Document:

exv10w1

 

Exhibit 10.1

FIRST MERCURY FINANCIAL CORPORATION

1998

STOCK COMPENSATION PLAN

 

 

TABLE OF CONTENTS

	 	 	 	 	 	 	 	 	 
	 	 	Page	 	 	 	 
	ARTICLE I INTRODUCTION
	 	 	1	 	 	 	 	 
	1.1 Purpose
	 	 	1	 	 	 	 	 
	ARTICLE II DEFINITIONS
	 	 	1	 	 	 	 	 
	2.1 “Affiliate”
	 	 	1	 	 	 	 	 
	2.2 “Agreement” or “Award Agreement”
	 	 	1	 	 	 	 	 
	2.3 “Award”
	 	 	1	 	 	 	 	 
	2.4 “Beneficiary”
	 	 	1	 	 	 	 	 
	2.5 “Board of Directors”
	 	 	2	 	 	 	 	 
	2.6 “Cause”
	 	 	2	 	 	 	 	 
	2.7 “Change in Control”
	 	 	2	 	 	 	 	 
	2.8 “Code”
	 	 	2	 	 	 	 	 
	2.9 “Commission”
	 	 	2	 	 	 	 	 
	2.10 “Committee”
	 	 	2	 	 	 	 	 
	2.11 “Common Stock”
	 	 	2	 	 	 	 	 
	2.12 “Company”
	 	 	2	 	 	 	 	 
	2.13 “Covered Employee”
	 	 	3	 	 	 	 	 
	2.14 “Disability” or “Permanent Disability”
	 	 	3	 	 	 	 	 
	2.15 “Effective Date”
	 	 	3	 	 	 	 	 
	2.16 “Exchange Act”
	 	 	3	 	 	 	 	 
	2.17 “Fair Market Value”
	 	 	3	 	 	 	 	 
	2.18 “Grant Date”
	 	 	3	 	 	 	 	 
	2.19 “Incentive Stock Option”
	 	 	3	 	 	 	 	 
	2.20 “NASDAQ”
	 	 	4	 	 	 	 	 
	2.21 “Non-Qualified Stock Opting”
	 	 	4	 	 	 	 	 
	2.22 “Option Period”
	 	 	4	 	 	 	 	 
	2.23 “Option Price”
	 	 	4	 	 	 	 	 
	2.24 “Participant”
	 	 	4	 	 	 	 	 
	2.25 “Plan”
	 	 	4	 	 	 	 	 
	2.26 “Representative”
	 	 	4	 	 	 	 	 
	2.27 “Retirement”
	 	 	4	 	 	 	 	 
	2.28 “Rule 16b-3” and “Rule 16a-1(c)(3)”
	 	 	4	 	 	 	 	 
	2.29 “Securities Act”
	 	 	4	 	 	 	 	 
	2.30 “Stock Option” or “Option”
	 	 	5	 	 	 	 	 
	2.31 “Termination of Employment”
	 	 	5	 	 	 	 	 
	2.31 “Transfer”
	 	 	5	 	 	 	 	 
	ARTICLE III ADMINISTRATION
	 	 	5	 	 	 	 	 
	3.1 Committee Structure and Authority
	 	 	5	 	 	 	 	 
	ARTICLE IV STOCK SUBJECT TO PLAN
	 	 	7	 	 	 	 	 
	4.1 Number of Shares
	 	 	7	 	 	 	 	 
	4.2 Release of Shares
	 	 	7	 	 	 	 	 
	4.3 Restrictions on Shares
	 	 	8	 	 	 	 	 
	4.4 Stockholder Rights
	 	 	8	 	 	 	 	 

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TABLE OF CONTENTS

(continued)

	 	 	 	 	 
	 	 	Page
	4.5 Best Efforts To Register
	 	 	8	 
	4.6 Anti-Dilution
	 	 	9	 
	ARTICLE V ELIGIBILITY
	 	 	9	 
	5.1 Eligibility
	 	 	9	 
	ARTICLE VI STOCK OPTIONS
	 	 	9	 
	6.1 General
	 	 	9	 
	6.2 Grant and Exercise
	 	 	10	 
	6.3 Terms and Conditions
	 	 	10	 
	6.4 Termination by Reason of Death
	 	 	11	 
	6.5 Termination by Reason of Disability
	 	 	12	 
	6.6 Other Termination
	 	 	12	 
	ARTICLE VII PROVISIONS APPLICABLE TO STOCK ACQUIRED UNDER THE PLAN
	 	 	12	 
	7.1 Limited Transfer During Offering
	 	 	12	 
	7.2 Committee Discretion
	 	 	12	 
	7.3 No Company Obligation
	 	 	13	 
	ARTICLE VIII CHANGE IN CONTROL PROVISIONS
	 	 	13	 
	8.1 Impact of Event
	 	 	13	 
	8.2 Definition of Change in Control
	 	 	14	 
	8.3 Change in Control Price
	 	 	14	 
	ARTICLE IX MISCELLANEOUS
	 	 	15	 
	9.1 Amendments and Termination
	 	 	15	 
	9.2 Stand-Alone, Additional, Tandem, and Substitute Awards
	 	 	15	 
	9.3 Form and Timing of Payment Under Awards; Deferrals
	 	 	16	 
	9.4 Status of Awards Under Code Section 162(m)
	 	 	16	 
	9.5 Unfunded Status of Plan; Limits on Transferability
	 	 	16	 
	9.6 General Provisions
	 	 	16	 
	9.7 Mitigation of Excise Tax
	 	 	18	 
	9.8 Rights with Respect to Continuance of Employment
	 	 	18	 
	9.9 Awards in Substitution for Awards Granted by Other Corporations
	 	 	18	 
	9.10 Procedure for Adoption
	 	 	18	 
	9.11 Procedure for Withdrawal
	 	 	19	 
	9.12 Delay
	 	 	19	 
	9.13 Heading
	 	 	19	 
	9.14 Severability
	 	 	19	 
	9.15 Successors and Assigns
	 	 	19	 
	9.16 Entire Agreement
	 	 	19	 

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FIRST MERCURY FINANCIAL CORPORATION

1998 STOCK COMPENSATION PLAN

ARTICLE I

INTRODUCTION

     1.1 Purpose

     The First Mercury Financial Corporation 1998 Stock Compensation Plan (“Plan”) is hereby
established by First Mercury Financial Corporation (“Company”). The purpose of the Plan is to
promote the overall financial objectives of the Company and its stockholders by motivating those
persons selected to participate in the Plan to achieve long-term growth in stockholder value and by
retaining the association of those individuals who are instrumental in achieving this growth. At
the time the Company is a publicly held corporation, if any, it is intended that compensation
awarded under the Plan qualifies for tax deductibility under Section 162(m) of the Code to the
extent deemed appropriate by the Committee (as defined herein). The Plan and the grant of Awards
(as defined herein) hereunder are expressly conditioned upon the Plan’s approval by the
stockholders of the Company. If such approval is not obtained, then this Plan and all Awards
hereunder shall be null and void ab initio. The Plan is adopted, subject to
stockholder approval, effective as of September 3, 1998.

ARTICLE II

DEFINITIONS

     For purposes of the Plan, the following terms are defined as set forth below:

     2.1 ““Affiliate” means any individual, partnership, firm, corporation, association,
trust joint-stock company, unincorporated association or other entity (other than the Company) that
directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under
common control with, the Company including, without limitation, any member of an affiliated group
of which the Company is a common parent corporation as provided in Section 1504 of the Code.

     2.2 “Agreement” or “Award Agreement” means, individually or collectively, any
agreement entered into pursuant to the Plan pursuant to which an Award is granted to a Participant.

     2.3 “Award” means any Option and any other right or interest granted to a participant
under the Plan.

     2.4 “Beneficiary” means the person, persons, trust or trusts which have been
designated by a Participant in his or her most recent written beneficiary designation filed with
the Committee to receive the benefits specified under the Plan upon such Participant’s death or to
which Awards or other rights are transferred if and to the extent permitted hereunder. If, upon a
Participant’s death, there is no designated Beneficiary
or surviving designated Beneficiary,

 

 

then the term Beneficiary means the person,
persons, trust or trusts entitled by will or the laws of descent and distribution to receive such
benefits.

     2.5 “Board of Directors” or “Board” means the Board of Directors of the Company.

     2.6 “Cause” shall mean, for purposes of whether and when a Participant has incurred a
Termination of Employment for Cause, any act or omission which permits the Company to terminate the
written agreement or arrangement between the Participant and the Company or an Affiliate for
“cause” as defined in such agreement or arrangement, or in the event there is no such agreement or
arrangement or the agreement or arrangement does not define the term “cause” or a substantially
equivalent term, then Cause shall mean (a) the Participant’s willful misconduct or participation in
any fraud against the Company or any of its Affiliates, (b) the Participant’s material breach of
fiduciary duty involving personal profit, which breach has a material adverse effect on the Company
and which breach is not cured within thirty (30) days after written notice thereof is given to the
Participant, or (c) a felony conviction in a court of law under applicable Federal or state laws
which results in material damage to the Company or any of its Affiliates or materially impairs the
value of the Participant’s services to the Company or any of its Affiliates.

     2.7 “Change in Control” and “Change in Control Price” have the meanings set
forth in Sections 8.2 and 8.3, respectively.

     2.8 “Code” or “Internal Revenue Code” means the Internal Revenue Code of 1986,
as amended, Treasury Regulations (including proposed regulations) thereunder and any subsequent
Internal Revenue Code.

     2.9 “Commission” means the Securities and Exchange Commission or any successor agency.

     2.10 “Committee” means the Compensation Committee of the Board and/or such other
individuals designated by the Board to administer the Plan and named in an Appendix to the Plan;
provided, however, that with respect to options granted at the time the Company is publicly held,
insofar as a Committee is responsible for granting Options to Participants hereunder, it shall
consist solely of two or more directors, each of whom is a “Non-Employee Director” within the
meaning of Rule 16b-3 and each of whom is also an “outside director’ under Section 162(m) of the
Code.

     2.11 “Common Stock” means the shares of the Company’s Common Stock, $0.1 par value,
whether presently or hereafter issued, and any other stock or security resulting from adjustment
thereof as described hereinafter or the common stock of any successor to the Company which is
designated for the purposes of the Plan.

     2.12 “Company” means First Financial Mercury Corporation and includes any successor or
assignee corporation or corporations into which the Company may be merged, changed or consolidated;
any corporation for whose
securities the securities of the Company shall be exchanged; and any assignee of or successor
to substantially all of the assets of the Company.

