
for the Company Performance Objectives will each range from 1-100% and together total
100%.

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	 	(c)	 	Company Performance Objectives may be reviewed and revised during the year
pursuant to the procedures used for their adoption. The Chief Human Resources Officer
may change the weighting of any objective for any Participant below Senior Vice
President (job level 11).

	5.	 	Determination of Target Awards

	 	(a)	 	Each Participant’s target award level is expressed as a percentage of Base Pay
and falls within a range of target award levels set for the Participant’s salary grade.
The Committee will periodically review and may modify the range of target award levels
for each salary grade. Subject to the approval of the Chief Human Resources Officer,
Reviewing Managers will periodically review and may modify specific target award levels
for individual Participants. The Chief Executive Officer may modify the specific
target award level for the Chief Human Resources Officer.
	 
	 	(b)	 	Each Participant’s target award for each year equals the product of (i) the
Participant’s highest annual rate of Base Pay in effect for three months or more during
the year, multiplied by (ii) the Participant’s highest target award level for which he
was eligible for three months or more during the year; provided, however, that with
respect to employees of RAI, R. J. Reynolds Tobacco Company and R. J. Reynolds Global
Products, Inc. (exclusive of any Puerto Rico based employees), if the product of (i)
and (ii) is less than $1,000, the Participant’s target award will be $1,000.

	6.	 	Determination of Employee Performance Rating Multipliers
	 
	 	 	Each Participant’s Employee Performance Rating Multiplier will be determined by his
performance rating under each Participating Company’s Performance Management Center (PMC)
process, as set forth in the following table; provided, that the Employee Performance Rating
Multiplier shall never be greater than 1.0 for Participants above the vice president level:

	 	 	 	 	 
	 	 	Employee Performance	 	Employee Performance
	 	 	Rating Multiplier	 	Rating Multiplier
	PMC	 	If Company Performance	 	If Company Performance
	Performance Rating	 	Rating is 100% or greater	 	Rating is less than 100%
	Exceeds

	 	1.5
	 	1.0
	High Achieves
	 	1.2
	 	1.0
	Achieves
	 	1.0
	 	1.0
	Almost Achieves
	 	0.5
	 	0.5
	Fails to Meet
	 	0
	 	0

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	7.	 	Determination of Cash Awards

	 	(a)	 	Promptly after the end of each year, the Chief Executive Officer of RAI will
review the performance of each Participating Company with the Committee. Subject to
the approval of the Committee, the Chief Executive Officers of the Participating
Companies may give a rating to each Company Performance Objective for the year (a
“Company Performance Rating”) ranging from 0-200% for each Company Performance
Objective.
	 
	 	(b)	 	The amount of each Cash Award is determined by the following formula:

	 	(i)	 	the product of the Company Performance Ratings multiplied by
the respective weights assigned to the corresponding Company Performance
Objectives pursuant to Section 4(c)
	 
	 	 	 	multiplied by
	 
	 	(ii)	 	the target award for the Participant established pursuant to
Section 5
	 
	 	 	 	multiplied by
	 
	 	(iii)	 	the Employee Performance Rating Multiplier established
pursuant to Section 6.

	 	(c)	 	When a Participant becomes eligible to participate in the Plan after the start
of the year, the Participant’s Cash Award will be prorated for the number of months of
eligibility during the year. In the event a Participant is on a leave of absence
during the year, the Participant’s Cash Award may be prorated, based on the number of
full or partial months of active employment, at the discretion of the Chief Human
Resources Officer.
	 
	 	(d)	 	If a Participant’s employment is interrupted by the Participant’s death,
Disability or Retirement at any time during the year, the Participant will receive a
Cash Award equal to his or her target award, prorated for the number of full or partial
months of employment during the year, as soon as practicable after such death,
Disability or Retirement. The Chief Human Resources Officer shall determine whether
such pro ration will be on a daily or monthly basis, and if on a monthly basis, whether
a full month’s credit will be given for any partial month of work or short-term
disability.
	 
	 	(e)	 	If a Participant loses eligibility under the Plan as the result of a transfer
to a non-Participating Company, the Participant will receive a Cash Award equal to his
or her actual award determined in accordance with Section 7(b), prorated for the number
of full and partial months as an eligible employee under the Plan. If the
Participant’s employment has been for a period of less than three months, the
Participant’s Cash Award shall be determined under this Plan at the Base Pay in effect
on the date before the Participant loses eligibility under the Plan.

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	 	(f)	 	If a Participant is reclassified into a job with a lower base job value as a
result of a company-initiated redeployment (involuntary move for the Participant), the
target award will equal the product of (i) the greater of the highest annual rate of
Base Pay in effect for three months or more during the year or the Base Pay in effect
prior to any reduction due to the redeployment, multiplied by (ii) the greater of the
highest target award level in effect for three months or more during the year or the
target award level in effect prior to any reduction due to the redeployment.
	 
	 	(g)	 	After obtaining approval from the Committee and satisfying its requirements,
the Companies will pay the Cash Award as soon as practicable after the end of the year,
but in any event no later than March 15 (other than for employees on international
assignment, who will be paid the Cash Award no later than June 30) or as otherwise
required by Section 409A of the Internal Revenue Code of 1986, as amended, except as
provided in the event of death, Disability or Retirement pursuant to Section 7(d).

	8.	 	Determination of Cash Awards for SBC Program Participants

	 	(a)	 	If a Participant’s employment terminates pursuant to the SBC Program at any
time during the year, the Participant will receive a Cash Award for the year of
termination of active employment equal to his or her actual award determined in
accordance with Section 7(b), prorated for the number of full or partial months as an
active employee. In addition, the SBC Program may provide the Participant with credit
for some or all of the period of salary continuation and, if so, will establish
criteria to determine the Company Performance Ratings for the Participant during this
period. Payment of the resulting Cash Awards, if any, will be governed by the terms of
the SBC Program.
	 
	 	(b)	 	If an employee returns from the SBC Program to active employment for a
Participating Company, where such employee received credit under the Plan in accordance
with Section 8(a) for some or all of the period of salary continuation pursuant to the
SBC Program, but the employee’s active employment for the Participating Companies does
not satisfy the eligibility requirements of Section 3, the employee will receive a Cash
Award equal to his or her target award, prorated for the period he or she received
salary continuation pursuant to the SBC Program and was eligible for credit under the
Plan. A Cash Award to be made pursuant to this Section 8(b) will be paid to the
employee as soon as practicable following his or her return to active service.
	 
