Document:

Exhibit
10.1

SCIENTIFIC
ADVISORY BOARD CHAIRMAN AGREEMENT

This
Scientific Advisory Board Chairman Agreement (this “Agreement”) dated as of
January 26, 2007 (the “Effective Date”) is by and between ArQule, Inc. (the “Company”)
located at 19 Presidential Way, Woburn, MA 01801 and Chiang J. Li, M.D. (the “Consultant”).

W I T N E S S E T
H

WHEREAS,
the Company is engaged in scientific research, development and production of
pharmaceutical products, specifically anticancer compounds which are designed
to target specific cell control pathways (the “Field”);

WHEREAS,
the Consultant has extensive expertise in the Field, and the Company seeks to
benefit from the Consultant’s expertise; and

WHEREAS,
the Company desires to have the Consultant serve as the chairman of the Company’s
Scientific Advisory Board (the “SAB”) and the Consultant wishes to perform
advisory services in the Field for the Company;

NOW,
THEREFORE, in consideration of the promises and mutual
agreements hereinafter set forth, effective as of the Effective Date, the
Company and the Consultant agree as follows:

1.             Scientific Advisory Board.  The Consultant shall serve on the Company’s
SAB as its chairman, advising the Company with respect to matters related to
the Field, upon the terms and conditions hereinafter set forth.  The Consultant shall be engaged by the
Company for the exchange of ideas only and shall not direct or conduct research
for or on behalf of the Company.

2.                                       Services.

2.1.          SAB
Duties.  The Consultant’s duties
shall include:  (i) attending and serving
as chair of  SAB meetings; (ii) providing
scientific advice regarding the Company’s product lines, the general direction
of its research programs, recruitment of personnel, and techniques used in
research in the Field; and (iii) generally advising the Company in its efforts
to produce, develop, and market products in the Field.

2.2.          Consulting
Duties.  Upon request by the Company,
and at times mutually agreed upon by the Company and the Consultant, the
Consultant shall devote additional consulting time annually to provide services
to the Company pursuant to this Agreement.

2.3.          Services.  The services set forth in Articles 1 and 2
shall be referred to as the “Services.”

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3.             Term
and Termination.

3.1.         Term.  The Consultant shall commence rendering the
Services on the Effective Date and, unless earlier terminated as provided in
Section 3.2 hereof, shall continue for a term of one year (the “Period of
Service”).  This Agreement may be
extended for additional one year periods upon the written agreement of both
parties.

3.2.         Termination.  Either the Company or the Consultant may,
without prejudice to any right or remedy it may have due to any failure of the
other party to perform obligations under this Agreement, terminate the Period
of Service upon 30 days prior written notice to the other party for any or no
reason.  Notwithstanding the foregoing,
the Company may terminate the Period of Service, effective immediately upon
receipt of written notice, if the Consultant breaches or threatens to breach any
provision of Sections 5, 6, 7 or 8 of this Agreement.

3.3          Effect
of Termination.  In the event of a
termination of this Agreement pursuant to this section, the parties shall not
enter into any new agreements or financial arrangements with respect to the
subject matter hereof from the date of termination until the next anniversary
date of the Effective Date.  Upon
termination all accrued payments as of the date of the notice of termination
will be paid by the Company.

3.4.         Survival.  The following provisions shall survive the
expiration or termination of this Agreement: 
Sections 3.3, 5, 6, 7, 8, 11.1, 11.3 and, 11.5.

4.             Compensation. 

4.1.         Stock
Options.  As compensation for the
Services rendered by Consultant during the Period of Service, the Company shall
grant to the Consultant an option (the “Option”) to purchase 12,500 shares of
the Company’s Common Stock, $0.01 par value per share (the “Common Stock”),
pursuant to the Company’s Amended and Restated 1994 Equity Incentive Plan (the “Plan”)
and in accordance with the terms set forth in the form of Option Certificate,
attached hereto as Exhibit A.The
exercise price of the Option will be set at the closing price of ArQule stock
on the date of grant.  The Option will be
fully vested and exercisable as of the date of grant, and Consultant shall have
until the expiration of the term of the Option to exercise the Option.  In the event that the Period of Service is
extended by mutual agreement of the parties, Consultant may be granted
additional stock options.

4.2.         Reimbursement
of Expenses. The Company shall reimburse the Consultant for all reasonable
and necessary expenses incurred in connection with or related to the
performance of Services under this Agreement. 
Within 30 days following the end of each month, Consultant shall submit
to Company his expense reports, and the Company shall issue a check for the
applicable amount within 30 days following receipt of such reports or otherwise
in accordance with the Company’s standard payment cycle.  Notwithstanding the foregoing, the Company
shall not reimburse expenses in excess of one thousand dollars ($1,000) without
its prior written approval.

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4.3.          Taxes, Benefits and Independent
Contractor. The Consultant shall be responsible for all tax obligations
associated with the receipt of fees and other consideration from the Company,
including the grant of options referred to in Section 4.1, and shall not be
entitled to any benefits, coverages or privileges made available to employees
of the Company, including without limitation, unemployment, worker’s
compensation, or medical insurance benefits or social security or pension
payments.  The Consultant shall be an
independent contractor and not an employee of the Company.

4.4           Fair Market Value.  The Company and Consultant acknowledge and
agree that the consideration set forth in this Section 4 represents the fair
market value for the Services to be rendered under this Agreement, and no
amount payable hereunder is intended to constitute a payment for the inducement
of patient referrals, the purchase, lease or order of any item or service, or
the recommending or arranging for the purchase, lease or order of any item or
service.

5.             Confidential Information and
Proprietary Materials.

5.1.          Confidential Information.

5.1.1.       Definition of Confidential Information.  “Confidential Information” shall mean any
technical or business information furnished by the Company to the Consultant in
connection with this Agreement or developed by the Consultant in the course of
performing the Services.  Such
Confidential Information may include, without limitation:

(a)           inventions, trade secrets, discoveries
and computer programs, including any improvements or modifications thereto;

(b)           engineering, research, development
and design projects, data, designs, drawings and specifications;

(c)           manufacturing, development and other
technical processes, applications, methods, apparatus and equipment;

(d)           business information such as lists of
approved components and sources, price lists, product costs, production
schedules, business plans, sales information, profit and loss information, and
customer and collaborator lists; and

(e)           any and all information, materials
and other items supplied by third parties to the Company (or generated by the
Company for third parties) under an obligation of confidentiality).