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     2.13 “Covered Employee” means a Participant who is a “covered employee” within the
meaning of Section 162(m) of the Code.

     2.14 “Disability” or “Permanent Disability”, unless otherwise provided in an
Agreement, means a mental or physical illness that entitles the Participant to receive benefits
under the long-term disability plan of the Company or an Affiliate, or if the Participant is not
covered by such a plan or the Participant is not an employee of the Company or an Affiliate, a
mental or physical illness that renders a Participant totally and permanently incapable of
performing the Participant’s duties for the Company or an Affiliate. Notwithstanding the
foregoing, a Disability shall not qualify under this Plan if it is the result of (i) a willfully
self-inflicted injury or willfully self-induced sickness; or (ii) an injury or disease contracted,
suffered, or incurred while participating in a felony criminal offense. The determination of
Disability shall be made by the Committee. The determination of Disability for purposes of this
Plan shall not be construed to be an admission of disability for any other purpose.

     2.15 “Effective Date” means September 3, 1998.

     2.16 “Exchange Act” means the Securities Exchange Act of 1934, as amended, and the
rules and regulations promulgated thereunder.

     2.17 “Fair Market Value” means the value determined on the basis of the good faith
determination of the Committee, without regard to whether the Common Stock is restricted or
represents a minority interest, pursuant to the applicable method described below:

     (a) if the Common Stock is listed on a national securities exchange or quoted in
NASDAQ, the Closing price of the Common Stock on the relevant date (or, if such date is not
a business day or a day on which quotations are reported, then on the immediately preceding
date on which quotations were reported), as reported by the principal national exchange on
which such shares are traded (in the case of an exchange) or by NASDAQ, as the case may be;

     (b) if the Common Stock is not listed on a national securities exchange or quoted on
NASDAQ, but is actively traded in the over-the-counter market, the average of the closing
bid and asked prices for the Common Stock on the relevant date (or, if such date is not a
business day or a day on which quotations are reported, then on the immediately preceding
date on which quotations were reported), or the most recent preceding date for which such
quotations are reported; and

     (c) if, on the relevant date, the Common Stock is not publicly traded or reported as
described in (a) or (B), the value determined in good faith by the Committee.

     2.18 “Grant Date” means the date as of which an Agreement is entered into pursuant to
the Plan.

     2.19 “Incentive Stock Option” means any Stock Option intended to be and designated as
an “incentive stock option” within the meaning of Section 422 of the Cede.

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     2.20 “NASDAQ” means The NASDAQ Stock Market, including the NASDAQ National Market.

     2.21 “Non-Qualified Stock Opting” means an Option to purchase Common Stock in the
Company granted under the Plan, the taxation of which is pursuant to Section 83 of the Code.

     2.22 “Option Period” means the period during which an Option shall be exercisable in
accordance with the related Agreement and Article VI.

     2.23 “Option Price” means the price at which the Common Stock may be purchased under
an Option as provided in Section 6.3(b).

     2.24 “Participant” means a person who satisfies the eligibility conditions of Article
V and with whom an Agreement has been entered into under the Plan, and in the event a
Representative is appointed for a Participant or another person becomes a Representative, then the
term “Participant” shall mean such Representative. The term shall also include a trust for the
benefit of the Participant, the Participant’s parents, spouse or descendants, or a custodian under
a uniform gifts to minors act or similar statute for the benefit of the Participant’s descendants,
to the extent permitted by the Committee and not inconsistent with Rule 16b-3. Notwithstanding the
foregoing, the term “Termination of Employment” shall mean the Termination of Employment of the
person to whom the Award was originally granted.

     2.25 “Plan” means this First Mercury Financial Corporation 1998 Stock Compensation
Plan, as herein set forth and as may be amended from time to time.

     2.26 “Representative” meats (a) the person or entity acting as the executor or
administrator of a Participant’s estate pursuant to the last will and testament of a Participant or
pursuant to the laws of the jurisdiction in which the Participant had the Participant’s primary
residence at the date of the Participant’s death; (b) the person or entity acting as the guardian
or temporary guardian of a Participant; (c) the person or entity which is the Beneficiary of the
Participant upon or following the Participant’s death; or (d) any person to whom an Option has been
permissibly transferred; provided that only one of the foregoing shall be the Representative at any
point in time as determined under applicable law and recognized by the Committee.

     2.27 “Retirement” means the Participant’s Termination of Employment after attaining
either the normal retirement age or the early
retirement age as defined in the principal (as determined by the Committee) tax-qualified plan
of the Company or an Affiliate, if the Participant is covered by such a plan, or if the Participant
is not covered by such a plan, then age 65, or age 55 with the accrual of 8 years of service.

     2.28 “Rule 16b-3” and “Rule 16a-1(c)(3)” mean Rule 16b-3 and “Rule
16a-1(c)(3), as from time to time in effect and applicable to the Plan and Participants,
promulgated by the Commission under Section 16 of the Exchange Act.

     2.29 “Securities Act” means the Securities Act of 1933, as amended, and the rules and
regulations promulgated thereunder.

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     2.30 “Stock Option” or “Option” means a right, granted to a Participant under
Section 6.1 hereof, to purchase Common Stock at a specified price during specified time periods.

     2.31 “Termination of Employment” means the occurrence of any act or event that
actually or effectively causes or results in the person’s ceasing, for whatever reason, to be an
officer, independent contractor, director or employee of the Company or of any Affiliate of the
Company, or to be an officer, independent contractor, director or employee of any entity that
provides services to the Company or an Affiliate of the Company, including, without limitation,
death, Disability, dismissal, severance at the election of the Participant, Retirement, or
severance as a result of the discontinuance, liquidation, sale or transfer by the Company or its
Affiliates of all businesses owned or operated by the Company or its Affiliates. With respect to
any person who is not an employee with respect to the Company, the Agreement shall establish what
act or event shall constitute a Termination of Employment for purposes of the Plan. A transfer of
employment from the Company to an Affiliate, or from an Affiliate to the Company, will not be a
Termination of Employment, unless expressly determined by the Committee. A Termination of
Employment shall occur for an employee who is employed by an Affiliate of the Company if the
Affiliate shall cease to be an Affiliate and the Participant shall nut immediately thereafter
become an employee of the Company or an Affiliate of the Company.

     2.32 “Transfer” means any sale, gill, assignment, distribution, conveyance, pledge,
hypothecation, encumbrance or other transfer of title, whether by operation of’ law or otherwise.

     In addition, certain other terms used herein have definitions given to them in the first place
in which they are used.

ARTICLE III

ADMINISTRATION

     3.1 Committee Structure and Authority. The Plan shall be administered by a committee
(the “Committee”) of the Board of Directors composed of no fewer than two directors designated by
the Board of Directors. For purposes of this Plan, including the definition of “Committee” and the
regulations thereunder, (a) a “Non-Employee Director” is determined
under the rules and regulations adopted by the Securities and Exchange Commission under
Section 16 of the Exchange Act and (b) an “outside director” is determined under the Regulations
adopted by the Internal Revenue Service relating to Section 162(m) of the Code. A majority or the
Committee shall constitute a quorum, the acts of a majority of the members present at any meeting
at which a quorum is present, or acts approved in writing by all of the members, shall be the acts
of the Committee. At any time the Company is publicly held, this Plan is intended to qualify for
exemption from Section 16(b) of the Exchange Act and to qualify as performance-based compensation
under Section 162(m) of the Code and shall be interpreted in such a way as to result in such
qualification. A member of the Committee shall not exercise any discretion respecting himself or
herself under the Plan. The Board shall have the authority to remove, replace or fill any vacancy
of any member of the Committee upon notice to the Committee and the affected member. Any member of
the Committee may resign upon notice to the Board. The Committee may allocate among one or more of
its members, or may delegate to one or more of its agents, such duties and responsibilities as it
determines.

- 5 -

 

     Subject to (i) the terms of the Plan, and (ii) subject to the approval of the Board (to the
extent required to qualify an Option granted hereunder for exemption under Section 16(b) of the
Exchange Act and as “performance-based compensation” under Section 162(m) of the Code), the
Committee shall have the authority:

     (a) to select those persons to whom Awards maybe granted from time to time;

     (b) to determine whether and to what extent Awards are to be granted hereunder;

     (c) to determine the number of shares of Common Stock to be covered by each Award
granted hereunder;

     (d) to determine the tens and conditions of any Option granted hereunder (including,
but not limited to, the Option Price, the Option Period, any exercise restriction or
limitation and any exercise acceleration, forfeiture or waiver
regarding any Award, any shares of Common Stock relating thereto, any performance criteria and the satisfaction of
each criteria);

     (e) to adjust the terms and conditions, at any time or from time to time, of any Award,
subject to the limitations of Section 9.1;

     (f) to determine to what extent and under what circumstances Common Stock and other
amounts payable with respect to an Award shall be deferred;

     (g) to determine under what circumstances an Award may be settled in cash or Common
Stock;

     (h) to provide for the forms of Agreements to be utilized in connection with the Plan;

     (i) to determine whether a Participant has a Disability or a Retirement;

     (j) to determine what securities law requirements are applicable to the Plan, Awards
and the issuance of shares of Common Stock under the Plan and to require of a Participant
that appropriate action be taken with respect to such requirements;

     (k) to cancel, with the consent of the Participant or as otherwise provided in the Plan
or an Agreement, outstanding Awards;

     (l)
to interpret and make final determinations with respect to the remaining number of shares of Common Stock available under this Plan;

     (m) to require, as a condition of the exercise of an Award or the issuance or transfer
of a certificate of Common Stock, the withholding from a Participant of the amount of any
Federal, state or local taxes as may be necessary in order for the Company or any other
employer to obtain a deduction or as may be otherwise required by law;

- 6 -

 

     (n) to determine whether and under what circumstances a Participant has incurred a
Termination of Employment;

     (o) to determine whether the Company or any other person has a right or obligation to
purchase Common Stock from a Participant and, if so, the terms and conditions on which such
Common Stock is to be purchased;

     (p) to determine the restrictions or limitations on the transfer of Common Stock;

     (q) to determine whether an Award is to be adjusted, modified or purchased, or is to
become fully exercisable, under the Plan or the terms of an Agreement;

     (r) to determine the permissible methods of Award exercise and payment, including
cashless exercise arrangements;

     (s) to adopt, amend and rescind such rules and regulations as, in its opinion, may be
advisable in the administration of the Plan; and

     (t) to appoint and compensate agents, counsel, auditors or other specialists to aid it
in the discharge of its duties.

