Document:

exv10w19

 

EXHIBIT 10.19

FIRST MERCURY FINANCIAL CORPORATION

OMNIBUS INCENTIVE PLAN OF 2006

 

 

FIRST MERCURY FINANCIAL CORPORATION

OMNIBUS INCENTIVE PLAN OF 2006

     1. Purpose. The purposes of the Plan are (a) to promote the interests of the Corporation and
its Subsidiaries and its stockholders by strengthening the ability of the Corporation and its
Subsidiaries to attract and retain highly competent officers and other key employees, and (b) to
provide a means to encourage Stock ownership and proprietary interest in the Corporation. The Plan
is intended to provide Plan Participants with forms of long-term incentive compensation that are
not subject to the deduction limitation rules prescribed under Code Section 162(m), and should be
construed to the extent possible as providing for remuneration which is “performance-based
compensation” within the meaning of Code Section 162(m) and the regulations promulgated thereunder.

     2. Definitions. Where the context of the Plan permits, words in the masculine gender shall
include the feminine gender, the plural form of a word shall include the singular form, and the
singular form of a word shall include the plural form. Unless the context clearly indicates
otherwise, the following terms shall have the following meanings:

	 	(a)	 	“Award” means the grant of incentive compensation under this Plan to a
Participant.
	 
	 	(b)	 	“Board” means the board of directors of the Corporation.
	 
	 	(c)	 	“Change of Control” means:

	 	(i)	 	upon the acquisition by any individual, entity or group,
including any Person, of beneficial ownership (as defined in Rule 13d-3
promulgated under the Exchange Act), directly or indirectly, of 35% or more of
the combined voting power of the then outstanding capital stock of the
Corporation that by its terms may be voted on all matters submitted to
stockholders of the Corporation generally (“Voting Stock”); provided, however,
that the following acquisitions shall not constitute a Change in Control: (A)
any acquisition directly from the Corporation (excluding any acquisition
resulting from the exercise of a conversion or exchange privilege in respect of
outstanding convertible or exchangeable securities

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unless such outstanding convertible or exchangeable securities were acquired
directly from the Corporation); (B) any acquisition by the Corporation; (C)
any acquisition by an employee benefit plan (or related trust) sponsored or
maintained by the Corporation or any corporation controlled by the
Corporation; or (D) any acquisition by any corporation pursuant to a
reorganization, merger or consolidation involving the Corporation, if,
immediately after such reorganization, merger or consolidation, each of the
conditions described in clauses (A), (B) and (C) of subsection (ii) below
shall be satisfied; and provided further that, for purposes of clause (B)
above, if (1) any Person (other than the Corporation or any employee benefit
plan (or related trust) sponsored or maintained by the Corporation or any
corporation controlled by the Corporation) shall become the beneficial owner
of 35% or more of the Voting Stock by reason of an acquisition of Voting
Stock by the Corporation, and (2) such Person shall, after such acquisition
by the Corporation, become the beneficial owner of any additional shares of
the Voting Stock and such beneficial ownership is publicly announced, then
such additional beneficial ownership shall constitute a Change in Control;
or

	 	(ii)	 	upon the consummation of a reorganization, merger or
consolidation of the Corporation, or a sale, lease, exchange or other transfer
of all or substantially all of the assets of the Corporation; excluding,
however, any such reorganization, merger, consolidation, sale, lease, exchange
or other transfer with respect to which, immediately after consummation of such
transaction: (A) all or substantially all of the beneficial owners of the
Voting Stock of the Corporation outstanding immediately prior to such
transaction continue to beneficially own, directly or indirectly (either by
remaining outstanding or by being converted into voting securities of the
entity resulting from such transaction), more than [65]% of the combined voting
power of the voting securities of the entity resulting from such transaction
(including, without limitation, the Corporation or an entity

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	 	 	 	which as a result of such transaction owns the Corporation or all or
substantially all of the Corporation‘s property or assets, directly or
indirectly) (the “Resulting Entity”) outstanding immediately after such
transaction, in substantially the same proportions relative to each other as
their ownership immediately prior to such transaction; and (B) no Person
(other than any Person that beneficially owned, immediately prior to such
reorganization, merger, consolidation, sale or other disposition, directly
or indirectly, Voting Stock representing 35% or more of the combined voting
power of the Corporation‘s then outstanding securities) beneficially owns,
directly or indirectly, 35% or more of the combined voting power of the then
outstanding securities of the Resulting Entity; and (C) at least a majority
of the members of the board of directors of the entity resulting from such
transaction were Continuing Directors of the Corporation at the time of the
execution of the initial agreement or action of the Board authorizing such
reorganization, merger, consolidation, sale or other disposition; or
	 
	 	(iii)	 	upon the approval of a plan of complete liquidation or
dissolution of the Corporation; or
	 
	 	(iv)	 	when the Continuing Directors cease for any reason to
constitute at least a majority of the Board.

	 	(d)	 	“Code” means the Internal Revenue Code of 1986, as amended.
	 
	 	(e)	 	“Committee” means the Compensation and Employee Benefits Committee of
the Board.
	 
	 	(f)	 	“Continuing Directors” means those individuals initially appointed as
the directors of the Corporation; provided, however, that any individual who
becomes a director of the Corporation at or after the first annual meeting of
stockholders of the Corporation whose election, or nomination for election by
the Corporation’s stockholders, was approved by the vote of at least a majority
of the directors then comprising the Board (or by the

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	 	 	 	nominating committee of the Board, if such committee is comprised of
Continuing Directors and has such authority) shall be deemed to have been a
Continuing Director; and provided further, that no individual shall be
deemed to be a Continuing Director if such individual initially was elected
as a director of the Corporation as a result of: (i) an actual or threatened
solicitation by a Person (other than the Board) made for the purpose of
opposing a solicitation by the Board with respect to the election or removal
of directors; or (ii) any other actual or threatened solicitation of proxies
or consents by or on behalf of any Person (other than the Board).
	 