Confidential
Information is contained in various media, including without limitation patent
applications, computer programs in object and/or source code, flow charts and
other program documentation, manuals, plans, drawings, designs, technical
specifications, laboratory notebooks, supplier and customer information,
internal financial data, and other documents and records of the Company,
whether or not in writing and whether or not labeled or identified as confidential
or proprietary.

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5.1.2.       Obligations.  During the Period of Service and thereafter,
the Consultant shall:

                                                (a)           maintain all Confidential Information
in strict confidence and not publish, disclose or otherwise make available to
any third party, other than employees of the Company, any Confidential
Information, except as expressly authorized in writing by the Company;

                                                (b)           use all Confidential Information
solely for the purpose of providing the Services as requested by the Company,
in accordance with any Company policies regarding the protection of
Confidential Information, and not use any Confidential Information for
Consultant’s own benefit or for the benefit of any person or business entity
other than the Company; and

                                                (c)           reproduce the Confidential
Information only to the extent necessary for providing the Services as
requested by the Company, with all such reproductions being considered
Confidential Information.

5.1.3.     Exceptions.  The obligations of the Consultant under
Section 5.1.2. above shall not apply to the extent that the Consultant can
demonstrate by clear and convincing evidence that the Confidential Information
in question:

                                                (a)           is or has become generally known
within the Company’s industry through no fault of Consultant;

                                                (b)           was known to Consultant at the time
it was disclosed by the Company, as evidenced by Consultant’s written records
at the time of disclosure; or

                                                (c)           was developed independently by
Consultant and not under the auspices of the Company or any other employer of
Consultant;

                                                (d)           was lawfully and in good faith made
available to Consultant by a third party who did not derive it from the Company
and who imposes no obligation of confidence on Consultant; or

                                                (e)           is required to be disclosed to comply
with applicable laws or regulations, or with a court or administrative order,
provided that the Company receives prior written notice of such disclosure and
that the Consultant takes all reasonable and lawful actions to obtain
confidential treatment for such disclosure and, if possible, to minimize the
extent of such disclosure.

5.2.          Proprietary Materials.

5.2.1.       Definition of Proprietary Materials.  “Proprietary Materials” shall mean any
tangible chemical, biological, or physical research materials furnished by the
Company to the Consultant in connection with this Agreement or developed by the
Consultant in the

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course of
performing the Services, including without limitation any and all reagents,
substances, chemical compounds, subcellular constituents, cells or cell lines,
organisms and progeny, and mutants, as well as any and all derivatives or
replications derived from or relating to such materials.  In the case of biological materials,
Proprietary Materials shall also include other materials ordinarily engendered
by the original materials, including without limitation any progeny derived
from a cell line (including naturally occurring mutants), monoclonal antibodies
produced by hybridoma cells, DNA or RNA replicated from isolated DNA or RNA,
recombinant proteins produced by a cell line, recombinant proteins produced
through use of isolated DNA or RNA, and substances routinely purified from any
source material included in the original materials.

5.2.2.       Limited Use.  The Consultant shall use Proprietary
Materials solely for the purpose of providing the Services as requested by the
Company, or as expressly authorized in writing by the Company.  The Consultant shall use the Proprietary
Materials only in compliance with all applicable governmental laws and
regulations, and not for any in vivo
experiments on human subjects.

5.2.3.       Limited Disposition.  The Consultant shall not transfer or
distribute any Proprietary Materials to any third party without the prior
written consent of the Company.

5.3.          Return of Confidential Information
and Proprietary Materials.  Upon the
termination or expiration of this Agreement, or earlier at the request of the
Company, the Consultant at the instruction of the Company shall either return
to the Company or destroy all originals, copies, and summaries of documents,
materials, and other tangible manifestations of Confidential Information and
Proprietary Materials in the possession or control of the Consultant, and shall
not retain any copies of the same.

5.4.          Survival of Obligations. The
obligations set forth in this Article 5 shall remain in effect for a period of
ten (10) years after termination of this Agreement, except that the obligations
of the Consultant to return or destroy Confidential Information and Proprietary
Materials shall survive until fulfilled.

6.             Intellectual Property.

6.1.          Definition of Intellectual Property.
“Intellectual Property” shall mean any and all Confidential Information,
Proprietary Materials, inventions, developments, data, discoveries,
improvements, ideas, concepts, computer programs, algorithms, work product,
protocols, systems and related documentation, and any other works of invention
or authorship (whether or not patentable, copyrightable, or entitled to or
eligible for other forms of legal protection) including any and all related
patents, copyrights, trademarks, trade names, and other industrial and
intellectual property rights and applications therefor, in the United States
and elsewhere, that the Consultant during the Period of Service or thereafter,
either solely or jointly with others, and whether during normal business hours
or otherwise, has conceived, devised, written, invented, discovered, developed,
or reduced to practice or tangible medium (whether alone, jointly with others,
or under the Consultant’s direction) in the course of providing the Services,
or which arise out of the Services or from Confidential Information or
Proprietary

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Materials
including but not limited to those which (i) result from tasks assigned to the
Consultant by the Company, or (ii) are funded by the Company, or (iii) result
from use of the premises owned, leased or contracted for by the Company.

6.2.          Disclosure and Records.  The Consultant shall promptly disclose to the
Company any and all Intellectual Property. 
The Consultant shall maintain adequate records (whether written,
electronic, or otherwise) to document the Intellectual Property, including
without limitation the conception and reduction to practice of all inventions,
and shall make such records available to the Company upon request.  The Company shall have sole ownership of all
such records.

