Document:

Form of Performance Restricted Stock Unit Agreement - cliff vesting

     

    
      
        

      

    PERFORMANCE
      RESTRICTED STOCK UNIT AGREEMENT

    PURSUANT
      TO THE OMEGA HEALTHCARE INVESTORS, INC.

    2004
      STOCK INCENTIVE PLAN

    

    THIS
      AGREEMENT (sometimes referred to as this “Award”) is made as of the Grant Date,
      by Omega Healthcare Investors, Inc. (the “Company”) to ______________ (the
“Recipient”) subject to acceptance by the Recipient.

    

    Upon
      and
      subject to the Terms and Conditions attached hereto and incorporated herein
      by
      reference as part of this Agreement, the Company hereby awards as of the Grant
      Date to the Recipient, the Restricted Units (the “Restricted Unit Grant”).
      Underlined and capitalized terms in items A through F below shall have the
      meanings there ascribed to them.

    

    
      	 	
              A.

            	
              Grant
                Date:
                May 7, 2007.

            

    

    

    
      	 	
              B.

            	
              Plan
                (under which Restricted Unit Grant is granted):
                Omega Healthcare Investors, Inc. 2004 Stock Incentive
                Plan.

            

    

    

    
      	 	
              C.

            	
              Restricted
                Units:
                _________Restricted Units. Each Restricted Unit represents the Company’s
                unsecured obligation to issue one share of the Company’s common stock
                (“Common Stock”) and accrued dividend equivalents (and accrued interest)
                in accordance with this Agreement, subject to the Vesting Schedule
                and
                subject to adjustment as provided in the attached Terms and
                Conditions.

            

    

    

    
      	 	
              D.

            	
              Vesting
                Schedule:
                The Restricted Units and shares of Common Stock represented by the
                Restricted Units (the “Shares”) shall vest according to the Vesting
                Schedule attached hereto as Exhibit
                1
                (the “Vesting Schedule”). The Restricted Units and Shares which have
                become vested pursuant to the Vesting Schedule are herein referred
                to as
                the “Vested Units” and “Vested Shares,” respectively.
                

            

    

    

    
      	E.  	
              Distribution
                Date of Vested Shares.
                Vested Shares attributable to Vested Units are to be issued and
                distributable within ten (10) business days following the earliest
                of the
                events listed below, subject to receipt from the Recipient of the
                required
                tax withholding:

            

    

    

    
      	 	
              1.

            	
              January
                2, 2011;

            

    

     

    
      	 	
              2.

            	
              the
                Recipient’s cessation of services as an employee, director or consultant
                of the Company or an Affiliate due to the Recipient’s death or Disability;
                or

            

    

     

    
      	 	
              3.

            	
              the
                Recipient’s resignation from the Company for Good Reason or termination of
                employment by the Company without
                Cause.

            

    

     

    
      	F.  	
              Distribution
                Date of Dividend Equivalents.
                Dividend Equivalents (and accrued interest) attributable to Restricted
                Units that are or become Vested Units are distributable to the Recipient
                on the same date as Vested Shares are distributable to the Recipient
                under
                Section E above.

            

    

    

    IN
      WITNESS WHEREOF, the Company and the Recipient have executed this Agreement
      as
      of the Grant Date set forth above.

    

    RECIPIENT     OMEGA
      HEALTHCARE INVESTORS, INC.

    

    

    By:
            

     

    [Signature]     Title:
            

    

    TERMS
      AND CONDITIONS TO THE

    PERFORMANCE
      RESTRICTED STOCK UNIT AGREEMENT

    PURSUANT
      TO THE OMEGA HEALTHCARE INVESTORS, INC.

    2004
      STOCK INCENTIVE PLAN

    

    1.  Payment
      for Restricted Units.
      This
      Section applies to Vested Units. The Company shall issue and deliver a share
      certificate representing the number of Vested Shares attributable to Vested
      Units to the Recipient within ten (10) business days following the Distribution
      Date of Vested Shares. In the event that the Recipient forfeits any of the
      Restricted Units, and the number of Vested Units includes a fraction of a Share,
      the Company shall not deliver the fractional Share, and the Company shall pay
      the Recipient the amount determined by the Company to be the estimated fair
      market value thereof. In the event the number of shares of Common Stock is
      increased or reduced by a change in the par value, split-up, stock split,
      reverse stock split, reclassification, merger, reorganization, consolidation,
      or
      otherwise, the Recipient agrees that any certificate representing shares of
      Common Stock or other securities of the Company issued as a result of any of
      the
      foregoing shall be subject to all of the provisions of this Award as if
      initially granted thereunder.

    

    2.  Dividends
      Equivalents.
      Each
      Restricted Unit will accrue an amount equal to the dividends per share paid
      on
      Common Stock to Shareholders of record on or after the Grant Date. Dividends
      equivalents attributable to Restricted Units that are or become Vested Units
      will be paid to the Recipient
      within ten (10) business days following the Distribution Date for
      Dividend Equivalents,
      with
      interest accrued on a quarterly basis at a rate equal to the Company's average
      borrowing rate for the preceding calendar quarter as determined in the sole
      discretion of the Company, and
      less
      required tax withholding.
      Dividend
      equivalents (and interest) on Restricted Units that do not become Vested Units
      are not paid to the Recipient but are forfeited when the Restricted Units to
      which they relate are forfeited.

    

    3.  Tax
      Withholding.
      

     

    (a) The
      Recipient must deliver to the Company, within ten (10) days after written
      notification from the Company as to the amount of the tax withholding that
      is
      due, either (i) cash, or (ii) a certified check payable to the Company, in
      the
      amount of all tax withholding obligations imposed on the Company on the
      Distribution Date of the Restricted Shares, except as provided in Section 3(b),
      or (iii) by tendering a number of whole shares of Common Stock which, when
      multiplied by the Fair Market Value of the Common Stock on the Distribution
      Date
      of the Restricted Shares, is sufficient to satisfy the minimum amount of the
      required tax withholding obligations imposed on the Company (the “Stock
      Tendering Election”); provided, however, the Committee may in its sole
      discretion, disapprove and give no effect to the Stock Tendering Election by
      giving written notice to the Recipient within ten (10) days after receipt of
      the
      Stock Tendering Election, in which event the Recipient must deliver, within
      ten
      (10) days after receiving such notice, the tax withholding in the manner
      provided in clause (i) or (ii). If the Recipient does not timely satisfy payment
      of the tax withholding obligation, the Recipient will forfeit the Vested
      Shares.