	 	(c)	 	If an employee returns from the SBC Program to active employment for a
Participating Company, where such employee received credit under the Plan in accordance
with Section 8(a) for some or all of the period of salary continuation pursuant to the
SBC Program and he or she continues to satisfy the eligibility requirements of Section
3, the Participant will receive (i) a Cash Award equal to his or her target award,
prorated for the period he or she received salary continuation pursuant to the SBC
Program and was eligible for credit under the Plan, and (ii) a Cash Award equal to his
or her actual award determined in accordance with Section 7(b), prorated for the number
of full or partial months as an active employee. Payment of the Participant’s Cash
Award pursuant to Section

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	 	 	 	8(c)(i) will be paid as soon as practicable following his or her return to active
service. Payment of the Participant’s Cash Award pursuant to Section 8(c)(ii) will
be paid as provided in Section 7(g).
	 
	 	(d)	 	If an employee has his or her SBC interrupted (short-term) and he or she
received credit under the Plan in accordance with Section 8(a) for some or all of the
period of salary continuation pursuant to the SBC Program, but the employee’s active
employment for Participating Companies does not satisfy the eligibility requirements of
Section 3, he or she will receive a Cash Award equal to his or her target award,
prorated for the period he or she received salary continuation pursuant to the SBC
Program and was eligible for credit under the Plan, to be paid at the end of the
employee’s SBC period.
	 
	 	(e)	 	If an employee has his or her SBC interrupted (short-term) and he or she
returns to active employment for a Participating Company, where such employee received
credit under the Plan in accordance with Section 8(a) for some or all of the period of
salary continuation pursuant to the SBC Program and he or she continues to satisfy the
eligibility requirements of Section 3, the Participant will receive (i) a Cash Award
equal to his or her target award, prorated for the period he or she received salary
continuation pursuant to the SBC Program and was eligible for credit under the Plan,
and (ii) a Cash Award equal to his or her actual award determined in accordance with
Section 7(b), prorated for the number of full or partial months as an active employee.
Payment of the Participant’s Cash Award pursuant to Section 8(e)(i) will be paid at the
end of the employee’s SBC period. Payment of the Participant’s Cash Award pursuant to
Section 8(e)(ii) will be paid as provided in Section 7(g).

	9.	 	Deferral

	 	(a)	 	As of the last day of each year prior to 2004, each Participant who was on a
U.S. dollar payroll could elect to defer payment of the Cash Award for that year. An
election to defer was made pursuant to procedures established by the Committee and was
made in writing, signed by the Participant and delivered to a Participating Company by
December 15 of the year preceding payment. The election was irrevocable and specified
the percentage of the Cash Awards (from 5% to 100%) to be paid (i) as soon as
practicable after the year in which the Participant’s Retirement, Disability or other
termination of employment occurs or, if earlier, (ii) in January of any designated
future year. If the Participant’s employment with all Participating Companies
terminates before the designated year, the award will be paid in January of the year
following termination. If a Participant was eligible for CIP and elected to defer the
proceeds of Cash Awards, the Participant’s Participating Company contributed an
additional 3% to the amount deferred on account of the 3% Company match that the
Participant would have received under CIP if the Participant had not deferred the Cash
Award.
	 
	 	(b)	 	Each Participant specified, on the notice electing deferred payment pursuant to
Section 9(a), whether the Cash Award was deferred by cash credit, Common Stock credit,
or a combination of the two. If a Participant elected to defer payment pursuant to
Section 9(a) and failed to choose a mode of deferral, the

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	 	 	 	Participant’s deferral was made by means of a cash credit. Cash credits and stock
credits are recorded in accounts established in each Participant’s name on the books
of the Participant’s Participating Company. At the direction of RAI, any
Participant’s accounts may be consolidated on the books of RAI or any of its
subsidiaries.

	 	(i)	 	If the deferral is wholly or partly a cash credit, the
Participant’s cash credit account will be credited, as of the date(s) that
payment of the Cash Awards would otherwise have been made, with the dollar
amount of the portion of the Cash Awards deferred by means of a cash credit.
In addition, the Participant’s cash credit account will be credited as of the
last day of each calendar quarter with an interest equivalent in an amount
determined by applying to the current balance in the account an interest rate
equal to the average prime rate of JPMorgan Chase & Co. or its successor during
the preceding quarter. Interest will be credited for the actual number of days
in the quarter using a 365-day year.
	 
	 	(ii)	 	If the deferral is wholly or partly a Common Stock credit, the
Participant’s Common Stock credit account will be credited, as of the date(s)
that payment of the Cash Awards would otherwise have been made, with the Common
Stock equivalent of the number of shares of Common Stock (including fractions
of a share) that could have been purchased with the portion of the Cash Awards
deferred by means of a Common Stock credit at the Closing Price on the date
that payment of the Cash Awards would otherwise have been made. As of the date
any dividend is paid to shareholders of Common Stock, the Participant’s Common
Stock credit account also will be credited with an additional Common Stock
equivalent equal to the number of shares of Common Stock (including fractions
of a share) that could have been purchased at the Closing Price on such date
with the dividend paid on the number of shares of Common Stock to which the
Participant’s Common Stock credit account is then equivalent. If dividends are
paid in property, the dividend will be deemed to be the fair market value of
the property at the time of distribution of the dividend, as determined by the
Committee.

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	 	(c)	 	Payment of deferred Cash Awards will be made in a single cash payment as soon
as practicable in January of the appropriate year. If and to the extent that the
deferral is by means of the Common Stock credit account the value of the payment will
be based on the Closing Price of Common Stock on the last trading day of the year prior
to payment. Notwithstanding the foregoing, if a Participant elects in writing before
December 15 of the year his employment terminates due to Retirement or Disability,
payment will be made in substantially equal annual installments (not to exceed ten)
commencing in January following the Retirement or Disability. Notwithstanding any
election under Section 9(a) to defer Cash Awards by means of a Common Stock credit, the
Common Stock credit account of a Participant who elects to receive installment payments
will be converted into a cash credit account as of January 1 of the year in which such
installment payments commence. Any election by a Participant under this Section 9(c)
will be irrevocable after December 15 of the year prior to commencement of payment.
	 
	 	(d)	 	At the one-time election of a Participant made in writing to the Committee, all
or any designated portion of the Common Stock credit account may be converted to, and
such Participant will be credited with, a cash credit account as of the first business
day of the calendar quarter following the quarter in which the election is made. The
amount credited to the cash credit account will be determined by multiplying the number
of shares of Common Stock to which the Participant’s Common Stock credit account is
then equivalent and as to which such election has been made by the Closing Price on the
last business day of the calendar quarter in which the election is made. Any Common
Stock credits attributable to dividends paid on Common Stock during the calendar
quarter in which the election is made will be credited before making the conversion.
Such election may be made by a Participant at any time prior to the end of the calendar
year in which termination of employment occurs. An election by a Participant under
this Section 9(d) will be irrevocable.
	 
