Document:

EXHIBIT 10.1

 

GRIFFON CORPORATION

2006 EQUITY INCENTIVE PLAN

AS AMENDED

 

 1.  Purpose.  The purpose of the Griffon Corporation 2006
Equity Incentive Plan (the “Plan”) is to attract and retain employees,
consultants and non-employee directors for Griffon Corporation and its
subsidiaries and to provide such persons with incentives and rewards for
superior performance.

 

 2.  Definitions.  As used in this Plan, the following terms
shall be defined as set forth below:

 

2.1.  “Award”
means any Performance Shares, Performance Units, Options, Stock Appreciation
Rights, Restricted Shares or Deferred Shares granted under the Plan.

 

2.2.  “Award
Agreement” means an agreement, certificate, resolution or other form
of writing or other evidence approved by the Committee that sets forth the
terms and conditions of an Award. An Award Agreement may be in an electronic
medium, or may be limited to a notation on the Company’s books or records, but
shall be signed by a representative of the Company and the Participant unless
otherwise approved by the Committee.

 

2.3.  “Base
Price” means the price used as the basis for determining the Spread
upon the exercise of Stock Appreciation Right.

 

2.4.  “Board”
means the Board of Directors of the Company.

 

2.5.  “Cause”
means, (a) if the applicable Participant is party to an effective
employment, consulting, severance or similar agreement with the Company or any
of its Subsidiaries, “Cause” shall have the same meaning as such term is
defined therein; (b) if the applicable Participant is not a party to an
effective employment, consulting, severance or similar agreement or if no
definition of “Cause” is set forth in the applicable employment, consulting,
severance or similar agreement, “Cause” shall have the same meaning as such
term is defined in the applicable Award Agreement; and (c) if the
applicable Participant is not a party to any effective employment, consulting,
severance or similar agreement or no definition of “Cause” is set forth in the
applicable employment, consulting, severance or similar agreement, and no
definition of “Cause” is set forth in the applicable Award Agreement, the
existence of “Cause” shall be determined in good faith by the Committee from
time to time as circumstances dictate; provided that the Committee shall provide
notice to the Participant of such determination and an opportunity for the
Participant to cure such event (if the Committee determines such event is
reasonably curable).

 

2.6.  “Change in
Control” means, after the effective date of the Plan:

 

(i)            the acquisition, directly or
indirectly, by a “person” (within the meaning of Section 13(d)(3) of
the Exchange Act) (a “Person”) of beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Exchange Act) of more than 20% of the combined voting
power of the voting securities of the Company entitled to vote generally in the
election of directors (the “Voting Securities”); provided, however, that the
following acquisitions shall not constitute a Change in Control: (a) any
acquisition by or from the Company or any Subsidiary, or 

 

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by any employee benefit plan
(or related trust) sponsored or maintained by the Company or any Subsidiary, (b) any
acquisition by an individual who as of the effective date of the Plan is a
member of the Board, (c) any acquisition by any underwriter in any firm
commitment underwriting of securities to be issued by the Company, or (d) any
acquisition by any corporation (or other entity) if, immediately following such
acquisition, 65% or more of the then outstanding shares of common stock (or
other equity unit) of such corporation (or other entity) and the combined
voting power of the then outstanding voting securities of such corporation (or
other entity), are beneficially owned, directly or indirectly, by all or
substantially all of the individuals or entities who, immediately prior to such
acquisition, were the beneficial owners of the then outstanding Shares and the
Voting Securities in substantially the same proportions, respectively, as their
ownership immediately prior to the acquisition of the Stock and Voting
Securities; or

 

(ii)           the consummation of the sale or other
disposition of all or substantially all of the assets of the Company, other
than to a wholly-owned Subsidiary or to a holding company of which the Company
is a direct or indirect wholly owned subsidiary prior to such transaction; or

 

(iii)          the approval by stockholders of the
Company of a reorganization, merger or consolidation of the Company, other than
a reorganization, merger or consolidation, which would result in the Voting
Securities outstanding immediately prior to the transaction continuing to
represent (whether by remaining outstanding or by being converted to voting
securities of the surviving entity) 65% or more of the Voting Securities or the
voting power of the voting securities of such surviving entity outstanding
immediately after such transaction; or

 

(iv)          the approval by stockholders of the
Company of a plan of complete liquidation or substantial dissolution of the
Company; or

 

(v)           the following individuals cease for
any reason to constitute a majority of the Board: individuals who, as of the
effective date of the Plan, constitute the Board and any new director (other
than a director whose initial assumption of office is in connection with an
actual or threatened election contest, including, but not limited to, a consent
solicitation relating to the election of directors of the Company) whose
appointment or election by the Board or nomination for election by the Company’s
stockholders was approved and recommended by a vote of at least two-thirds of
the directors then still in office who either were directors on the effective
date of the Plan or whose appointment, election or nomination for election was
previously so approved or recommended; or

 

(vi)          the sale, transfer, assignment,
distribution or other disposition by the Company and/or one of its
Subsidiaries, in one transaction, or in a series of related transactions within
any period of 18 consecutive calendar months (including, without limitation, by
means of the sale, transfer, assignment, distribution or other disposition of
the capital stock of any Subsidiary or Subsidiaries), of assets which account
for an aggregate of 50% or more of the consolidated revenues of the Company and
its Subsidiaries, as determined in accordance with U.S. generally accepted
accounting principles, for the fiscal year most recently ended prior to the
date of such transaction (or, in the case of a series of transactions as
described above, the first such transaction); provided, however, that no such
transaction shall be taken into account if 

 

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substantially all the
proceeds thereof (whether in cash or in kind) are used after such transaction
in the ongoing conduct by the Company and/or its Subsidiaries of the business
conducted by the Company and/or its Subsidiaries prior to such transaction; or

 

(vii)         notwithstanding Sections 2.6(i) through
2.6(vi) above, in the case of a distribution under the Plan of an amount
which is subject to section 409A of the Code, an event which constitutes a
“change in control event” as defined under Section 409A of the Code.