    

    (b) In
      lieu
      of paying the tax withholding obligation as described in Section 3(a), Recipient
      may elect to have the actual number of Vested Shares reduced by the number
      of
      whole shares of Common Stock which, when multiplied by the Fair Market Value
      of
      the Common Stock on the Distribution Date of the Vested Shares, is sufficient
      to
      satisfy the minimum amount of the required tax obligations imposed on the
      Company on the Distribution Date of the Vested Shares (the “Withholding
      Election”). Recipient may make a Withholding Election only if all of the
      following conditions are met:

     

    (i) the
      Withholding Election must be made within ten (10) days after the Recipient
      receives written notification from the Company as to the amount of the tax
      withholding that is due (the “Tax Notice Date”), by executing and delivering to
      the Company a properly completed Notice of Withholding Election, in
      substantially the form of Exhibit
      2
      attached
      hereto; and

     

    (ii) any
      Withholding Election made will be irrevocable; however, the Committee may,
      in
      its sole discretion, disapprove and give no effect to any Withholding Election,
      by giving written notice to the Recipient no later than ten (10) days after
      the
      Company’s receipt of the Notice of Withholding Election, in which event the
      Recipient must deliver to the Company, within ten (10) days after receiving
      such
      notice, the amount of the tax withholding pursuant to Section 3(a).

     

    4.  Restrictions
      on Transfer.
      Except
for the transfer by bequest
      or
      inheritance, the Recipient shall not have the right to make or permit to exist
      any transfer or hypothecation, whether outright or as security, with or without
      consideration, voluntary or involuntary, of all or any part of any right, title
      or interest in or to any Restricted Units. Any such disposition not made in
      accordance with this Award shall be deemed null and void. Any permitted
      transferee under this Section shall be bound by the terms of this
      Award.

    

    5.  Additional
      Restrictions on Transfer. Certificates
      evidencing the Restricted Shares shall have noted conspicuously on the
      certificate a legend required under applicable securities laws or otherwise
      determined by the Company to be appropriate, such as:

    

    TRANSFER
      IS RESTRICTED

    

    The
      securities evidenced by this certificate are subject to restrictions on transfer
      and forfeiture provisions which also apply to the transferee as set forth in
      a
      restricted stock agreement dated May 7,
      2007,
      a copy
      of which is available from the company. The
      securities evidenced by this certificate may not be sold, transferred, assigned,
      or hypothecated unless (1) there is an effective registration under such act
      covering such securities, (2) the transfer is made in compliance with rule
      144
      promulgated under such act, or (3) the issuer receives an opinion of counsel,
      reasonably satisfactory to the company, stating that such sale, transfer,
      assignment or hypothecation is exempt from the registration requirements of
      such
      act.

    

    6.  Change
      in Capitalization.

    

    (a) The
      number and kind of Shares shall be proportionately adjusted for any increase
      or
      decrease in the number of issued shares of Common Stock resulting from a
      subdivision or combination of shares or the payment of a stock dividend in
      shares of Common Stock to holders of outstanding shares of Common Stock or
      any
      other increase or decrease in the number of shares of Common Stock outstanding
      is effected without receipt of consideration by the Company. No fractional
      shares shall be issued in making such adjustment. 

    

    (b) In
      the
      event of a merger, consolidation, extraordinary dividend, spin-off, sale of
      substantially all of the Company’s assets or other material change in the
      capital structure of the Company, or a tender offer for shares of Common Stock,
      or other reorganization of the Company or upon a Change in Control, the
      Committee shall take such action to make such adjustments with respect to the
      Shares or the terms of this Award as the Committee, in its sole discretion,
      determines in good faith is necessary or appropriate, including, without
      limitation, adjusting the number and class of securities subject to the Award,
      substituting cash, other securities, or other property to replace the Award,
      or
      removing of restrictions on Shares. If the Committee substitutes cash, the
      unvested portion of the Award shall be adjusted through the Distribution Date
      for Vested Shares by the annualized dividend yield of the Company for the four
      (4) most recently completed calendar quarters as of the date of the transaction
      and, within ten (10) business days following the Distribution Date of Vested
      Shares, payment shall be released from escrow and made to the
      Recipient.

    

    (c) All
      determinations and adjustments made by the Committee pursuant to this Section
      will be final and binding on the Recipient. Any action taken by the Committee
      need not treat all recipients of awards under the Plan equally.

    

    (d) The
      existence of the Plan and the Restricted Unit Grant shall not affect the right
      or power of the Company to make or authorize any adjustment, reclassification,
      reorganization or other change in its capital or business structure, any merger
      or consolidation of the Company, any issue of debt or equity securities having
      preferences or priorities as to the Common Stock or the rights thereof, the
      dissolution or liquidation of the Company, any sale or transfer of all or part
      of its business or assets, or any other corporate act or
      proceeding.

    

    7. Governing
      Laws.
      This
      Award shall be construed, administered and enforced according to the laws of
      the
      State of Maryland; provided, however, no Shares shall be issued except, in
      the
      reasonable judgment of the Committee, in compliance with exemptions under
      applicable state securities laws of the state in which Recipient resides, and/or
      any other applicable securities laws.

    

    8. Successors.
      This
      Award shall be binding upon and inure to the benefit of the heirs, legal
      representatives, successors, and permitted assigns of the parties.

    

    9. Notice.
      Except
      as otherwise specified herein, all notices and other communications under this
      Award shall be in writing and shall be deemed to have been given if personally
      delivered or if sent by registered or certified United States mail, return
      receipt requested, postage prepaid, addressed to the proposed recipient at
      the
      last known address of the recipient. Any party may designate any other address
      to which notices shall be sent by giving notice of the address to the other
      parties in the same manner as provided herein.

    

    10. Severability.
      In the
      event that any one or more of the provisions or portion thereof contained in
      this Award shall for any reason be held to be invalid, illegal, or unenforceable
      in any respect, the same shall not invalidate or otherwise affect any other
      provisions of this Award, and this Award shall be construed as if the invalid,
      illegal or unenforceable provision or portion thereof had never been contained
      herein.

    

    11. Entire
      Agreement.
      Subject
      to the terms and conditions of the Plan, this Award expresses the entire
      understanding and agreement of the parties with respect to the subject matter.
      

    

    12. Headings
      and Capitalized Terms.
      Paragraph headings used herein are for convenience of reference only and shall
      not be considered in construing this Award. Capitalized
      terms used, but not defined, in this Award shall be given the meaning ascribed
      to them in the Plan.

    

    13. Specific
      Performance.
      In the
      event of any actual or threatened default in, or breach of, any of the terms,
      conditions and provisions of this Award, the party or parties who are thereby
      aggrieved shall have the right to specific performance and injunction in
      addition to any and all other rights and remedies at law or in equity, and
      all
      such rights and remedies shall be cumulative.

    

    14. No
      Right to Continued Retention.
      Neither
      the establishment of the Plan nor the award of Restricted Shares hereunder
      shall
      be construed as giving Recipient the right to continued service with the Company
      or an Affiliate.

     

    15. Definitions.
      As used
      in these Terms and Conditions in this Agreement:

     

    “Beginning
      Stock Price”
means
      the average closing price per share of the Company’s Common Stock for the twenty
      (20) days the exchange on which the Company’s Common Stock is traded is open
      which immediately precede the Grant Date.