	 	(e)	 	If the number of shares of Common Stock is increased or decreased as a result
of any stock dividend, subdivision or reclassification of shares, the number of shares
of Common Stock to which each Participant’s Common Stock credit account is equivalent
shall be increased in proportion to the increase or decrease in the number of
outstanding shares of Common Stock and the Closing Price on which payments hereunder is
based will be proportionately decreased or increased. If the number of outstanding
            shares of Common Stock is decreased as the result of any combination or
reclassification of shares, the number of shares of Common Stock to which each
Participant’s Common Stock credit account is equivalent will be decreased in proportion
to the decrease in the number of outstanding shares of Common Stock. In the event RAI
is consolidated with or merged into any other corporation and holders of Common Stock
receive common shares of the resulting or surviving corporation, each Participant’s
Common Stock credit account, in place of the shares then credited thereto, will be
credited with a stock equivalent determined by multiplying the number of common shares
of stock given in exchange for a share of Common Stock upon such consolidation or
merger, by the number of shares of Common Stock to which the Participant’s account is
then equivalent. If in such a consolidation or merger, holders of

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	 	 	 	Common Stock receive any consideration other than common shares of the resulting or
surviving corporation, the Committee will determine the appropriate change in
Participants’ accounts. In the event of an extraordinary dividend, including any
spin-off, the Committee will make appropriate adjustments to each Participant’s
Common Stock credit account.
	 
	 	(f)	 	If a Participant dies, whether before or after termination of employment, any
cash credit account and Common Stock credit account to which he or she is entitled,
including any award approved after the Participant’s death as to which an election to
defer was made and any remaining installment payments, will be distributed in cash as
soon as practicable (unless the Committee otherwise provides) to the Participant’s
beneficiaries pursuant to Section 13(i).

	10.	 	Tax Withholding
	 
	 	 	Each Participant’s employer will deduct any taxes required to be withheld by federal, state,
local or foreign governments from payments and distributions under the Plan.
	 
	11.	 	Adjustments, Amendments or Termination

	 	(a)	 	The Committee may make appropriate and equitable adjustments in the Company
Performance Ratings and the number, terms and conditions of any Cash Awards if it
determines that conditions warrant such adjustment. Such conditions may include,
without limitation, changes in the economy, laws, regulations and generally accepted
accounting principles, as well as corporate events such as a merger, consolidation,
recapitalization, reclassification, stock split, stock dividend, spin-off, change of
control or other event. Any adjustment made by the Committee shall be final and
binding upon the Participating Companies and the Participants.
	 
	 	(b)	 	The Committee may amend, suspend or terminate the Plan at will and at any time,
but it will not take any action that would materially adversely affect the rights of
Participants with respect to deferral accounts.

	12.	 	Adoption/Withdrawal by Participating Companies

	 	(a)	 	Adoption of Plan. Any entity may, with the consent of the Committee, adopt the
Plan and thereby become a Participating Company hereunder by executing an instrument
evidencing such adoption and filing a copy thereof with the Committee. By this
adoption of the Plan, Participating Companies (other than RAI) shall be deemed to
consent to actions taken by RAI in entering into any arrangements for the purpose of
providing benefits under the Plan, and to authorize RAI and/or the Committee on behalf
of RAI to take any actions within the authority of RAI under the terms of the Plan.
	 
	 	(b)	 	Withdrawal/Effect of Termination. Notwithstanding the foregoing, in the case
of any Participating Company that adopts the Plan and thereafter (i) ceases to exist or
(ii) withdraws or is eliminated from the Plan, it shall not thereafter be considered a
Participating Company thereunder and the employees of such

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	 	 	 	Participating Company shall no longer be eligible to participate in the Plan. Any
Participating Company (other than RAI) which adopts the Plan may elect separately to
withdraw from the Plan and such withdrawal shall constitute a termination of the
Plan as to it; provided, however, that such terminating Participating Company shall
continue to be a Participating Company for the purposes hereof as to Participants to
whom it owes obligations hereunder, unless RAI or the Committee directs otherwise.

	 	(c)	 	Expenses. The expenses of administering the Plan will be paid by RAI, unless
RAI, in its sole and absolute discretion, directs the other Participating Companies to
pay some or all of the expenses.
	 
	 	(d)	 	Liability for Payment/Transfers of Employment.

	 	(i)	 	Subject to the provisions of subsections (ii) and (iii) hereof,
each Participating Company shall be solely liable for and shall reimburse RAI
for the Participating Company’s appropriate share of any funding necessary to
provide benefits to its employees who are Participants under this Plan;
	 
	 	(ii)	 	Notwithstanding the foregoing, upon a transfer of employment
among Participating Companies, any liability for the payment of a Cash Award to
or on behalf of a Participant shall be transferred from the prior Participating
Company to the new Participating Company. The last Participating Company of
the Participant shall be responsible for the payment of any Cash Award payable
hereunder after the Participant’s termination of employment, whether liability
for such payment accrued before or after the Participant’s transfer of
employment to such Participating Company; and
	 
	 	(iii)	 	Notwithstanding the foregoing, in the event that RAI is unable
or refuses to satisfy its obligation hereunder with respect to the payment of
any Cash Award to or on behalf of its Participants, each of the Participating
Companies (unless it is insolvent), other than RAI, shall guarantee and be
jointly and severally liable for a portion of such Cash Award under the Plan,
allocated based on a fraction, the numerator of which is equal to the number of
Participants in the Plan who are current or former employees of the
Participating Company and the denominator of which is the total number of
Participants in the Plan, excluding current or former RAI employees (as in
effect on the date of the determination).

	13.	 	Miscellaneous

	 	(a)	 	Except as determined by the Committee, no person will have any right to receive
an award.
	 
	 	(b)	 	The Committee has the power to interpret the Plan and, together with the
officers of the Companies, has complete discretion in making determinations and taking
action pursuant to the Plan. All interpretations, determinations and actions by the

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	 	 	 	Committee will be final, conclusive and binding on all parties. Subject to the
preceding sentence, the Chief Executive Officer of RAI will administer the Plan and
will resolve all administrative questions and interpretations. The Committee and
the Chief Executive Officer of RAI may delegate their authority to anyone. In such
event, references in the Plan to the Committee or to the Chief Executive Officer of
RAI will refer to their delegates when appropriate.
	 
	 	(c)	 	The Participating Companies, their boards of directors, the Committee, the
officers and the other employees of RAI and its subsidiaries will not be liable for any
action taken in good faith in interpreting and administering the Plan.
	 
