Document:

exv10w7

 

Exhibit 10.7

CONNETICS CORPORATION

1995 DIRECTORS’ STOCK OPTION PLAN

(as amended by the Board of Directors on February 17, 2001,

effective by vote of the stockholders as of May 17, 2001)

(as further amended by the Board of Directors on December 13, 2001 and February 10, 2005)

     1.      Purposes of the Plan. The purposes of this Directors’ Stock Option Plan are to
attract and retain the best available personnel for service as Directors of the Company, to provide
additional incentive to the Outside Directors of the Company to serve as Directors, and to
encourage their continued service on the Board.

               All options granted hereunder shall be “nonstatutory stock options”.

     2.      Definitions. As used herein, the following definitions shall apply:

               (a)      “Board” shall mean the Board of Directors of the Company.

               (b)      “Code” shall mean the Internal Revenue Code of 1986, as amended.

               (c)      “Common Stock” shall mean the Common Stock of the Company.

               (d)      “Company” shall mean Connetics Corporation, a Delaware corporation.

               (e)      “Continuous Status as a Director” shall mean the absence of any interruption or
termination of service as a Director.

               (f)      “Director” shall mean a member of the Board.

               (g)      “Employee” shall mean any person, including officers and directors, employed by
the Company or any Parent or Subsidiary of the Company. The payment of a director’s fee by the
Company shall not be sufficient in and of itself to constitute “employment” by the Company.

               (h)      “Exchange Act” shall mean the Securities Exchange Act of 1934, as amended.

               (i)      “Option” shall mean a stock option granted pursuant to the Plan. All options
shall be nonstatutory stock options (i.e., options that are not intended to qualify as incentive
stock options under Section 422 of the Code).

               (j)      “Optioned Stock” shall mean the Common Stock subject to an Option.

               (k)      “Optionee” shall mean an Outside Director who receives an Option.

               (l)      “Outside Director” shall mean a Director who is not an Employee.

               (m)      “Parent” shall mean a “parent corporation”, whether now or hereafter existing, as
defined in Section 424(e) of the Code.

               (n)      “Plan” shall mean this 1995 Directors’ Stock Option Plan.

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               (o)      “Share” shall mean a share of the Common Stock, as adjusted in accordance with
Section 11 of the Plan.

               (p)      “Subsidiary” shall mean a “subsidiary corporation”, whether now or hereafter
existing, as defined in Section 424(f) of the Code.

     3.      Stock Subject to the Plan. Subject to the provisions of Section 11 of the Plan,
the maximum aggregate number of Shares which may be optioned and sold under the Plan is 600,000
Shares (the “Pool”) of Common Stock. The Shares may be authorized, but unissued, or reacquired
Common Stock.

               If an Option should expire or become unexercisable for any reason without having been
exercised in full, the unpurchased Shares which were subject thereto shall, unless the Plan shall
have been terminated, become available for future grant under the Plan. If Shares which were
acquired upon exercise of an Option are subsequently repurchased by the Company, such Shares shall
not in any event be returned to the Plan and shall not become available for future grant under the
Plan.

     4.      Administration of and Grants of Options under the Plan.

               (a)      Administrator. Except as otherwise required herein, the Plan shall be
administered by the Board.

               (b)      Procedure for Grants. All grants of Options hereunder shall be automatic and
nondiscretionary and shall be made strictly in accordance with the following provisions:

                         (i)      No person shall have any discretion to select which Outside Directors shall be granted
Options or to determine the number of Shares to be covered by Options granted to Outside Directors.

                         (ii)      Each Outside Director who first becomes an Outside Director after the effective date of
this Plan shall be automatically granted an Option (the “First Option”) to purchase 30,000 Shares
on the date on which such person first becomes an Outside Director, whether through election by the
shareholders of the Company or appointment by the Board of Directors to fill a vacancy.

                         (iii)      Each Outside Director (including Outside Directors who were not eligible for a First
Option) shall thereafter be automatically granted an Option to purchase 15,000 Shares (a
“Subsequent Option”) on the date of each Annual Meeting of the Company’s shareholders at which such
Outside Director is elected, provided that, on such date, he or she shall have served on the Board
for at least six (6) months prior to the date of such Annual Meeting.