     

    “Cause”
shall
      have the meaning set forth in the employment agreement then in effect between
      the Recipient and the Company, or, if there is none, then Cause shall mean
      the
      occurrence of any of the following events:

     

    (a) willful
      refusal by the Recipient to follow a lawful direction of the person to whom
      the
      Recipient reports or the Board of Directors of the Company (the “Board”),
      provided the direction is not materially inconsistent with the duties or
      responsibilities of the Recipient’s position with the Company, which refusal
      continues after the Board has again given the direction in writing;

     

    (b) willful
      misconduct or reckless disregard by the Recipient of his duties or of the
      interest or property of the Company;

     

    (c) intentional
      disclosure by the Recipient to an unauthorized person of Confidential
      Information or Trade Secrets, which causes material harm to the Company;

     

    (d) any
      act
      by the Recipient of fraud against material misappropriation from, significant
      dishonesty to either the Company or an Affiliate, or any other party, but in
      the
      latter case only if in the reasonable opinion of at least two-thirds of the
      members of the Board (excluding the Recipient), such fraud, material
      misappropriation, or significant dishonesty could reasonably be expected to
      have
      a material adverse impact on the Company or its Affiliates; or 

     

    (e) commission
      by the Recipient of a felony as reasonably determined by at least two-thirds
      of
      the members of the Board (excluding the Recipient).

     

    “Change
      in Control”
means
      any one of the following events which occurs following the Grant
      Date:

     

    (a) the
      acquisition, directly or indirectly, by any “person” or “persons” (as such terms
      are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934,
      as
      amended), other than the Company or any employee benefits plan of the Company
      or
      an Affiliate, or any corporation pursuant to a reorganization, merger or
      consolidation, of equity securities of the Company, resulting in such person
      or
      persons holding equity securities of the Company that in the aggregate represent
      thirty percent (30%) or more of the combined ordinary voting power of the
      Company’s then outstanding equity securities;

     

    (b) individuals
      who as of the date hereof, constitute the Board (the “Incumbent Board”) cease
      for any reason to constitute at least a majority of the Board; provided,
      however, that any individual becoming a director subsequent to the date hereof
      whose election, or nomination for election by the Company’s shareholders, was
      approved by a vote of at least two-thirds of the directors then comprising
      the
      Incumbent Board shall be considered as though such individual were a member
      of
      the Incumbent Board, but excluding, for this purpose, any such individual whose
      initial assumption of office occurs as a result of an actual or threatened
      election contest with respect to the election or removal of directors or other
      actual or threatened solicitation of proxies or consents by or on behalf of
      a
      person other than the Board;

     

    (c) a
      reorganization, merger or consolidation, with respect to which persons who
      were
      the holders of equity securities of the Company immediately prior to such
      reorganization, merger or consolidation do not, immediately thereafter, own
      equity securities of the surviving entity representing more than fifty percent
      (50%) of the combined ordinary voting power of the then outstanding voting
      securities of the surviving entity; or

     

    (d) a
      sale,
      or one or more sales occurring in a twelve-month period, of all or substantially
      all of the assets of the Company to any third party.

     

    Notwithstanding
      the foregoing, no Change in Control shall be deemed to have occurred for
      purposes of this Award by reason of any actions or events in which the Recipient
      participates in a capacity other than in his capacity as an officer, employee,
      or director of the Company or an Affiliate.

     

    “Confidential
      Information”
means
      data and information relating to the Business of the Company or an Affiliate
      (which does not rise to the status of a Trade Secret) which is or has been
      disclosed to the Recipient or of which the Recipient became aware as a
      consequence of or through his relationship to the Company or an Affiliate and
      which has value to the Company or an Affiliate and is not generally known to
      its
      competitors. Confidential Information shall not include any data or information
      that has been voluntarily disclosed to the public by the Company or an Affiliate
      (except where such public disclosure has been made by the Recipient without
      authorization) or that has been independently developed and disclosed by others,
      or that otherwise enters the public domain through lawful means without breach
      of any obligations of confidentiality owed to the Company or any of its
      Affiliates.

     

    “Ending
      Stock Price”
means
      the average closing price per share of the Company’s Common Stock for the twenty
      (20) days the exchange on which the Company’s Common Stock is traded is open
      which end on the last day of the Performance Period, except that in the case
      of
      a Change in Control, the Ending Stock Price shall mean the closing price per
      share of the Company’s Common Stock on the date of the Change in Control or, if
      no closing price, the implied price the share of Common Stock paid in the Change
      in Control transaction.

     

    “Good
      Reason”
shall
      have the meaning set forth in the employment agreement then in effect between
      the Recipient and the Company, or, if there is none, then Good Reason shall
      mean
      the occurrence of all of the events listed in either (a) or (b)
      below:

     

    (a) (i)
      the
      Recipient experiences a material diminution of the Recipient’s responsibilities
      of his position, as reasonably modified by the person to whom the Recipient
      reports or the Board from time to time, such that the Recipient would no longer
      have responsibilities substantially equivalent to those of other executives
      holding equivalent positions at companies with similar revenues and market
      capitalization;

     

    (ii) the
      Recipient gives written notice to the Company of the facts and circumstances
      constituting the material diminution in responsibilities within ten (10) days
      following the occurrence of such material diminution;

     

    (iii) the
      Company fails to remedy the material diminution in responsibilities within
      ten
      (10) days following the Recipient’s written notice of the material diminution in
      responsibilities; and

     

    (iv) the
      Recipient terminates his employment and this Agreement within ten (10) days
      following the Company’s failure to remedy the material diminution in
      responsibilities.

     

    (b) (i)
      the
      Company requires the Recipient to relocate the Recipient’s primary place of
      employment to a new location, that is more than fifty (50) miles from its
      current location (determined using the most direct driving route), without
      the
      Recipient’s consent;

     

    (ii) the
      Recipient gives written notice to the Company within ten (10) days following
      receipt of notice of relocation of his objection to the relocation;

     

    (iii) the
      Company fails to rescind the notice of relocation within ten (10) days following
      the Recipient’s written notice; and

     

    (iv) the
      Recipient terminates his employment within ten (10) days following the Company’s
      failure to rescind the notice.

     

    “Performance
      Period”
      means the period from and including the Grant Date through December
      31, 2010. Notwithstanding the foregoing, the Performance Period shall end on
      the
      earliest to occur of the following:

     

    (a) the
      date
      of the Change in Control;

     

    (b) the
      Recipient’s cessation of services as an employee, director or consultant of the
      Company or an Affiliate due to death or Disability;

     

    (c) the
      Recipient’s resignation from the Company for Good Reason; or

     

    (d) the
      Recipient’s termination of employment by the Company for Cause. 

     

    “Target
      Shareholder Return”
means
      an annualized Total Shareholder Return of at least 11% compounded annually
      as of
      December 31 each year after the Grant Date through the last day of the
      Performance Period.

     

    “Total
      Shareholder Return”
means
      the sum of the total increase (decrease) of the Ending Stock Price over the
      Beginning Stock Price, plus any dividends paid to a shareholder of record with
      respect to one share of Common Stock during the Performance Period.