	 	(d)	 	For purposes of the Plan, a Participant on leave of absence approved by a
Participating Company will be considered an employee. Except as otherwise provided
herein, a Participant on salary continuation under an SBC Program or agreement of
severance will not be considered an employee but will be deemed to be terminated on his
or her last day of active employment. A Participant absent due to short-term
disability on the last day of a year is deemed to be actively employed if such
Participant was actively employed at any time during the year.
	 
	 	(e)	 	Nothing herein creates a vested right. The Cash Awards and the interest,
dividends and other expenses on Cash Awards deferred under Section 9 are not funded
and, except to the extent provided in Section 12(d)(iii), are paid from the general
assets of the Company from which the Participant terminated employment. Nothing herein
shall be construed to require the Participating Companies to maintain any fund or
segregate any amount for the benefit of any Participant and no Participant or other
person shall have any claim against, right to, or security or other interest in, any
fund, account or asset of any Participating Company from which he or she terminated
employment. Other benefits referred to herein may be funded or unfunded as provided
for in the individual plans.
	 
	 	(f)	 	The Plan does not create or confer on any Participant any right to employment,
and the employment of any Participant may be terminated by the Participant or the
Participant’s employer without regard to the effect that termination might have on the
Participant with respect to the Plan.
	 
	 	(g)	 	Participants may not transfer, pledge or encumber any benefit under the Plan
prior to its receipt in cash. Except as required by law, creditors may not attach or
seize any such benefit.
	 
	 	(h)	 	The Plan will be governed by and subject to the laws of the State of North
Carolina.
	 
	 	(i)	 	In the event of the death of a Participant, any distribution to which such
Participant is entitled under the Plan shall be made to the beneficiary designated by
the Participant to receive the proceeds of any noncontributory group life insurance
coverage provided for the Participant by the Participant’s Participating Company
(“Group Life Insurance Coverage”). If the Participant has not designated such
beneficiary, does not have any Group Life Insurance coverage or desires to designate a
different beneficiary, the Participant may file with the Chief

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	 	 	 	Human Resources Officer a written designation of a beneficiary under the Plan, which
designation may be changed or revoked only by the Participant, in writing. If no
designation of beneficiary has been made by a Participant under the Group Life
Insurance Coverage or filed with the Chief Human Resources Officer under the Plan,
distribution upon such Participant’s death shall be made in accordance with the
provisions of the Group Life Insurance Coverage. If a Participant is no longer an
employee of a Participating Company at the time of death, no longer has or never had
any Group Life Insurance Coverage and has not filed a designation of beneficiary
with the Chief Human Resources Officer under the Plan, distribution upon such
Participant’s death shall be made to the Participant’s estate.
	 
	 	(j)	 	A Company may supersede some or all of the terms of the Plan with respect to
individual Participants pursuant to an employment, termination or similar agreement.
In case of conflict, the agreement will control.

	14.	 	Effective Date
	 
	 	 	The Plan is effective as of July 30, 2004. The Plan as set forth herein reflects amendments
effective November 30, 2004, February 2, 2005, January 1, 2006, November 29, 2006, and May
10, 2007.

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EXHIBIT A

Definitions

	 	(a)	 	“Base Pay” shall mean an amount or rate of compensation for a specified
position of employment excluding any other payments or allowances, such as shift
differential, overtime, merit or general increase lump sums or bonus payments.
	 
	 	(b)	 	“Board of Directors” shall mean the Board of Directors of RAI.
	 
	 	(c)	 	“Cash Award” shall mean annual cash payments made to Participants pursuant to
the Plan.
	 
	 	(d)	 	“Chief Executive Officer” shall mean, for employees of RAI and the chief
executive officers of the other Participating Companies, the chief executive officer of
RAI. For the other employees of each Participating Company other than RAI, “Chief
Executive Officer” shall mean the chief executive officer of the Participating Company
primarily responsible for their performance.
	 
	 	(e)	 	“Chief Human Resources Officer” shall mean, for employees of RAI and the
executive officers of the other Participating Companies, the chief human resources
officer of RAI. For the other employees of each Participating Company other than RAI,
“Chief Human Resources Officer” shall mean the chief human resources officer of the
Participating Company primarily responsible for their performance.
	 
	 	(f)	 	“CIP” shall mean the Reynolds American Capital Investment Plan, or comparable
Participating Company-sponsored 401(k) plan in which employees participate, or any
successor thereof.
	 
	 	(g)	 	“Closing Price” shall mean the closing sale price of the Common Stock as shown
on the New York Stock Exchange consolidated tape and reported in the Wall Street
Journal.
	 
	 	(h)	 	“Committee” shall mean the Compensation Committee of the Board of Directors.
	 
	 	(i)	 	“Common Stock” shall mean the Common Stock of RAI.
	 
	 	(j)	 	“Company Performance Objectives” shall have the meaning set forth in Section
4(a) of the Plan.
	 
	 	(k)	 	“Company Performance Rating” shall have the meaning set forth in Section 7(a)
of the Plan.
	 
	 	(l)	 	“Disability” shall mean being totally and permanently disabled as defined in
the Long-Term Disability Plan of the Participating Company employing the participant.

 

 

	 	(m)	 	“Employee Performance Rating Multiplier” shall have the meaning set forth in
Section 6 of the Plan.
	 
	 	(n)	 	“Group Life Insurance Coverage” shall have the meaning set forth in Section
13(i) of the Plan.
	 
	 	(o)	 	“Participant” shall mean, for any year, an employee who is eligible for or who
has deferred receipt of an award under the Plan. An eligible employee is a Participant
only with respect to the Participating Company for which he works most directly.
“Participant” shall also mean the heir or estate of a deceased Participant.
	 
	 	(p)	 	“Participating Companies” shall mean RAI, R. J. Reynolds Tobacco Company, FHS,
Inc., R. J. Reynolds Global Products, Inc., Santa Fe Natural Tobacco Company, Inc.,
Lane, Limited, Conwood Company, LLC, and any other affiliates of RAI that adopt the
Plan pursuant to Section 12(a).
	 
	 	(q)	 	“Plan” shall mean the Reynolds American Inc. Annual Incentive Award Plan.
	 
	 	(r)	 	“RAI” shall mean Reynolds American Inc. and its successor companies.
	 
	 	(s)	 	“Retirement” shall mean a Participant’s voluntary termination of employment on
or after his or her 65th birthday, on or after his or her 55th
birthday with 10 or more years of service with the Participating Companies, or on or
after his or her 50th birthday with 20 or more years of service with the
Participating Companies.
	 
	 	(t)	 	“Reviewing Manager” shall mean the manager to whom a Participant reports.
	 
	 	(u)	 	“SBC” or “SBC Program” shall mean a salary and benefits continuation or other
program maintained by a Participating Company for the purpose of providing
severance-type benefits to employees whose employment is involuntarily terminated.EX-10.6

 

Exhibit 10.6

REYNOLDS AMERICAN INC.