 

2.7.  “Code”
means the Internal Revenue Code of 1986, as amended from time to time and the
regulations and other guidance issued thereunder.

 

2.8.  “Committee”
means the Compensation Committee of the Board. The Committee shall have at
least two members, each of whom shall be a “non-employee director” as defined
in Rule 16b-3 under the Exchange Act and an “outside director” as defined
in Section 162(m) of the Code and the regulations thereunder, and, if
applicable meet the independence requirements of the applicable stock exchange,
quotation system or other self-regulatory organization on which the Shares are
traded.

 

2.9.  “Company”
means Griffon Corporation., a Delaware corporation, or any successor
corporation.

 

2.10.  “Consultant”
means an individual (other than an Employee or a Non-employee Director) who
renders services to the Company or a Subsidiary, including an independent
contractor or an advisor.

 

2.11.  “Deferral
Period” means the period of time during which Deferred Shares are
subject to deferral limitations under Section 9.

 

2.12.  “Deferred
Shares” means an Award pursuant to Section 9 of the right to
receive Shares at the end of a specified Deferral Period.

 

2.13.  “Employee”
means any person, including an officer, employed by the Company or a
Subsidiary.

 

2.14.  “Exchange
Act” means the Securities Exchange Act of 1934, as amended from time
to time, including rules thereunder and successor provisions and rules thereto.

 

2.15.  “Fair
Market Value” means, on any given date, unless otherwise determined
by the Committee, the closing sale prices reported as having occurred on the
New York Stock Exchange (or other principal exchange or market on which the
Shares are traded or listed) on such date, or, if no sale was made on such date
on such principal exchange or market, on the last preceding day on which the Shares
were traded or listed.

 

2.16.  “Grant
Date” means the date specified by the Committee on which a grant of
an Award shall become effective, which shall not be earlier than the date on
which the Committee takes action with respect thereto.

 

2.17.  “Incentive
Stock Option” means any Option which meets the requirements of Section 422
of the Code and which is designated as an Incentive Stock Option by the
Committee.

 

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2.18.  “Nonemployee
Director” means a member of the Board who is not an Employee.

 

2.19.  “Nonqualified
Stock Option” means an Option that is not intended to qualify as an
Incentive Stock Option, and designated as a Nonqualified Stock Option by the
Committee.

 

2.20.  “Option”
means any option to purchase Shares granted under Section 6.

 

2.21.  “Optionee”
means the person so designated in an agreement evidencing an outstanding
Option.

 

2.22.  “Option
Price” means the purchase price payable upon the exercise of an
Option.

 

2.23.  “Participant”
means an Employee, Nonemployee Director or Consultant who is selected by the
Committee to receive Awards, provided that only Employees may receive grants of
Incentive Stock Options.

 

2.24.  “Performance
Objectives” means the performance objectives established in the sole
discretion of the Committee for Participants who are eligible to receive Awards
under the Plan. Performance Objectives may be described in terms of
Company-wide objectives or objectives that are related to the performance of
the individual Participant or the Subsidiary, division, department or function
within the Company or Subsidiary in which the Participant is employed.
Performance Objectives may be measured on an absolute or relative basis.
Relative performance may be measured by a group of peer companies or by a
financial market index. Any Performance Objectives applicable to a Qualified
Performance-Based Award shall be limited to: specified levels of or increases
in the Company’s, a division’s or a Subsidiary’s return on capital, equity or assets;
earnings measures/ratios (on a gross, net, pre-tax or post-tax basis),
including basic earnings per share, diluted earnings per share, total earnings,
operating earnings, earnings growth, earnings before interest and taxes and
earnings before interest, taxes, depreciation and amortization; net economic
profit (which is operating earnings minus a charge to capital); net income;
operating income; sales; sales growth; gross margin; direct margin; Share price
(including but not limited to growth measures and total stockholder return);
operating profit; per period or cumulative cash flow (including but not limited
to operating cash flow and free cash flow) or cash flow return on investment
(which equals net cash flow divided by total capital); inventory turns;
financial return ratios; market share; balance sheet measurements such as
receivable turnover; improvement in or attainment of expense levels;
improvement in or attainment of working capital levels; debt reduction;
strategic innovation; customer or employee satisfaction; individual objectives;
and any combination of the foregoing. If the Committee determines that a change
in the business, operations, corporate structure or capital structure of the
Company, or the manner in which it conducts its business, or other events or
circumstances render the Performance Objectives unsuitable, the Committee may
modify such Performance Objectives or the related minimum acceptable level of
achievement, in whole or in part, as the Committee deems appropriate and equitable.

 

2.25.  “Performance
Period” means a period of time established under Section 5
within which the Performance Objectives relating to Awards are to be achieved.

 

2.26.  “Performance
Share” means a bookkeeping entry that records the equivalent of one
Share awarded pursuant to Section 5.

 

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2.27.  “Performance
Unit” means a bookkeeping entry that records a unit equivalent to
$1.00 awarded pursuant to Section 5.

 

2.28.  “Qualified
Performance-Based Award” means an Award or portion of an Award that
is intended to satisfy the requirements for “qualified performance-based
compensation” under Code Section 162(m). The Committee shall designate any
Qualified Performance-Based Award as such at the time of grant.

 

2.29.  “Restricted
Shares” mean Shares granted under Section 8 subject to a
substantial risk of forfeiture.

 

2.30.  “Shares”
means shares of the Common Stock of the Company, $.25 par value, or any
security into which Shares may be converted by reason of any transaction or
event of the type referred to in Section 14.

 

2.31.  “Spread”
means, in the case of a Stock Appreciation Right, the amount by which the Fair
Market Value on the date when any such right is exercised exceeds the Base
Price specified in such right.

 

2.32.  “Stock
Appreciation Right” means a right granted under Section 7.

 

2.33.  “Subsidiary”
means a corporation or other entity in which the Company owns or controls
directly or indirectly at least 50 percent of the total combined voting
power represented by all classes of stock issued by such corporation, or in the
case of a noncorporate entity, at least 50% of the profits or capital interest
in such entity, at the time of such grant.