     

    “Trade
      Secrets”
means
      information including, but not limited to, technical or nontechnical data,
      formulae, patterns, compilations, programs, devices, methods, techniques,
      drawings, processes, financial data, financial plans, product plans or lists
      of
      actual or potential customers or suppliers which (i) derives economic value,
      actual or potential, from not being generally known to, and not being readily
      ascertainable by proper means by, other persons who can obtain economic value
      from its disclosure or use, and (ii) is the subject of efforts that are
      reasonable under the circumstances to maintain its secrecy.

     

    

     

    

    

    EXHIBIT
      1

    

    VESTING
      SCHEDULE

    

    
      	
              A.

            	
              The
                Restricted Units shall become Vested Units on December 31, 2010,
                provided
                that the Company has achieved the Target Shareholder Return as of
                the last
                day of the Performance Period, and provided further that the Recipient
                must remain an employee, director or consultant of the Company or
                an
                Affiliate through December 31, 2010.

            

    

     

    
      	
              B.

            	
              Notwithstanding
                the foregoing, all Restricted Units shall become Vested Units if
                they have
                not been previously forfeited on the earliest to occur of the
                following:

            

    

     

    
      	 	
              1.

            	
              the
                Recipient’s cessation of services as an employee, director or consultant
                of the Company or an Affiliate due to the Recipient’s death or
                Disability;

            

    

     

    
      	 	
              2.

            	
              the
                Recipient’s resignation from the Company for Good Reason;
                or

            

    

     

    
      	 	
              3.

            	
              the
                Recipient’s termination of employment by the Company without
                Cause.

            

    

     

    ,
      but, in
      each case, only if the Company has achieved the Target Shareholder Return as
      of
      the date of such event. If the Company has not achieved the Target Shareholder
      Return as of such date, the Restricted Units which have not become Vested Units
      shall be forfeited.

     

    
      	
              C.

            	
              Notwithstanding
                any other provision hereof, Restricted Units which have not become
                Vested
                Units by December 31, 2010 are forfeited. Restricted
                Shares which have not become Vested Shares as of the Recipient’s cessation
                of services as an employee, director, or consultant of the Company
                or an
                Affiliate shall be forfeited.

            

    

     

    

    

    

    EXHIBIT
      2

    

    

    NOTICE
      OF WITHHOLDING ELECTION

    PURSUANT
      TO OMEGA HEALTHCARE INVESTORS, INC.

    2004
      STOCK INCENTIVE PLAN

    

    

    TO: Omega
      Healthcare Investors, Inc.

    Attention:
      Chief Financial Officer

    

    FROM:      

    

    RE:  Withholding
      Election

    

    This
      election relates to the Performance Restricted Unit Grant identified in
      Paragraph 3 below. I hereby certify that:

     

    (1) My
      correct name and social security number and my current address are set forth
      at
      the end of this document.

     

    (2) I
      am
      (check one, whichever is applicable).

     

    [
      ] the
      original recipient of the Performance Restricted Unit Grant.

     

    
      	 	
              [
                ]

            	
              the
                legal representative of the estate of the original recipient of the
                Performance Restricted Unit Grant.

            

    

     

    
      	 	
              [
                ]

            	
              a
                legatee of the original recipient of the Performance Restricted Unit
                Grant.

            

    

     

    
      	 	
              [
                ]

            	
              the
                legal guardian of the original recipient of the Performance Restricted
                Unit Grant.

            

    

     

    (3) The
      Performance Restricted Unit Grant pursuant to which this election relates was
      issued with a Grant Date of __________________ under the Omega Healthcare
      Investors, Inc. 2004 Stock Incentive Plan (the “Plan”) in the name of
      _________________ for a total of ______________ Restricted Units. This election
      relates to ______ shares of Common Stock issuable pursuant to the Performance
      Restricted Unit Grant, provided that the numbers set forth above shall be deemed
      changed as appropriate to reflect stock splits and other adjustments
      contemplated by the applicable Plan provisions.

    

    (4) I
      hereby
      elect to have certain of the shares of Common Stock withheld by the Company
      for
      the purpose of having the value of the shares applied to pay federal, state
      and
      local, if any, taxes arising from the exercise.

    

    The
      fair
      market value of the shares of Common Stock to be withheld in addition to
      $_________ in cash to be tendered to the Company by the recipient of the
      Performance Restricted Unit Grant shall be equal to the minimum statutory tax
      withholding requirement under federal, state and local law in connection with
      the exercise.

    

    (5) This
      Withholding Election is made no later than ten (10) days after the Tax Notice
      Date and is otherwise timely made pursuant to the Plan.

    

    (6) I
      further
      understand that, if this Withholding Election is not disapproved by the
      Committee, the Company shall withhold from the Common Stock issuable to me
      a
      whole number of shares of Common Stock having the value specified in Paragraph
      4
      above.

    

    (7) The
      Plan
      has been made available to me by the Company, I have read and understand the
      Plan and I have no reason to believe that any of the conditions therein to
      the
      making of this Withholding Election have not been met. Capitalized terms used
      in
      this Notice of Withholding Election without definition shall have the meanings
      given to them in the Plan.

    

    

    Dated:
             

    

    Signature:
            

    

     

    Name
      (Printed)

    

    ______________________________

    Street
      Address

    

    ______________________________

    City,
      State, Zip Codeexv10w1

 

Exhibit 10.1

EXECUTIVE EMPLOYMENT AGREEMENT

     This Employment Agreement (the “Agreement”) is made and entered into effective
as of March 22, 2007 (the “Effective Date”), by and between Ardea Biosciences, Inc. (the
“Company”) and Christopher W. Krueger (the “Executive”). The Company and the Executive
are hereinafter collectively referred to as the “Parties”, and individually referred to as a
“Party”.

Recitals

     A. The Company desires assurance of the association and services of the Executive in order to
retain the Executive’s experience, skills, abilities, background and knowledge, and is willing to
engage the Executive’s services on the terms and conditions set forth in this Agreement.

     B. The Executive desires to be in the employ of the Company, and is willing to accept such
employment on the terms and conditions set forth in this Agreement.

Agreement

     In consideration of the foregoing Recitals and the mutual promises and covenants herein
contained, and for other good and valuable consideration, the Parties, intending to be legally
bound, agree as follows:

     1. Employment.

          1.1 Title. The Executive shall initially have the title of Senior Vice President, Chief
Business Officer of the Company and shall serve in such other capacity or capacities as the Company
may from time to time prescribe. The Executive shall initially report to the Company’s Chief
Executive Officer (“CEO”).

          1.2 Duties. The Executive shall do and perform all services, acts or things necessary or
advisable to manage and conduct the business of the Company, which are normally associated with the
position of Senior Vice President, Chief Business Officer, including Business Development, Investor
Relations, Legal Affairs, and joint oversight of Corporate Finance with the CEO consistent with the
bylaws of the Company and as required by the CEO.