	 	(g)	 	“Corporation” means First Mercury Financial Corporation, a Delaware
corporation, or any successor thereto.
	 
	 	(h)	 	“Covered Employees” means covered employees within the meaning of Code
Section 162(m).
	 
	 	(i)	 	“Deferred Stock Unit” (“DSU”) means a vested right to a future award of
Stock granted pursuant to Section 10 below.
	 
	 	(j)	 	“Exchange Act” means the Securities Exchange Act of 1934, as amended.
	 
	 	(k)	 	“Fair Market Value” means the fair market value of Stock determined at
any time in such manner as the Committee may deem equitable, or as required by
applicable law or regulation.
	 
	 	(l)	 	“Incentive Stock Options” means a Stock Option designed to meet the
requirements of Code Section 422 or any successor law.
	 
	 	(m)	 	“Nonqualified Stock Option” means a Stock Option that is not an
Incentive Stock Option.
	 
	 	(n)	 	“Participant” means (i) an employee of the Corporation or its
Subsidiaries; or (ii) a non-employee director of the Corporation

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	 	 	 	designated by the Committee as eligible to receive an Award under the Plan.
	 
	 	(o)	 	“Performance Cash Awards” means cash incentives subject to the
satisfaction of long-term Performance Criteria and granted pursuant to Section
12 below.
	 
	 	(p)	 	“Performance Criteria” means business criteria within the meaning of
Code Section 162(m), including, but not limited to: revenue; revenue growth;
earnings before interest and taxes; earnings before interest, taxes,
depreciation and amortization; earnings per share; operating income; pre-or
after-tax income; net operating profit after taxes; economic value added (or an
equivalent metric); ratio of operating earnings to capital spending; cash flow
(before or after dividends); cash-flow per share (before or after dividends);
net earnings; net sales; sales growth; share price performance; return on
assets or net assets; return on equity; return on capital (including return on
total capital or return on invested capital); cash flow return on investment;
total shareholder return; improvement in or attainment of expense levels; and
improvement in or attainment of working capital levels or Performance Criteria.
Any Performance Criteria may be used to measure our performance as a whole or
any of our business units and may be measured relative to a peer group or
index.
	 
	 	(q)	 	“Performance Period” means the period as designated by the Committee
with a minimum of one year and a maximum of five years.
	 
	 	(r)	 	“Performance Shares” means Awards subject to the satisfaction of
long-term Performance Criteria and granted pursuant to Section 11 below.
	 
	 	(s)	 	“Person” means any individual, entity or group, including any “person”
within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act.
	 
	 	(t)	 	“Plan” means the First Mercury Financial Corporation Omnibus Incentive
Plan of 2006.

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	 	(u)	 	“Restricted Stock” means Stock subject to a vesting condition specified
by the Committee in an Award in accordance with Section 9 below.
	 
	 	(v)	 	“Resulting Entity” means the entity resulting from a transaction
(including, without limitation, the Corporation or an entity which as a result
of such transaction owns the Corporation or all or substantially all of the
Corporation’s property or assets, directly or indirectly).
	 
	 	(w)	 	“RSU” means a restricted stock unit providing a Participant with the
right to receive Stock at a date on or after vesting in accordance with the
terms of such grant and/or upon the attainment of Performance Criteria
specified by the Committee in the Award in accordance with Section 9 below.
	 
	 	(x)	 	“SAR” means a stock appreciation right granted pursuant to Section 8
below.
	 
	 	(y)	 	“Stock” means a share of common stock of the Corporation that, by its
terms, may be voted on all matters submitted to stockholders of the Corporation
generally.
	 
	 	(z)	 	“Stock Option” means the right to acquire shares of Stock at a certain
price that is granted pursuant to Section 7 below. The term Stock Option
includes both Incentive Stock Options and Nonqualified Stock Options.
	 
	 	(aa)	 	“Subsidiary” or “Subsidiaries” means any corporation or entity of which
the Corporation owns directly or indirectly, at least 50% of the total voting
power or in which it has at least a 50% economic interest, and which is
authorized to participate in the Plan.

     3. Administration. The Plan will be administered by the Committee consisting of two or more
directors of the Corporation as the Board may designate from time to time, each of whom shall
satisfy such requirements as:

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	 	(a)	 	the Securities and Exchange Commission may establish for administrators
acting under plans intended to qualify for exemption under Rule 16b-3 or its
successor under the Exchange Act;
	 
	 	(b)	 	the New York Stock Exchange may establish pursuant to its rule-making
authority; and
	 
	 	(c)	 	the Internal Revenue Service may establish for outside directors acting
under plans intended to qualify for exemption under Code Section 162(m).

     The Committee shall have the discretionary authority to construe and interpret the Plan and
any Awards granted thereunder, to establish and amend rules for Plan administration, to change the
terms and conditions of Awards at or after grant (subject to the provisions of Section 20 below),
to correct any defect or supply any omission or reconcile any inconsistency in the Plan or in any
Award granted under the Plan, and to make all other determinations which it deems necessary or
advisable for the administration of the Plan.

     Awards under the Plan to a Covered Employee may be made subject to the satisfaction of one or
more Performance Criteria. Performance Criteria shall be established by the Committee for a
Participant (or group of Participants) no later than ninety (90) days after the commencement of
each Performance Period (or the date on which 25% of the Performance Period has elapsed, if
earlier). The Committee may select one or more Performance Criteria and may apply those
Performance Criteria on a corporate-wide or division/business segment basis; provided, however,
that the Committee may not increase the amount of compensation payable to a Covered Employee upon
the satisfaction of Performance Criteria.