                         (iv)      Notwithstanding the provisions of subsections (ii) and (iii) hereof, in the event that a
grant would cause the number of Shares subject to outstanding Options plus the number of Shares
previously purchased upon exercise of Options to exceed the Pool, then each such automatic grant
shall be for that number of Shares determined by dividing the total number of Shares remaining
available for grant by the number of Outside Directors receiving an Option on such date on the
automatic grant date. Any further grants shall then be deferred until such time, if any, as
additional Shares become available for grant under the Plan through action of the shareholders to
increase the number of Shares which may be issued under the Plan or through cancellation or
expiration of Options previously granted hereunder.

                         (v)      Notwithstanding the provisions of subsections (ii) and (iii) hereof, any grant of an
Option made before the Company has obtained shareholder approval of the Plan in accordance with
Section 17 hereof shall be conditioned upon obtaining such shareholder approval of the Plan in
accordance with Section 17 hereof.

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                         (vi)      The terms of each First Option granted hereunder shall be as follows:

                                      (1)      the First Option shall be exercisable only while the Outside Director remains a Director
of the Company, except as set forth in Section 9 hereof.

                                      (2)      the exercise price per Share shall be 100% of the fair market value per Share on the date
of grant of the First Option, determined in accordance with Section 8 hereof.

                                      (3)      the First Option shall become exercisable in installments cumulatively as to 25% of the
Shares subject to the First Option on each of the first, second, third and fourth anniversaries of
the date of grant of the Option.

                         (vii)      The terms of each Subsequent Option granted hereunder shall be as follows:

                                      (1)      the Subsequent Option shall be exercisable only while the Outside Director remains a
Director of the Company, except as set forth in Section 9 hereof.

                                      (2)      the exercise price per Share shall be 100% of the fair market value per Share on the date
of grant of the Subsequent Option, determined in accordance with Section 8 hereof.

                                      (3)      the Subsequent Option shall become exercisable as to one hundred percent (100%) of the
Shares subject to the Subsequent Option on the first anniversary of the date of grant of the
Subsequent Option.

               (c)      Powers of the Board. Subject to the provisions and restrictions of the Plan, the
Board shall have the authority, in its discretion: (i) to determine, upon review of relevant
information and in accordance with Section 8(b) of the Plan, the fair market value of the Common
Stock; (ii) to determine the exercise price per share of Options to be granted, which exercise
price shall be determined in accordance with Section 8(a) of the Plan; (iii) to interpret the Plan;
(iv) to prescribe, amend and rescind rules and regulations relating to the Plan; (v) to authorize
any person to execute on behalf of the Company any instrument required to effectuate the grant of
an Option previously granted hereunder; and (vi) to make all other determinations deemed necessary
or advisable for the administration of the Plan.

               (d)      Effect of Board’s Decision. All decisions, determinations and interpretations of
the Board shall be final and binding on all Optionees and any other holders of any Options granted
under the Plan.

               (e)      Suspension or Termination of Option. If the President or his or her designee
reasonably believes that an Optionee has committed an act of misconduct, the President may suspend
the Optionee’s right to exercise any option pending a determination by the Board of Directors
(excluding the Outside Director accused of such misconduct). If the Board of Directors (excluding
the Outside Director accused of such misconduct) determines an Optionee has committed an act of
embezzlement, fraud, dishonesty, nonpayment of an obligation owed to the Company, breach of
fiduciary duty or deliberate disregard of the Company rules resulting in loss, damage or injury to
the Company, or if an Optionee makes an unauthorized disclosure of any Company trade secret or
confidential information, engages in any conduct constituting unfair competition, induces any
Company customer to breach a contract with the Company or induces any principal for whom the
Company acts as agent to terminate such agency relationship, neither the Optionee nor his or her
estate shall be entitled to exercise any option whatsoever. In making such determination, the
Board of Directors (excluding the Outside Director accused of such

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misconduct) shall act fairly and shall give the Optionee an opportunity to appear and present
evidence on Optionee’s behalf at a hearing before the Board or a committee of the Board.

     5.      Eligibility. Options may be granted only to Outside Directors. All Options shall
be automatically granted in accordance with the terms set forth in Section 4(b) hereof. An Outside
Director who has been granted an Option may, if he or she is otherwise eligible, be granted an
additional Option or Options in accordance with such provisions.

               The Plan shall not confer upon any Optionee any right with respect to continuation of service
as a Director or nomination to serve as a Director, nor shall it interfere in any way with any
rights which the Director or the Company may have to terminate his or her directorship at any time.