     The Committee shall have the authority to adopt, alter and repeal such administrative rules,
guidelines and practices governing the Plan as it shall, from time to time, deem advisable, to
interpret the terms and provisions of the Plan and any Award issued under the Plan (and any
Agreement) and to otherwise supervise the administration of the Plan. The Committee’s policies and
procedures may differ with respect to Awards granted at different times or to different
Participants.

     Any determination made by the Committee pursuant to the provisions of the Plan shall be made
in its sole discretion, and in the case of any determination relating to an Award, may be made at
the time of the grant of the Award or, unless in contravention of any express term of the Plan or
an Agreement, at any time thereafter. All decisions made by the Committee pursuant to
the provisions of the Plan shall be final and binding on all persons, including the Company
and Participants. No determination shall be subject to de novo review if
challenged in court.

ARTICLE IV

STOCK SUBJECT TO PLAN

     4.1 Number of Shares. Subject to the adjustment under Section 46, the total number of
shares of Common Stock reserved and available for distribution pursuant to Awards under the Plan
shall be 600 shares of Common Stock. Such shares may consist, in whole or in part, of authorized
and unissued shares or treasury shares.

     4.2 Release of Shares. Subject to Section 6.3(f), if any shares of Common Stock that
are subject to any Award cease to be subject to an Award or are forfeited or repurchased, if any
Award otherwise terminates without issuance of shares of Common Stock being made to the

- 7 -

 

Participant, or if any shares of Common Stock are received by the Company in connection with the
exercise of an Award, including the satisfaction of tax withholding, such shares, in the discretion
of the Committee, may again be available for distribution in connection with Awards under the Plan.

     4.3 Restrictions on Shares. Shares of Common Stock issued as or in conjunction with
an Award shall be subject to the terms and conditions specified herein and to such other terms,
conditions and restrictions as the Committee in its discretion may determine or provide in an
Agreement. The Company shall not be required to issue or deliver any certificates for shares of
Common Stock, cash or other property prior to (i) the listing of such shares on any stock exchange
or NASDAQ (or other public market) on which the Common Stock may then be listed (or regularly
traded), (ii) the completion of any registration or qualification of such shares under Federal or
state law, or any ruling or regulation of any government body which the Committee determines to be
necessary or advisable, and (iii) the satisfaction of any applicable withholding obligation in
order for the Company or an Affiliate to obtain a deduction with respect to the exercise of an
Award. The Company may cause any certificate for any share of Common Stock to be delivered to be
properly marked with a legend or other notation reflecting the limitations on transfer of such
Common Stock as provided in this Plan or as the Committee may otherwise require. The Committee may
require any person exercising an Award to make such representations and furnish such information as
it may consider appropriate in connection with the issuance or delivery of the shares of Common
Stock in compliance with applicable law or otherwise. Fractional shares shall not be delivered,
but shall be rounded to the next lower whole number of shares, and the Fair Market Value of such
fractional shares, as of the date of exercise, shall be paid in cash.

     4.4 Stockholder Rights. No person shall have any rights of a stockholder as to shares
of Common Stock subject to an Award until, (i) after proper exercise of the Award, (ii) after such
other action required pursuant to such Award, or (iii) as otherwise provided herein or in an
Agreement, such shares shall have been recorded on the Company’s official stockholder records as
having been issued or transferred. Upon exercise of the Award or any portion thereof, the Company
will have thirty (30) days in which to issue the shares, and the Participant will not be treated as
a stockholder for any purpose prior to such issuance. No adjustment shall be made for
cash dividends or other rights for which the record date is prior to the date such shares are
recorded as issued or transferred in the Company’s official stockholder records, except as provided
herein or in an Agreement.

     4.5 Best Efforts To Register. The Company will register under the Securities Act the
Common Stock delivered or deliverable pursuant to Awards on Commission Form S-8 if available to the
Company for this purpose (or any successor or alternate form that is substantially similar to that
form to the extent available to effect such registration), in accordance with the rules and
regulations governing such forms, as soon after stockholder approval of the Plan as the Committee,
in its sole discretion, shall deem appropriate. The Company will use its best efforts to cause the
registration statement to become effective and will file such supplements and amendments to the
registration statement as may be necessary to keep the registration statement in effect until the
earliest of (a) one year following the expiration of the Award Period of the last Award
outstanding, (b) the date the Company is no longer a reporting company under the

- 8 -

 

Exchange Act and
(c) the date all Participants have disposed of all shares delivered pursuant to any Award.

     4.6 Anti-Dilution. In the event of any Company stock dividend, stock split,
combination or exchange of shares, recapitalization or other change in the capital structure of the
Company, corporate separation or division of the Company (including, but not limited to, a
split-off, spin-off split-off or distribution to Company stockholders other than a normal cash
dividend), sale by the Company of all or a substantial portion of its assets, reorganization,
rights offering, a partial or complete liquidation, or any other corporate transaction or event
involving the Company, then the Committee shall adjust or substitute, as the case may be, the
number of shares of Common Stock available for Awards under the Plan, the number of shares of
Common Stock covered by outstanding Awards, the exercise price per share of outstanding Awards, and
performance conditions and any other characteristics or terms of the Awards as the Committee shall
deem necessary or appropriate to reflect equitably the effects of such changes to the Participants;
provided, however, that the Committee may limit any such adjustment so as to
maintain the deductibility of the Awards under Section 162(m) of the Code and that any fractional
shares resulting from such adjustment shall be eliminated by rounding to the next lower whole
number of shares, and the Fair Market Value of such fractional shares, as of the date of such
adjustment, shall be paid in cash.

ARTICLE V

ELIGIBILITY

     5.1 Eligibility. The persons eligible to participate in the Plan and be granted
Awards shall be directors, officers, employees, consultants or other service providers of the
Company or any Affiliate of the Company, who shall be in a position, in the opinion of the
Committee, to make contributions to the growth, management, protection and success of the Company
and its Affiliates. Of those persons described in the preceding sentence, the Committee may, from
time to time, select persons to be granted Awards and shall determine the terms and conditions with
respect thereto. The Committee may give consideration to the person’s functions and
responsibilities, the person’s contributions to the Company, the value of the individual’s service
to the Company and other factors deemed relevant by the Committee.

ARTICLE VI

STOCK OPTIONS

     6.1 General. The Committee shall have authority to grant Stock Options under the Plan
at any time or from time to time. Stock Options may be either Incentive Stock Options or
Non-Qualified Stock Options. An Option shall entitle the Participant to receive shams of Common
Stock upon exercise of such Option, subject to the Participants satisfaction in full of any
conditions, restrictions or limitations imposed in accordance with the Plan or an Option Agreement
(which may differ from other Agreements), including, without limitation, payment of the Option
Price. During any calendar year, Options to purchase no more than 300 shares (as adjusted pursuant
to Sections 4.1 and 4.6) of Common Stock shall be granted to any Participant.

- 9 -

 

     6.2 Grant and Exercise. The grant of a Stock Option shall occur as of the date the
Committee determines. Each Option granted under this Plan shall be evidenced by an Agreement, in a
form approved by the Committee, which shall embody the terms and conditions of such Option and
which shall be subject to the express terms and conditions set forth in the Plan. Such Agreement
shall become effective upon execution by the Participant. To the extent that any Stock Option is
not designated as an Incentive Stock Option or even if so designated does not qualify as an
Incentive Stock Option, it shall constitute a Non-Qualified Stock Option. Anything in the Plan to
the contrary notwithstanding, no term of the Plan relating to Incentive Stock Options shall be
interpreted, amended or altered, nor shall any discretion or authority granted under the Plan be
exercised, so as to disqualify the Plan under Section 422 of the Code.

     6.3 Terms and Conditions. Stock Options shall be subject to such terms and conditions
as shall be determined by the Committee, including the following:

     (a) Option Period. The Option Period of each Stock Option shall be fixed by
the Committee; provided that no Stock Option shall be exercisable more than ten (10) years
after the date the Stock Option is granted. No Option which is intended to be an Incentive
Stock Option shall be granted more than ten (10) years from the date the Plan is adopted by
the Company or the date the Plan is approved by the stockholders of the Company, whichever
is earlier.

     (b) Option Price. The Option Price per share of the Common Stock purchasable
under an Option shall be determined by the Committee.

     (c) Exerciseability. Subject to Section 8.1, Stock Options shall be
exercisable at such time or times and subject to such terms and conditions as shall be
determined by the Committee. If the Committee provides that any Stock Option is exercisable
only in installments, the Committee may, to the extent such waiver will not cause the Option
income to fail to be deductible under Section 162(m), at any time waive such installment
exercise provisions, in whole or in part, and, subject to the foregoing, may at any time
accelerate the exerciseability of any Stock Option. The aggregate Fair Market Value
(determined at the Grant Date) of the Common Stock under an Incentive Stock Option shall not
exceed $100,000 of exercisable Common Stock in any calendar year.

     (d) Method of Exercise. Subject to the provisions of this Article VI, a
Participant may exercise Stock Options, in whole or in part, at any time during the Option
Period by the Participants giving written notice of exercise on a form provided by the
Committee (if available) to the Company specifying the number of shares of Common Stock
subject to the Stock Option to be purchased. Such notice shall be accompanied by payment in
full of the purchase price by cash or check or such other form of payment as the Company may
accept. If approved by the Committee, payment in full or in part may also be made (i) by
delivering Common Stock already owned by the Participant having a total Fair Market Value on
the date of such delivery equal to the Option Price; (ii) by the execution and delivery of a
note or other evidence of indebtedness (and any security agreement thereunder) satisfactory
to the Committee and permitted in accordance with Section 6.3(e); (iii) by the delivery of
cash or the extension of credit by a broker-dealer to whom the Participant has submitted a
notice of exercise or otherwise indicated
an intent

- 10 -

 

to exercise an Option (in accordance
with Part 220, Chapter II, Title 12 of the Code of Federal Regulations, so-called “cashless”
exercise); (iv) by authorizing the Company to retain shares of Common Stock which would
otherwise be issuable upon the exercise of the Option having a total Fair Market Value on
the date of delivery equal to the Option Price; or (v) by any combination of the foregoing.
In the case of an incentive Stock Option, the right to make a payment in the form of already
owned shares of Common Stock of the same class as the Common Stock subject to the Stock
Option may be authorized only at the time the Stock Option is granted. No shares of Common
Stock shall be issued until full payment therefor, as determined by the Committee, has been
made.