LONG-TERM INCENTIVE PLAN

(Amended and Restated Effective May 11, 2007)

1. Purpose of Plan

     The Reynolds American Inc. Long-Term Incentive Plan (the “Plan”) is an amendment, restatement
and continuation of the R.J. Reynolds Tobacco Holdings, Inc. 1999 Long-Term Incentive Plan. The
Plan became effective June 14, 1999 and is designed:

	 	(a)	 	     to promote the long-term financial interests and growth of Reynolds American
Inc. and its Subsidiaries (collectively, the “Corporation”) by attracting and retaining
management personnel with the training, experience and ability to enable them to make a
substantial contribution to the success of the Corporation’s business;
	 
	 	(b)	 	    to motivate management personnel by means of growth-related incentives to
achieve long range goals; and
	 
	 	(c)	 	    to further the identity of interests of Participants with those of the
stockholders of Reynolds American through opportunities for increased stock, or
stock-based, ownership in Reynolds American.

2. Definitions

     As used in the Plan, the following words shall have the following meanings:

	 	(a)	 	     “Affiliate” of any person shall mean another person that directly or
indirectly, through one or more intermediaries, controls, is controlled by, or is under
common control with, such first person;
	 
	 	(b)	 	     “Base Value” means not less than the Fair Market Value on the date a Stock
Appreciation Right is granted, or, in the case of a Stock Appreciation Right granted
retroactively in tandem with (or in replacement of) an outstanding Option, not less
than the exercise price of such Option;
	 
		(c)	 	     “BAT” shall mean, collectively, British American Tobacco, p.l.c., a public
limited company incorporated under the laws of England and Wales, and its Affiliates;
	 
	 	(d)	 	     “Board of Directors” means the Board of Directors of Reynolds American;
	 
	 	(e)	 	      “Code” means the Internal Revenue Code of 1986, as amended;
	 
	 	(f)	 	     “Committee” means the Compensation Committee of the Board of Directors;

 

 

	 	(g)	 	     “Common Stock” or “Share” means common stock, par value $0.0001 per share, of
Reynolds American which may be authorized but unissued, or issued and reacquired;
	 
	 	(h)	 	     “Effective Date” shall have the meaning set forth in Section 14;
	 
	 	(i)	 	      “Exchange Act” means the Securities Exchange Act of 1934, as amended;
	 
	 	(j)	 	     “Fair Market Value” means such value of a Share as reported for stock exchange
transactions and/or determined in accordance with any applicable resolutions or
regulations of the Committee in effect at the relevant time;
	 
	 	(k)	 	      “Grant Agreement” means an agreement between Reynolds American and a
Participant that sets forth the terms, conditions and limitations applicable to a
Grant;
	 
	 	(l)	 	      “Grant” means an award made to a Participant pursuant to the Plan and described
in Section 5, including, without limitation, an award of an Incentive Stock Option,
Other Stock Option, Stock Appreciation Right, Restricted Stock, Performance Units or
Performance Shares or any combination of the foregoing;
	 
	 	(m)	 	     “Incentive Stock Options” shall have the meaning set forth in Section 5(a);
	 
	 	(n)	 	     “ Other Stock Options” shall have the meaning set forth in Section 5(b);
	 
	 	(o)	 	     “ Options” shall mean Incentive Stock Options and Other Stock Options;
	 
	 	(p)	 	     “Participant” means any employee, or other person having a unique relationship
with Reynolds American or one of its Subsidiaries, to whom one or more Grants have been
made and such Grants have not all been forfeited or terminated under the Plan;
provided, however, that a Participant who is elected or appointed as a
non-employee director of the Corporation may not receive any Grant during the term of
his or her service as a non-employee director of the Corporation;
	 
	 	(q)	 	     “Performance Units” shall have the meaning set forth in Section 5(e);
	 
	 	(r)	 	      “ Performance Shares” shall have the meaning set forth in Section 5(f);
	 
	 	(s)	 	      “Restricted Stock” shall have the meaning set forth in Section 5(d);
	 
	 	(t)	 	     “Reynolds American” means Reynolds American Inc. and any successors thereto;
	 
	 	(u)	 	      “RJR” means R.J. Reynolds Tobacco Holdings, Inc.
	 
	 	(v)	 	     “Stock Appreciation Rights” shall have the meaning set forth in Section 5(c);
and

2

 

	 	(w)	 	      “Subsidiary” means any corporation or other entity in which Reynolds American
has a significant equity or other interest as determined by the Committee.

3. Administration of Plan

	 	(a)	 	     The Plan shall be administered by the Committee or, in lieu of the Committee,
the Board of Directors. The Committee may adopt its own rules of procedure and act
either by vote at a telephonic or other meeting or by unanimous written consent in lieu
of a meeting. The Committee shall have the power and authority to administer, construe
and interpret the Plan, to make rules for carrying it out and to make changes in such
rules. Any such interpretations, rules and administration shall be consistent with the
basic purposes of the Plan.
	 
	 	(b)	 	      The Committee may delegate its duties under the Plan to the Chief Executive
Officer, to other senior officers of the Corporation, or to the Chairman of the Board
of Directors, acting as a committee established by the Committee, subject to such
conditions and limitations as the Committee shall prescribe; provided,
however, that only the Committee may designate and make Grants to Participants
who are subject to Section 16 of the Exchange Act.
	 
	 	(c)	 	      The Committee may employ attorneys, consultants, accountants, appraisers,
brokers or other persons. The Committee, Reynolds American and the officers and
directors of Reynolds American shall be entitled to rely upon the advice, opinions or
valuations of any such persons. All actions taken and all interpretations and
determinations made by the Committee in good faith shall be final and binding upon all
Participants, Reynolds American and all other interested persons. No member of the
Committee shall be personally liable for any action, determination or interpretation
made in good faith with respect to the Plan or the Grants, and all members of the
Committee shall be fully protected by Reynolds American with respect to any such
action, determination or interpretation.

4. Eligibility

     The Committee may from time to time make Grants under the Plan to such employees, or other
persons having a unique relationship with Reynolds American or any of its Subsidiaries, and in such
form and having such terms, conditions and limitations as the Committee may determine. No Grants
may be made under this Plan to non-employee directors of Reynolds American or any of its
Subsidiaries. Grants may be granted singly, in combination or in tandem. The terms, conditions
and limitations of each Grant under the Plan shall be set forth in a Grant Agreement, in a form
approved by the Committee, consistent, however, with the terms of the Plan; provided,
however, such Grant Agreement shall contain provisions dealing with the treatment of Grants
in the event of the termination, death or disability of a Participant, and may also include
provisions concerning the treatment of Grants in the event of a change of control of Reynolds
American.