     6.      Term of Plan; Effective Date. The Plan shall become effective on the earlier to
occur of its adoption by the Board of Directors or its approval by the shareholders of the Company.
It shall continue in effect for a term of ten (10) years unless sooner terminated under Section 13
of the Plan.

     7.      Term of Options. The term of each Option shall be ten (10) years from the date of
grant thereof.

     8.      Exercise Price and Consideration.

               (a)      Exercise Price. The per Share exercise price for the Shares to be issued pursuant
to exercise of an Option shall be 100% of the fair market value per Share on the date of grant of
the Option.

               (b)      Fair Market Value. The fair market value shall be determined by the Board;
provided, however, that where there is a public market for the Common Stock, the fair market value
per Share shall be the mean of the bid and asked prices of the Common Stock in the over-the-counter
market on the date of grant, as reported in The Wall Street Journal (or, if not so reported, as
otherwise reported by the National Association of Securities Dealers Automated Quotation (“Nasdaq”)
System) or, in the event the Common Stock is traded on the Nasdaq National Market or listed on a
stock exchange, the fair market value per Share shall be the closing price on such system or
exchange on the date of grant of the Option, as reported in The Wall Street Journal. With respect
to any Options granted hereunder concurrently with the initial effectiveness of the Plan, the fair
market value shall be the Price to Public as set forth in the final prospectus relating to such
initial public offering.

               (c)      Form of Consideration. The consideration to be paid for the Shares to be issued
upon exercise of an Option shall consist entirely of cash, check, other Shares of Common Stock
having a fair market value on the date of surrender equal to the aggregate exercise price of the
Shares as to which said Option shall be exercised (which, if acquired from the Company, shall have
been held for at least six months), or any combination of such methods of payment and/or any other
consideration or method of payment as shall be permitted under applicable corporate law.

     9.      Exercise of Option.

               (a)      Procedure for Exercise; Rights as a Shareholder. Any Option granted hereunder
shall be exercisable at such times as are set forth in Section 4(b) hereof; provided, however, that
no Options shall be exercisable prior to shareholder approval of the Plan in accordance with
Section 17 hereof has been obtained.

                         An Option may not be exercised for a fraction of a Share.

                         An Option shall be deemed to be exercised when written notice of such exercise has been given
to the Company in accordance with the terms of the Option by the person entitled to

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exercise the Option and full payment for the Shares with respect to which the Option is
exercised has been received by the Company. Full payment may consist of any consideration and
method of payment allowable under Section 8(c) of the Plan. Until the issuance (as evidenced by
the appropriate entry on the books of the Company or of a duly authorized transfer agent of the
Company) of the stock certificate evidencing such Shares, no right to vote or receive dividends or
any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding
the exercise of the Option. A share certificate for the number of Shares so acquired shall be
issued to the Optionee as soon as practicable after exercise of the Option. No adjustment will be
made for a dividend or other right for which the record date is prior to the date the stock
certificate is issued, except as provided in Section 11 of the Plan.

                         Exercise of an Option in any manner shall result in a decrease in the number of Shares which
thereafter may be available, both for purposes of the Plan and for sale under the Option, by the
number of Shares as to which the Option is exercised.

               (b)      Termination of Status as a Director. If an Outside Director ceases to serve as a
Director, he or she may, but only within twelve (12) months after the date he or she ceases to be a
Director of the Company, exercise his or her Option to the extent that he or she was entitled to
exercise it at the date of such termination. Notwithstanding the foregoing, in no event may the
Option be exercised after its term set forth in Section 7 has expired. To the extent that such
Outside Director was not entitled to exercise an Option at the date of such termination, or does
not exercise such Option (which he or she was entitled to exercise) within the time specified
herein, the Option shall terminate.

               (c)      Disability of Optionee. Notwithstanding Section 9(b) above, in the event a
Director is unable to continue his or her service as a Director with the Company as a result of his
or her total and permanent disability (as defined in Section 22(e)(3) of the Internal Revenue
Code), he or she may, but only within six (6) months (or such other period of time not exceeding
twelve (12) months as is determined by the Board) from the date of such termination, exercise his
or her Option to the extent he or she was entitled to exercise it at the date of such termination.
Notwithstanding the foregoing, in no event may the Option be exercised after its term set forth in
Section 7 has expired. To the extent that he or she was not entitled to exercise the Option at the
date of termination, or if he or she does not exercise such Option (which he or she was entitled to
exercise) within the time specified herein, the Option shall terminate.