 

 3.  Shares
Available Under the Plan.

 

3.1.  Reserved
Shares.  Subject to adjustment
as provided in Section 14, the maximum number of Shares that may be (a) issued
upon the exercise of Options or Stock Appreciation Rights, (b) issued as
Restricted Shares and released from substantial risk of forfeiture, or (c) issued
in payment of Deferred Shares or Performance Shares, shall not in the aggregate
exceed 2,000,000
Shares. Such Shares may be Shares of original issuance, Shares held in
Treasury, or Shares that have been reacquired by the Company. In addition:

 

(i)            To the extent any Shares covered by
an Award are not issued to a Participant (or, if applicable, his heir, legatee
or permitted transferee) because the Award is forfeited or canceled, such
Shares shall not be deemed to have been issued for purposes of determining the
maximum number of Shares available for issuance under the Plan.

 

(ii)           Shares issued under the Plan in
settlement, assumption or substitution of outstanding awards (or obligations to
grant future awards) under the plans or arrangements of another entity shall
not reduce the maximum number of Shares available for issuance under the Plan,
to the extent that such settlement, assumption or substitution is a result of
the Company acquiring another entity (or an interest in another entity).

 

3.2.  Reduction
Ratio.  For purposes of Section 3.1,
each Share issued pursuant to an Award other than an Option shall reduce the
number of Shares available for issuance under the Plan by two 

 

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Shares. For example, if all
Awards under the Plan are in the form of Restricted Shares, 1,000,000 Shares are
available for issuance, subject to adjustment as provided in Section 14.

 

3.3.  ISO Maximum.  In no event shall the number of Shares issued
upon the exercise of Incentive Stock Options exceed 600,000 Shares, subject to
adjustment as provided in Section 14.

 

3.4.  Maximum
Annual Award.  No Participant
my receive Awards (including performance-based Awards) representing more than
500,000 Shares underlying Option grants (or 250,000 Shares underlying any
Award, except for Options) in any one fiscal year, subject to adjustment as
provided in Section 14. The maximum Qualified Performance-Based Award that
may be granted to a Participant in any one Performance Period is 250,000 Shares
(subject to adjustment as provided in Section 14).

 

 4.  Plan
Administration.

 

4.1.  Committee
Administration.  This Plan
shall be administered by the Committee. The interpretation and construction by
the Committee of any provision of this Plan or of any Award Agreement and any
determination by the Committee pursuant to any provision of this Plan or any
such agreement, notification or document, shall be final and conclusive. No
member of the Committee shall be liable to any person for any such action taken
or determination, other than one made in bad faith.

 

4.2.  Committee
Powers.  The Committee shall
have full authority to interpret the Plan; to establish and amend rules and
regulations relating to the Plan; to select the Participants and determine the type
of Awards to be made to Participants, the number of shares subject to Awards
and the terms, conditions, restrictions and limitations of Awards; and to make
all other determinations as are necessary or advisable for the administration
of the Plan.

 

4.3.  Committee
Delegation.  The Committee may
delegate to one or more officers of the Company the authority to grant Awards
to Participants who are not subject to the requirements of Section 16 of
the Exchange Act or Section 162(m) of the Code and the rules and
regulations thereunder, provided that the Committee shall have fixed the total
number of Shares subject to such grants. Any such delegation shall be subject
to the limitations of Section 157(c) of the Delaware General
Corporation Law. The Committee may revoke any such allocation or delegation at
any time for any reason with or without prior notice.

 

 5.  Performance
Shares and Performance Units. 
The Committee may authorize grants of Performance Shares and Performance
Units, which shall vest and become payable to the Participant upon the
achievement of specified Performance Objectives during a specified Performance
Period, upon such terms and conditions as the Committee may determine in
accordance with the following provisions:

 

5.1.  Terms and
Conditions of Performance Share/Performance Unit Awards.  Each grant shall specify the number of
Performance Shares or Performance Units to which it pertains. The Performance
Period with respect to each Performance Share or Performance Unit shall
commence on the Grant Date and may be subject to earlier termination in the
event of a Change in Control or other similar transaction or event. Each grant
shall specify the Performance Objectives that are to be achieved by the
Participant. Each grant may specify in respect of the specified Performance
Objectives a minimum acceptable level of achievement below which no payment
will be made and may set forth a 

 

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formula for determining the
amount of any payment to be made if performance is at or above such minimum
acceptable level but falls short of the maximum achievement of the specified
Performance Objectives.

 

5.2.  Payment of
Performance Shares and Units. 
Each grant shall specify the time and manner of payment of Performance
Shares or Performance Units that shall have been earned, and shall be paid by
the Company in Shares.

 

5.3.  Maximum
Payment.  Subject to Section 3.4
of the Plan, any grant of Performance Shares may specify that the Shares
payable with respect thereto may not exceed a maximum specified by the
Committee on the Grant Date. Any grant of Performance Units may specify the
number of Shares issued, with respect thereto may not exceed maximums specified
by the Committee on the Grant Date.

 

5.4.  Adjustment of
Performance Objectives.  The
Committee may adjust Performance Objectives and the related minimum acceptable
level of achievement if, in the sole judgment of the Committee, events or
transactions have occurred after the Grant Date that are unrelated to the performance
of the Participant and result in distortion of the Performance Objectives or
the related minimum acceptable level of achievement.

 

5.5.  Qualified
Performance-Based Awards.  In
the case of a Qualified Performance-Based Award the following provisions shall
apply in addition to, and where necessary, in lieu of other provisions of the
Plan, including the provisions of Sections 5.1 through 5.4:

 

(i)            Only Employees who are “Covered
Employees” within the meaning of Section 162(m) of the Code shall be eligible
to receive Qualified Performance-Based Awards. The Committee shall designate in
its sole discretion which Covered Employees will be Participants for a
Performance Period within the earlier of the (a) first 90 days of a
Performance Period and (b) the lapse of 25% of the Performance Period.