3

 

5. Grants

     From time to time, the Committee will determine the forms and amounts of Grants for
Participants. Such Grants may take the following forms in the Committee’s sole discretion:

	 	(a)	 	      Incentive Stock Options — These are stock options within the meaning of Section
422 of the Code to purchase Common Stock. In addition to other restrictions contained
in the Plan, an option granted under this Section 5(a), (i) may not be exercised more
than 10 years after the date it is granted, (ii) may not have an option price less than
the Fair Market Value of Common Stock on the date the option is granted, (iii) must
otherwise comply with Section 422 of the Code, and (iv) must be designated as an
“Incentive Stock Option” by the Committee. The maximum aggregate Fair Market Value of
Common Stock (determined at the time of each Grant) with respect to which any
Participant may first exercise Incentive Stock Options under this Plan and any
Incentive Stock Options granted to the Participant for such year under any plans of
Reynolds American or any Subsidiary in any calendar year is $100,000. Payment of the
option price shall be made in cash or in shares of Common Stock, or a combination
thereof, in accordance with the terms of the Plan, the Grant Agreement and any
applicable guidelines of the Committee in effect at the time.
	 
	 	(b)	 	      Other Stock Options — These are options to purchase Common Stock which are not
designated by the Committee as “Incentive Stock Options.” At the time of the Grant, the
Committee shall determine, and shall have contained in the Grant Agreement or other
Plan rules, the option exercise period, the option price and such other conditions,
restrictions or factors on the grant or exercise of the option as the Committee deems
appropriate. In addition to other restrictions contained in the Plan, an option
granted under this Section 5(b), (i) may not be exercised more than fifteen (15) years
after the date it is granted and (ii) may not have an option exercise price less than
the Fair Market Value of Common Stock on the date the option is granted. Payment of
the option price shall be made in cash or in shares of Common Stock, or a combination
thereof, in accordance with the terms of the Plan and of any applicable guidelines of
the Committee in effect at the time. The requirement of payment in cash will be deemed
satisfied if the Participant has made arrangements satisfactory to the Corporation with
a duly registered broker-dealer that is a member of the National Association of
Securities Dealers, Inc. to sell on the date of exercise a sufficient number of shares
of Common Stock being purchased so that the net proceeds of the sale transaction will
at least equal the full exercise price and pursuant to which the broker-dealer
undertakes to deliver the full exercise price to the Corporation not later than the
later of (A) the settlement date of the sale transaction and (B) the date on which the
Corporation delivers to the broker-dealer the shares of Common Stock being purchased
pursuant to the exercise of such option. This method is known as the “broker-dealer
exercise method” and is subject to the terms and conditions set forth herein, in the
Grant Agreement and in guidelines established by the Committee.

4

 

	 	(c)	 	      Stock Appreciation Rights — These are rights that on exercise entitle the
holder to receive the excess of (i) the Fair Market Value of a share of Common Stock on
the date of exercise over (ii) the Base Value multiplied by (iii) the number of rights
exercised in cash, stock or a combination thereof as determined by the Committee.
Stock Appreciation Rights granted under the Plan may, but need not, be granted in
conjunction with an Option under Sections 5(a) or 5(b). The Committee, in the Grant
Agreement or by other Plan rules, may impose such conditions, restrictions or factors
on the exercise of Stock Appreciation Rights as it deems appropriate, and may
terminate, amend, or suspend such Stock Appreciation Rights at any time, subject to
Section 9. No Stock Appreciation Right granted under this Plan may be exercised more
than fifteen (15) years after the date it is granted.
	 
	 	(d)	 	     Restricted Stock — Restricted Stock is a Grant of Common Stock or stock units
equivalent to Common Stock subject to such conditions, restrictions or factors as the
Committee shall determine. Any rights to dividends or dividend equivalents accruing
due to a grant of Restricted Stock shall also be determined by the Committee. Grants
of Restricted Stock shall be subject to a normal minimum vesting schedule of three (3)
years. The number of shares of Restricted Stock and the restrictions or conditions on
such shares, as the Committee may determine, shall be set forth in the Grant Agreement
or by other Plan rules, and the certificate for the Restricted Stock shall bear
evidence of the restrictions or conditions.
	 
	 	(e)	 	      Performance Units — These are rights, denominated in cash or cash units, to
receive, at a specified future date, payment in cash or Common Stock of an amount equal
to all or a portion of the value of a unit granted by the Committee. At the time of
the Grant, in the Grant Agreement or by other Plan rules, the Committee must determine
the base value of the unit, the performance factors applicable to the determination of
the ultimate payment value of the unit as set forth in Section 7 and the period over
which performance will be measured.
	 
	 	(f)	 	      Performance Shares — These are rights granted in the form of Common Stock or
stock units equivalent to Common Stock to receive, at a specified future date, payment
in cash or Common Stock, as determined by the Committee, of an amount equal to all or a
portion of the Fair Market Value at which the Common Stock is traded on the last day of
the specified performance period of a specified number of shares of Common Stock based
on performance during the period. At the time of the Grant, the Committee, in the
Grant Agreement or by Plan rules, will determine the factors which will govern the
portion of the Grants so payable as set forth in Section 7 and the period over which
performance will be measured.

6. Limitations and Conditions

	 	(a)	 	     The number of shares of Common Stock available for Grants under this Plan shall
be eight (8) million shares of the authorized Common Stock, plus 5,772,814 shares of
Common Stock that cover grants under the RJR Nabisco

5

 

	 	 	 	Holdings Corp. 1990 Long Term Incentive Plan that were converted into options to
acquire RJR stock or restricted shares of RJR common stock. The maximum number of
shares of Common Stock subject to Grants of Options and Stock Appreciation Rights to
any one Participant in any calendar year shall not exceed two (2) million shares of
Common Stock for each type of Grant, plus any amount of shares of Common Stock that
were available within this limit for such type of Grant for any prior year such
limitation was in effect and which were not covered by Options or Stock Appreciation
Rights granted to such Participant during such year. No more than three (3) million
shares of Common Stock may be granted as Incentive Stock Options. The maximum
payment that any one Participant may be paid in respect of any Grant of Performance
Units granted for any specified performance period shall not exceed $10 million.
The maximum payment that any one Participant may receive in respect of any Grant of
Performance Shares granted for any specified performance period shall not exceed
500,000 shares of Common Stock or the cash equivalent thereof. The aggregate
maximum number of shares of Common Stock to which Restricted Stock granted may
relate shall not exceed three (3) million shares of Common Stock. Shares of Common
Stock related to Grants that are withheld, forfeited, terminated, cancelled, expire
unexercised, settled in cash in lieu of stock, received in full or partial payment
of any exercise price or in such manner that all or some of the shares of Common
Stock covered by a Grant are not issued to a Participant, shall immediately become
available for Grants. A Grant may contain the right to receive dividends or
dividend equivalent payments which may be paid either currently, credited to a
Participant or deemed invested in shares of Common Stock or share units of Common
Stock. Any such crediting of dividends or dividend equivalents or reinvestment in
shares of Common Stock may be subject to such conditions, restrictions and
contingencies as the Committee shall establish, including the reinvestment of such
credited amounts in Common Stock equivalents. Subject to the overall limitation on
the number of shares of Common Stock that may be delivered under this Plan, the
Committee may use available shares of Common Stock as the form of payment for
compensation, grants or rights earned or due under any other compensation plans or
arrangements of Reynolds American, including the plan of any entity acquired by
Reynolds American.
	 