     (e) Company Loan or Guarantee. Upon the exercise of any Option and subject to
the pertinent Agreement and the discretion of the Committee, the Company may at the request
of the Participant:

     (i) lend to the Participant an amount equal to such portion of the Option Price
as the Committee may determine; or

     (ii) guarantee a loan obtained by the Participant from a third-party for the
purpose of tendering the Option Price.

The terms and conditions of any loan or guarantee, including the term, interest rate
and any security interest thereunder and whether the loan shall be with recourse,
shall be determined by the Committee, except that no extension of credit or guarantee
shall obligate the Company for an amount to exceed the lesser of the aggregate Fair
Market Value per share of the Common Stock on the date of exercise, less the par
value of the shares of Common Stock to be purchased upon the exercise of the Award,
or the amount permitted under applicable laws or the regulations and rules of the
Federal Reserve Board and any other governmental agency having jurisdiction.

     (f)
 Non-transferability of Options. Except as provided herein or in an Agreement, no
Stock Option or interest therein shall be transferable by the Participant other than by will
or by the laws of descent and distribution, and all Stock Options shall
be exercisable during the Participant’s lifetime only by the Participant. If and to
the extent transferability is permitted by Rule 16b-3 or does not result in liability to any
Participant and except as otherwise provided by an Agreement, every Option granted hereunder
shall be freely transferable, but only if such transfer is consistent with the use of Form
S-8 (or the Committee’s waiver of such condition) and consistent with an Award’s intended
status as an Incentive Stock Option (as applicable).

     6.4 Termination by Reason of Death. Unless otherwise provided in an Agreement or
determined by the Committee, if a Participant incurs a Termination of Employment due to death, any
unexpired and unexercised Stack Option held by such Participant shall thereafter be fully
exercisable for a period of ninety (90) days following the date of the appointment of a
Representative (or such other period or no period as the Committee may specify) or until the
expiration of the Option Retied, whichever period is the shorter.

- 11 -

 

     6.5 Termination by Reason of Disability. Unless otherwise provided in an Agreement or
determined by the Committee, if a Participant incurs a Termination of Employment due to a
Disability, any unexpired and unexercised Stock Option held by such Participant shall thereafter be
fully exercisable by the Participant for the period of ninety (90) days (or such other period or no
period as the Committee may specify) immediately following the date of such Termination of
Employment or until the expiration of the Option Period, whichever period is shorter, and the
Participant’s death at any time following such Termination of Employment due to Disability shall
not affect the foregoing. In the event of Termination of Employment by reason of Disability, if an
Incentive Stock Option is exercised after the expiration of the exercise periods that apply for
purposes of Section 422 of the Code, such Stock Option will thereafter be treated as a
Non-Qualified Stock Option.

     6.6 Other Termination. Unless otherwise provided in an Agreement or determined by the
Committee, if a Participant incurs a Termination of Employment due to Retirement, or the
Termination of Employment is involuntary on the part of the Participant (but is not due to death or
Disability or with Cause), any Stock Option held by such Participant shall thereupon terminate,
except that such Stock Option, to the extent then exercisable, may be exercised for the lesser of
the ninety (90) day period commencing with the date of such Termination of Employment or until the
expiration of the Option Period. Unless otherwise provided in an Agreement or determined by the
Committee, if the Participant incurs a Termination of Employment which is voluntary on the part or
the Participant (and is not due to Retirement) the Option shall terminate 30 days after such
Termination. Unless otherwise provided in an Agreement or determined by the Committee, if the
Participant’s Termination of Employment is for Cause, the Option shall terminate immediately. The
death or Disability of a Participant after a Termination of Employment otherwise provided herein
shall not extend the time permitted to exercise an Option.

ARTICLE VII

PROVISIONS APPLICABLE TO STOCK ACQUIRED UNDER THE PLAN

     7.1 Limited Transfer During Offering. In the event there is an effective registration
statement under the Securities Act pursuant to which shares of Common Stock shall be offered
for sale in an underwritten offering, a Participant shall not, during the period requested by
the underwriters managing the registered public offering, effect any public sale or distribution of
shares received directly or indirectly pursuant to an exercise of an Award.

     7.2 Committee Discretion. The Committee may in its sole discretion include in any
Agreement an obligation that the Company purchase a Participant’s shares of Common Stock received
upon the exercise of an Award (including the purchase of any unexercised Awards which have not
expired), or may obligate a Participant to sell shares of Common Stock to the Company, upon such
terms and conditions as the Committee may determine and set forth in an Agreement. The provisions
of this Article VII shall be construed by the Committee in its sole discretion, and shall be
subject to such other terms and conditions as the Committee may from time to time determine.
Notwithstanding any provision herein to the contrary, the Company may upon determination by the
Committee assign its right to purchase shares of Common Stock under

- 12 -

 

this Article VII, whereupon the
assignee of such right shall have all the rights, duties and obligations of the Company with
respect to purchase of the shares of Common Stock.

     7.3 No Company Obligation. None of the Company, an Affiliate or the Committee shall
have any duty or obligation to disclose affirmatively to a record or beneficial holder of Common
Stock or an Award, and such holder shall have no right to be advised of, any material information
regarding the Company or any Affiliate at any time prior to, upon or in connection with receipt or
the exercise of an Award or the Company’s purchase of Common Stock or an Award from such holder in
accordance with the terms hereof.

ARTICLE VIII

CHANGE IN CONTROL PROVISIONS

     8.1 Impact of Event. Notwithstanding any other provision of the Plan to the contrary,
unless otherwise provided in an Agreement, in the event of a Change in Control (as defined in
Section 8.2):

     (a) Any Stock Options outstanding as of the date of such Change in Control and not then
exercisable shall become fully exercisable to the full extent of the original grant;

     (b) The restrictions and deferral limitations applicable to any Award shall lapse, and
such Award shall become free of all restrictions and become fully vested and transferable to
the full extent of the original grant.

     (c) Notwithstanding any other provision of the Plan, unless the Committee shall provide
otherwise in an Agreement, a Participant shall have the right, whether or not the Award is
fully exercisable or may be otherwise realized by the Participant, by giving notice during
the 60-day period from and after a Change in Control to the Company, to elect to surrender
all or part of a stock-based Award to the Company and to receive cash, within 30 days of
such notice, in an amount equal to the amount by which the “Change in Control Price” (as
defined in Section 8.3) per share of Common Stock on the date of such election shall exceed
the amount which the Participant must pay to exercise the Award
per share of Common Stock wider the Award (the “Spread”) multiplied by the number of
            shares of Common Stock granted under the Award as to which the right granted under this
Section 8.1 shall have been exercised; provided, however, that if the end of such 60-day
period from and after a Change in Control is within six months of the date of grant of the
Award held by a Participant (except a Participant who has died during such six-month period)
who is an officer or director of the Company (within the meaning of Section 16(b) of the
Exchange Act), such Award shall be cancelled in exchange for a payment to the Participant,
effective on the day which is six months and one day after the date of grant of such Award,
equal to the Spread multiplied by the number of shares of Common Stock granted under the
Award, plus interest on such amount at the prime rate as reported from time to time in
The Wall Street Journal, compounded annually and determined from time to time. With
respect to any Participant who is an officer or director of the Company (within the meaning
of Section 16(b) of the Exchange Act), the 60-day period

- 13 -

 

shall be extended, if necessary, to
include the “window period” of Rule 16b-3 which first commences on or after the date of the
(Change in Control and the Committee shall have sole discretion, if necessary, to approve
the Participant’s exercise hereunder and the date on which the Spread is calculated may be
adjusted, if necessary, to a later date if necessary to avoid liability to such Participant
under Section 16(b).

     8.2 Definition of Change in Control. For purposes of this Plan, a “Change in Control”
shall be deemed to have occurred if:

     (a) any individual, partnership, firm, corporation, association, trust, joint-stock
company, unincorporated association or other entity, or any syndicate or group deemed to be
a person under Section 14(d)(2) of the Exchange Act (other than shareholders holding more
than 20% of the Company’s voting securities as of the effective date of the Plan), is or
becomes the “beneficial owner” (as defined in Rule 13d-3 of the General Rules and
Regulations under the Exchange Act), directly or indirectly, of securities of the Company
representing 50% or more of the combined voting power of the Company’s then outstanding
securities entitled to vote in the election of directors of the Company; or

     (b) Jerome M. Shaw no longer shall be entitled, pursuant to that certain Agreement
Among Stockholders of Mercury Insurance Group, Inc. (n/k/a First Mercury Financial
Corporation), effective as of January 1, 1994, as such agreement may be amended and/or
restated from time to time, to nominate for election to the Company’s Board that number of
individuals which will constitute a majority of the Company’s Board; or

     (c) all or substantially all of the assets of the Company are transferred, liquidated
or distributed.

     8.3 Change in Control Price. For purposes of the Plan, “Change in Control Price”
means the higher of (a) the highest reported sales price of a share of Common Stock in any
transaction reported on the principal exchange on which such shares are listed or on NASDAQ during
the 60-day period prior to and including the date of a Change in Control or (b) if the Change in
Control is the result of a tender or exchange officer merger, consolidation, liquidation
or sale of all or substantially all of the assets of the Company (in each case a “Corporate
Transaction”), the highest price per share of Common Stock paid in such Corporate Transaction,
except that, in the case of Incentive Stock Options, such price shall be based only on the Fair
Market Value of the Common Stock on the date any such Incentive Stock Option is exercised. To the
extent that the consideration paid in any such Corporate Transaction consists all or in part of
securities or other non-cash consideration, the value of such securities or other non-cash
consideration shall be determined in the sole discretion of the Committee.

- 14 -

 

ARTICLE IX

MISCELLANEOUS

     9.1 Amendments and Termination. The Board may amend, alter or discontinue the Plan at
any time, but no amendment, alteration or discontinuation shall be made which would (a) impair the
rights of a Participant under a Stock Option theretofore granted without the Participant’s consent,
except such an amendment made to cause the Plan to qualify for the exemption provided by Rule 16b-3
or (b) disqualify the Plan from the exemption provided by Rule 16b-3. In addition, no such
amendment shall be made without the approval of the Company’s stockholders to the extent such
approval is required by law or agreement.