6.3.          Ownership.  The Consultant acknowledges and agrees that
all Confidential Information and Proprietary Materials that are provided by the
Company to the Consultant under this Agreement are and shall remain the
exclusive property of the Company or the third party entrusting such
Confidential Information or Proprietary Materials to the Company.  The Consultant acknowledges and agrees that
any Intellectual Property is and shall be the exclusive property of the
Company.  The Consultant hereby assigns,
conveys, and grants to the Company all of the Consultant’s right, title, and
interest in and to the Intellectual Property and any and all patents, patent
applications, and copyrights relating to the Intellectual Property.  Upon request, the Consultant shall cooperate
with the Company, at the expense of the Company, in obtaining legal protection
for the Intellectual Property including confirmation of ownership.  The Consultant agrees to execute all
documents that the Company may reasonably request in order to perfect its
rights in the Intellectual Property; in the event that the Consultant should
fail or refuse to execute such documents within a reasonable time, the
Consultant hereby appoints the Company attorney-in-fact to execute and deliver
any such documents on the Consultant’s behalf.

6.4.          Third-Party Intellectual Property.  The Consultant acknowledges that the Company
does not desire to acquire any trade secrets, know-how, confidential
information, or other intellectual property that the Consultant may have
acquired from or developed for any third party unrelated to Company or
Consultant. (“Third-Party IP”).  The
Consultant agrees that in the course of providing the Services, the Consultant
shall not improperly use or disclose any Third-Party IP, including without
limitation any intellectual property of (i) any former or current employer,
(ii) any person for whom the Consultant has performed or currently performs
consulting services, or (iii) any other person to whom the Consultant has a
legal obligation regarding the use or disclosure of such intellectual property.

6.5.          Compliance with the Company’s
Third-Party Obligations.  Consultant
acknowledges that the Company from time to time may have agreements with other
persons or with the United States Government, or agencies thereof, that impose
obligations or restrictions on the Company regarding inventions made during the
course of work under such agreements or regarding the confidential nature of
such work.  The Consultant agrees to be
bound by all such obligations and restrictions that are known to Consultant and
to take all action necessary to discharge the obligations of the Company under
such agreements.

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6.6.          Unfunded Publications and
Intellectual Property.  Except as
otherwise provided herein, the Company shall have no rights by reason of this
Agreement in any publication, invention, discovery, improvement, or other
intellectual property, which is developed as a result of a program of research
not financed, in whole or in part, by funds provided by or under the control of
the Company.  The Company also
acknowledges and agrees that it will not obtain any right, priority or
advantage as a result of the consultancy created by this Agreement in gaining
access, whether by license or otherwise, to any proprietary information or
intellectual property that arises from any research undertaken by the
Consultant in Consultant’s capacity as an employee any unrelated third party.

7.             Noncompetition.

7.1.         No Third Party Conflict of Interest.  The Consultant represents and warrants that,
as of the Effective Date, Consultant is not party to any agreement that (a)
would constitute a conflict of interest with this Agreement, (b) would prevent
Consultant from carrying out Consultant’s obligations to the Company under this
Agreement or (c) would be breached by Consultant as a result of carrying out
Consultant’s obligations hereunder (such agreement as described under
subsections (a) (b) or (c) is hereinafter termed a “Conflicting Agreement”).  During the Period of Service, the Consultant
agrees not to enter into any Conflicting Agreement.  If the Consultant should enter into any
Conflicting Agreement in breach of the foregoing sentence, the Company shall
have the right to immediately terminate this Agreement.

7.2.          Non-Compete in Field.  The Consultant agrees that during the Period
of Service the Consultant shall not become employed by, serve as a member of a
scientific advisory board (or comparable organization) of, render services to,
or act on behalf of, directly or indirectly, own, manage, operate, join,
control, finance, consult to, advise or participate in ownership, management,
operation, control or financing of, or be connected as an officer, director,
employee, partner, principal, agent, representative, consultant or otherwise
with, or allow Consultant’s name to be used in any annual report, quarterly
report, private placement memorandum or advertisement of, or solicit or attempt
to solicit business on behalf of any person or other enterprise other than the
Company on matters relating to the Field, except to the extent permitted under
that certain Separation Agreement and General Release by and between the
parties of even date herewith.

7.3           Disclosure of Potential Conflicts.  Consultant has disclosed on the attached
Schedule 7.3 all present (and during the Period of Service Consultant shall
promptly disclose to the Ethics Officer of the Company any subsequent) actual
or potential conflicts between this Agreement and any other agreements under
which Consultant owes any duties or obligations, including any agreements or
understandings that Consultant has with any person or firm relating to the
Field of Interest.

7.4           Disclosure of Agreement.  The parties contemplate that Consultant is or
will be employed by Boston Biomedical, Inc., and in conjunction with the
foregoing, Consultant agrees to promptly inform Boston Biomedical, Inc (or any
subsequent employers) of the existence and terms of this Agreement and
Consultant’s responsibilities hereunder.

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The
Company reserves the right to inform Boston Biomedical, Inc (or any subsequent
employers) of the existence and terms of this Agreement and Consultant’s
representations, responsibilities and obligation hereunder.

8.             Non-Solicitation.  The Consultant agrees that during the Period
of Service of this Agreement and thereafter for a period of one (1) year, the
Consultant shall not, directly or indirectly, (i) solicit, divert, or take
away, or attempt to take away, the business or patronage of any actual or
prospective clients, customers, or accounts of the Company, or (ii) recruit,
solicit, or hire any employee or consultant of the Company, or induce or
attempt to induce any employee or consultant of the Company, to discontinue his
or her relationship with the Company, except to the extent permitted under that
certain Separation Agreement and General Release by and between the parties of
even date herewith.

9.             Research Agreement, Separation Agreement and General
Release.  Regardless of any other
provision of this Agreement, it shall not be a violation of any provision of
this Agreement for Consultant to take any action authorized or allowed pursuant
to either the Research Agreement between the Company and Boston Biomedical,
Inc. dated January 26, 2007 or the Separation Agreement and General Release
Agreement between the Company and Consultant dated January 26, 2007.

10            Publicity.   The Consultant consents to the use by the
Company of his name and likeness in written materials or oral presentations to
current or prospective customers, investors or others, provided that such
materials or presentations accurately describe the nature of the Consultant’s
relationship with or contribution to the Company.  The Company will submit to Consultant for his
approval prior to use, which approval will not be unreasonably withheld, all
materials which use Consultant’s name or likeness or which imply his approval.