          1.3 Policies and Practices. The employment relationship between the Parties shall be governed
by the policies and practices established by the Company and/or the Company’s Board of Directors
(the “Board”). The Executive acknowledges that he has read the Company’s Employee Handbook and
other governing policies, which will govern the terms and conditions of his employment with the
Company, along with this Agreement. In the event that the terms of this Agreement differ from or
are in conflict with the Company’s policies or practices or the Company’s Employee Handbook, this
Agreement shall control.

          1.4 Location. Unless the Parties otherwise agree in writing, during the term of this
Agreement, the Executive shall perform the services the Executive is required to perform

 

 

pursuant to this Agreement at the Company’s offices, located in San Diego, California;
provided, however, that the Company may from time to time reasonably require the Executive to
travel temporarily to other locations in connection with the Company’s business.

     2. Loyal and Conscientious Performance; Noncompetition.

          2.1 Loyalty. During the Executive’s employment by the Company, the Executive shall devote the
Executive’s full business energies, interest, abilities and productive time to the proper and
efficient performance of the Executive’s duties under this Agreement.

          2.2 Covenant not to Compete. Except with the prior written consent of the Board or the CEO,
which shall not be unreasonably withheld, the Executive will not, during the Executive’s employment
by the Company, engage in competition with the Company and/or any of its Affiliates, either
directly or indirectly, in any manner or capacity, as adviser, principal, agent, affiliate,
promoter, partner, officer, director, employee, stockholder, owner, co-owner, consultant, or member
of any association or otherwise, in any phase of the business of developing, manufacturing and
marketing of products or services which are in the same field of use or which otherwise compete
with the products or services or proposed products or services of the Company and/or any of its
Affiliates. For purposes of this Agreement, “Affiliate” means, with respect to any specific
entity, any other entity that, directly or indirectly, through one or more intermediaries,
controls, is controlled by or is under common control with such specified entity.

          2.3 Agreement not to Participate in Company’s Competitors. During any period during which the
Executive is receiving any compensation or consideration from the Company, the Executive agrees not
to acquire, assume or participate in, directly or indirectly, any position, investment or interest
known by the Executive to be adverse or antagonistic to the Company, its business or prospects,
financial or otherwise or in any company, person or entity that is, directly or indirectly, in
competition with the business of the Company or any of its Affiliates. Notwithstanding the
foregoing, ownership by the Executive, as a passive investment, of less than two percent (2%) of
the outstanding shares of capital stock of any corporation with one or more classes of its capital
stock listed on a national securities exchange or publicly traded on the Nasdaq Stock Market or in
the over-the-counter market shall not constitute a breach of Section 2.2 or this Section 2.3.

     3. Compensation of the Executive.

          3.1 Base Salary. The Company shall pay the Executive a base salary of Two Hundred Seventy
Thousand Dollars ($270,000) per year, less payroll deductions and all required withholdings payable
in regular periodic payments in accordance with Company policy. Such base salary shall be prorated
for any partial year of employment on the basis of a 365-day fiscal year.

          3.2 Annual Performance Bonus. In addition to the Executive’s base salary, the Executive shall
be eligible for an annual performance bonus based upon the Executive’s and the Company’s
achievement of specified objectives established by the CEO and/or the Board during the first
quarter of each year, as evaluated by the CEO and/or Board in the exercise of

2

 

good faith reasonable judgment. The target bonus for achievement of all objectives shall be
thirty-five percent (35%) of the Executive’s then-current base salary.

          3.3 Signing and Merit Bonus. Within thirty (30) days of the Executive’s first day of
employment with the Company, the Company shall pay the Executive a signing bonus of Twenty Five
Thousand Dollars ($25,000), less standard deductions and withholdings.

          3.4 Stock Option. Upon the commencement of the Executive’s employment and subject to approval
of the Board and the terms of the Company’s 2004 Stock Equity Incentive Plan, (the “Plan”), the
Executive will be granted a stock option under the Plan to purchase one hundred ninety thousand
(190,000) shares of the Company’s Common Stock (the “Option”). To the maximum extent possible, the
Option shall be an Incentive Stock Option as such term is defined in Section 422 of the Internal
Revenue Code of 1986, as amended. The Option will be governed by and granted pursuant to a
separate Stock Option Agreement and the Plan. The exercise price per share of the Option will be
equal to the fair market value of the Common Stock established on the date of grant, subject to
approval by the Board. The Option will vest over four (4) years for so long as the Executive
continues to be employed by the Company, as follows: twenty-five percent (25%) of the shares
subject to the Option shall vest on the first anniversary of the Executive’s first day of
employment with the Company, and 1/48th of the shares subject to the Option shall vest
on the same calendar day of each month thereafter.

          3.5 Changes to Compensation. The Executive’s compensation will be reviewed on a regular basis
by the Company and may be increased from time to time as deemed appropriate.

          3.6 Employment Taxes. All of the Executive’s compensation shall be subject to customary
withholding taxes and any other employment taxes as are commonly required to be collected or
withheld by the Company.

          3.7 Other Benefits. The Executive shall also be eligible to receive all other benefits
normally offered to full-time regular executive level employees, including, without limitation,
medical insurance, dental insurance, life insurance, 401(k) plan and 15 working days paid time off
per year accruing on a bi-weekly basis, as outlined in the Company’s Employee Handbook.

     4. Termination.

          4.1 Termination by the Company. The Executive’s employment by the Company shall be at will.
The Executive’s employment with the Company may be terminated by the Company at any time and for
any reason or no reason. Subject to the terms of the Company’s Senior Executive Severance Benefit
Plan, which is hereby incorporated into this Agreement, as it may be amended from time to time
(provided that any amendment shall not result in a reduction of benefits as set forth in such plan
as of the date hereof), in the event the Company terminates the Executive’s employment, the Company
shall have no further obligation to the Executive, except for payment of earned wages and accrued
and unused paid time off earned through the date of termination, at the rate in effect at the time
of termination, subject to

3

 

standard deductions and withholdings, and such other benefits as required in such event by
applicable law.

          4.2 Termination by Mutual Agreement of the Parties. The Executive’s employment pursuant to
this Agreement may be terminated at any time upon mutual agreement in writing of the Parties. Any
such termination of employment shall have the consequences specified in such agreement.

          4.3 Termination by the Executive. The Executive’s employment by the Company shall be at will.
The Executive shall have the right to resign or terminate the Executive’s employment at any time
and for any reason or no reason. Subject to the terms of the Company’s Senior Executive Severance
Benefit Plan, as it may be amended from time to time (provided that any amendment shall not result
in a reduction of benefits as set forth in such plan as of the date hereof), in the event the
Executive resigns or terminates his employment, the Company shall have no further obligation to the
Executive, except for payment of earned wages and accrued and unused paid time off earned through
the date of resignation or termination, at the rate in effect at the time of resignation or
termination, subject to standard deductions and withholdings, and such other benefits as required
in such event by applicable law.

          4.4 Change in Control. The provisions of Article Two, Section IVB(i) and (ii) of the Plan
providing for acceleration of vesting of outstanding stock options in the event of a “Change in
Control” (as defined in the Appendix, Section C, of the Plan) and an “Involuntary Termination”
thereafter (as defined in the Plan) are hereby incorporated into this Agreement and shall apply in
full.