     The
Committee  or the Board  or one or more officers of the
Corporation authorized by the Committee or the Board, may select employees to
participate in the Plan and determine the number and type of
Awards to be granted to such Participants; provided,
that on and after the date that the Corporation’s Stock is
first traded on a public stock exchange, only the Committee
may authorize Awards to officers subject to
Section 16 of the Exchange Act, or to non-employee
directors of the Corporation, or to officers who are, or who
are reasonably expected to be, Covered Employees. Any
reference in the plan to the Committee share include such officer or
officers.

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     The determinations of the Committee shall be made in accordance with their judgment as to the
best interests of the Corporation and its stockholders and in accordance with the purposes of the
Plan. Any determination of the Committee under the Plan may be made without notice or meeting of
the Committee, if in writing signed by all the Committee members.

     4. Participants. Participants may consist of all employees of the Corporation and its
subsidiaries and all non-employee directors of the Corporation; provided, however, the following
individuals shall be excluded from participation in the Plan: (a) contract labor; (b) employees
whose base wage or base salary is not processed for payment by the payroll department of the
Corporation or any subsidiary; and (c) any individual performing services under an independent
contractor or consultant agreement, a purchase order, a supplier agreement or any other agreement
that the Corporation enters into for service. Designation of a Participant in any year shall not
require the Committee to designate that person to receive an Award in any other year or to receive
the same type or amount of Award as granted to the Participant in any other year or as granted to
any other Participant in any year. The Committee shall consider all factors that it deems relevant
in selecting Participants and in determining the type and amount of their respective Awards.

     5. Shares Available under the Plan. There is hereby reserved for issuance under the Plan an
aggregate of 1,500,000 shares of Stock. Stock covered by an Award granted under the Plan shall not
be counted as used unless and until actually issued and delivered to a Participant. Accordingly,
if there is (a) a lapse, expiration, termination or cancellation of any Stock Option or other Award
outstanding under this Plan prior to the issuance of Stock thereunder or (b) a forfeiture of any
shares of Restricted Stock or Stock subject to Awards granted under this Plan prior to vesting,
then the Stock subject to these Stock Options or other Awards shall be added to the Stock available
for Awards under the Plan. In addition, any Stock covered by an SAR (including an SAR settled in
Stock which the Committee, in its discretion, may substitute for an outstanding Stock Option) shall
be counted as used only to the extent Stock is actually issued to the Participant upon exercise of
the right. Finally, any Stock exchanged by an optionee as full or partial payment of the exercise
price under any Stock Option exercised under the Plan, any Stock retained by the Corporation to
comply with applicable income tax withholding requirements, and any Stock covered by an Award which
is settled in cash, shall be

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added to the Stock available for Awards under the Plan.

     All Stock issued under the Plan may be either authorized and unissued Stock or issued Stock
reacquired by the Corporation. All of the available Stock may, but need not, be issued pursuant to
the exercise of Incentive Stock Options; provided, however, notwithstanding a Stock Option’s
designation, to the extent that Incentive Stock Options are exercisable for the first time by the
Participant during any calendar year with respect to Stock whose aggregate Fair Market Value
exceeds $100,000, such Stock Options shall be treated as Nonqualified Stock Options.

     No Participant may receive in any calendar year Awards relating to more than 500,000 shares of
Stock.

     The Stock reserved for issuance and the other limitations set forth above shall be subject to
adjustment in accordance with Section 15 hereto.

     6. Types of Awards, Payments, and Limitations. Awards under the Plan shall consist of Stock
Options, SARs, Restricted Stock, RSUs, DSUs, Performance Shares, Performance Cash Awards, and other
Stock or cash Awards, all as described below. Payment of Awards may be in the form of cash, Stock,
other Awards or combinations thereof as the Committee shall determine, and with the expectation
that any Award of Stock shall be styled to preserve such restrictions as it may impose. The
Committee, either at the time of grant or by subsequent amendment, and subject to the provisions of
Sections 20 and 21 hereto, may require or permit Participants to elect to defer the issuance of
Stock or the settlement of Awards in cash under such rules and procedures as the Committee may
establish under the Plan.

     The Committee may provide that any Awards under the Plan earn dividends or dividend
equivalents and interest on such dividends or dividend equivalents. Such dividends or dividend
equivalents may be paid currently or may be credited to a Participant’s Plan account and are
subject to the same vesting or Performance Criteria as the underlying Award. Any crediting of
dividends or dividend equivalents may be subject to such restrictions and conditions as the
Committee may establish, including reinvestment in additional Stock or Stock equivalents.

     Awards shall be evidenced by an agreement that sets forth the terms, conditions and
limitations of such Award. Such terms may include, but are not limited to, the term of the Award,
the provisions applicable in the event the Participant’s employment terminates, and the
Corporation’s authority to unilaterally or bilaterally amend, modify, suspend, cancel or rescind

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any Award including without limitation the ability to amend such Awards to comply with changes
in applicable law. An Award may also be subject to other provisions (whether or not applicable to
similar Awards granted to other Participants) as the Committee determines appropriate, including
provisions intended to comply with federal or state securities laws and stock exchange
requirements, understandings or conditions as to the Participant’s employment, requirements or
inducements for continued ownership of Stock after exercise or vesting of Awards, or forfeiture of
Awards in the event of termination of employment shortly after exercise or vesting, or breach of
noncompetition or confidentiality agreements following termination of employment.