	 	(b)	 	     At the time a Grant is made or amended or the terms or conditions of a Grant
are changed, the Committee may provide for limitations or conditions on such Grant.
Reynolds American may adopt other compensation programs, plans or arrangements as it
deems appropriate.
	 
	 	(c)	 	      Nothing contained herein shall affect the right of the Corporation to terminate
any Participant’s employment at any time or for any reason.
	 
	 	(d)	 	      No benefit under the Plan shall, prior to receipt thereof by the Participant,
be in any manner liable for or subject to the debts, contracts, liabilities,
engagements, or torts of the Participant.

6

 

	 	(e)	 	      Except to the extent otherwise provided in any other retirement or benefit
plan, any Grant under this Plan shall not be deemed compensation for purposes of
computing benefits or contributions under any retirement plan of Reynolds American or
its Subsidiaries and shall not affect any benefits under any other benefit plan of any
kind or subsequently in effect under which the availability or amount of benefits is
related to level of compensation.
	 
	 	(f)	 	     This Plan is not a “Retirement Plan” or “Welfare Plan” under the Employee
Retirement Income Security Act of 1974, as amended. This Plan shall be unfunded and
shall not create (or be construed to create) a trust or a separate fund or funds. The
Plan shall not establish any fiduciary relationship between Reynolds American and any
Participant or beneficiary of a Participant. To the extent any person holds any
obligation of Reynolds American by virtue of an award granted under this Plan, such
obligation shall merely constitute a general unsecured liability of Reynolds American
and accordingly shall not confer upon such person any right, title or interest in any
assets of Reynolds American.
	 
	 	(g)	 	     Unless the Committee determines otherwise, no benefit or promise under the Plan
shall be secured by any specific assets of Reynolds American or any of its
Subsidiaries, nor shall any assets of Reynolds American or any of its Subsidiaries be
designated as attributable or allocated to the satisfaction of Reynolds American’s
obligations under the Plan.

7. Performance Factors

	 	(a)	 	     The performance factors, if any, selected by the Committee in respect of any
Grant shall be based on any one or more of the following: price of Common Stock or the
stock of any affiliate, shareholder return, level of dividend return, return on equity,
return on investment, return on capital, return on invested capital, economic profit,
economic value added, net income, cash net income, free cash flow, earnings per share,
cash earnings per share, operating company contribution or market share. These factors
shall have a minimum performance standard below which no amount will be paid (to the
extent not waived by the Committee or except as otherwise provided in a Grant
Agreement) and may have a maximum performance standard above which no additional
payments will be made. The applicable performance period shall not exceed ten (10)
years.
	 
	 	(b)	 	      In addition to any performance factors established pursuant to section 7(a),
the Committee may, in its sole discretion, assign individual performance objectives in
respect of any Grant made hereunder to a Participant who at the time of such Grant is
not a “covered employee” for purposes of section 162(m) of the Code.

8. Adjustments

	 	(a)	 	     In the event of any stock split, spin-off, stock dividend, extraordinary cash
dividend, stock combination or reclassification, recapitalization or merger, change

7

 

	 	 	 	in control, or similar event, the Committee shall adjust appropriately the number or
kind of shares subject to the Plan and available for or covered by Grants, share
prices related to outstanding Grants and the other applicable limitations of Section
6(a), and make such other revisions to outstanding Grants and the Plan as it deems
are equitably required.

	 	(b)	 	     In the event of a Change of Control, except as otherwise set forth in the terms
of a Grant:

	 	(i)	 	     Options granted pursuant to Sections 5(a) or 5(b) hereof shall
become fully vested and exercisable; provided, however, that
the Committee may make a cash payment to Participants (A) in cancellation of
such Options as provided in the applicable Grant Agreements or any amendments
or deemed amendments thereto entered into by Reynolds American and the
Participant in such amount as shall be provided in such Grant Agreements or
amendments or (B) in lieu of the delivery of shares of Common Stock upon
exercise, equal to the product of (x) and (y), where (x) is the excess of the
Fair Market Value on the date of exercise over the exercise price, and (y) is
the number of shares of Common Stock subject to the Options being exercised;
	 
	 	(ii)	 	     Stock Appreciation Rights shall become fully vested and
exercisable;
	 
	 	(iii)	 	     Restricted Stock shall have all restrictions removed;
	 
	 	(iv)	 	     Performance Units whose performance period ends after the date
of the Change of Control shall become vested as to a percentage of Performance
Units granted equal to the number of months (including partial months) in the
performance period before the date of the Change of Control, divided by the
total number of months in the performance period. The value of the Performance
Units shall be equal to the greater of the target value of the Performance
Units or the value derived from the actual performance as of the date of the
Change of Control;
	 
	 	(v)	 	      Performance Shares whose performance period ends after the date
of the Change of Control shall become vested pro rata as to the number of
Performance Shares granted equal to the number of months (including partial
months) in the performance period before the date of Change of Control, divided
by the total number of months in the performance period. The prorated number
of Performance Shares derived from the preceding calculation shall be further
adjusted by applying the higher of target or actual performance to the date of
Change of Control; and
	 
	 	(vi)	 	     The Committee shall have authority to establish or to revise
the terms of any such Grant or any other Grant as it, in its discretion, deems
appropriate; provided, however, that the Committee may not make

8

 

	 	 	 	revisions that are adverse to the Participant without the Participant’s
consent unless such revision is provided for or contemplated in the terms of
the Grant.