 

(ii)           The Committee shall establish in
writing within the earlier of the (a) first 90 days of a Performance
Period and (b) the lapse of 25% of the Performance Period, and in any
event, while the outcome is substantially uncertain, (x) Performance
Objectives for the Performance Period, and (y) in respect of such
Performance Objectives, a minimum acceptable level of achievement below which
no Award will be made, and an objective formula or other method for determining
the Award to be made if performance is at or above such minimum acceptable
level but falls short of the maximum achievement of the specified Performance
Objectives.

 

(iii)          Following the completion of a
Performance Period, the Committee shall review and certify in writing whether,
and to what extent, the Performance Objectives for the Performance Period have
been achieved and, if so, to also calculate and certify in writing the amount
of the Qualified Performance-Based Awards earned for the period based upon the
Performance Objectives and the related formulas or methods as determined
pursuant to Section 5.5(ii). The Committee shall then determine the actual
number of Shares issuable under each Participant’s Award for the Performance
Period, and, in doing so, may reduce or eliminate, unless otherwise and/or to
the extent provided in the Award Agreement, the amount of the Award. In no
event shall the Committee have the authority to increase Award amounts to any
Covered Employee.

 

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(iv)          Subject to Section 20.2, Awards
granted for a Performance Period shall be made to Participants within a
reasonable time after completion of the certification described in Section 5.5(iii).

 

5.6.  Other Awards.  Any grant of an Award under Sections 6, 7, 8
or 9, and/or the vesting or exercise thereof, may be further conditioned upon
the attainment of Performance Objectives established by the Committee in
accordance with the applicable provisions of this Section 5 regarding
Performance Shares and Performance Units.

 

 6.  Options.  The Committee may from time to time authorize
grants of Options to Participants upon such terms and conditions as the
Committee may determine in accordance with the following provisions:

 

6.1.  Number of Shares.  Each grant shall specify the number of Shares
to which it pertains.

 

6.2.  Option Price.  Each grant shall specify an Option Price per
Share, which shall be equal to or greater than the Fair Market Value per Share
on the Grant Date; provided that in the case of any Incentive Stock Option
granted to a person who on any given date owns, either directly or indirectly
(taking into account the attribution rules contained in Section 424(d) of
the Code), stock possessing more than 10 percent of the total combined
voting power of all classes of stock of the Company or any Subsidiary, the
Option Price shall not be less than 110% of the Fair Market Value of a Share on
the date of grant.

 

6.3. 
Consideration.  Each
grant shall specify the form of consideration to be paid in satisfaction of the
Option Price and the manner of payment of such consideration, which may include
(i) cash in the form of currency or check or other cash equivalent, in
each such case as is acceptable to the Company, (ii) subject to approval
by the Committee, nonforfeitable, unrestricted Shares owned by the Optionee, (iii) any
other legal consideration that the Committee may deem appropriate, including
without limitation any form of consideration authorized under Section 6.4,
on such basis as the Committee may determine in accordance with this Plan, or (iv) any
combination of the foregoing.

 

6.4.  Payment of
Option Price in Restricted Shares. 
On or after the Grant Date of any Option other than an Incentive Stock
Option, the Committee may determine that payment of the Option Price may also
be made in whole or in part in the form of Restricted Shares or other Shares
that are subject to risk of forfeiture or restrictions on transfer. Unless
otherwise determined by the Committee, whenever any Option Price is paid in
whole or in part by means of any of the forms of consideration specified in
this Section 6.4, the Shares received by the Optionee upon the exercise of
the Options shall be subject to the same risks of forfeiture or restrictions on
transfer as those that applied to the consideration surrendered by the
Optionee, provided that such risks of forfeiture and restrictions on transfer
shall apply only to the same number of Shares received by the Optionee as
applied to the forfeitable or restricted Shares surrendered by the Optionee.

 

6.5.  Broker
Assisted Exercise.  To the
extent such program is permitted by the Company and permitted by applicable
law, rule or regulations, the Option Price may be satisfied from the
proceeds of a sale through a bank or broker on the date of exercise of some or
all of the Shares to which the exercise relates pursuant to a broker assisted
exercise program provided by such bank or broker.

 

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6.6.  Exercise
Period.  No Option granted may
be exercised more than ten years after the Grant Date; provided that in the
case of any Incentive Stock Option granted to a person who on any given date
owns, either directly or indirectly (taking into account the attribution rules contained
in Section 424(d) of the Code), stock possessing more than
10 percent of the total combined voting power of all classes of stock of
the Company or any Subsidiary, such Option shall be exercised within five years
after the Grant Date.

 

6.7.  Disqualifying
Dispositions of ISOs.  Each
Participant awarded an Incentive Stock Option under the Plan shall notify the
Company in writing immediately after the date he or she makes a disqualifying
disposition (as defined in Section 421(b) of the Code) of any Shares
acquired pursuant to the exercise of such Incentive Stock Option. The Company
may, if determined by the Committee and in accordance with procedures
established by it, retain possession of any Shares acquired pursuant to the exercise
of an Incentive Stock Option as agent for the applicable Participant until the
end of the period described in the preceding sentence, subject to complying
with any instructions from such Participant as to the sale of such Shares.

 

7.  Stock Appreciation Rights.  The Committee may also authorize grants to
Participants of Stock Appreciation Rights. A Stock Appreciation Right is the
right of the Participant to receive from the Company an amount, which, shall be
determined by the Committee and shall be expressed as a percentage (not
exceeding 100 percent) of the Spread at the time of the exercise of such
right. Any grant of Stock Appreciation Rights shall be upon such terms and
conditions as the Committee may determine in accordance with the following
provisions:

 

7.1.  Payment in
Shares.  Any amount payable
upon the exercise of a Stock Appreciation Right shall be paid by the Company in
Shares. Any grant may specify that the Shares payable upon the exercise of a
Stock Appreciation Right shall not exceed a maximum specified by the Committee
on the Grant Date.