     The Committee may amend the Plan at any time provided that (a) no amendment shall impair the
rights of any Participant under any Award theretofore granted without the Participant’s consent,
(b) no amendment shall disqualify the Plan from the exemption provided by Rule 16b-3, and (c) any
amendment shall be subject to the approval or rejection of the Board.

     The Committee may amend the terms of any Award or other Award theretofore granted,
prospectively or retroactively, but no such amendment shall impair the rights of any Participant
without the Participant’s consent or reduce an Option Price, except such an amendment made to cause
the Plan or Award to qualify for the exemption provided by Rule 16b-3.

     Subject to the above provisions, the Board shall have authority to amend the Plan to take into
account changes in law and tax and accounting rules, as well as other developments, and to grant
Awards which qualify for beneficial treatment under such rules without stockholder approval.
Notwithstanding anything in the Plan to the contrary, if any right under this Plan would cause a
transaction to be ineligible for pooling of interest accounting that would, but for the right
hereunder, be eligible for such accounting treatment, the Committee may modify or adjust the right
so that pooling of interest accounting shall be available, including the substitution of Common
Stock having a Fair Market Value equal to the cash otherwise payable hereunder for the right which
caused the transaction to be ineligible for pooling of interest accounting.

     9.2 Stand-Alone, Additional, Tandem, and Substitute Awards. Awards granted under the
Plan may, in the discretion of the Committee, be granted either alone or in addition to, in tandem
with, or in substitution or exchange for, any other Award or any award granted under another plan
of the Company, any Affiliate, or any business entity to be acquired by the Company or an
Affiliate, or any other right of a Participant to receive payment from the Company or any
Affiliate, except as provided in such other plan or right. Such additional, tandem, any substitute
or exchange Awards may be granted at any time. If an Award is granted
in substitution or exchange for another Award or award, the Committee shall require the
surrender of such other Award or award in consideration for the grant of the new Award. In
addition, Awards may be granted in lieu of cash compensation, including in lieu of cash amounts
payable under other plans of the Company or any Affiliate, in which the Fair Market Value of Common
Stock subject to the Award is equivalent in value to the cash compensation, or in which the
exercise price, grant price or purchase price of the Award in the nature of a right that maybe
exercised is equal to the Fair Market Value of the underlying Common Stock minus the value of the
cash compensation surrendered.

- 15 -

 

     9.3 Form and Timing of Payment Under Awards; Deferrals. Subject to the terms of the
Plan and any applicable Agreement, payments to be made by the Company or an Affiliate upon the
exercise of an Award or settlement of an Award may be made in such forms as the Committee shall
determine, including, without limitation, cash, Common Stock, other Awards or other property, and
may be made in a single payment or transfer, in installments, or on a deferred basis. The
settlement of any Award may be accelerated, and cash paid in lieu of Common Stock in connection
with such settlement, in the discretion of the Committee or upon occurrence of one or more
specified events (in addition to a Change in Control). Installment or deferred payments may be
required by the Committee (subject to Section 9.1 of the Plan) or permitted at the election of the
Participant. Payments may include, without limitation, provisions for the payment or crediting of
reasonable interest on installment or deferred payments or the granting or crediting of dividend
equivalents in respect of installment or deferred payments denominated in Common Stock.

     9.4 Status of Awards Under Code Section 162(m). It is the intent of the Company that
Awards granted to persons who are Covered Employees within the meaning of Code Section 162(m) shall
constitute “qualified performance-based compensation” satisfying the requirements of Code Section
162(m). Accordingly, the provisions of the Plan shall be interpreted in a manner consistent with
Code Section 162(m). If any provision of the Plan or any agreement relating to such an Award does
not comply or is inconsistent with the requirements of Code Section 162(m), such provision shall be
construed or deemed amended to the extent necessary to conform to such requirements.

     9.5 Unfunded Status of Plan; Limits on Transferability. It is intended that the Plan
be an “unfunded” plan for incentive and deterred compensation. The Committee may authorize the
creation of trusts or other arrangements to meet the obligations created under the Plan to deliver
Common Stock or make payments; provided, however, that, unless the Committee otherwise determines,
the existence of such trusts or other arrangements is consistent with the “unfunded” status of the
Plan. Unless otherwise provided in this Plan or in an Agreement, no Award shall be subject to the
claims of Participant’s creditors and no Award may be transferred, assigned, alienated or
encumbered in any way other than by will or the laws of descent and distribution or to a
Representative upon the death of the Participant.

     9.6 General Provisions.

     (a) Representation. The Committee may require each person purchasing or
receiving shares pursuant to an Award to represent to and agree with the Company in writing
that such person is acquiring the shares without a view to the distribution thereof
The certificates for such shares may include any legend which the Committee deems
appropriate to reflect any restrictions on transfer.

     (b) No Additional Obligation. Nothing contained in the Plan shall prevent the
Company or an Affiliate from adopting other or additional compensation arrangements for its
employees.

     (c) Withholding. No later than the date as of which an amount first becomes
includable in the gross income of the Participant for Federal income tax purposes with

- 16 -

 

respect to any Award, the Participant shall pay to the Company (or other entity identified
by the Committee), or make arrangements satisfactory to the Company or other entity
identified by the Committee regarding the payment of, any Federal, state, local or foreign
taxes of any kind required by law to be withheld with respect to such amount required in
order for the Company or an Affiliate to obtain a current deduction. If the Participant
disposes of shares of Common Stuck acquired pursuant to an Incentive Stock Option in any
transaction considered to be a disqualifying transaction under the Code, the Participant
must give written notice of such transfer and the Company shall have the right to deduct any
taxes required by law to be withheld from any amounts otherwise payable to the Participant.
Unless a otherwise determined by the Committee, withholding obligations may be settled with
Common Stock, including Common Stock that is part of the Award that gives rise to the
withholding requirement, provided that any applicable requirements under Section 16 of the
Exchange Act ate satisfied. The obligations of the Company under the Plan shall be
conditional on such payment or arrangements, and the Company and its Affiliates shall, to
the extent permitted by law, have the right to deduct any such taxes from any payment
otherwise due to the Participant.

     (d) Reinvestment. The reinvestment of dividends in additional shares of Common
Stock at the time of any dividend payment shall be permissible only if sufficient shares of
Common Stock are available under the Plan for such reinvestment (taking into account then
outstanding Options and other Awards).

     (e) Representation. The Committee shall establish such procedures as it deems
appropriate for a Participant to designate a Representative to whom any amounts payable in
the event of the Participants death are to be paid.

     (f) Controlling Law. The Plan and all Awards made and actions taken thereunder
shall be governed by and construed in accordance with the laws of the State of Michigan
(other than its law respecting choice of law). The Plan shall be construed to comply with
all applicable law and to avoid liability to the Company, an Affiliate or a Participant,
including, without limitation, liability under Section 16(b) of the Exchange Act.

     (g) Offset. Any amounts owed to the Company or an Affiliate by the Participant
of whatever nature may be offset by the Company from the value of any shares of Common
Stock, cash or other thing of value under this Plan or an Agreement to be transferred to the
Participant, and no shares of Common Stock, cash or other thing of value under this Plan or
an Agreement shall be transferred unless and until all disputes
between the Company and the Participant have been fully and finally resolved and the
Participant has waived all claims to such against the Company or an Affiliate.

     (h) Fail Safe. With respect to persons subject to Section 16 of the Exchange
Act, transactions under this Plan are intended to comply with all applicable conditions of
Rule 16b-3 or Rule 16a-1(c)(3), as applicable To the extent any provision of the Plan or
action by the Committee fails to so comply, it shall be deemed null and void, to the extent
permitted by law and deemed advisable by the Committee Moreover, in the event the Plan does
not include a provision required by Rule 16b-3 or Rule 16a-1(c)(3) to be stated

- 17 -

 

herein, such
provision (other than one relating to eligibility requirements or the price and amount of
Awards) shall be deemed to be incorporated by reference into the Plan with respect to
Participants subject to Section 16.

     9.7 Mitigation of Excise Tax. Except as otherwise provided in an Agreement, if any
payment or right accruing to a Participant under this Plan (without the application of this Section
9.7), either alone or together with other payments or rights accruing to the Participant from the
Company or an Affiliate (“Total Payments”), would constitute a ‘parachute payment” (as defined in
Section 280G of the Code and regulations thereunder), such payment or right shall, if so elected by
the Participant in his or her sole discretion, be reduced to the largest amount or greatest right
that will result in no portion of the amount payable or right accruing under the Plan being subject
to an excise tax under Section 4999 of the Code or being disallowed as a deduction under Section
280G of the Code. The determination of the amount of any potential reduction in the rights or
payments shall be made by the Committee in good faith after consultation with the Participant and
shall be communicated to Participant prior to his or her making such election. The Participant
shall cooperate in good faith with the Committee in making such determination and providing the
necessary information for this purpose. The foregoing provisions of this Section 9.7 shall apply
with respect to any person only if, after reduction for any applicable Federal excise tax imposed
by Section 4999 of the Code and Federal income tax imposed by the Code, the Total Payments accruing
to such person would be less than the amount of the Total Payments as reduced, if applicable, under
the foregoing provisions of the Plan and after reduction for only Federal income taxes.

     9.8 Rights with Respect to Continuance of Employment. Nothing contained herein shall
be deemed to alter the relationship between the Company or an Affiliate and a Participant, or (he
contractual relationship between a Participant aid the Company or an Affiliate if there is a
written contract regarding such relationship. Nothing contained heroin shall be construed to
constitute a contract of employment between the Company or an Affiliate and a Participant. The
Company or an Affiliate and each of the Participants continue to have the right to terminate the
employment or service relationship at any time for any reason, except as provided in a written
contract.

     9.9 Awards in Substitution for Awards Granted by Other Corporations. Awards
(including cash in respect of fractional shares) may be granted under the Plan from time to time in
substitution for awards held by employees, directors or service providers of other corporations who
are about to become officers, directors or employees of the Company or an Affiliate as the result
of a merger or consolidation of the employing corporation with the Company or an Affiliate, or the
acquisition by the Company or an Affiliate of the assets of the employing
corporation, or the acquisition by the Company or Affiliate of the stock of the employing
corporation, as the result of which it becomes a designated employer under the Plan. The terms and
conditions of the Awards so granted may vary from the terms and conditions set forth in this Plan
at the time of such grant as the majority of the members of the Committee may deem appropriate to
conform, in whole or in part, to the provisions of the awards in substitution for which they are
granted.