     5. Confidential and Proprietary Information; Nonsolicitation.

          As a condition of employment, the Executive agrees to execute and abide by the Proprietary
Information and Inventions Agreement attached hereto as Exhibit A.

     6. Assignment and Binding Effect.

          This Agreement shall be binding upon and inure to the benefit of the Executive and the
Executive’s heirs, executors, personal representatives, assigns, administrators and legal
representatives. Because of the unique and personal nature of the Executive’s duties under this
Agreement, neither this Agreement nor any rights or obligations under this Agreement shall be
assignable by the Executive. This Agreement shall be binding upon and inure to the benefit of the
Company and its successors, assigns and legal representatives.

     7. Choice of Law.

          This Agreement is made in California. This Agreement shall be governed by and construed and
interpreted in accordance with the laws of the State of California.

     8. Integration.

          This Agreement, the Company’s Proprietary Information and Inventions Agreement attached as
Exhibit A hereto, the Company’s Senior Executive Severance Benefit

4

 

Plan and the Plan contain the complete, final and exclusive agreement of the Parties relating
to the terms and conditions of the Executive’s employment and the termination of Executive’s
employment, and supersedes all prior and contemporaneous oral and written employment agreements or
arrangements between the Parties. To the extent this Agreement conflicts with the Proprietary
Information and Inventions Agreement attached as Exhibit A hereto, the Proprietary Information and
Inventions Agreement shall control. To the extent this Agreement conflicts with the terms of the
Employee Handbook, the Company’s Senior Executive Severance Benefit Plan or the Plan, this
Agreement shall control.

     9. Amendment.

          This Agreement cannot be amended or modified, except by a written agreement signed by the
Executive and the Company.

     10. Waiver.

          No term, covenant or condition of this Agreement or any breach thereof shall be deemed waived,
except with the written consent of the Party against whom the wavier is claimed, and any waiver of
any such term, covenant, condition or breach shall not be deemed to be a waiver of any preceding or
succeeding breach of the same or any other term, covenant, condition or breach.

     11. Severability.

          The finding by a court of competent jurisdiction of the unenforceability, invalidity or
illegality of any provision of this Agreement shall not render any other provision of this
Agreement unenforceable, invalid or illegal. Such court shall have the authority to modify or
replace the invalid or unenforceable term or provision with a valid and enforceable term or
provision which most accurately represents the Parties’ intention with respect to the invalid or
unenforceable term or provision.

     12. Interpretation; Construction.

          The headings set forth in this Agreement are for convenience of reference only and shall not
be used in interpreting this Agreement. This Agreement has been drafted by legal counsel
representing the Company, but the Executive has been encouraged to consult with the Executive’s own
independent counsel and tax advisors with respect to the terms of this Agreement. The Parties
acknowledge that each Party has reviewed and revised, or had an opportunity to review and revise,
this Agreement, and the normal rule of construction to the effect that any ambiguities are to be
resolved against the drafting party shall not be employed in the interpretation of this Agreement.

     13. Representations and Warranties.

          The Executive represents and warrants that the Executive is not restricted or prohibited,
contractually or otherwise, from entering into and performing each of the terms and covenants
contained in this Agreement, and that the Executive’s execution and performance of this Agreement
will not violate or breach any other agreements between the Executive and any

5

 

other person or entity.

     14. Counterparts.

          This Agreement may be executed in two counterparts, each of which shall be deemed an original,
all of which together shall constitute one and the same instrument. Delivery of an executed
counterpart of a signature page to this Agreement by facsimile or by email of a scanned copy will
be effective as delivery of an original executed counterpart of this Agreement.

     15. Arbitration.

          To ensure the rapid and economical resolution of disputes that may arise in connection with
the Executive’s employment with the Company, the Executive and the Company agree that any and all
disputes, claims or causes of action, in law or equity, arising from or relating to the Executive’s
employment, or the termination of that employment, will be resolved pursuant to the Federal
Arbitration Act and to the fullest extent permitted by law, by final, binding and confidential
arbitration in San Diego, California conducted by the Judicial Arbitration and Mediation Services
(“JAMS”), or its successors, under the then current rules of JAMS for employment disputes;
provided, however, that the arbitrator shall: (a) have the authority to compel adequate discovery
for the resolution of the dispute and to award such relief as would otherwise be permitted by law;
and (b) issue a written arbitration decision, including the arbitrator’s essential findings and
conclusions and a statement of the award. Both the Executive and the Company shall be entitled to
all rights and remedies that either the Executive or the Company would be entitled to pursue in a
court of law. The Company shall pay all fees, including the arbitrator’s fee. Nothing in this
Agreement is intended to prevent either the Executive or the Company from obtaining injunctive
relief in court to prevent irreparable harm pending the conclusion of any such arbitration.

     16. Trade Secrets Of Others.

          It is the understanding of both the Company and the Executive that the Executive shall not
divulge to the Company and/or its Affiliates any confidential information or trade secrets
belonging to others, including the Executive’s former employers, nor shall the Company and/or its
Affiliates seek to elicit from the Executive any such information. Consistent with the foregoing,
the Executive shall not provide to the Company and/or its Affiliates, and the Company and/or its
Affiliates shall not request, any documents or copies of documents containing such information.

     17. Advertising Waiver.

          The Executive agrees to permit the Company and/or its Affiliates, and persons or other
organizations authorized by the Company and/or its Affiliates, to use, publish and distribute
advertising or sales promotional literature concerning the products and/or services of the Company
and/or its Affiliates, or the machinery and equipment used in the provision thereof, in which the
Executive’s name and/or pictures of the Executive taken in the course of the Executive’s provision
of services to the Company and/or its Affiliates, appear. The Executive hereby waives and releases
any claim or right the Executive may otherwise have arising out of such use, publication or
distribution.

6

 

     18. Indemnification.

          The Executive shall have no liability to the Company for any loss suffered by the Company that
arises out of any action or inaction of the Executive if the Executive in good faith determined
that such course of conduct was in the best interest of the Company, and such course of conduct did
not constitute gross negligence or willful misconduct of the Executive. The Executive shall be
indemnified by the Company against losses, judgments, liabilities, expenses and amounts paid in
settlement of any claims sustained by him in connection with the Company, provided that the same
were not the result of gross negligence or willful misconduct on the part of the Executive.

     In Witness Whereof, the Parties have executed this Agreement as of the Effective
Date.

	 	 	 
	Ardea Biosciences, Inc.