     The Committee may make retroactive adjustments to and the Participant shall reimburse to the
Corporation any cash or equity based incentive compensation paid to the Participant where such
compensation was predicated upon achieving certain financial results that were substantially the
subject of a restatement, and as a result of the restatement it is determined that the Participant
otherwise would not have been paid such compensation, regardless of whether or not the restatement
resulted from the Participant’s misconduct. In each such instance, the Corporation will, to the
extent practicable, seek to recover the amount by which the Participant’s cash or equity based
incentive compensation for the relevant period exceeded the lower payment that would have been made
based on the restated financial results. The Corporation will, to the extent permitted by
governing law, require reimbursement of any cash or equity based incentive compensation paid to any
named executive officer (for purposes of this policy “named executive officers” has the meaning
given that term in Item 402(a)(3) of Regulation S-K under the Securities Exchange Act of 1934)
where: (i) the payment was predicated upon the achievement of certain financial results that were
subsequently the subject of a substantial restatement, and (ii) in the Committee’s view the officer
engaged in fraud or misconduct that caused or partially caused the need for the substantial
restatement. In each instance described above, the Corporation will, to the extent practicable,
seek to recover the described cash or equity based incentive compensation for the relevant period,
plus a reasonable rate of interest.

     Measurement of the attainment of Performance Criteria may exclude, if the Committee provides
in an Award agreement, impact of charges for restructurings, discontinued operations,

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extraordinary items and other unusual or non-recurring items, and the cumulative effects of
tax or accounting changes, each as defined by Generally Accepted Accounting Principles and as
identified in the financial statements, in the notes to the financial statements, in the
Management’s Discussion and Analysis section of the financial statements, or in other Securities
and Exchange Commission filings.

     The Committee, in its sole discretion, may require a Participant to have amounts or Stock that
otherwise would be paid or delivered to the Participant as a result of the exercise or settlement
of an Award under the Plan credited to a deferred compensation or stock unit account established
for the Participant by the Committee on the Corporation’s books of account. In addition, the
Committee may permit Participants to defer the receipt of payments of Awards pursuant to such
rules, procedures or programs as may be established for purposes of this Plan.

     The Committee need not require the execution of any such agreement by a Participant.
Acceptance of the Award by the respective Participant shall constitute agreement by the Participant
to the terms of the Award.

     7. Stock Options. Stock Options may be granted to Participants, at any time as determined by
the Committee. The Committee shall determine the number of shares subject to each Stock Option and
whether the Stock Option is an Incentive Stock Option. The exercise price for each Stock Option
shall be determined by the Committee but shall not be less than 100% of the Fair Market Value of
the Stock on the date the Stock Option is granted unless the Stock Option is a substitute or
assumed Stock Option granted pursuant to Section 16 hereto. Each Stock Option shall expire at such
time as the Committee shall determine at the time of grant. Stock Options shall be exercisable at
such time and subject to such terms and conditions as the Committee shall determine; provided,
however, that no Stock Option shall be exercisable later than the tenth anniversary of its grant.
The exercise price, upon exercise of any Stock Option, shall be payable to the Corporation in full
by: (a) cash payment or its equivalent; (b) tendering previously acquired Stock having a Fair
Market Value at the time of exercise equal to the exercise price or certification of ownership of
such previously-acquired Stock; (c) to the extent permitted by applicable law, delivery of a
properly executed exercise notice, together with irrevocable instructions to a broker to promptly
deliver to the Corporation the amount of sale proceeds from the Stock Option shares or loan
proceeds to pay the exercise price and any

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withholding taxes due to the Corporation; and (d) such other methods of payment as the
Committee, in its discretion, deems appropriate. In no event shall the Committee cancel any
outstanding Stock Option with an exercise price greater than the then current Fair Market Value of
the Stock for the purpose of reissuing any other Award to the Participant at a lower exercise price
nor reduce the exercise price of an outstanding Stock Option without stockholder approval. Reload
options are not permitted.

     8. Stock Appreciation Rights. SARs may be granted to Participants at any time as determined
by the Committee. Notwithstanding any other provision of the Plan, the Committee may, in its
discretion, substitute SARs which can be settled only in Stock for outstanding Stock Options. The
grant price of a substitute SAR shall be equal to the exercise price of the related Stock Option
and the substitute SAR shall have substantive terms (e.g., duration) that are equivalent to the
related Stock Option. The grant price of any other SAR shall be equal to the Fair Market Value of
the Stock on the date of its grant unless the SARs are substitute or assumed SARs granted pursuant
to Section 16 hereto. An SAR may be exercised upon such terms and conditions and for the term the
Committee in its sole discretion determines; provided, however, that the term shall not exceed the
Stock Option term in the case of a substitute SAR or ten years in the case of any other SAR, and
the terms and conditions applicable to a substitute SAR shall be substantially the same as those
applicable to the Stock Option which it replaces. Upon exercise of an SAR, the Participant shall
be entitled to receive payment from the Corporation in an amount determined by multiplying (a) the
difference between the Fair Market Value of a share of Stock on the date of exercise and the grant
price of the SAR by (b) the number of shares with respect to which the SAR is exercised. The
payment may be made in cash or Stock, at the discretion of the Committee, except in the case of a
substitute SAR payment which may be made only in Stock. In no event shall the Committee cancel any
outstanding SAR with an exercise price greater than the then current Fair Market Value of the Stock
for the purpose of reissuing any other Award to the Participant at a lower grant price nor reduce
the grant price of an outstanding SAR without stockholder approval.

     9. Restricted Stock and RSUs. Restricted Stock and RSUs may be awarded or sold to
Participants under such terms and conditions as shall be established by the Committee.

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Restricted Stock and RSUs shall be subject to such restrictions as the Committee determines,
including, without limitation, any of the following:

	 	(a)	 	a prohibition against sale, assignment, transfer, pledge, hypothecation
or other encumbrance for a specified period;
	 
	 	(b)	 	a requirement that the holder forfeit (or in the case of Stock or RSUs
sold to the Participant, resell to the Corporation at cost) such Stock or RSUs
in the event of termination of employment during the period of restriction; and
	 
	 	(c)	 	the attainment of Performance Criteria.