	 	(c)	 	      For purposes of the Plan, a “Change of Control” shall mean the first to occur
of the following events:

	 	(i)	 	     an individual, corporation, partnership, group, associate or
other entity or “person”, as such term is defined in Section 14(d) of the
Exchange Act, other than any employee benefit plans sponsored by Reynolds
American, is or becomes the “beneficial owner” (as defined in Rule 13d-3 under
the Exchange Act), directly or indirectly, of thirty percent (30%) or more of
the combined voting power of Reynolds American’s outstanding securities
ordinarily having the right to vote at elections of directors;
provided, however, that the acquisition of Reynolds American
securities by BAT pursuant to the Business Combination Agreement, dated as of
October 27, 2003, between RJR and Brown & Williamson Tobacco Corporation
(“B&W”), as thereafter amended (the “BCA”) or as expressly permitted by the
Governance Agreement, dated as of July 30, 2004, among British American
Tobacco, p.l.c., B&W and Reynolds American (the “Governance Agreement”), shall
not be considered a Change of Control for purposes of this subsection (i);
	 
	 	(ii)	 	     individuals who constitute the Board of Directors (or who have
been designated as directors in accordance with Section 1.09 of the BCA) on
July 30, 2004 (the “Incumbent Board”) cease for any reason to constitute at
least a majority thereof, provided that any person becoming a director
subsequent to such date whose election, or nomination for election by Reynolds
American’s stockholders, was (1) approved by a vote of at least three-quarters
of the directors comprising the Incumbent Board (either by a specific vote or
by approval of the proxy statement of Reynolds American in which such person is
named as a nominee of Reynolds American for director) or (2) made in accordance
with Section 2.01 of the Governance Agreement, but excluding for this purpose
any such individual whose initial assumption of office occurs as a result of
either an actual or threatened election contest (as such terms are used in Rule
14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or
threatened solicitation of proxies or consents by or on behalf of an
individual, corporation, partnership, group, associate or other entity or
person other than Reynolds American’s Board, shall be, for purposes of this
paragraph (ii), considered as though such person were a member of the Incumbent
Board; and
	 
	 	(iii)     	 	the approval by the stockholders of Reynolds American of a
plan or agreement providing (A) for a merger or consolidation of Reynolds
American other than with a wholly owned Subsidiary and other than a merger or
consolidation that would result in the voting securities of

9

 

	 	 	 	Reynolds American outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted into voting
securities of the surviving entity) more than fifty percent (50%) of the
combined voting power of the voting securities of Reynolds American or such
surviving entity outstanding immediately after such merger or consolidation,
or (B) for a sale, exchange or other disposition of all or substantially all
of the assets of Reynolds American, other than any such transaction where
the transferee of all or substantially all of the assets of Reynolds
American is a wholly owned Subsidiary or an entity more than fifty percent
(50%) of the combined voting power of the voting securities of which is
represented by voting securities of Reynolds American outstanding
immediately prior to the transaction (either remaining outstanding or by
being converted into voting securities of the transferee entity). If any of
the events enumerated in this paragraph (iii) occur, Reynolds American’s
Board shall determine the effective date of the Change of Control resulting
therefrom for purposes of this Plan and the Grants hereunder.

9. Amendment and Termination

     Except as otherwise required by law or as provided under the New York Stock Exchange Rules,
the Committee shall have the authority to make such amendments to any terms and conditions
applicable to outstanding Grants as are consistent with this Plan, provided that, except for
adjustments under Sections 8(a) and 10 hereof, no such action shall modify such Grant in a manner
adverse to the Participant without the Participant’s consent except as such modification is
provided for or contemplated in the terms of the Grant. Except as provided in Section 8(a), the
exercise price of any outstanding Option or Stock Appreciation Right may not be adjusted or
amended, whether through amendment, cancellation or replacement, unless such adjustment or
amendment is properly approved by Reynolds American’s shareholders. Likewise, the share and
payment limitations set forth in Section 6(a) cannot be increased, and the minimum Option or Stock
Appreciation Right grant price limitations set forth in Sections 5(a), 5(b) and 5(c) cannot be
reduced, in either case without proper stockholder approval. Subject to the foregoing and except
as otherwise required by law or as provided in the New York Stock Exchange Rules, the Corporation’s
Board of Directors may amend, suspend or terminate this Plan as it deems necessary and appropriate
to better achieve the Plan’s purpose.

10. Compliance with Section 409A of the Code

     The Plan is intended to comply with Section 409A of the Code and shall be construed and
interpreted in accordance with such intent.

11. Foreign Options and Rights

	 	(a)	 	      The Committee may make Grants to employees who are subject to the tax laws of
nations other than the United States, which Grants may have terms and conditions that
differ from the terms thereof as provided elsewhere in the Plan for the purpose of
complying with the foreign tax laws. Grants of stock options may

10

 

	 	 	 	have terms and conditions that differ from Incentive Stock Options and Other Stock
Options for the purpose of complying with the foreign tax laws.

	 	(b)	 	      The terms and conditions of stock options granted under Section 11(a) may
differ from the terms and conditions which the Plan would require to be imposed upon
Incentive Stock Options and Other Stock Options if the Committee determines that the
Grants are desirable to promote the purposes of the Plan.

12. Withholding Taxes

     The Corporation shall have the right to deduct from any payment or settlement made under the
Plan any federal, state or local income or other taxes required by law to be withheld with respect
to such payment.

13. Distribution upon Death

     In the event of the death of a Participant, any distribution to which such Participant is
entitled under the Plan shall be made to the beneficiary designated by the Participant to receive
the proceeds of any noncontributory group life insurance coverage provided for the Participant by
the Corporation (“Group Life Insurance Coverage”). If the Participant has not designated such
beneficiary, or desires to designate a different beneficiary, the Participant may file with the
Corporation a written designation of a beneficiary under the Plan, which designation may be changed
or revoked only by the Participant, in writing. If no designation of beneficiary has been made by
a Participant under the Group Life Insurance Coverage or filed with the Corporation under the Plan,
distribution upon such Participant’s death shall be made in accordance with the provisions of the
Group Life Insurance Coverage. If a Participant is no longer an employee of the Corporation at the
time of death, no longer has any Group Life Insurance Coverage and has not filed a designation of
beneficiary with the Corporation under the Plan, distribution upon such Participant’s death shall
be made to the Participant’s estate.

14. Effective Date and Termination Dates

     The Plan was adopted by Reynolds American on July 30, 2004 and amended and restated effective
February 2, 2005, and May 11, 2007. The Plan originally became effective on and as of June 14,
1999 (the “Effective Date”), and shall terminate ten (10) years later, subject to earlier
termination by the Board of Directors pursuant to Section 9. The terms of Grants made on or before
the expiration of the Plan shall extend beyond such expiration. Grants shall be governed by the
terms of the Plan as in effect on the date such Grant was made, except as may be necessary to
comply with Section 409A of the Code.

15. Governing Law

     All questions arising in respect of the Plan, including those pertaining to its validity,
interpretation and administration, shall be governed, controlled and determined in accordance with
the applicable provisions of federal law and, to the extent not preempted by federal law, the laws
of the State of North Carolina.

11

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