11.           Compliance with Law.   This Agreement shall be construed to the
fullest extent possible to be in compliance with and permitted by all U.S.,
non-U.S., state or other local laws, statutes, rules and regulations.  If a Triggering Event (as defined below)
occurs after the date hereof, the parties agree that they shall amend this
Agreement solely to the extent necessary to comply with the item giving rise to
the Triggering Event and in a manner that shall preserve the underlying
economic and financial arrangements between the parties with the least changes
to the parties’ expectations hereunder. 
For purposes of this Section 10, a “Triggering Event” shall mean any
U.S., state or local governmental agency, or any other non-U.S. local
governmental agency, or any court or administrative tribunal, passing, issuing
or promulgating any law, final rule, final regulation, or rendering from an
evidentiary proceeding any order, decision or judgment (including but not
limited to those relating to any final regulations promulgated under applicable
anti-kickback or self-referral statutes) which in the good faith and reasonable
judgment of a party hereto materially and adversely affects such party’s
licensure or certification, ability to obtain any material benefit hereunder or
under any payment program to which it is a party or ability to perform a
material obligation hereunder.  If the
parties in good faith cannot agree on a necessary amendment under this Section
11 within thirty (30) days of the Triggering Event, then this Agreement shall
terminate without further action on the 30th day.

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12.           Miscellaneous.

11.1.        Notices.  All notices, requests, demands and other
communications required or permitted to be given pursuant to this Agreement
shall be in writing and shall be deemed to have been duly given upon the date
of receipt if delivery by hand, recognized national overnight courier, or
confirmed facsimile transmission, or upon the date sent if mailed by registered
or certified mail, return receipt requested, postage prepaid, to the following
addresses or facsimile numbers:

If to Company:

	
  

  	
   

  	
  ArQule, Inc.

  	
   

  	
   

  
	
   

  	
   

  	
  19 Presidential Way

  	
   

  	
   

  
	
   

  	
   

  	
  Woburn, MA 01801

  	
   

  	
   

  
	
   

  	
   

  	
  Tel: 781-994-0300

  	
   

  	
   

  
	
   

  	
   

  	
  Fax: 781-994-0587

  	
   

  	
   

  
	
   

  	
   

  	
  Attn: General Counsel

  	
   

  	
   

  

 

If to Consultant: 
to the address set forth in the first paragraph of this Agreement.

Each
party may change its designated address and facsimile number by notice to the
other party in the manner provided in this Section.

12.2.   Amendment
and Waiver.  This Agreement may be
modified, amended, or supplemented only by means of a written instrument signed
by both parties.  Any waiver of any
rights or failure to act in a specific instance shall relate only to such
instance and shall not be construed as an agreement to waive any rights or fail
to act in any other instance, whether or not similar.

12.3.   Governing
Law.  This Agreement and all disputes
and causes of action between the parties (in contract, warranty, tort, strict
liability, by statute or otherwise) shall be governed by and construed in
accordance with the laws of the Commonwealth of Massachusetts applicable to
contacts made and to be performed entirely within such jurisdiction and without
giving effect to its choice or conflict of laws rules or principles.

12.4.   Severability.  In the event that any provision of this
Agreement shall, for any reason, be held to be invalid or unenforceable in any
respect, such invalidity or unenforceability shall not affect any other
provision hereof, and this Agreement shall be construed as if such invalid or
unenforceable provision had not been included herein.  To the extent this Agreement may be construed
in accordance with the laws of any state that limits the assignability to the
Company of certain inventions, this Agreement shall be interpreted not to apply
to any such invention that a court rules or the Company agrees is subject to
such state limitation.

12.5.   Equitable
Relief.  The Consultant acknowledges
that the restrictions contained in this Agreement are necessary for the
protection of the business and goodwill of the

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Company and are
reasonable for such purpose.  The
Consultant agrees that any breach of the Consultant’s obligations under this
Agreement will cause irreparable harm to the Company.  Therefore, in addition to any other remedies
that may be available to the Company, the Company may apply for and obtain
immediate injunctive relief if any court of competent jurisdiction to restrain
the breach or threatened breach of, or otherwise to specifically enforce, any
obligations of the Consultant under this Agreement.

12.6.   Entire
Agreement.  This Agreement, which
includes all of the terms and conditions hereunder, and all appendices,
schedules, exhibits, or riders attached hereto, is intended to be the exclusive
and final statement of the terms and understandings relative to the subject
matter hereof, merging herein and superseding all negotiations and prior
written or oral agreements between the parties as to the subject matter
hereto.  There are no promises,
representations or understandings made in connection with this Agreement or
contemporaneous with the execution hereof, except as set forth in this
Agreement.

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

12.8   Headings.
 All headings in this Agreement are for
convenience only and shall not affect the meaning of any provision hereof.

12.9.   Binding
Effect.  This Agreement shall inure
to the benefit of and be binding upon the parties and their respective lawful
successors, assigns, heirs, and personal representatives.

12.10.   Assignment.  This Agreement may not be assigned by either
party without the prior written consent of the other party, except that the
Company may assign this Agreement to an affiliate or in connection with the
merger, consolidation, or sale of all or substantially all of its business or
assets relating to this Agreement.

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IN
WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day
and year set forth above.

	
  CONSULTANT

  	
  ARQULE, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  By:

  	
  /s/ Chiang J. Li,
  M.D. 

  	
   

  	
   

  	
  By:

  	
  /s/ Peter S. Lawrence

  	
   

  	
   

  
	
  Name:

  	
  Chiang J. Li,
  M.D.