     9.10 Procedure for Adoption. Any Affiliate of the Company may by resolution of such
Affiliate’s board of directors, with the consent of the Board of Directors and subject to such

- 18 -

 

conditions as may be imposed by the Board of Directors, adopt the Plan for the benefit of its
employees as of the date specified in the board resolution.

     9.11 Procedure for Withdrawal. Any Affiliate which has adopted the Plan may, by
resolution of the board of directors of such Affiliate, with the consent of the Board of Directors
and subject to such conditions as may be imposed by the Board of Directors, terminate its adoption
of the Plan.

     9.12 Delay. If at the time a Participant incurs a Termination of Employment (other
than due to Cause) or if at the time of a Change in Control, the Participant is subject to
“short-swing” liability under Section 16 of the Exchange Act, any time period provided for under
the Plan or an Agreement to the extent necessary to avoid the imposition of liability shall be
suspended and delayed during the period the Participant would be subject to such liability, but not
more than six (6) months and one (1) day and not to exceed the Option Period. The Company shall
have the right to suspend or delay any time period described in the Plan or art Agreement if the
Committee shall determine that the action may constitute a violation of any law or result in
liability under any law to the Company, an Affiliate or a stockholder of the Company until such
time as the action required or permitted shall not constitute a violation of law or result in
liability to the Company, an Affiliate or a stockholder of the Company. The Committee shall have
the discretion to suspend the application of the provisions of the Plan required solely to comply
with Rule 16b-3 if the Committee shall determine that Rule 16b-3 does not apply to the Plait.

     9.13 Heading. The headings contained in this Plan are for reference purposes only and
shall not affect the meaning or interpretation of this Plan.

     9.14 Severability. If any provision of this Plan shall for any reason be held to be
invalid or unenforceable, such invalidity or unenforceability shall not effect any other provision
hereby, and this Plan shall be construed as if such invalid or unenforceable provision were
omitted.

     9.15 Successors and Assigns. This Plan shall inure to the benefit of and be binding
upon each successor and assign of the Company. All obligations imposed upon a Participant, and all
rights granted to the Company hereunder, shall be binding upon the Participant’s heirs, legal
representatives and successors.

     9.16 Entire Agreement. This Plan and the Agreement constitute the entire agreement
with respect to the subject matter hereof and thereof, provided that in the event of any
inconsistency between the Plan and (he Agreement, the terms and conditions of this Plan shall
control.

- 19 -

 

     IN WITNESS WHEREOF, this instrument has been executed by the undersigned as of September 14,
1998.

	 	 	 	 	 	 	 
	 	 	FIRST MERCURY FINANCIAL CORPORATION	 	 
	 
	 	 	 	 	 	 
	 

	 	By:	 	/s/ Richard H. Smith
	 

	 	 	 	 

	 	 
	 

	 	Name:	 	Richard H. Smith	 	 
	 

	 	 	 	 

	 	 
	 

	 	Its:	 	President, C.O.O.	 	 
	 

	 	 	 	 

	 	 

- 20  -

 

AMENDMENT NO. 1

TO THE

FIRST MERCURY FINANCIAL CORPORATION

1998 STOCK COMPENSATION PLAN

     THIS AMENDMENT NO. 1 TO THE FIRST MERCURY FINANCIAL CORPORATION 1998 STOCK COMPENSATION PLAN
(this “Amendment”) is adopted, subject to
stockholder approval, effective as of March 2, 1999. This Amendment amends that certain First Mercury Financial Corporation 1998 Stock
Compensation Plan (the “Plan”), effective September 3, 1998, which was established by First
Mercury Financial Corporation, a Delaware corporation (“FMFC”). The Plan was adopted by
the Board of Directors of FMFC on September 3 1998 and approved by the stockholders of FMFC on
October 6, 1998;

     WHEREAS, according to Section 1.1 of the Plan, the purpose of the Plan is to promote the
overall financial objectives of FMFC and its stockholders by motivating those persons selected to
participate in (he Plan to achieve long-term growth in stockholder value and by retaining the
association of those individuals who are instrumental in achieving this growth; and

     WHEREAS in order to fulfill this purpose, it is in FMFC’s best interest to amend the Plan
according to the provisions of this Amendment, in accordance with Section 9.1 of the Plan.

     NOW, THEREFORE, in consideration of the foregoing premises and other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the Plan is hereby
amended as follows:

     1. Section 2.11 of the Plan is deleted in its entirety and replaced with the following:

2.11 “Common Stock” means the shares of the Company’s Common
Stock, voting or non-voting, $.01 par value, whether presently or
hereafter issued, and any other stock or security resulting from
adjustment thereof as described hereinafter or the common stock of any
successor to the Company which is designated for the purposes of the
Plan.

     2. Section 4.1 of the Plan is deleted in its entirety and replaced with the following:

4.1 Number of Shares. Subject to the adjustment under Section
4.6, the total number of shares of Common Stock reserved and available
for distribution pursuant to Awards under the Plan shall be 0 shares of
the Company’s Class A voting common stock and 5,000 shares of the
Company’s Class B non-voting common stock. Such shares may consist, in
whole or in part, of authorized and unissued shares or treasury shares.

 

 

     3. Section 6.1 of the Plan is deleted in its entirety and replaced with the following:

6.1 General. The Committee shall have authority to grant
Stock Options under the Plan at any time or from time to time. Stock
Options may be either Incentive Stock Options or Non-Qualified Stock
Options. An Option shall entitle the Participant to receive shares of
Common Stock upon exercise of such Option, subject to the Participant’s
satisfaction in full of any conditions, restrictions or limitations
imposed in accordance with the Plan or an Option Agreement (which may
differ from other Agreements) including, without limitation, payment of
the Option Price. During any calendar year, Options to purchase tin
tame than 0 shares (as adjusted Pursuant to Sections 4.1 and 4.6) of the
Company‘s Class A voting common stock and 2,500 states (as adjusted
pursuant to Sections 4.1 and 4.6) of the Company’s Class B non-voting
common stock shall be granted to any Participant.

     Pursuant to Section 9.1 of the Plan, this Amendment shall not be effective without the
approval of the Company’s stockholders. If such approval is not obtained, then this Amendment
shall be null and void ab initio.

     IN WITNESS WHEREOF, this instrument has been executed by the undersigned as of March 2, 1999.

	 	 	 	 	 
	 	FIRST MERCURY FINANCIAL CORPORATION

 
	 	By:  	/s/ Richard H. Smith	 
	 	 	Richard H. Smith, President 	 

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-exv10w2

 

Exhibit 10.2

REGISTRATION RIGHTS AGREEMENT

          This Registration Rights Agreement (this “Agreement”) is made as of this
7th day of June, 2004 by and among First Mercury Financial Corporation, a Delaware
corporation (together with any successor thereto, the “Company”), and FMFC Holdings, LLC, a
Delaware limited liability company (the “Investor”).

          WHEREAS, the Company and the Investor are entering into a certain Series A Convertible
Preferred Stock Purchase Agreement, dated as of March 1, 2004 (the “Purchase Agreement”),
pursuant to which the Company has agreed to issue and sell, and the Investor has agreed to
purchase, shares of Series A Convertible Preferred Stock, par value $.01 per share (the “Series
A Preferred Stock”); and

          WHEREAS, the execution of this Agreement is a condition precedent to the purchase by the
Investor of the Series A Preferred Stock under the Purchase Agreement.

          NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements
hereinafter set forth, the parties hereto agree as follows:

     1. Certain Definitions. As used in this Agreement, the following terms shall have the
respective meanings set forth below:

          An “Affiliate” of a Person means any person controlling, controlled by, or under
common control with, such Person. For purposes of this definition, “control” means the power to
direct the management and policies of a Person, whether through the ownership of voting securities,
by agreement or otherwise, including control within the meaning of Section 15 of the Securities Act
or Section 20 of the Exchange Act.

          “Agreement” has the meaning set forth in the introduction to this Agreement.

          “Commission” means the United States Securities and Exchange Commission or any other
federal agency at the time administering the Securities Act and the Exchange Act.

          “Common Stock” means the Company’s common stock, par value $.01 per share.

          “Company” has the meaning set forth in the introduction to this Agreement.

          “Controlling Person” has the meaning set forth in Section 5 of this Agreement.

          “Exchange Act” means the Securities Exchange Act of 1934, as amended from time to
time, or any similar successor federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.

          “Form S-1 Demand Registration” has the meaning set forth in Section 3(a) of this
Agreement.

          “Holders” has the meaning set forth in Section 2 of this Agreement.

 

 

          “Initial Public Offering” means the initial public offering of Common Stock by the
Company pursuant to an effective registration statement under the Securities Act.

          “Inspector” has the meaning set forth in Section 4(h) of this Agreement.

          “Investor” has the meaning set forth in the introduction to this Agreement.

          “Person” means any individual, corporation, association, partnership, limited
liability company, joint venture, estate, trust, or unincorporated organization or any government
and any agency or political subdivision thereof.

          “Purchase Agreement” has the meaning set forth in the introduction to this Agreement.

          “Registrable Securities” means (i) any shares of Series A Preferred Stock held by the
Investor, (ii) the shares of Common Stock or any other securities issued or issuable upon
conversion of the Series A Preferred Stock, (iii) any other shares of Common Stock acquired by the
Investor and (iv) any other securities issued or issuable with respect to any such shares described
in clauses (i), (ii) and (iii) above by way of a stock dividend or stock split or in connection
with a combination of shares, recapitalization, merger, consolidation or other reorganization (it
being understood that for purposes of this Agreement, a Person will be deemed to be a holder of
Registrable Securities whenever such Person has the right to then acquire or obtain from the
Company any Registrable Securities, whether or not such acquisition has actually been effected).

          “Securities Act” shall mean the Securities Act of 1933, as amended from time to time,
or any similar successor federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.

          “Selling Holder” has the meaning set forth in Section 5 of this Agreement.

          “Series A Preferred Stock” has the meaning set forth in the introduction to this
Agreement.

          “Stockholders Agreement” means the Stockholders Agreement of even date herewith by and
among the Company, the Investor and all the stockholders of the Company.

          “Tier 1 Default” has the meaning set forth in the Purchase Agreement.

          “Tier 2 Default” has the meaning set forth in the Purchase Agreement.