 

7.2.  Exercise
Period.  Any grant may specify
(a) a waiting period or periods before Stock Appreciation Rights shall
become exercisable and (b) permissible dates or periods on or during which
Stock Appreciation Rights shall be exercisable; provided that no Stock
Appreciation Right granted may be exercised more than ten years after the Grant
Date. A grant may specify that a Stock Appreciation Right may be exercised only
in the event of a Change in Control or other similar transaction or event.

 

7.3.  Base Price.  Each grant shall specify in respect of each
Stock Appreciation Right a Base Price per Share, which shall be equal to or
greater than the Fair Market Value on the Grant Date.

 

7.4.  Deemed
Exercise.  The Committee may
provide that a Stock Appreciation Right shall be deemed to be exercised at the
close of business on the scheduled expiration date of such Stock Appreciation
Right if at such time the Stock Appreciation Right by its terms remains exercisable
and, if so exercised, would result in a payment of Shares to the holder of such
Stock Appreciation Right.

 

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8.  Restricted Shares.  The Committee may also authorize grants to
Participants of Restricted Shares upon such terms and conditions as the
Committee may determine in accordance with the following provisions:

 

8.1.  Transfer of
Shares.  Each grant shall
constitute an immediate transfer of the ownership of Shares to the Participant
in consideration of the performance of services, subject to the substantial
risk of forfeiture and restrictions on transfer referred to in Section 10.
Each grant may be made without additional consideration from the Participant or
in consideration of a payment by the Participant that is less than the Fair
Market Value on the Grant Date.

 

8.2.  Dividends.  Any grant may require that any or all
dividends or other distributions paid on the Restricted Shares during the
period of such restrictions be reinvested in additional Shares or held in cash,
which additional Shares or cash, as the case may be, may be subject to the same
restrictions as the underlying Award or such other restrictions as the
Committee may determine.

 

 9.  Deferred
Shares.  The Committee may
authorize grants of Deferred Shares to Participants upon such terms and
conditions as the Committee may determine in accordance with the following
provisions:

 

9.1.  Deferred
Transfer of Shares.  Each
grant shall constitute the agreement by the Company to issue or transfer Shares
to the Participant in the future in consideration of the performance of
services, subject to the fulfillment during the Deferral Period of such
conditions as the Committee may specify.

 

9.2. 
Consideration.  Each
grant may be made without additional consideration from the Participant or in
consideration of a payment by the Participant that is less than the Fair Market
Value on the Grant Date.

 

10.  Vesting.

 

10.1.  In General.  Each grant of Options and Stock Appreciation
Rights shall specify the period of continuous employment by the Company or any
Subsidiary, or service to the Company or any Subsidiary (and in the case of a
Nonemployee Director, service on the Board), of the Participant that is
necessary before such Options or Stock Appreciation Rights, or installments
thereof, shall become exercisable. Each grant of Restricted Shares shall
specify the period during which such Restricted Shares shall be subject to a “substantial
risk of forfeiture” within the meaning of Code Section 83, and each grant
of Deferred Shares shall specify the Deferral Period to which such Deferred
Shares shall be subject. Each grant of such Award may provide for the earlier
exercise of rights, termination of a risk of forfeiture or termination of a
Deferral Period in the event of a Change in Control or similar transaction or
event.

 

10.2.  Restrictions
on Transfer of Restricted Shares. 
Each grant of Restricted Shares shall provide that, during the period
for which a substantial risk of forfeiture is to continue, the transferability
of the Restricted Shares shall be prohibited or restricted in the manner and to
the extent prescribed by the Committee on the Grant Date. Such restrictions may
include, without limitation, rights of repurchase or first refusal in the Company
or provisions subjecting the Restricted Shares to a continuing substantial risk
of forfeiture in the hands of any transferee.

 

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11.  Dividends and Other Ownership Rights.

 

11.1.  Restricted
Shares.  Unless otherwise
determined by the Committee, an Award of Restricted Shares shall entitle the
Participant to dividend, voting and other ownership rights during the period
for which a substantial risk of forfeiture is to continue.

 

11.2.  Deferred
Shares.  Unless otherwise
determined by the Committee, during the Deferral Period, the Participant shall
not have any right to transfer any rights under an Award of Deferred Shares,
shall not have any rights of ownership in the Deferred Shares and shall not
have any right to vote such Shares.

 

12.  Transferability.

 

12.1.  Transfer
Restrictions.  Except as
provided in Section 12.2, no Award granted shall be transferable by a
Participant other than by will or the laws of descent and distribution, and
Options and Stock Appreciation Rights shall be exercisable during a Participant’s
lifetime only by the Participant or, in the event of the Participant’s legal
incapacity, by his or her guardian or legal representative acting in a
fiduciary capacity on behalf of the Participant under state law. Any attempt to
transfer an Award in violation of this Plan shall render such Award null and
void.

 

12.2.  Limited
Transfer Rights.  The
Committee may expressly provide in an Award Agreement (or an amendment to an
Award Agreement) that a Participant may transfer such Award (other than an
Incentive Stock Option), in whole or in part, to a spouse or lineal descendant
(a “Family Member”), a trust for the exclusive benefit of Family Members, a
partnership or other entity in which all the beneficial owners are Family
Members, or any other entity affiliated with the Participant that may be
approved by the Committee. Subsequent transfers of Awards shall be prohibited
except in accordance with this Section 12.2. All terms and conditions of
the Award, including without limitation provisions relating to termination of
the Participant’s employment or service with the Company or a Subsidiary, shall
continue to apply following a transfer made in accordance with this Section 12.2.
In order for a transfer to be effective, a Participant must agree in writing
prior to the transfer on a form provided by the Company to pay any and all
payroll and withholding taxes due upon exercise of the transferred Option. In
addition, prior to the exercise of a transferred Option by a transferee,
arrangements must be made by the Participant with the Company for the payment
of all payroll and withholding taxes. Finally, the Company shall be under no
obligation to provide a transferee with any notice regarding the transferred
Awards held by the transferee upon forfeiture or any other circumstance.