               (d)      Death of Optionee. In the event of the death of an Optionee:

                         (i)      During the term of the Option who is, at the time of his or her death, a Director of the
Company and who shall have been in Continuous Status as a Director since the date of grant of the
Option, the Option may be exercised, at any time within six (6) months following the date of death,
by the Optionee’s estate or by a person who acquired the right to exercise the Option by bequest or
inheritance, but only to the extent of the right to exercise that would have accrued had the
Optionee continued living and remained in Continuous Status as Director for six (6) months (or such
lesser period of time as is determined by the Board) after the date of death. Notwithstanding the
foregoing, in no event may the Option be exercised after its term set forth in Section 7 has
expired.

                         (ii)      Within three (3) months after the termination of Continuous Status as a Director, the
Option may be exercised, at any time within six (6) months following the date of death, by the
Optionee’s estate or by a person who acquired the right to exercise the Option by bequest or
inheritance, but only to the extent of the right to exercise that had accrued at the date of
termination. Notwithstanding the foregoing, in no event may the option be exercised after its term
set forth in Section 7 has expired.

     10.      Nontransferability of Options. The Option may not be sold, pledged, assigned,
hypothecated, transferred, or disposed of in any manner other than by will or by the laws of
descent or distribution or pursuant to a qualified domestic relations order (as defined by the Code
or the rules

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thereunder). The designation of a beneficiary by an Optionee does not constitute a transfer.
An Option may be exercised during the lifetime of an Optionee only by the Optionee or a transferee
permitted by this Section.

     11.      Adjustments Upon Changes in Capitalization; Corporate Transactions.

               (a)      Adjustment. Subject to any required action by the shareholders of the Company, the
number of shares of Common Stock covered by each outstanding Option, and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to which no Options have
yet been granted or which have been returned to the Plan upon cancellation or expiration of an
Option, as well as the price per share of Common Stock covered by each such outstanding Option,
shall be proportionately adjusted for any increase or decrease in the number of issued shares of
Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or
reclassification of the Common Stock, or any other increase or decrease in the number of issued
shares of Common Stock effected without receipt of consideration by the Company; provided, however,
that conversion of any convertible securities of the Company shall not be deemed to have been
“effected without receipt of consideration.” Such adjustment shall be made by the Board, whose
determination in that respect shall be final, binding and conclusive. Except as expressly provided
herein, no issuance by the Company of shares of stock of any class, or securities convertible into
shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with
respect to, the number or price of shares of Common Stock subject to an Option.

               (b)      Corporate Transactions. In the event of (i) a dissolution or liquidation of the Company,
(ii) a sale of all or substantially all of the Company’s assets, (iii) a merger or consolidation in
which the Company is not the surviving corporation, or (iv) any other capital reorganization in
which more than fifty percent (50%) of the shares of the Company entitled to vote are exchanged,
the Company shall give to the Eligible Director, at the time of adoption of the plan for
liquidation, dissolution, sale, merger, consolidation or reorganization, either a reasonable time
thereafter within which to exercise the Option, including Shares as to which the Option would not
be otherwise exercisable, prior to the effectiveness of such liquidation, dissolution, sale,
merger, consolidation or reorganization, at the end of which time the Option shall terminate, or
the right to exercise the Option, including Shares as to which the Option would not be otherwise
exercisable (or receive a substitute option with comparable terms), as to an equivalent number of
shares of stock of the corporation succeeding the Company or acquiring its business by reason of
such liquidation, dissolution, sale, merger, consolidation or reorganization.

     12.      Time of Granting Options. The date of grant of an Option shall, for all purposes,
be the date determined in accordance with Section 4(b) hereof. Notice of the determination shall
be given to each Outside Director to whom an Option is so granted within a reasonable time after
the date of such grant.

     13.      Amendment and Termination of the Plan.

               (a)      Amendment and Termination. The Board may amend or terminate the Plan from time to
time in such respects as the Board may deem advisable; provided that, to the extent necessary and
desirable to comply with Rule 16b-3 under the Exchange Act (or any other applicable law or
regulation), the Company shall obtain approval of the shareholders of the Company to Plan
amendments to the extent and in the manner required by such law or regulation. Notwithstanding the
foregoing, the provisions set forth in Section 4 of this Plan (and any other Sections of this Plan
that affect the formula award terms required to be specified in this Plan by Rule 16b-3) shall not
be amended more than once every six months, other than to comport with changes in the Code, the
Employee Retirement Income Security Act of 1974, as amended, or the rules thereunder.