	 	 
	 
	 	 
	/s/ BARRY D. QUART
	 	 
	 

	 	 
	Barry Quart
	 	 
	Chief Executive Officer
	 	 
	 
	 	 
	Executive
	 	 
	 
	 	 
	/s/ CHRISTOPHER W. KRUEGER
	 	 
	 

	 	 
	Christopher W. Krueger
	 	 

7

 

EXHIBIT A

PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT

     In consideration of my employment or continued employment by Ardea Biosciences,
Inc. (“Company”), and the compensation paid to me now and during my employment with the
Company, I agree to the terms of this Agreement as follows:

1. Confidential Information Protections.

     1.1 Nondisclosure; Recognition of Company’s Rights. At all times during and after my
employment, I will hold in confidence and will not disclose, use, lecture upon or publish any of
Company’s Confidential Information (defined below), except as may be required in connection with my
work for Company, or as expressly authorized by the Chief Executive Officer (the “CEO”) of Company.
I will obtain the CEO’s written approval before publishing or submitting for publication any
material (written, oral or otherwise) that relates to my work at Company and/or incorporates any
Confidential Information. I hereby assign to Company any rights I may have or acquire in any and
all Confidential Information and recognize that all Confidential Information shall be the sole and
exclusive property of Company and its assigns.

     1.2 Confidential Information. The term “Confidential Information” shall mean any and all
confidential knowledge, data or information related to Company’s business or its actual or
demonstrably anticipated research or development activities, including, without limitation, (a)
trade secrets, inventions, ideas, processes, computer source and object code, data, formulae,
programs, other works of authorship, know-how, improvements, discoveries, developments, designs,
and techniques; (b) information regarding products, services, plans for research and development,
marketing and business plans, budgets, financial statements, contracts, prices, suppliers and
customers; (c) information regarding the skills and compensation of Company’s employees,
contractors, and any other service providers of Company; and (d) the existence of any business
discussions, negotiations or agreements between Company and any third party.

     1.3 Third Party Information. I understand that Company has received and in the future will
receive from third parties confidential or proprietary information (“Third Party Information”)
subject to a duty on Company’s part to maintain the confidentiality of such information and to use
it only for certain limited purposes. During and after the term of my employment, I will hold
Third Party Information in strict confidence and will not disclose to anyone (other than Company
personnel who need to know such information in connection with their work for Company) or use Third
Party Information, except in connection with my work for Company or unless expressly authorized by
an officer of Company in writing.

     1.4 No Improper Use of Information of Prior Employers and Others. I represent that my
employment by Company does not and will not breach any agreement with any former employer,
including any non-compete agreement or any agreement to keep in confidence or refrain from using
information acquired by me prior to my employment by Company. I further represent that I have not
entered into, and will not enter into, any agreement, either written or oral, in conflict with my
obligations under this Agreement. During my employment by Company, I will not improperly make use
of or disclose any information or trade secrets of any former employer or other third party, nor
will I bring onto the premises of Company or use any unpublished documents or any property
belonging to any former employer or other third party, in violation of any lawful agreements with
that former employer or third party. I will use in the performance of my duties only information
that is generally known and used by persons with training and experience comparable to my own, is
common knowledge in the industry or otherwise legally in the public domain, or is otherwise
provided or developed by Company.

2. Inventions.

     2.1 Inventions and Intellectual Property Rights. As used in this Agreement, the term
“Invention” means any ideas, concepts, information, materials, processes, data, programs, know-how,
improvements, discoveries, developments, designs, artwork, formulae, other copyrightable works, and
techniques and all Intellectual Property Rights in any of the items listed above. The term
“Intellectual Property Rights” means all trade secrets, copyrights, trademarks, mask work rights,
patents and other intellectual property rights recognized by the laws of any jurisdiction or
country.

     2.2 Prior Inventions. I have disclosed on Exhibit A a complete list of all Inventions that
(a) I have, or I have caused to be, alone or jointly with others, conceived, developed or reduced
to practice prior to the commencement of my employment by Company; (b) in which I have an ownership
interest or which I have a license to use; (c) and that I wish to have excluded from the scope of
this Agreement (collectively referred to as “Prior Inventions”). If no Prior Inventions are listed
in Exhibit A, I warrant that there are no Prior Inventions. I agree that I will not incorporate,
or permit to be incorporated, Prior Inventions in any Company Inventions (defined below) without
Company’s prior written consent. If, in the course of my employment with Company, I incorporate a
Prior Invention into a Company process, machine or other work, I hereby grant Company a
non-exclusive, perpetual,

1

 

fully-paid and royalty-free, irrevocable and worldwide license, with rights to sublicense
through multiple levels of sublicensees, to reproduce, make derivative works of, distribute,
publicly perform and publicly display in any form or medium, whether now known or later developed,
make, have made, use, sell, import, offer for sale, and exercise any and all present or future
rights in, such Prior Invention.

     2.3 Assignment of Company Inventions. Inventions assigned to the Company or to a third party
as directed by the Company pursuant to the section titled “Government or Third Party” are referred
to in this Agreement as “Company Inventions.” Subject to the section titled “Government or Third
Party” and except for Inventions that I can prove qualify fully under the provisions of California
Labor Code section 2870 and I have set forth in Exhibit A, I hereby assign and agree to assign in
the future (when any such Inventions or Intellectual Property Rights are first reduced to practice
or first fixed in a tangible medium, as applicable) to Company all my right, title, and interest in
and to any and all Inventions (and all Intellectual Property Rights with respect thereto) made,
conceived, reduced to practice or learned by me, either alone or with others, during the period of
my employment by Company.

     2.4 Obligation to Keep Company Informed. During the period of my employment and for one (1)
year after my employment ends, I will promptly and fully disclose to Company in writing (a) all
Inventions authored, conceived or reduced to practice by me, either alone or with others, including
any that might be covered under California Labor Code section 2870, and (b) all patent applications
filed by me or in which I am named as an inventor or co-inventor.

     2.5 Government or Third Party. I agree that, as directed by the Company, I will assign to a
third party, including, without limitation, the United States, all my right, title and interest in
and to any particular Company Invention.

     2.6 Enforcement of Intellectual Property Rights and Assistance. During and after the period
of my employment, I will assist Company in every proper way to obtain and enforce United States and
foreign Intellectual Property Rights relating to Company Inventions in all countries. If the
Company is unable to secure my signature on any document needed in connection with such purposes, I
hereby irrevocably designate and appoint Company and its duly authorized officers and agents as my
agent and attorney in fact, which appointment is coupled with an interest, to act on my behalf to
execute and file any such documents and to do all other lawfully permitted acts to further such
purposes with the same legal force and effect as if executed by me.

     2.7 Incorporation of Software Code. I agree that I will not incorporate into any Company
software or otherwise deliver to Company any software code licensed under the GNU General Public
License or Lesser General Public License or any other license that, by its terms, requires or
conditions the use or distribution of such code on the disclosure, licensing or distribution of any
source code owned or licensed by Company.

3. Records. I agree to keep and maintain adequate and current records (in the form of
notes, sketches, drawings and in any other form that is required by the Company) of all Inventions
made by me during the period of my employment by the Company, which records shall be available to,
and remain the sole property of, the Company at all times.

4. Additional Activities. I agree that (a) during the term of my employment by Company, I
will not, without Company’s express written consent, engage in any employment or business activity
that is competitive with, or would otherwise conflict with my employment by, Company, and (b) for
the period of my employment by Company and for one (l) year thereafter, I will not, either directly
or indirectly, solicit or attempt to solicit any employee, independent contractor or consultant of
Company to terminate his, her or its relationship with Company in order to become an employee,
consultant or independent contractor to or for any other person or entity.