 

12.3.  Restrictions
on Transfer.  Any Award
granted may provide that all or any part of the Shares that are (a) to be
issued or transferred by the Company upon the exercise of Options or Stock
Appreciation Rights, upon termination of the Deferral Period applicable to
Deferred Shares or upon payment under any grant of Performance Shares or
Performance Units, or (b) no longer subject to the substantial risk of
forfeiture and restrictions on transfer referred to in Section 10, shall
be subject to further restrictions upon transfer, including restrictions
relating to any minimum Share ownership requirements imposed by the Company
with respect to a Participant.

 

A-11

 

13.  Award Agreement.  Each grant under the Plan shall be evidenced
by an Award Agreement, which shall describe the subject Award, state that the
Award is subject to all of the terms and conditions of this Plan and contain
such other terms and provisions as the Committee may determine consistent with
this Plan.

 

14.  Adjustments.  The Committee shall make or provide for
appropriate adjustments in the (a) number of Shares covered by outstanding
Options, Stock Appreciation Rights, Deferred Shares, Restricted Shares and
Performance Shares granted hereunder, (b) prices per Share applicable to
such Options and Stock Appreciation Rights, and (c) kind of Shares covered
thereby (including Shares of another issuer), as the Committee in its sole
discretion may in good faith determine to be equitably required in order to
prevent dilution or enlargement of the rights of Participants that otherwise
would result from (x) any stock dividend, stock split, combination or
exchange of Shares, recapitalization or other change in the capital structure
of the Company, (y) any merger, consolidation, spin-off, spin-out,
split-off, split-up, reorganization, partial or complete liquidation or other
distribution of assets (other than a normal cash dividend), issuance of rights
or warrants to purchase securities, or (z) any other corporate transaction
or event having an effect similar to any of the foregoing. Moreover, in the
event of any such transaction or event, the Committee may provide in
substitution for any or all outstanding Awards such alternative consideration
as it may in good faith determine to be equitable under the circumstances and
may require in connection therewith the surrender of all Awards so replaced.
The Committee may also make or provide for such adjustments in each of the
limitations specified in Section 3 as the Committee in its sole discretion
may in good faith determine to be appropriate in order to reflect any
transaction or event described in this Section 14. The Company shall give
each Participant notice of an adjustment hereunder and, upon notice, such
adjustment shall be conclusive and binding for all purposes.

 

15.  Fractional Shares.  The Company shall not be required to issue
any fractional Shares pursuant to this Plan. The Committee may provide for the
elimination of fractions or for the settlement thereof in cash.

 

16.  Withholding Taxes.  The Company shall be entitled to deduct from
any payment under the Plan, regardless of the form of such payment, the amount
of all applicable income and employment taxes required by law to be withheld
with respect to such payment or may require the Participant to pay to it such
tax prior to and as a condition of the making of such payment. In accordance
with any applicable administrative guidelines it establishes, the Committee may
allow a Participant to pay the amount of taxes required by law to be withheld
from an Award by withholding from any payment of Shares due as a result of such
Award, or by permitting the Participant to deliver to the Company Shares having
a Fair Market Value, as determined by the Committee, equal to the minimum
amount of such required withholding taxes.

 

17.  Certain Terminations of Employment, Hardship
and Approved Leaves of Absence. 
In the event of termination of employment by reason of death,
disability, normal retirement, early retirement with the consent of the
Committee, other termination of employment or a leave of absence that is
approved by the Committee, or in the event of hardship or other special
circumstances that are approved by the Committee, of a Participant who holds an
Option or Stock Appreciation Right that is not immediately and fully
exercisable, any Restricted Shares as to which the substantial risk of
forfeiture or the prohibition or restriction on transfer has not lapsed, any
Deferred Shares as to which the Deferral Period is not complete, any
Performance Shares or Performance Units that have not been fully earned, or any
Shares that are

 

A-12

 

subject to any transfer restriction pursuant
to Section 12.3, the Committee may, in its sole discretion, take any
action that it deems to be equitable under the circumstances or in the best
interests of the Company, including without limitation waiving or modifying any
limitation or requirement with respect to any Award and providing for
post-termination exercise periods with respect to any Option or Stock
Appreciation Right.

 

18.  Termination for Cause.  A Participant who is terminated for Cause
shall, unless otherwise determined by the Committee, immediately forfeit,
effective as of the date the Participant engages in such conduct, all
unexercised, unearned, and/or unpaid Awards, including, but not by way of
limitation, Awards earned but not yet paid or exercised, all unpaid dividends
and all interest, if any, accrued on the foregoing.

 

19.  Foreign Participants.  In order to facilitate the making of any
grant or combination of grants under this Plan, the Committee may provide for
such special terms for Awards to Participants who are foreign nationals, or who
are employed by or perform services for the Company or any Subsidiary outside
of the United States of America, as the Committee may consider necessary or
appropriate to accommodate differences in local law, tax policy or custom.
Moreover, the Committee may approve such supplements to, or amendments,
restatements or alternative versions of, this Plan as it may consider necessary
or appropriate for such purposes without thereby affecting the terms of this
Plan as in effect for any other purpose, provided that no such supplements,
amendments, restatements or alternative versions shall include any provisions
that are inconsistent with the terms of this Plan, as then in effect, unless
this Plan could have been amended to eliminate such inconsistency without
further approval by the stockholders of the Company.

 

20.  Amendments and Other Matters.

 

20.1.  Plan
Amendments.  This Plan may be
amended from time to time by the Board, but no such amendment shall: (a) increase
any of the limitations specified in Section 3, other than to reflect an
adjustment made in accordance with Section 14, (b) change the class
of persons eligible to receive grants of Awards or the types of Awards
available under the Plan, or (c) increase the benefits to Participants
under the Plan, in any such case without the further approval of the
stockholders of the Company. The Board will also condition any amendment on the
approval of the stockholders of the Company if such approval is necessary with respect
to the applicable listing or other requirements of a national securities
exchange or other applicable laws, policies or regulations, and the Board may
condition any amendment on the approval of the stockholders of the Company if
such approval is deemed advisable to comply with such requirements.