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               (b)      Effect of Amendment or Termination. Any such amendment or termination of the Plan
that would impair the rights of any Optionee shall not affect Options already granted to such
Optionee and such Options shall remain in full force and effect as if this Plan had not been
amended or terminated, unless mutually agreed otherwise between the Optionee and the Board, which
agreement must be in writing and signed by the Optionee and the Company.

     14.      Conditions Upon Issuance of Shares. Shares shall not be issued pursuant to the
exercise of an Option unless the exercise of such Option and the issuance and delivery of such
Shares pursuant thereto shall comply with all relevant provisions of law, including, without
limitation, the Securities Act of 1933, as amended, the Exchange Act, the rules and regulations
promulgated thereunder, state securities laws, and the requirements of any stock exchange upon
which the Shares may then be listed, and shall be further subject to the approval of counsel for
the Company with respect to such compliance. As a condition to the exercise of an Option, the
Company may require the person exercising such Option to represent and warrant at the time of any
such exercise that the Shares are being purchased only for investment and without any present
intention to sell or distribute such Shares, if, in the opinion of counsel for the Company, such a
representation is required by any of the aforementioned relevant provisions of law.

     15.      Reservation of Shares. The Company, during the term of this Plan, will at all
times reserve and keep available such number of Shares as shall be sufficient to satisfy the
requirements of the Plan. Inability of the Company to obtain authority from any regulatory body
having jurisdiction, which authority is deemed by the Company’s counsel to be necessary to the
lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in
respect of the failure to issue or sell such Shares as to which such requisite authority shall not
have been obtained.

     16.      Option Agreement. Options shall be evidenced by written option agreements in such
form as the Board shall approve.

     17.      Shareholder Approval. Continuance of the Plan shall be subject to approval by the
shareholders of the Company at or prior to the first annual meeting of shareholders held subsequent
to the granting of an Option hereunder. If such shareholder approval is obtained at a duly held
shareholders’ meeting, it may be obtained by the affirmative vote of the holders of a majority of
the outstanding shares of the Company present or represented and entitled to vote thereon. If such
shareholder approval is obtained by written consent, it may be obtained by the written consent of
the holders of a majority of the outstanding shares of the Company. Options may be granted, but
not exercised, before such shareholder approval.

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EXHIBIT 10.8

DESCRIPTION OF COMPENSATION PAYABLE TO

NON-EMPLOYEE DIRECTORS

     On May 4, 2005, the Compensation Committee of the Board
of Directors of Connetics Corporation approved the payment of the
following compensation to each non-employee director of the Board in respect of his or her service
on the Board, effective April 1, 2005:

	•	 	An annual retainer fee of $30,000. The
annual retainer fee is payable, at the director’s election, in cash or shares of
Connetics’ common stock.

	•	 	An initial stock option grant to purchase 30,000 shares of Connetics’ common stock,
granted on the date on which the individual first becomes a director. The exercise price
for the option is equal to the fair market value of the common stock on the date of grant.
The option vests in four equal installments on the first, second, third and fourth
anniversaries of the date of grant.

	•	 	An annual stock option grant to purchase 15,000 shares of Connetics’ common stock in
each year the director is re-elected to the Board if, on the date of grant, the director
has served on the Board for at least six months. The exercise price for the option is
equal to the fair market value of Connetics’ common stock on the date of grant. The
option is exercisable in full on the first anniversary of the date of grant.

	•	 	A fee of $2,000 for each Board meeting attended in person, which will increase to
$2,500 effective January 1, 2006.

	•	 	A fee of $500 for each regularly scheduled Board meeting attended by telephone, which
will increase to $1,000 effective January 1, 2006.

	•	 	A fee of $1,000 for each Board committee meeting attended in person or $500 for each
Board committee meeting attended by telephone.

	•	 	An annual retainer of $15,000 for the chair of the Audit Committee, which is payable in
cash in quarterly installments.

	•	 	An annual retainer of $7,500 for the chair of the Compensation Committee and for the
chair of the Governance and Nominating Committee, which is payable in cash in quarterly
installments.

	•	 	Reimbursement of out-of pocket expenses incurred by the director in connection with
attending Board meetings.

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