     All restrictions shall expire at such times as the Committee shall specify, but generally
shall require the Participant to complete three years of service to fully vest in the Award.

     10. DSUs. DSUs provide a Participant a vested right to receive Stock in lieu of other
compensation at termination of employment or service or at a specific future designated date.

     11. Performance Shares. The Committee shall designate the Participants to whom Performance
Shares are to be awarded and determine the number of shares, the length of the Performance Period
and the other terms and conditions of each such Award; provided the stated Performance Period will
not be less than 12 months and to the extent the Award is designed to constitute performance-based
compensation under Code Section 162(m), Performance Criteria shall be established within 90 days of
the period of service to which the Performance Criteria relate has elapsed. Each Award of
Performance Shares shall entitle the Participant to a payment in the form of Stock upon the
attainment of Performance Criteria and other terms and conditions specified by the Committee.

     Notwithstanding satisfaction of any Performance Criteria, the number of shares issued under a
Performance Shares Award may be adjusted by the Committee on the basis of such further
consideration as the Committee in its sole discretion shall determine. However, the Committee may
not, in any event, increase the number of shares earned upon satisfaction of any Performance
Criteria by any Participant who is a Covered Employee. The Committee may, in

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its discretion, make a cash payment equal to the Fair Market Value of Stock otherwise required
to be issued to a Participant pursuant to a Performance Share Award.

     12. Performance Cash Awards. The Committee shall designate the Participants to whom
Performance Cash Awards are to be awarded and determine the amount of the Award and the terms and
conditions of each such Award; provided the Performance Period will not be less than 12 months and
to the extent the Award is designed to constitute performance-based compensation under Code Section
162(m), Performance Criteria shall be established within 90 days of the period of service to which
the Performance Criteria relate has elapsed. Each Performance Cash Award shall entitle the
Participant to a payment in cash upon the attainment of Performance Criteria and other terms and
conditions specified by the Committee. No Award may be paid to a Participant in excess of
$2,000,000 for any single year. If an Award is earned in excess of $2,000,000, the amount of the
Award in excess of this amount shall be deferred in accordance with the date the Participant ceases
to be covered by Code Section 162(m) (or six months after that date if the Participant ceases to be
covered by Code Section 162(m) because of Participant’s separation from service (as defined in Code
Section 409A).

     Notwithstanding the satisfaction of any Performance Criteria, the amount to be paid under a
Performance Cash Award may be adjusted by the Committee on the basis of such further consideration
as the Committee in its sole discretion shall determine. However, the Committee may not, in any
event, increase the amount earned under Performance Cash Awards upon satisfaction of any
Performance Criteria by any Participant who is a Covered Employee. The Committee may, in its
discretion, substitute actual Stock for the cash payment otherwise required to be made to a
Participant pursuant to a Performance Cash Award.

     13. Other Stock or Cash Awards. In addition to the incentives described in Sections 6 through
12 above, the Committee may grant other incentives payable in cash or in Stock under the Plan as it
determines to be in the best interests of the Corporation and subject to such other terms and
conditions as it deems appropriate; provided an outright grant of Stock will not be made unless it
is offered in exchange for cash compensation that has otherwise already been earned by the
recipient including without limitation awards earned under the First Mercury Financial Corporation
Performance-Based Annual Incentive Plan (or any successor annual

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incentive plan of the Corporation) or the First Mercury Financial Corporation Non-qualified
Deferred Compensation Plan.

     14. Change of Control. Except as otherwise determined by the Committee at the time of grant
of an Award, upon a Change of Control, all outstanding Stock Options and SARs shall become vested
and exercisable; all restrictions on Restricted Stock and RSUs shall lapse; all Performance
Criteria shall be deemed achieved at target levels and all other terms and conditions met; all
Performance Shares shall be delivered; all Performance Cash Awards, DSUs and RSUs shall be paid out
as promptly as practicable; and all other Stock or cash Awards shall be delivered or paid.

     In the event that a payment or delivery of an Award following a Change of Control would not be
a permissible distribution event, as defined in Code Section 409A(a)(2) or any regulations or other
guidance issued thereunder, then the payment or delivery shall be made on the earlier of: (a) the
date of payment or delivery originally provided for such Award; or (b) the date of termination of
the Participant’s employment or service with the Corporation or six months after such termination
in the case of a “specified employee” (as defined in Code Section 409A(a)(2)(B)(i)).

     15. Adjustment Provisions.

	 	(a)	 	In the event of any change affecting the number, class, market price or
terms of the Stock by reason of share dividend, share split, recapitalization,
reorganization, merger, consolidation, spin-off, disaffiliation of a
subsidiary, combination of Stock, exchange of Stock, Stock rights offering, or
other similar event, or any distribution to the holders of Stock other than a
regular cash dividend, the Committee shall equitably substitute or adjust the
number or class of Stock which may be issued under the Plan in the aggregate or
to any one Participant in any calendar year and the number, class, price or
terms of shares of Stock subject to outstanding Awards granted under the Plan.
	 
	 	(b)	 	In the event of any merger, consolidation or reorganization of the
Corporation with or into another corporation which results in the

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	 	 	 	outstanding Stock of the Corporation being converted into or exchanged for
different securities, cash or other property, or any combination thereof,
there shall be substituted, on an equitable basis, for each share of Stock
then subject to an Award granted under the Plan, the number and kind of
 shares of stock, other securities, cash or other property to which holders
of Stock will be entitled pursuant to the transaction.