5. Return of Company Property.  Upon termination of my employment or upon Company’s
request at any other time, I will deliver to Company all of Company’s property, equipment and
documents, together with all copies thereof, and any other material containing or disclosing any
Inventions, Third Party Information or Confidential Information and certify in writing that I have
fully complied with the foregoing obligation. I agree that I will not copy, delete or alter any
information contained upon my Company computer or Company equipment before I return it to Company.
In addition, if I have used any personal computer, server or e-mail system to receive, store,
review, prepare or transmit any Company information, including, but not limited to, Confidential
Information, I agree to provide the Company with a computer-useable copy of all such Confidential
Information and then permanently delete and expunge such Confidential Information from those
systems. I agree to provide the Company access to my system as reasonably requested to verify that
the necessary copying and/or deletion is completed. I further agree that any property situated on
Company’s premises and owned by Company is subject to inspection by Company’s personnel at any time
with or without notice. Prior to the termination of my employment or promptly after termination of
my employment, I will cooperate with Company in attending an exit interview and certify in writing
that I have complied with the requirements of this section.

6. Notification Of New Employer. If I leave the employ of Company, I consent to the
notification of my new employer of my rights and obligations under this Agreement, by Company
providing a copy of this Agreement or otherwise.

7. General Provisions.

     7.1 Governing Law and Venue. This Agreement and any action related thereto will be governed
and interpreted by and under the laws of the State of California,

2

 

without giving effect to any conflicts of laws principles that require the application of the
law of a different state. I expressly consent to personal jurisdiction and venue in the state and
federal courts for the county in which Company’s principal place of business is located for any
lawsuit filed there against me by Company arising from or related to this Agreement.

     7.2 Severability. If any provision of this Agreement is, for any reason, held to be invalid
or unenforceable, the other provisions of this Agreement will remain enforceable and the invalid or
unenforceable provision will be deemed modified so that it is valid and enforceable to the maximum
extent permitted by law.

     7.3 Survival. This Agreement shall survive the termination of my employment and the
assignment of this Agreement by Company to any successor or other assignee and be binding upon my
heirs and legal representatives.

     7.4 Employment. I agree and understand that nothing in this Agreement shall give me any right
to continued employment by Company, and it will not interfere in any way with my right or Company’s
right to terminate my employment at any time, with or without cause and with or without advance
notice.

     7.5 Notices. Each party must deliver all notices or other communications required or
permitted under this Agreement in writing to the other party at the address listed on the signature
page, by courier, by certified or registered mail (postage prepaid and return receipt requested),
or by a nationally-recognized express mail service. Notice will be effective upon receipt or
refusal of delivery. If delivered by certified or registered mail, notice will be considered to
have been given five (5) business days after it was mailed, as evidenced by the postmark. If
delivered by courier or express mail service, notice will be considered to have been given on the
delivery date reflected by the courier or express mail service receipt. Each party may change its
address for receipt of notice by giving notice of the change to the other party.

     7.6 Injunctive Relief. I acknowledge that, because my services are personal and unique and
because I will have access to the Confidential Information of Company, any breach of this Agreement
by me may cause irreparable injury to Company for which monetary damages would not be an adequate
remedy and, therefore, will entitle Company to seek injunctive relief (including specific
performance). The rights and remedies provided to each party in this Agreement are cumulative and
in addition to any other rights and remedies available to such party at law or in equity.

     7.7 Waiver. Any waiver or failure to enforce any provision of this Agreement on one occasion
will not be deemed a waiver of that provision or any other provision on any other occasion.

     7.8 Export. I agree not to export, directly or indirectly, any U.S. technical data acquired
from Company or any products utilizing such data, to countries outside the United States, because
such export could be in violation of the United States export laws or regulations.

     7.9 Entire Agreement. If no other agreement governs nondisclosure and assignment of
inventions during any period in which I was previously employed or am in the future employed by
Company as an independent contractor, the obligations pursuant to sections of this Agreement titled
“Confidential Information Protections” and “Inventions” shall apply. This Agreement is the final,
complete and exclusive agreement of the parties with respect to the subject matter hereof and
supersedes and merges all prior communications between us with respect to such matters. No
modification of or amendment to this Agreement, or any waiver of any rights under this Agreement,
will be effective unless in writing and signed by me and the CEO of Company. Any subsequent change
or changes in my duties, salary or compensation will not affect the validity or scope of this
Agreement.

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     This Agreement shall be effective as of the first day of my employment with Company.

	 	 	 	 	 	 	 	 	 	 	 
	 	 	Christopher W. Krueger	 	 	 	Ardea Biosciences, Inc.
	 
	 	 	 	 	 	 	 	 	 	 
	     I have read, understand, and accept
this Agreement and have been given the
opportunity to review it with independent
legal counsel:	 	 	 	Accepted and agreed:
	 
	 	 	 	 	 	 	 	 	 	 
	 

	 	By:
	 	/s/ CHRISTOPHER W. KRUEGER
	 	 	 	By:
	 	/s/ BARRY D. QUART
	 

	 	 	 	 
	 	 	 	 	 	 
	 

	 	 	 	 	 	 	 	 	 	Barry Quart
	 

	 	 	 	 	 	 	 	 	 	Chief Executive Officer
	 
	 	 	 	 	 	 	 	 	 	 
	 

	 	Address:
	 	288 Ocean View Ave.
	 	 	 	Address:
	 	2131 Palomar Airport Road, Suite 300
	 

	 	 	 	Del Mar, CA 92014
	 	 	 	 	 	Carlsbad, CA 92011

Signature Page to Krueger Proprietary Information and Inventions Agreement

 

 

EXHIBIT A

INVENTIONS

     1. Prior Inventions Disclosure. The following is a complete list of all Prior Inventions (as
provided in Section 2.2 of the attached Employee Confidential Information and Inventions Assignment
Agreement, defined herein as the “Agreement”):

     þ None

     o See immediately below:

 

 

     2. Limited Exclusion Notification.

     This is to notify you in accordance with Section 2872 of the California Labor Code
that the foregoing Agreement between you and Company does not require you to assign or offer to
assign to Company any Invention that you develop entirely on your own time without using Company’s
equipment, supplies, facilities or trade secret information, except for those Inventions that
either:

     a. Relate at the time of conception or reduction to practice to Company’s business, or actual
or demonstrably anticipated research or development; or

     b. Result from any work performed by you for Company.

     To the extent a provision in the foregoing Agreement purports to require you to assign an
Invention otherwise excluded from the preceding paragraph, the provision is against the public
policy of this state and is unenforceable.

     This limited exclusion does not apply to any patent or Invention covered by a contract between
Company and the United States or any of its agencies requiring full title to such patent or
Invention to be in the United States.

Exhibit A to Krueger Proprietary Information and Inventions Agreement

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