 

20.2.  Award
Deferrals.  An Award Agreement
may provide that payment of any Award, dividend, or any portion thereof, may be
deferred by a Participant until such time as the Committee may establish. All
such deferrals shall be accomplished by the delivery of a written, irrevocable
election by the Participant prior to the time established by the Committee for
such purpose, on a form provided by the Company. Deferred Awards may also be
credited with interest, at such rates to be determined by the Committee.

 

20.3.  Conditional
Awards.  The Committee may
condition the grant of any Award or combination of Awards on the surrender or
deferral by the Participant of his or her right to receive a cash bonus or
other compensation otherwise payable by the Company or any Subsidiary to the
Participant.

 

A-13

 

20.4.  Repricing
Prohibited.  No Award may be
repriced, replaced, regranted through cancellation, or modified, directly or
indirectly, without the approval of the stockholders of the Company, provided
that nothing herein shall prevent the Committee from taking any action provided
for in Section 14.

 

20.5.  Amendments to
Awards.  Subject to the
requirements of Section 20.4, the Committee may at any time unilaterally
amend any unexercised, unearned, or unpaid Award, including, but not by way of
limitation, Awards earned but not yet paid, to the extent it deems appropriate
(including for the purposes of compliance with local laws and regulations or to
avoid costly government filings); provided, however, that except to the extent
that the Committee determines that an amendment is necessary to avoid a penalty
tax under Section 409A of the Code, any such amendment which, in the opinion
of the Committee, is adverse to the Participant shall require the Participant’s
consent.

 

20.6.  No Employment
Right.  This Plan shall not
confer upon any Participant any right with respect to continuance of employment
or other service with the Company or any Subsidiary and shall not interfere in
any way with any right that the Company or any Subsidiary would otherwise have
to terminate any Participant’s employment or other service at any time.

 

20.7.  Compliance
with Section 409A of the Code. 
Notwithstanding any other provision of the Plan to the contrary, (a) to
the extent that any payment of or in connection with an Award constitutes a
payment under a “non-qualified deferred compensation plan,” as defined in Section 409A
of the Code, such payment shall be made in compliance with Section 409A of
the Code and (b) any adjustment of Shares or prices per Share or
substitution of Awards pursuant to Section 14 and any modification of
Awards pursuant to Section 17 shall not cause the affected Award to
violate the requirements of Section 409A of the Code.

 

21.  Change in Control.  Except as otherwise provided at the time of
grant in an Award Agreement relating to a particular Award and subject to the
requirements of Section 14, if a Change in Control occurs, then:

 

21.1.        The Participant’s Restricted Shares, Deferred Shares,
Performance Shares, Performance Units or other Share-based Awards that were
forfeitable shall, unless otherwise determined by the Committee prior to the
occurrence of the Change in Control, become nonforfeitable and, to the extent
applicable, shall be converted into Shares.

 

21.2.        Any unexercised Option or Stock Appreciation Right, whether
or not exercisable on the date of such Change in Control, shall thereupon be
fully exercisable and may be exercised, in whole or in part.

 

21.3.        Notwithstanding Sections 21.1 and 21.2, in the event of a
Change in Control, the Committee may in its discretion cancel any outstanding
Awards and (a) pay to the holders thereof, in cash or stock, or any
combination thereof, the value of such Awards based upon the price per share of
Stock received or to be received by other stockholders of the Company in the
event or (b) arrange for fully vested substitute awards to be granted to
the holders thereof, denominated in the equity of the acquirer or an affiliate
thereof, provided such substitute awards substantially preserve the value of
the substituted Awards.

 

A-14

 

21.4.        If a Change in Control occurs during the term of one or more
Performance Periods for which the Committee has granted performance-based
Awards pursuant to the provisions of Section 5, the term of each such Performance
Period (hereinafter a “current Performance Period”) shall immediately terminate
upon the occurrence of such Change in Control. Upon a Change in Control, for
each current Performance Period and each completed Performance Period for which
the Committee has not on or before such date made a determination as to whether
and to what degree the Performance Objectives for such period have been
attained (hereinafter a “completed Performance Period”), it shall be assumed
that the Performance Objectives have been attained at a level of one hundred
percent (100%) or the equivalent thereof. A Participant in one or more current
Performance Periods shall be considered to have earned and, therefore, be
entitled to receive, a prorated portion of the Award previously granted to him
for each such current Performance Period. Such prorated portion shall be
determined by multiplying the number of Performance Shares or Performance Units
(or other performance-based Awards), as the case may be, granted to the
Participant by a fraction, the numerator of which is the total number of days
that have elapsed since the beginning of the current Performance Period, and
the denominator of which is the total number of days in such current
Performance Period. A Participant in one or more completed Performance Periods
shall be considered to have earned and, therefore, be entitled to receive all
the Performance Shares or Performance Units (or other performance-based
Awards), as the case may be, previously granted to him during each such
completed Performance Period.

 

21.5.        Unless otherwise provided by the Committee, at any time, upon
a Change in Control, any Awards deferred by a Participant under Section 20.2,
but for which he or she has not received payment as of such date, shall be paid
by the 90th day following the Change in Control.

 

22.  Effective
Date.  This Plan shall become
effective upon its approval by the stockholders of the Company.

 

23.  Termination.  This Plan shall terminate on the tenth
anniversary of the date upon which it is approved by the stockholders of the
Company, and no Award shall be granted after that date.

 

24.  Arbitration
of Disputes.  Any and all
disputes arising out of or relating to the Plan or any Award Agreement (or
breach thereof) shall be resolved exclusively through binding arbitration in
the State of New York in accordance with the rules of the American Arbitration
Association then in effect.

 

25.  Regulatory
Approvals and Listings. 
Notwithstanding anything contained in this Plan to the contrary, the
Company shall have no obligation to issue or deliver certificates of Shares
evidencing Awards or any other Award resulting in the payment of Shares prior
to (i) the obtaining of any approval from any governmental agency which
the Company shall, in its sole discretion, determine to be necessary or
advisable, (ii) the admission of such Shares to listing on the stock
exchange or market on which the Shares may be listed, and (iii) the
completion of any registration or other qualification of said Shares under any
state or federal law or ruling of any governmental body which the Company
shall, in its sole discretion, determine to be necessary or advisable. The
Committee may, from time to time, impose additional restrictions upon an Award,
including but not limited to, restrictions regarding tax withholdings and
restrictions regarding the Participant’s ability to exercise Awards under the
Company’s broker-assisted stock option exercise program.