  	
   

  	
   

  
	
   

  	
  Title: Executive Vice
  President, Chief Business

  Officer, General Counsel and Secretary

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Date: January
  26, 2007

  	
  Date: January 26, 2007

  
										

 

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SCHEDULE 7.3 TO THE

SCIENTIFIC
ADVISORY BOARD CHAIRMAN AGREEMENT

Any actual or potential
conflicts between this Agreement and any other agreements under which
Consultant owes any duties or obligations, including any agreements or
understandings that Consultant has with any person or firm relating to the
Field:

                                                                                                                                                                                                        

                                                                                                                                                                                                        

                                                                                                                                                                                                        

                                                                                                                                                                                                        

                                                                                                                                                                                                        

                                                                                                                                                                                                        

                                                                                                                                                                                                        

                                                                                                                                                                                                        

                                                                                                                                                                                                        

                                                                                                                                                                                                        

                                                                                                                                                                                                        

                                                                                                                                                                                   

 

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EXHIBIT A

STOCK OPTION
CERTIFICATE

 1Exhibit
10.2

Separation
Agreement and General Release

This
agreement (“Agreement”) is made by and between ArQule, Inc., a Delaware
corporation, with its principal place of business at 19 Presidential Way,
Woburn, MA 01801 (the “Company”) and Chiang J. Li, M.D. (“Employee”).  In consideration of the mutual covenants
contained herein, the receipt and sufficiency of which are hereby acknowledged,
the parties agree as follows:

1.                                       Separation of Employment. 
In order to pursue other employment opportunities with Boston
Biomedical, Inc. (“BBI”), Employee shall resign his employment with the Company
effective as of January 28, 2007 (“Separation Date”).  The Company hereby waives the three month
prior notice requirement under Employee’s Employment Agreement with the Company
dated as of September 5, 2003 (the “Employment Agreement”).  The Company agrees, and Employee further
acknowledges that, no later than the Separation Date, Employee shall receive a
cash payment in the gross amount of $112,500, which represents the full amount
Employee is entitled to under the Company’s Annual Incentive Program.

2.                                       Separation Package.  Regardless
of whether Employee signs this Agreement, Employee acknowledges that, as of the
Separation Date, Employee will receive any and all wages, including accrued but
unused vacation time.  In the event that
Employee signs this Agreement, returns it to the Company and does not revoke as
provided in Section 18, Employee will receive the following separation package
(the “Separation Package”):

a.                                       Lump Sum Separation Payment. 
The Company shall pay Employee a lump sum separation payment (the “Separation
Payment”) in the following gross amount, which shall be subject to legally
required and voluntarily authorized deductions and withholdings:

i.                                          $321,048,
which amount represents Employee’s current base salary through the end of the
twelve (12) month period commencing on the Separation Date; plus

ii.                                       $109,802.50,
which amount represents the average bonus paid by the Company to Executive with
respect to calendar years 2005 and 2006.

The Separation Payment
shall be paid to Employee on the date of his separation from service as defined
under Section 409A of the Internal Revenue Code of 1986, as amended, and any
regulations promulgated thereunder, as determined in good faith by Employee and
his tax counsel, subject to the Company’s consent, which shall not be
unreasonably withheld; provided, however, if Employee is a specified employee
as of such date, the Separation Date shall be made on the date that is six months
after such date of separation from service.

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b.                                      Full Vesting of the Stock Option. 
Pursuant to Section 4.2.1 of Employee’s Employment Agreement,
Employee was granted a stock option (the “Stock Option”) to purchase 115,000
shares of the Company’s common stock, $0.01 par value per share (“Common Stock”),
pursuant to the Company’s Amended and Restated 1994 Equity Incentive Plan.  Notwithstanding any vesting schedule to the
contrary, the Stock Option shall be fully vested and shall be fully and
immediately exercisable as of the Separation Date.

c.                                       Grant of New Option.  Subject
to approval by the Board of Directors, on January 26, 2007, Employee will be
granted a stock option (the “New Option”) to purchase 64,375 shares of the
Company’s Common Stock, pursuant to the Company’s Amended and Restated 1994
Equity Incentive Plan (the “Plan”) and in accordance with the terms set forth
in the form of Option Certificate attached hereto as Exhibit A.  The exercise price of the New Option will be
set at the closing price of Common Stock of the Company on the date of
grant.  The New Option shall become fully
vested and fully and immediately exercisable once Employee signs this Agreement
and does not (and may no longer) revoke it as provided in Section 18, provided
that if Employee does not sign this Agreement by January 26, 2007, or signs
this Agreement by January 26, 2007 and later revokes it in accordance with its
terms, the New Option shall be forfeited in its entirety.  If Employee signs this Agreement by January
26, 2007 and does not (any may no longer) revoke it as provided in Section 18,
Employee shall have until December 31, 2008 to exercise the New Option.

d.                                      Extension of Time to Exercise Current Options.  Exclusive of the New Option, Employee has
been granted certain stock options, as set forth in the attached Exhibit B, to
purchase shares of the Company’s Common Stock pursuant to the Plan (the “Current
Options”).  As set forth in Exhibit B, as
of the Separation Date, 216,250 shares subject to the Current Options will be
vested and exercisable.  The time in
which Employee may exercise the Current Options that have vested as of the
Separation Date shall be extended to December 31, 2007, and any agreement or
terms and conditions with respect to such Current Options shall be amended
accordingly.  It is expressly agreed
that, in the absence of this extension, Employee would have had three months
from the Separation Date to exercise the Current Options.

e.                                       Continuation of Benefits. 
For a period of twelve (12) months following the Separation Date, the
Company shall continue to provide coverage for Employee under its group
medical, dental, life and disability insurance policies under the same terms
and conditions as other Company employees, including any employee contribution,
subject to the applicable plan documents.

Employee specifically
acknowledges that the Separation Package described above exceeds any legal
payment obligation of the Company and provides valid consideration for the
General Release contained in this Agreement.

 2
 

3.                                       Insurance and Other Benefits. Unless otherwise provided for
expressly in this Agreement, all benefits provided by the Company to Employee
will cease as of the Separation Date.

a.                                       Group Health, Dental and Vision
Coverage.  A COBRA notice will issue twelve (12) months
following the Separation Date.  Except as
expressly set forth in this Agreement, any continuing coverage after the
Separation Date will be at Employee’s sole expense as provided by federal COBRA
law.  Eligibility to continue insurance
coverage ceases upon the termination of any period allowed by law and is at all
times subject to the terms and conditions of the applicable plan(s).

b.                                      Unemployment.  The
Company shall not contest Employee’s claim, if any, for unemployment insurance
benefits, it being understood and agreed that Employee’s entitlement to
unemployment insurance benefits shall be determined solely by the Massachusetts
Division of Unemployment Assistance.