     16. Substitution and Assumption of Awards. The Board or the Committee may authorize the
issuance of Awards under this Plan in connection with the assumption of, or substitution for,
outstanding Awards previously granted to individuals who become employees of the Corporation or any
subsidiary as a result of any merger, consolidation, acquisition of property or stock, or
reorganization, upon such terms and conditions as the Committee may deem appropriate. Any
substitute Awards granted under the Plan shall not count against the Stock limitations set forth in
Section 5 hereto, to the extent permitted by Section 303A.08 of the Corporate Governance Standards
of the New York Stock Exchange.

     17. Nontransferability. Each Award granted under the Plan shall not be transferable other
than by will or the laws of descent and distribution, and each Stock Option and SAR shall be
exercisable during the Participant’s lifetime only by the Participant or, in the event of
disability, by the Participant’s personal representative. In the event of the death of a
Participant, exercise of any Award or payment with respect to any Award shall be made only by or to
the beneficiary, executor or administrator of the estate of the deceased Participant or the person
or persons to whom the deceased Participant’s rights under the Award shall pass by will or the laws
of descent and distribution. Subject to the approval of the Committee in its sole discretion,
Stock Options may be transferable to charity or to members of the immediate family of the
Participant and to one or more trusts for the benefit of such family members, partnerships in which
such family members are the only partners, or corporations in which such family members are the
only stockholders. Members of the immediate family means the Participant’s spouse, children,
stepchildren, grandchildren, parents, grandparents, siblings (including half brothers and sisters),
and individuals who are family members by adoption.

     18. Taxes. The Corporation shall be entitled to withhold the amount of any tax attributable
to any amounts payable or Stock deliverable under the Plan, after giving notice to the

-17-

 

person entitled to receive such payment or delivery, and the Corporation may defer making
payment or delivery as to any Award, if any such tax is payable, until indemnified to its
satisfaction. A Participant may pay all or a portion of any withholding limited to the minimum
statutory amount arising in connection with the exercise of a Stock Option or SAR or the receipt or
vesting of Stock hereunder by electing to have the Corporation withhold Stock having a Fair Market
Value equal to the amount required to be withheld.

     19. Duration of the Plan. No Award shall be made under the Plan more than ten years after the
date of its adoption by the Board; provided, however, that the terms and conditions applicable to
any Stock Option granted on or before such date may thereafter be amended or modified by mutual
agreement between the Corporation and the Participant, or such other person as may then have an
interest therein.

     20. Amendment and Termination. The Board or the Committee may amend the Plan from time to
time or terminate the Plan at any time. However, unless expressly provided in an Award or the
Plan, no such action shall reduce the amount of any existing Award or change the terms and
conditions thereof without the Participant’s consent; provided, however, that the Committee may, in
its discretion, substitute SARs which can be settled only in Stock for outstanding Stock Options,
and may require an Award be deferred pursuant to Section 6 hereto, without a Participant’s consent;
and further provided that the Committee may amend or terminate an Award to comply with changes in
law without a Participant’s consent. Notwithstanding any provision of the Plan to the contrary,
the final sentence in each of Section 7 and Section 8 of the Plan (regarding the reissuing at a
relatively reduced price, Stock Options and SARs respectively) shall not be amended without
stockholder approval. Notwithstanding any provision of the Plan to the contrary, to the extent
that Awards under the Plan are subject to the provisions of Code Section 409A, then the Plan as
applied to those amounts shall be interpreted and administered so that it is consistent with such
Code section.

     The Corporation shall obtain stockholder approval of any Plan amendment to the extent
necessary to comply with applicable laws, regulations, or stock exchange rules.

     21. Other Provisions.

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	 	(a)	 	In the event any Award under this Plan is granted to an employee who is
employed or providing services outside the United States and who is not
compensated from a payroll maintained in the United States, the Committee may,
in its sole discretion: (i) modify the provisions of the Plan as they pertain
to such individuals to comply with applicable law, regulation or accounting
rules consistent with the purposes of the Plan; and (ii) cause the Corporation
to enter into an agreement with any local subsidiary pursuant to which such
subsidiary will reimburse the Corporation for the cost of such equity
incentives.
	 
	 	(b)	 	Neither the Plan nor any Award shall confer upon a Participant any
right with respect to continuing the Participant’s employment with the
Corporation; nor interfere in any way with the Participant’s right or the
Corporation’s right to terminate such relationship at any time, with or without
cause, to the extent permitted by applicable laws and any enforceable agreement
between the employee and the Corporation.
	 
	 	(c)	 	No fractional shares of Stock shall be issued or delivered pursuant to
the Plan or any Award, and the Committee, in its discretion, shall determine
whether cash, other securities, or other property shall be paid or transferred
in lieu of any fractional shares of Stock, or whether such fractional shares or
any rights thereto shall be canceled, terminated, or otherwise eliminated.
	 
	 	(d)	 	In the event any provision of the Plan shall be held to be illegal or
invalid for any reason, such illegality or invalidity shall not affect the
remaining parts of the Plan, and the Plan shall be construed and enforced as if
such illegal or invalid provisions had never been contained in the Plan.
	 
	 	(e)	 	Payments and other benefits received by a Participant under an Award
made pursuant to the Plan generally shall not be deemed a part of a
Participant’s compensation for purposes of determining the Participant’s
benefits under any other employee benefit plans or arrangements provided

-19-

 

	 	 	 	by the Corporation or a subsidiary, unless the Committee expressly provides
otherwise in writing or unless expressly provided under such plan. The
Committee shall administer, construe, interpret, and exercise discretion
under the Plan and each Award in a manner that is consistent and in
compliance with a reasonable, good faith interpretation of all applicable
laws, and that avoids (to the extent practicable) the classification of any
Award as “deferred compensation” for purposes of Code Section 409A, as
determined by the Committee.