     2. Piggyback Registrations. If at any time or times after the date hereof the Company
shall seek to file a registration statement under the Securities Act with respect to an offering of
shares of Common Stock to the public for its own account or on the account of others (except with
respect to registration statements on Form S-4 or Form S-8 or another form not available for
registering the Registrable Securities for sale to the public), the Company will promptly give
written notice thereof to all holders of Registrable Securities (the “Holders”). If within
twenty (20) days after their receipt of such notice, one or more Holders request the

- 2 -

 

inclusion of some or all of the Registrable Securities held by them in such registration
statement, the Company will use its best efforts to include such securities in such registration
statement. In the case of any underwritten public offering, if the managing underwriter determines
that marketing factors require a limitation on the number of Registrable Securities to be offered
under such registration statement, subject to the following sentence, the Company shall not be
required to include in such registration statement Registrable Securities of the Holders in excess
of the amount, if any, of shares of Common Stock which the managing underwriter of such
underwritten offering shall reasonably and in good faith agree to include in such offering in
addition to any amount to be registered for the account of the Company. If any limitation of the
number of shares of Registrable Securities to be registered by the Holders is required pursuant to
this Section 2, the number of such securities to be excluded from such registration statement shall
be determined in the following sequence: (i) first, securities held by any Persons not having any
contractual, incidental “piggyback” registration rights to include such securities in the
registration statement, (ii) second, securities held by any Persons having contractual, incidental
“piggyback” rights to include such securities on the registration statement pursuant to an
agreement which is not this Agreement and (iii) third, Registrable Securities to be registered by
the Holders as determined on a pro rata basis (based upon the relative number of Registrable
Securities held by such Holders requesting inclusion pursuant to this Section 2).

     3. Required Registrations.

          (a) Demand Registration. At any time on or after the two (2) year anniversary of
the date hereof (or at any time after the occurrence and during the continuation of a Tier 1
Default or a Tier 2 Default, the Holders of a majority of the then outstanding Registrable
Securities may request that the Company register under the Securities Act all or a portion of the
Registrable Securities held by such requesting Holders having an aggregate value of at least
$10,000,000 (based on the then current market price) (a “Form S-1 Demand Registration”);
provided however, that in the event of a Material Default (as defined in the
Purchase Agreement), the Holders shall be entitled to exercise their rights under this Section
3(a) at any time prior to the two (2) year anniversary of the date hereof or at any time
thereafter. Such requests shall be in writing and shall state the number of shares of
Registrable Securities to be disposed of and the intended method of disposition of such shares by
such requesting Holders. The Holders shall only be entitled to request two (2) Form S-1 Demand
Registrations pursuant to this Section 3(a). Notwithstanding anything to the contrary contained
herein, a registration will not count as a Form S-1 Demand Registration under this Section 3(a)
until the registration statement relating to all such Registrable Securities requested to be so
registered has been declared effective by the Commission at the request of the requesting Holders
and, if such method of disposition is a firm commitment underwritten
public offering, all of such shares shall have been sold pursuant thereto.

          (b) Registration Requirements. Following receipt of a request for registration
pursuant to this Section 3, the Company will promptly notify all of the other Holders of such
request and such Holders shall then have twenty (20) days to notify the Company of their desire
to participate in the registration. Thereupon, the Company will use its best efforts to cause
such of the Registrable Securities as may be requested by the Holders to be registered under the
Securities Act in accordance with the terms of this Section 3. If the request for registration
contemplates an underwritten public offering, the Company shall state

- 3 -

 

such in the written notice and in such event the right of any Person to participate in such
registration shall be conditioned upon their participation in such underwritten public offering
and the inclusion of their securities in the underwritten public offering to the extent provided
herein.

          (c) Underwritten Offering. If a requested registration pursuant to this Section 3
involves an underwritten public offering and the managing underwriter of such offering determines
in good faith that the number of securities sought to be offered should be limited due to market
conditions, then the number of securities to be included in such underwritten public offering
shall be reduced to a number deemed satisfactory by such managing underwriter; provided
that the shares to be excluded shall be determined in the following sequence: (i) first,
securities held by any Persons not having any contractual, incidental “piggyback” registration
rights to include such securities on the registration statement, (ii) second, securities held by
any Persons (other than the Holders) having contractual, incidental “piggyback” rights to include
such securities in the registration statement pursuant to an agreement which is not this
Agreement, (iii) third, securities to be registered by the Company for its own account and (iv)
fourth, Registrable Securities sought to be included by the Holders. If there is a reduction of
the number of Registrable Securities pursuant to clause (iv), such reduction shall be made on a
pro rata basis (based upon the relative number of Registrable Securities held by Holders
requesting inclusion pursuant to this Section 3). With respect to a request for registration
pursuant to this Section 3 which is for an underwritten public offering, the managing underwriter
shall be chosen by a majority-in-interest of the Holders requesting such registration, subject to
the approval of the Company, which approval will not be unreasonably withheld. If the managing
underwriter has not limited the number of Registrable Securities or other securities to be
underwritten, the Company may include securities for its own account in such registration if the
managing underwriter so agrees and if the number of Registrable Securities which would otherwise
have been included in such registration and underwriting will not thereby be limited. If
requested in good faith by the managing underwriter, the Holders agree not to offer, sell,
pledge, transfer or otherwise dispose of any Common Stock not registered under the Securities Act
for a period not to exceed ninety (90) days following the effective date of the registration
statement filed by the Company.

          (d) Postponement. The Company may postpone the filing of a registration statement
requested by the Holders pursuant to this Section 3 for a reasonable period of time not more than
once during any twelve-month period, if the Company delivers to such Holders a certificate signed
by the President of the Company stating that the Board of Directors of the Company determined in
good faith that the filing of a registration statement would have a material adverse effect on
the Company at such time. The Company shall not be required to cause a registration statement
requested pursuant to this Section 3 to become effective within ninety (90) days following the
effective date of a registration statement on Form S-1 initiated by the Company, provided
that the Company had received the Holder’s request for registration after the Company had given
written notice, made in good faith, to the Holders that the Company was commencing to prepare a
Company-initiated registration statement (other than a registration effected solely to implement
an employee benefit plan or a transaction to which Rule 145 or any other similar rule under the
Securities Act is applicable); provided further, however, that the
Company shall use its best efforts to achieve such

- 4 -

 

effectiveness promptly following such period.

     4. Further Obligations of the Company. Whenever the Company is required hereunder to
include any Registrable Securities in a registration statement under the Securities Act, it agrees
that it shall also do the following:

          (a) Pay all fees and expenses relating to such registrations and offerings (exclusive of
underwriting discounts and commissions) and the reasonable fees and expenses of not more than one
independent counsel for the Holders (chosen by a majority-in-interest of the Holders requesting
registration of Registrable Securities) in connection with any registrations pursuant to Sections
2 or 3 hereof;

          (b) Use its best efforts to diligently prepare and file with the Commission a registration
statement and such amendments and supplements to such registration statement and the prospectus
used in connection therewith as may be necessary to keep such registration statement effective
until the Holder or Holders have completed the distribution described in the registration
statement relating thereto and to comply with the provisions of the Securities Act with respect
to the sale of securities covered by such registration statement for such period;

          (c) Furnish to each selling Holder such copies of each preliminary and final prospectus and
such other documents as such Holder may reasonably request to facilitate the public offering of
its Registrable Securities;

          (d) Enter into any reasonable underwriting agreement required by the proposed underwriter,
if any, in such form and containing such terms as are customary; provided,
however, that no Holder shall be required to make any representations or warranties other
than with respect to its title to the Registrable Securities and with respect to any written
information provided by the Holder to the Company;

          (e) Use its best efforts to register or qualify the securities covered by such registration
statement under the securities or “blue sky” laws of such jurisdictions as any selling Holder may
reasonably request; provided that the Company shall not for any such purpose be required
to qualify to do business as a foreign corporation in any jurisdiction wherein it is not so
qualified;

          (f) Immediately notify each selling Holder, at any time when a prospectus relating to his,
her or its Registrable Securities is required to be delivered under the Securities Act, of the
happening of any event as a result of which such prospectus contains an untrue statement of a
material fact or omits any material fact necessary to make the statements therein not misleading,
and, at the request of any such selling Holder, promptly prepare a supplement or amendment to
such prospectus so that, as thereafter delivered to the purchasers of such Registrable
Securities, such prospectus will not contain any untrue statement of a material fact or omit to
state any material fact necessary to make the statements therein not misleading;

          (g) Cause all such Registrable Securities to be listed on each securities exchange or
quotation system on which similar securities issued by the Company are then

- 5 -

 

listed or quoted (or if similar securities issued by the Company are not yet listed or
quoted, then on such exchange or quotation system as a majority-in-interest of the Holders
requesting such registration shall determine) and provide a transfer agent and registrar for all
such Registrable Securities not later than the effective date of such registration statement;

          (h) Make available to each selling Holder, any underwriter participating in any disposition
pursuant to a registration statement, and any attorney, accountant or other agent or
representative retained by any such selling Holder or underwriter (each, an “Inspector”),
all financial and other records, pertinent corporate documents and properties of the Company, as
shall be reasonably necessary to enable them to exercise their due diligence responsibility, and
cause the Company’s officers to supply all information reasonably requested by any such Inspector
in connection with such registration statement as shall be reasonably necessary to enable them to
exercise their due diligence responsibility; provided, however, that such
Inspector shall agree in writing to hold in confidence and trust all information so provided and
to use such information only to satisfy such due diligence responsibility and no other.

          (i) Permit any Holder, who, in its sole and exclusive judgment exercised in good faith,
believes that it might be deemed to be a Controlling Person (as defined in Section 5) of the
Company, to participate in good faith and at its own expense in the preparation of such
registration or comparable statement and to request the insertion therein of material furnished
to the Company in writing, which request shall not be denied by the Company without good reason;
provided, however, that preparation of the registration or comparable statement
shall be under the Company’s control and at the Company’s direction, and the Company shall retain
authority to determine the content of the registration or comparable statement.

          (j) Otherwise use its best reasonable efforts to comply with the securities laws of the
United States and other applicable jurisdictions and all applicable rules and regulations of the
Commission and comparable governmental agencies in other applicable jurisdictions and make
generally available to the Holders, in each case as soon as practicable, but not later than
forty-five (45) days after the end of the twelve (12) month period beginning at the end of the
fiscal quarter of the Company during which the effective date of the registration statement
occurs (or ninety (90) days if such twelve (12) month period coincides with the Company’s fiscal
year), an earnings statement (which need not be audited) of the Company, covering such twelve
(12) month period, which will satisfy the provisions of Section 11(a) of the Securities Act;

          (k) In the case of an underwritten public offering, furnish to a prospective selling Holder
holding at least a majority of the Registrable Securities being sold in such offering, upon
written request, a signed counterpart, addressed to such prospective selling Holder, of an
opinion of counsel for the Company, dated the effective date of the registration statement, and
covering substantially the same matters with respect to the registration statement (and the
prospectus included therein), as customarily covered in opinions of the Company’s counsel
delivered to the underwriters in underwritten public offerings of securities; and

          (l) Otherwise cooperate with the underwriter or underwriters, the Commission

- 6 -

 

and other regulatory agencies and take all actions and execute and deliver or cause to be
executed and delivered all documents necessary to effect the registration of any Registrable
Securities hereunder.