4.                                       Return of Property. 
Except as expressly authorized by the Company with respect to general
categories or specific items of Company property to be used by Employee as “Principal
Investigator” under that certain Research Agreement between the Company and BBI
of even date herewith (“Research Agreement”), no later than the Separation
Date, Employee shall return all property belonging to the Company, including
but not limited to papers, files and documents (physical or electronic),
computers, telephones, PDAs, reference guides, equipment, keys, identification
cards, credit cards, software, computer access codes, disks and institutional
manuals.  Employee shall not retain any
copies, duplicates, reproductions or excerpts thereof.  In addition, Employee warrants that Employee
has deleted any information belonging to the Company from any personal computer
that Employee may have at home or elsewhere (other than the Company’s offices)
without retaining any copies of any such information, in electronic or other
format, and will permit the Company to have access to such computer at times
reasonably agreed to by Employee an upon reasonable notice to confirm such
deletion. Notwithstanding the foregoing, this Section shall not apply to any “Loaned
Equipment” as that term is defined in the Research Agreement.

5.                                       C-MET Program Bonus. 
In the event that the Company executes a binding agreement (including a
non-binding letter of intent, provided that such letter of intent results in a
binding agreement) related to the partnering of its C-MET Program by or before
December 31, 2007, the Company shall pay Employee a lump sum of $50,000 within
ten (10) business days of the entering into of such agreement.  If the Company does not execute a binding
agreement (including letter of intent) related to the partnering of its C-MET
Program by or before December 31, 2007, no payment shall be made to Employee.

6.                                       SAB Chair.  Employee
agrees to serve as the Chair of the Company’s Scientific Advisory Board (“SAB”)
for a period of one year from the Separation Date, unless such period of
service is sooner terminated by the Company, pursuant to the terms and
conditions of the consulting agreement attached as Exhibit C to this
Agreement.  As set forth more fully in
the consulting agreement, on the date of execution of such consulting

 3
 

agreement, and for each
year that Employee serves as Chair of the SAB, Employee shall receive a stock
option to purchase 12,500 shares of the Company’s Common Stock, which options
shall be fully vested and fully and immediately exercisable on the date of
grant, pursuant to the terms of such consulting agreement and in accordance
with the Company’s then-standard form of Option Certificate for SAB members,
which currently is substantially in the form attached hereto as Exhibit D.

7.                                       Nondisclosure of Confidential Information.  Employee acknowledges that during the course
of Employee’s employment with the Company Employee has had access to and/or
developed confidential information belonging to the Company and its
customers.  Employee agrees not to use to
Employee’s own advantage or to disclose, except as required by law, to any
person or entity any confidential information of the Company or of any past or
present customer of the Company, including but not limited to financial data or
projections, customer lists, projects, economic information, systems, plans,
methods, procedures, operations, techniques, know-how, trade secrets or
merchandising or marketing strategies. 
Moreover, Employee agrees that, as a condition of receipt of the
benefits described in this Agreement, Employee shall continue to be bound by
the terms of the Employee Non-Disclosure and Inventions Agreement previously
executed by Employee which is attached as Exhibit E, the terms of which are
incorporated herein by reference. Notwithstanding the foregoing, nothing in
this Section and nothing in the Employee Non-Disclosure and Inventions
Agreement shall prohibit Employee from obtaining employment with BBI or from
using Confidential Information in connection with Employee’s performance under
the Research Agreement and to disclose Confidential Information to the extent
permitted thereby.

8.                                       Cooperation.  Employee agrees and covenants as a material term
of this Agreement to provide reasonable cooperation to the Company for a period
of twelve months following the end of Employee’s engagement with BBI, including
but not limited to, with respect to matters previously within Employee’s scope
or course of employment with the Company. 
The Company will reimburse Employee for any time expended on behalf of
the Company at the request of the Company at an agreed-to per diem or per hour
rate (or pro-rata share thereof) and reimburse Employee for out-of-pocket
expenses related thereto.  In the event
that the Company determines that such expense reimbursement is or would be
prohibited by law, the Company promptly shall notify Employee to such effect,
and such reimbursement shall not be made to Employee.  For the avoidance of doubt, this Section
shall not apply to any interaction between Employee and the Company in which
Employee is acting in any capacity on behalf of BBI or in his role as a member
of the Company’s SAB.

9.                                       General Release. 
Except with respect to any rights, obligations or duties arising out of
this Agreement, and in consideration of the Separation Package and other
benefits set forth in this Agreement, Employee hereby unconditionally and
irrevocably releases and discharges the Company and its officers, directors,
partners, stockholders, trustees, attorneys, insurers, representatives, agents
and employees, in both their individual and corporate capacities (collectively,
the “Releasees”), of and from any and all complaints, charges, lawsuits, costs
(including attorney fees and costs actually incurred), debts liabilities or
claims for relief of any kind by Employee that Employee now has or ever

 4
 

had against the Releasees
or any one of them, whether known or unknown, arising out of any matter or
thing that has happened before the signing of this Agreement (collectively, “Claims”),
including but not limited to (i) claims for tort or contract, or relating to
salary, wages, bonuses, severance, commissions, stock, and stock options, the
breach of any oral or written contract or promise, misrepresentation,
defamation, and interference with prospective economic advantage, interference
with contract, intentional and negligent infliction of emotional distress,
negligence, breach of the covenant of good faith and fair dealing, medical,
disability or other leave; (ii) claims arising out of, based on, or connected
with Employee’s employment, including terms and conditions of employment, by
the Company and the termination of that employment, including but not limited
to claims arising under Section 806 of the Sarbanes-Oxley Act of 2002, and any
other claims alleging retaliation of any nature; (iii) claims under G.L. c. 93A
or in any way related to restricted stock, stock options, or vesting or
exercise of the same, or for alleged securities violations; and (iv) claims for
unlawful employment discrimination of any kind, including discrimination due to
age, sex, disability or handicap, including failure to offer reasonable
accommodations, race, color, religion, pregnancy, sexual orientation, national
origin, or sexual or other unlawful harassment arising under or based on the
following, all as amended: Title VII of the Civil Rights Act of 1964, the Age
Discrimination in Employment Act of 1967 (“ADEA”), the Americans with
Disabilities Act (“ADA”), the Equal Pay Act of 1963, the Fair Labor Standards
Act of 1938, the Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”),
the Family and Medical Leave Act, the Massachusetts Fair Employment Practices
Act, the Massachusetts Civil Rights Act, the Massachusetts Equal Rights Law,
the Massachusetts or United States Constitution, including any right of privacy
thereunder, and any other state or federal equal employment opportunity or
anti-discrimination law, policy, order, regulation or guidelines affecting or
relating to claims or rights of employees. 
It is further expressly agreed and understood by Employee that the
release contained herein is a GENERAL RELEASE.