     22. Governing Law. The Plan and any actions taken in connection herewith shall be governed by
and construed in accordance with the laws of the State of Michigan without regard to any state’s
conflict of laws principles. Any legal action related to this Plan shall be brought only in a
federal or state court located in Michigan.

     23. Stockholder Approval. This Plan shall be effective as of October 16, 2006.

-20-exv10w20

 

EXHIBIT 10.20

FIRST MERCURY FINANCIAL CORPORATION

PERFORMANCE-BASED ANNUAL INCENTIVE PLAN

 

 

FIRST
MERCURY FINANCIAL CORPORATION

PERFORMANCE-BASED ANNUAL INCENTIVE PLAN

     1. Purpose. The purpose of the First Mercury Financial Corporation Performance-Based Annual
Incentive Plan (the “Plan”) is to advance the interests of First Mercury Financial Corporation and
its stockholders by providing certain of its key executives with annual incentive compensation
which is tied to the achievement of pre-established and objective performance goals. The Plan is
intended to provide Participants with annual incentive compensation which is not subject to the
deduction limitation rules prescribed under Section 162(m) of the Internal Revenue Code of 1986, as
amended (the “Code”), and should be construed to the extent possible as providing for remuneration
which is “performance-based compensation” within the meaning of Section 162(m) of the Code and the
regulations promulgated thereunder.

     2. Definitions. Where the context of the Plan permits, words in the masculine gender
shall include the feminine gender, the plural form of a word shall include the singular
form, and the singular form of a word shall include the plural form. Unless the context
clearly indicates otherwise, the following terms shall have the following meanings:

	 	(a)	 	“Board” means the Board of Directors of the Corporation.
	 
	 	(b)	 	“Committee” means the Compensation and Employee Benefits Committee of the
Board, a subcommittee thereof, or such other committee as may be appointed by the
Board. The Committee shall be comprised of two or more non-employee members of the
Board who shall qualify to administer the Plan as “outside directors” under Section
162(m) of the Code and who shall qualify as “independent” under the New York Stock
Exchange listing requirements.
	 
	 	(c)	 	“Corporation” means First Mercury Financial Corporation, a Delaware
corporation, and any successor thereto.
	 
	 	(d)	 	“Incentive Pool” Fund means a percentage of Operating Income as determined by
the Committee.

2

 

	 	(e)	 	“Operating Income” means the Corporation’s operating income for the applicable
Performance Period as reported in the Corporation’s income statement and as adjusted to
eliminate the effects of charges for restructurings, discontinued operations,
extraordinary items, other unusual or non-recurring items, and the cumulative effect of
tax or accounting changes, each as determined in accordance with Generally Accepted
Accounting Principles and identified in the financial statements, in the notes to the
financial statements or in the Management’s Discussion and Analysis section of the
financial statements.
	 
	 	(f)	 	“Participant” means (i) a “covered employee,” as defined in Section 162(m) of
the Code and the regulations promulgated thereunder, of the Corporation or its
Subsidiaries who has been selected by the Committee to participate in the Plan during a
Performance Period and (ii) each other employee of the Corporation or its Subsidiaries
who has been selected by the Committee to participate in the Plan during a Performance
Period.
	 
	 	(g)	 	“Performance Award” means an award granted pursuant to the terms of Section 4
of this Plan. A Participant shall have no right to any Performance Award until that
award is paid.
	 
	 	(h)	 	“Performance Period” means the Corporation’s fiscal year, or such other period
as designated by the Committee.
	 
	 	(i)	 	“Plan” means the First Mercury Financial Corporation Performance-Based Annual
Incentive Plan, as amended from time to time.
	 
	 	(j)	 	“Pool Fund Allocation” means the percentage of the Incentive Pool Fund that is
allocated to each Participant with respect to any Performance Period. A maximum of 40%
may be allocated to any single Participant. The total allocation may not exceed 100%.
	 
	 	(k)	 	“Subsidiary” or “Subsidiaries” means any corporation or entity of which the
Corporation owns directly or indirectly, at least 50% of the total voting power or in
which it has at least a 50% economic interest, and which is authorized to participate
in the Plan.

3

 

     3. Plan Administration. The Committee shall have full discretion, power and authority to
administer and interpret the Plan and to establish rules and procedures for its administration as
the Committee deems necessary and appropriate. The Committee may delegate to officers and
employees of the Corporation the authority to manage the day-to-day administration of the Plan
including without limitation the discretionary authority to (i) administer and interpret the terms
of the Plan, and (ii) amend the Plan only as necessary to reflect any ministerial, administrative
or managerial functions; provided that any such amendment does not increase the Incentive Pool Fund
or the Pool Fund Allocation. Pool Fund Allocations shall be established by the Committee for a
Participant (or group of Participants) no later than ninety (90) days after the commencement of
each Performance Period (or the date on which 25% of the Performance Period has elapsed, if
earlier).

     Any interpretation of the Plan or other act of the Committee (or its delegate) in
administering the Plan shall be final and binding upon all Participants.

     4. Performance Awards. For each Performance Period, the Committee shall determine the amount
of a Participant’s Performance Award as follows:

	 	(a)	 	General. The maximum amount of a Participant’s Performance Award shall be equal
to the Participant’s Pool Fund Allocation of the Incentive Pool Fund for the
Performance Period. The actual amount of a Participant’s Performance Award may be
reduced or eliminated by the Committee as set forth in subsection (c) below.
	 
	 	(b)	 	Allocation of Incentive Pool Fund. The Incentive Pool Fund for each Performance
Period shall be allocated among Participants. The maximum award for a Participant is
equal to the Participant’s Pool Fund Allocation.
	 