 

A-15

 

26.  No Right,
Title, or Interest in Company Assets.  No Participant shall have any rights as a
stockholder of the Company as a result of participation in the Plan until the
date of issuance of a stock certificate in his or her name, and, in the case of
Restricted Shares, such rights are granted to the Participant under the Plan.
To the extent any person acquires a right to receive payments from the Company
under the Plan, such rights shall be no greater than the rights of an unsecured
creditor of the Company and the Participant shall not have any rights in or
against any specific assets of the Company. All of the Awards granted under the
Plan shall be unfunded.

 

27.  No Guarantee
of Tax Consequences. 
Notwithstanding any other provision of the Plan, no person connected
with the Plan in any capacity, including, but not limited to, the Company and
its directors, officers, agents and employees, makes any representation,
commitment, or guarantee that any tax treatment, including, but not limited to,
federal, state and local income, estate and gift tax treatment, will be
applicable with respect to the tax treatment of any Award, any amounts deferred
under the Plan, or paid to or for the benefit of a Participant under the Plan,
or that such tax treatment will apply to or be available to a Participant on
account of participation in the Plan, or that any of the foregoing amounts will
not be subject to the 20% penalty tax and interest under Section 409A of
the Code.

 

28.  Governing
Law.  The validity,
construction and effect of this Plan and any Award hereunder will be determined
in accordance with the laws of the State of Delaware.

 

A-16Exhibit 4.3

 

December 21, 2007

 

Carl E. Berg

Berg & Berg Enterprises, LLC

10050 Bandley Drive

Cupertino, CA 95014

 

                Re:  Series C-1 and C-2 Preferred Stock Dividends

 

Dear Carl:

 

                The
purpose of this letter is to memorialize certain prior understandings regarding
the cumulative dividends on certain preferred stock of Valence Technology, Inc.
(“Valence”)
held by Berg & Berg Enterprises, LLC (“Berg & Berg”).

 

                By
way of background, on July 14, 2005, Berg & Berg and Valence
entered into an assignment agreement whereby Valence assigned to Berg &
Berg the right to purchase certain shares of Series C-2 Convertible
Preferred Stock (the “Series C-2 Agreement”). Similarly, on December 14, 2005, Berg &
Berg and Valence entered into an assignment agreement whereby Valence assigned
to Berg & Berg the right to purchase certain shares of Series C-1
Convertible Preferred Stock (the “Series C-1 Agreement,”
and collectively with Series C-2 Agreement, the “Preferred Stock Agreements”). Pursuant to the Series C-1 Agreement, Berg & Berg
purchased 430 shares of Series C-1 Convertible Preferred Stock (the “Series C-1 Preferred Stock”). Likewise, pursuant to the Series C-2
Agreement, Berg & Berg purchased 431 shares of Series C-2
Convertible Preferred Stock (the “Series C-2
Preferred Stock,” and collectively with the Series C-1
Preferred Stock, the “Preferred
Stock”). After such purchases, Berg & Berg holds
all of the outstanding shares of Preferred Stock.

 

                The
rights and obligations with respect to the Preferred Stock are set forth in the
Certificate of Designations, Preferences and Rights of Series C-1
Convertible Preferred Stock of Valence (the “Series C-1
Preferred Stock Designation”) and the Certificate of
Designations, Preferences and Rights of Series C-2 Convertible Preferred
Stock of Valence (the “Series C-2 Preferred Stock Designation,” and collectively with the Series C-1
Preferred Stock Designation, the “Preferred Stock
Designations”). 

 

                In
addition to conferring the right to purchase Preferred Stock, the Preferred
Stock Agreements specifically provided that Valence’s failure to redeem the
Preferred Stock on December 15, 2005 in accordance with the terms of the
Preferred Stock Designations did not constitute a default under the Preferred
Stock Designations. In addition, Berg & Berg waived the accrual of any
default interest applicable as a result of Valence’s failure to redeem the
Preferred Stock.

 

Valence
Technology, Inc. 12201 Technology Blvd. Suite 150, Austin, TX 78727

Tel:
512-527-2900, Fax: 512-527-2910

 

 

                Although it is not specified in the Preferred Stock Agreements, this
letter confirms that it also was the mutual understanding of Berg & Berg and Valence that, until we agreed
otherwise, Valence would not
be required to pay to Berg &
Berg cumulative dividends on the
Preferred Stock, as specified in the Preferred Stock Designations, which provided that such dividends would be due and
payable on a quarterly basis. Instead,
such dividends would continue to cumulate and accrue (without interest) on the
Preferred Stock according to the terms set forth in the Preferred Stock Designations, to be paid at such time as we may
mutually agree, or upon redemption or conversion in accordance with the terms of the Preferred Stock
Designations. Thus, Valence has not failed to make when due any payments of
Preferred Stock dividends owed to Berg & Berg and is not in default under the terms of the Preferred
Stock Designations.

 

                If
the facts and recitations set forth
in this letter are in accord with your understanding, please sign, date and return the enclosed counterpart of
this letter to us.

 

	
   

  	
  Very truly yours,

  
	
   

  	
   

  
	
   

  	
  VALENCE TECHNOLOGY, INC.

  
	
   

  	
   

  
	
   

  	
  By: 

  	
  /s/ Robert L. Kanode

  
	
   

  	
   

  	
  Robert L. Kanode

  
	
   

  	
   

  	
  President and Chief Executive Officer

  

 

AGREED AND ACCEPTED THIS

21st day of December      , 2007

 

BERG & BERG ENTERPRISES, LLC

 

	
  By: 

  	
  /s/ Carl E. Berg

  	
   

  
	
   

  	
  Carl E. Berg

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