10.                                 Covenant Not to Sue. 
Employee represents and warrants that Employee has not filed any
complaints, charges, or claims for relief against the Releasees, or any one of
them, with any local, state or federal court or administrative agency, any
professional or regulatory board, or any other agency or entity.  Employee further warrants that Employee has
not previously assigned or transferred any of the claims that are the subject
of the General Release contained herein. 
Employee agrees and covenants not to sue or bring any claims or charges
against the Releasees, or any one of them, with respect to matters subject to
the General Release contained herein. 
Employee further agrees not to institute any claim, charge, complaint or
lawsuit to challenge the validity of the General Release or the circumstances
surrounding its execution.  In the event
that Employee institutes any action covered by this Section, that action shall
be dismissed upon presentation of this Agreement and Employee shall reimburse
the affected Releasees for all legal fees and expenses incurred in defending
such claim and obtaining its dismissal.

11.                                 Exclusion.  Nothing in
this Agreement shall preclude Employee from filing a charge or complaint,
including a challenge to the validity of this Agreement, with the Equal
Employment Opportunity Commission, the Massachusetts Commission Against
Discrimination or any other state anti-discrimination agency or from
participating or

 5
 

cooperating in any investigation
or proceeding conducted by any of such agencies.  In the event that a charge or complaint is
filed with any administrative agency by Employee or in the event of an
authorized investigation, charge or lawsuit filed by any administrative agency,
Employee expressly waives and shall not accept any monetary award or damages,
costs or attorneys’ fees of any sort therefrom against the Company or any of
the Releasees.

12.                                 Nonadmissions Clause. 
It is understood and agreed that this Agreement does not constitute any
admission by the Company that any action taken with respect to Employee was
unlawful or wrongful, or that such action constituted a breach of contract or
violated any federal or state law, policy, rule or regulation.

13.                                 Nondisclosure of this Agreement.  Except as set forth in Section 11 and except
to the extent publicly disclosed by the Company, Employee expressly agrees that
the nature and terms of this Agreement are confidential, and expressly agrees
not to discuss or disclose them, or the facts and contentions contained
therein, without the prior written consent of the Company, with or to any
person, except to Employee’s accountant, tax advisor, attorney, immediate
family, therapist or healthcare provider, if any, the Internal Revenue Service,
state tax authorities, or as required by law. 
If Employee makes any disclosure authorized by this Section, Employee shall
apprise the person or entity to whom such disclosure is made of the
confidential nature of the terms and conditions of the Agreement and shall use
reasonable and good faith efforts to secure the confidentiality of the
information so disclosed.  In particular,
if Employee is compelled to disclose the terms or conditions of this Agreement
in response to a subpoena or discovery request issued in litigation, Employee shall
provide the Company with a copy of the subpoena or discovery request as
promptly as practicable following receipt by the Employee in order to provide
the Company with the opportunity to seek a protective order from the appropriate
court.

14.                                 Nondisparagement. 
Employee agrees not to disparage or make negative statements about the
Company or any of the Company’s programs or products.  The Company agrees to instruct all members of
the Company’s executive management team not to disparage or make negative
statements about Employee, provided that nothing in this Section shall be
construed in any way to restrict or prevent Employee or the Company from
providing truthful information to, or truthful responses to requests from, their
respective auditors, accountants, investment bankers, insurers, potential
purchasers, successors, acquirers, or any other persons or entities as required
by business necessity or for a legitimate business reason.  Nothing in this Agreement shall bar Employee
or the Company from providing truthful testimony in any legal proceeding, or in
responding to any request from any governmental agency, or as required by law,
or by court order or other legal process.

15.                                 References.  Any
reference request on Employee will be directed to Anthony S. Messina, or his
successor as Vice President of Human Development, who will respond in
accordance with Company practice with only Employee’s dates of employment and
job titles and by stating that Company policy precludes the provision of any
further information to the inquirer. 
However, if Employee completes and return to the Company

 6
 

a Reference Release form,
the Company will answer questions about Employee’s employment based on Employee’s
employment records.

16.                                 Breach.  Employee
agrees that the consideration contained in this Agreement which flows to
Employee from the Company is subject to termination, reduction, disgorgement or
cancellation in the event that Employee takes any action or engages in any
conduct, including failure to perform, deemed by the Company to be in violation
of this Agreement.  In the event that
Employee institutes legal proceedings to enforce this Agreement, Employee agrees
that the sole remedy available to Employee shall be enforcement of the terms of
this Agreement, but that under no circumstances shall Employee be entitled to
receive or collect any damages for Claims that Employee has released under this
Agreement in accordance with the General Release contained in Section 9 of this
Agreement.

17.                                 Governing Law.  This Agreement shall be governed by the laws of
the Commonwealth of Massachusetts applicable to contracts made and to be
performed entirely within such jurisdiction and without giving effect to its
choice or conflict of laws rules or principles. 
Each of the parties irrevocably submits to the exclusive jurisdiction of
the courts of the Commonwealth of Massachusetts and of any United States
federal court sitting in the Commonwealth of Massachusetts in any action or
proceeding arising out of or relating to this Agreement, and irrevocably agrees
that all claims in respect of such action or proceedings shall be heard and
determined in any such Massachusetts or United States federal court.

18.                                 Time to Consider Agreement.

a.                                       Employee
acknowledges that Employee has been given the opportunity to consult an
attorney of Employee’s choice before signing this Agreement.

b.                                      Employee
acknowledges that Employee has been given the opportunity to review and
consider this Agreement for at least forty-five (45) days before signing it and
that, if Employee has signed this Agreement in less than that time, Employeehas done so voluntarily in order to obtain sooner the
benefits of this Agreement.

c.                                       Employee
further acknowledges that Employee may revoke this Agreement within seven (7)
days of signing it, provided that this Agreement will not become effective
until such seven-day period has expired. 
To be effective, any such revocation must be in writing and delivered to
the Company’s principal place of business (as set forth in the preamble to this
Agreement) to the attention of Anthony S. Messina by close of business on the
seventh day after signing and must expressly state Employee’s intention to
revoke the Agreement.  The eighth day
following Employee’s execution hereof shall be deemed the “Effective Date” of
this Agreement.

d.                                      The
parties also agree that the release provided by Employee in this Agreement does
not include claims under the ADEA arising after the date Employee signs this
Agreement.