	 	(c)	 	Reduction or Elimination of Pool Fund. The Pool Fund Allocation for each
Participant may be reduced or eliminated by the Committee in its sole discretion;
provided, however, that under no circumstances may the amount of the Incentive Pool
Fund, or the Pool Fund Allocation to any Participant, be increased. Once the Committee
has determined the amount of a Participant’s Performance Award

4

 

	 	 	 	pursuant to subsections (a), (b), and (c) in this Section 4, and upon the
certification required under Section 5 hereto, the Committee shall pay the
Participant’s Performance Award pursuant to such terms and procedures as the
Committee shall adopt under Section 3 hereto.

     5. Payment of Performance Awards. Subject to any stockholder approval required by law,
payment of any Performance Award to a Participant for any Performance Period shall be made in cash
(or in stock or stock-based awards under the First Mercury Financial Corporation Omnibus Incentive
Plan of 2006 as restated and/or amended from time to time) after written certification by the
Committee that the performance goal for the Performance Period was achieved, and any other material
terms of the Performance Award were satisfied. Any Performance Award may be deferred pursuant to
the terms and conditions of the Corporation’s deferred compensation plan or plans then in effect.

     A Participant is not entitled to any award hereunder for the Performance Period during which
Participant breaches any confidentiality, proprietary information, or non-compete provisions of any
agreement or plan then in effect between Corporation and Participant, and shall immediately forfeit
his right to any accrued but unpaid amounts attributable to any Performance Period. Further, if a
Participant breaches any confidentiality, proprietary information, or non-compete provisions of any
agreement or plan between Corporation and the Participant in effect after the Participant’s
termination of employment, the Participant shall repay to Corporation any award paid to the
Participant under the Plan within one year of such breach (plus the cost of collection and a
reasonable rate of interest) and shall immediately forfeit his right to any accrued unpaid amounts
attributable to any Performance Period.

     The Committee may make retroactive adjustments to and the Participant shall reimburse to the
Corporation any cash or equity based incentive compensation paid to the Participant where such
compensation was predicated upon achieving certain financial results that were substantially the
subject of a restatement, and as a result of the restatement it is determined that the Participant
otherwise would not have been paid such compensation, regardless of whether or

5

 

not the restatement resulted from the Participant’s misconduct. In each such instance, the
Corporation will, to the extent practicable, seek to recover the amount by which the Participant’s
cash or equity based incentive compensation for the relevant period exceeded the lower payment that
would have been made based on the restated financial results. The Corporation will, to the extent
permitted by governing law, require reimbursement of any cash or equity based incentive
compensation paid to any named executive officer (for purposes of this policy “named executive
officers” has the meaning given that term in Item 402(a)(3) of Regulation S-K under the Securities
Exchange Act of 1934) where: (i) the payment was predicated upon the achievement of certain
financial results that were subsequently the subject of a substantial restatement, and (ii) in the
Committee’s view the officer engaged in fraud or misconduct that caused or partially caused the
need for the substantial restatement. In each instance described above, the Corporation will, to
the extent practicable, seek to recover the described cash or equity based incentive compensation
for the relevant period, plus a reasonable rate of interest.

     6. Plan Amendment and Termination. Except as explicitly provided by law, this Plan is
provided at the Corporation’s sole discretion and the Board or the Committee may modify or
terminate it at any time, prospectively or retroactively, without notice or obligation for any
reason, subject to obtaining any necessary stockholder approval as required by law, regulation, or
listing exchange requirement. In addition, there is no obligation to extend the Plan or establish
a replacement plan in subsequent years.

     7. Miscellaneous Provisions.

	 	(a)	 	Employment Rights. The Plan does not constitute a contract of employment and
participation in the Plan will not give a Participant the right to continue in the
employ of the Corporation, or any of its subsidiaries or affiliates, on a full-time,
part-time, or any other basis. Participation in the Plan will not give any Participant
any right or claim to any benefit under the Plan, unless such right or claim has
specifically been granted by the Committee under the terms of the Plan.

6

 

	 	(b)	 	Committee’s Decision Final. Any interpretation of the Plan and any decision on
any matter pertaining to the Plan which is made by the Committee in its discretion in
good faith shall be binding on all persons.
	 
	 	(c)	 	Governing Law. Except to the extent superseded by the laws of the United
States, the laws of the State of Michigan, without regard to any state’s conflict of
laws principles, shall govern in all matters relating to the Plan. Any legal action
related to this Plan shall be brought only in a federal or state court located in
Michigan.
	 
	 	(d)	 	Interests Not Transferable. Any interests of Participants under the Plan may
not be voluntarily sold, transferred, alienated, assigned or encumbered, other than by
will or pursuant to the laws of descent and distribution.
	 
	 	(e)	 	Severability. In the event any provision of the Plan shall be held to be
illegal or invalid for any reason, such illegality or invalidity shall not affect the
remaining parts of the Plan, and the Plan shall be construed and enforced as if such
illegal or invalid provision(s) had never been contained in the Plan.
	 
	 	(f)	 	Withholding. The Corporation will withhold from any amounts payable under this
Plan all federal, state, foreign, city and local taxes as shall be legally required.
	 
	 	(g)	 	Effect on Other Plans or Agreements. Payments or benefits provided to a
Participant under any stock, deferred compensation, savings, retirement or other
employee benefit plan are governed solely by the terms of such plan.

     8. Effective Date. This Plan shall be effective as of October 16, 2006. The Plan shall
automatically terminate as of the first meeting of shareholders on and after the third anniversary
of the date on which the Corporation first issues equity securities of the Corporation that are
required to be registered under Section 12 of the Securities Exchange Act of 1934 as amended,
unless resubmitted to and approved by shareholders prior to that date.

7

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