 7
 

e.                                       Employee
further acknowledges and agrees that the consideration Employeeis to receive under this Agreement exceeds the
consideration to which Employeewould
otherwise be entitled to upon his termination from employment with the Company.

19.                                 Information As To Separation. Employee acknowledges that
Employee has received from the Company on the attached Exhibit F, which is made
a part of this Agreement, information concerning who is eligible for and who
was offered the Separation Package (or portion thereof).  Employee has also been informed in Exhibit F
as to the organizational unit which is being offered the Separation Package,
the job titles and ages of all employees selected to be offered the Separation
Package and the job titles and ages of all employees in the same organizational
unit not selected to be offered the Separation Package.

20.                                 Representations. 
Employee acknowledges that in exchange for entering into this Agreement
Employee has received good and valuable consideration in excess of that to
which Employee would otherwise have been entitled in the absence of this
Agreement.  This consideration includes,
but is not limited to, the Separation Package described in Section 2.  Employee further acknowledges the sufficiency
of that consideration.  The Company and
Employee attest that no other representations were made regarding this
Agreement other than those contained herein.

21.                                 Severability.  If any
of the terms of this Agreement shall be held to be invalid and unenforceable,
the remaining terms of this Agreement are severable and shall not be affected
thereby.  However, should the General
Release or Covenant Not to Sue provisions of this Agreement be declared or
determined by any tribunal, administrative agency or court of competent
jurisdiction to be illegal or invalid, and should Employee thereupon seek to
institute any claims that would have been within the scope of the General
Release or Covenant Not to Sue, the Company shall be entitled to immediate
repayment, and Employee shall immediately return, the Separation Payment.

22.                                 Entire Agreement. 
This Agreement and its Exhibits constitute the entire agreement between
the parties about or relating to the Company’s obligations to Employee with
respect to Employee’s terms and conditions of employment, and termination of
employment, and fully supersedes any and all prior agreements or understandings
between the parties other than the Employee Non-Disclosure and Inventions
Agreement, referenced in Section 7 above. 
The terms of this Agreement are contractual in nature and not a mere
recital, and they shall take effect as a sealed document.  This Agreement may not be modified orally,
but only by agreement in writing signed by both parties.

23.                                 Interpretation.  Each
party agrees that in any dispute regarding the interpretation or construction
of this Agreement, no presumption shall operate in favor of or against any
party by virtue of such party’s role in drafting, or not drafting, the terms
and conditions set forth herein.

 8
 

24.                                 Notice.  Any notice
under this Agreement given to Employee, shall be by certified mail, return
receipt requested, to the address set forth in the Employee’s personnel file at
the Company.

Any notice under
this Agreement given to Company, shall be to:

	
  

  	
  Anthony S. Messina

  	
   

  	
   

  
	
   

  	
  Vice President, Human Development

  	
   

  	
   

  
	
   

  	
  ArQule, Inc.

  	
   

  	
   

  
	
   

  	
  19 Presidential Way

  	
   

  	
   

  
	
   

  	
  Woburn, MA 01801

  	
   

  	
   

  

 

25.                                 Counterparts.  This
Agreement may be executed in two or more of counterparts, each of which when
executed and delivered constitutes an original of this Agreement, but all the
counterparts shall together constitute one and the same agreement.  No counterpart shall be effective until each
party has executed at least one counterpart.

26.                                 Access to Legal Counsel.  EMPLOYEE
REPRESENTS, WARRANTS AND ACKNOWLEDGES THAT EMPLOYEEHAS
CAREFULLY READ ALL OF THIS AGREEMENT, THAT EMPLOYEEHAS
HAD THE OPPORTUNITY TO CONSULT WITH LEGAL COUNSEL CONCERNING THE LEGAL EFFECT
OF THIS AGREEMENT AND THE ADVISABILITY OF ENTERING INTO THIS AGREEMENT AND
GIVING THE GENERAL RELEASE PROVIDED FOR HEREIN, AND THAT EMPLOYEEFULLY UNDERSTANDS THE SAME. 
EMPLOYEE FURTHER REPRESENTS, WARRANTS AND ACKNOWLEDGES THAT EMPLOYEEIS EXECUTING THIS AGREEMENT WITH THE INTENT TO GRANT THE
GENERAL RELEASE SET FORTH HEREIN, WITHOUT RELIANCE UPON ANY STATEMENT OR
REPRESENTATION OF THE COMPANY OR ANY REPRESENTATIVE, EMPLOYEE, DIRECTOR OR
ATTORNEY OF THE COMPANY OTHER THAN AS SET FORTH HEREIN, AND THAT EMPLOYEEHAS SIGNED THIS AGREEMENT ON EMPLOYEE’SOWN
BEHALF AND OF EMPLOYEE’SOWN FREE WILL.

 [The remainder of this page is left blank
intentionally.]

 9
 

IN WITNESS WHEREOF,
the Company and Employee have duly executed this Agreement as of the day and
year written below.

ArQule, Inc.

By:  /s/ Anthony S. Messina

Name:     Anthony S. Messina

Title:       Vice President, Human Development

Date: January 26,
2007

Employee

/s/ Chiang J. Li                                                                      

Name: Chiang J. Li, M.D.

Date: January 26,
2007

/s/ Peter S. Lawrence                                                           

Witness to
Employee’s signature

Date: January 26,
2007

 10
 

Exhibit A

(Form of Option
Certificate)

Exhibit B

(Listing of Current
Options)

Exhibit C

(SAB Agreement)

Exhibit D

(Form option
agreement for SAB options)

Exhibit
E

(copy of Employee
Non-Disclosure and Inventions Agreement)

Exhibit
F

(information as to
separation)

 

 11

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