     5. Indemnification; Contribution.

          (a) Incident to any registration of any Registrable Securities under the Securities Act
pursuant to this Agreement, the Company will indemnify and hold harmless each underwriter, each
Holder who offers or sells any such Registrable Securities in connection with such registration
statement (including its partners (including partners of partners and stockholders of any such
partners), directors, officers, employees, representatives and agents of any of them) (each, a
“Selling Holder”), and each person who controls any of them within the meaning of Section
15 of the Securities Act or Section 20 of the Exchange Act (each, a “Controlling
Person”), from and against any and all losses, claims, damages, expenses and liabilities,
joint or several (including any investigative, legal and other expenses reasonably incurred in
connection with, and any amount paid in settlement of, any action, suit or proceeding or any
claim asserted, as the same are incurred), to which they, or any of them, may become subject
under the Securities Act, the Exchange Act or other federal or state statutory law or regulation,
at common law or otherwise, insofar as such losses, claims, damages or liabilities arise out of
or are based on (i) any untrue statement or alleged untrue statement of a material fact contained
in such registration statement (including any related preliminary or definitive prospectus, or
any amendment or supplement to such registration statement or prospectus), (ii) any omission or
alleged omission to state in such document a material fact required to be stated in it or
necessary to make the statements in it not misleading, (iii) any violation or alleged violation
by the Company of the Securities Act, the Exchange Act or any state securities law or any rule or
regulation promulgated under the Securities Act, the Exchange Act or any state securities law,
(iv) any failure to register or qualify the Registrable Securities in any state where the Company
or its agents has affirmatively undertaken or agreed in writing that the Company (the undertaking
of any underwriter chosen by the Company being attributed to the Company) will undertake such
registration or qualification on the Selling Holder’s behalf (provided that in such instance the
Company shall not be so liable if it has undertaken its best efforts to so register or qualify
the Registrable Securities), or (v) any blue sky application or other document executed by the
Company specifically for the purpose or based upon written information furnished by the Company
filed in any state or other jurisdiction in order to qualify any or all of the Registrable
Securities under the securities laws thereof; provided, however, that the Company
will not be liable to the extent that such loss, claim, damage, expense or liability arises from
and is based on an untrue statement or omission of a material fact contained in such registration
statement or alleged untrue statement or omission made in reliance on and in conformity with
information furnished in writing to the Company by such underwriter, Selling Holder or
Controlling Person expressly for use in such registration statement. With respect to such untrue
statement or omission or alleged untrue statement or omission in the information furnished in
writing to the Company by such Selling Holder expressly for use in such registration statement,
such Selling Holder will indemnify and hold harmless each underwriter, the Company (including its
directors, officers, employees, representatives and agents), each other Holder (including its
partners (including partners of partners and stockholders of such partners), directors, officers,
employees, representatives and agents of

- 7 -

 

any of them, and each Controlling Person of any of them), from and against any and all
losses, claims, damages, expenses and liabilities, joint or several, to which they, or any of
them, may become subject under the Securities Act, the Exchange Act or other federal or state
statutory law or regulation, at common law or otherwise as a direct result of such untrue
statement or omission or alleged untrue statement or omission in the information furnished in
writing to the Company by such Selling Holder expressly for use in such registration statement.
In no event, however, shall the liability of a Selling Holder for indemnification under this
Section 5(a) exceed the net proceeds received by such Selling Holder from its sale of Registrable
Securities under such registration statement.

          (b) If the indemnification provided for in Section 5(a) above for any reason is held by a
court of competent jurisdiction to be unavailable to an indemnified party in respect of any
losses, claims, damages, expenses or liabilities referred to therein, then each indemnifying
party under this Section 5, in lieu of indemnifying such indemnified party thereunder, shall
contribute to the amount paid or payable by such indemnified party as a result of such losses,
claims, damages, expenses or liabilities in such proportion as is appropriate to reflect (i) the
relative benefits received by the Company, the Selling Holders and the underwriters from the
offering of the Registrable Securities and (ii) the relative fault of the Company, the Selling
Holders and the underwriters in connection with the statements or omissions which resulted in
such losses, claims, damages, expenses or liabilities, as well as any other relevant equitable
considerations; provided, however, that in the event of a registration statement
filed in response to a demand for registration under Section 3(a) or Section 3(b) and in which
the Company does not register any shares of capital stock, the proportion of contribution by the
Company, the Selling Holders and the underwriters shall in all cases be governed solely by clause
(ii) above. The relative benefits received by the Company, the Selling Holders and the
underwriters shall be deemed to be in the same respective proportions that the net proceeds from
the offering (before deducting expenses) received by the Company and the Selling Holders and the
underwriting discount received by the underwriters, in each case as set forth in the table on the
cover page of the applicable prospectus, bear to the aggregate public offering price of the
Registrable Securities. The relative fault of the Company, the Selling Holders and the
underwriters shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Company, the Selling Holders or the
underwriters and the parties’ relative intent, knowledge, access to information and opportunity
to correct or prevent such statement or omission.

          The Company and the Selling Holders agree that it would not be just and equitable if
contribution pursuant to this Section 5(b) were determined by pro rata or per capita allocation or
by any other method of allocation which does not take account of the equitable considerations
referred to in the immediately preceding paragraph. In no event, however, shall a Selling Holder
be required to contribute any amount under this Section 5(b) in excess of the net proceeds received
by such Selling Holder from its sale of Registrable Securities under such registration statement.
No Person found guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any Person who was not found guilty of such
fraudulent misrepresentation.

- 8 -

 

          (c) The amount required to be paid by an indemnifying party or payable to an indemnified
party as a result of the losses, claims, damages and liabilities referred to in this Section 5
shall be deemed to include, subject to the limitations set forth above, any legal or other
expenses reasonably incurred by such indemnified party in connection with investigating or
defending any such action or claim, payable as the same are incurred. The indemnification and
contribution provided for in this Section 5 will remain in full force and effect regardless of
any investigation made by or on behalf of the indemnified parties or any officer, director,
employee, agent or Controlling Person of the indemnified parties. No indemnifying party, in the
defense of any such claim or litigation, shall enter into a consent of entry of any judgment or
enter into a settlement without the consent of the indemnified party, which consent will not be
unreasonably withheld.

     6. Rule 144 and Rule 144A Requirement. In the event that the Company becomes subject
to Section 13 or Section 15(d) of the Exchange Act, the Company shall use its best efforts to take
all action as may be required as a condition to the availability of Rule 144 or Rule 144A under the
Securities Act (or any successor or similar exemptive rules hereafter in effect). The Company
shall furnish to any Holder, within fifteen (15) days of a written request, a written statement
verifying its compliance with the current public information requirement of Rule 144 or Rule 144A
or such successor rules.

     7. Transferability of Registration Rights. The registration rights set forth in this
Agreement are transferable to any transferee of 5% or more of the Registrable Securities. Each
subsequent holder of Registrable Securities must consent in writing to be bound by the terms and
conditions of this Agreement in order to acquire the rights of a Holder granted pursuant to this
Agreement.

     8. Rights Which May Be Granted to Subsequent Investors. Other than transferees of
Registrable Securities under Section 7 hereof, the Company shall not, without the prior written
consent of the holders of a majority of the outstanding Registrable Securities, grant any other
registration rights to any third parties.

     9. Miscellaneous.

          (a) Amendments. For the purposes of this Agreement and all agreements executed
pursuant hereto, no course of dealing between the parties hereto and no delay on the part of
either party hereto in exercising any rights hereunder or thereunder shall operate as a waiver of
the rights hereof and thereof. This Agreement may be amended, modified or terminated and any
provision hereof may be waived by the joint written consent of the Company and the holders of not
less than a majority of the outstanding Registrable Securities; provided that no
amendment, modification or waiver may treat adversely one Holder in a manner different from the
Holders as a group without the consent of such Holder. Any amendment, modification, termination
or waiver effected in accordance with this Section 9(a) shall be binding upon all Holders of
Registrable Securities even if they do not execute such joint written consent.

          (b) Notices and Demands. Any notice or demand which, by any provision of this
Agreement or any agreement, document or instrument executed pursuant hereto or

- 9 -

 

thereto, except as otherwise provided therein, is required to be given shall be deemed to
have been sufficiently given or served and received for all purposes when delivered by hand or
facsimile or five (5) days after being sent by certified or registered mail, postage and charges
prepaid, return receipt requested, or two (2) days after being sent by overnight delivery
providing receipt of delivery, to the following addresses:

               (i) If to the Company, First Mercury Financial Corporation, 29621 Northwestern Highway,
Southfield, MI 48034, Attn: Richard Smith, or at such other address designated by the Company to
the Investor in writing, with a copy to Dickinson Wright PLLC, 215 S. Washington Square, Suite 200,
Lansing, MI 48933, Attn: Joseph A. Fink.

               (ii) If to the Investor, FMFC Holdings, LLC, 222 West Adams Street, Suite 1000, Chicago, IL
60606, Attn: Douglas Patterson, or at such other address designated by the Investor to the Company
in writing, with a copy to McDermott, Will & Emery, 227 West Monroe Street, Chicago, IL 60606,
Attn: Scott M. Williams.

          (c) Remedies; Severability. It is specifically understood and agreed that any
breach of the provisions of this Agreement by either party will result in irreparable injury to
the other party, that the remedy at law alone will be an inadequate remedy for such breach, and
that, in addition to any other remedies which it may have, such other party may enforce its
rights by an action or actions for specific performance in the federal or state courts in the
State of Illinois (to the extent permitted by law). Whenever possible, each provision of this
Agreement shall be interpreted in such a manner as to be effective and valid under applicable
law, but if any provision of this Agreement shall be deemed prohibited or invalid under such
applicable law, such provision shall be ineffective to the extent of such prohibition or
invalidity, and such prohibition or invalidity shall not invalidate the remainder of such
provision or the other provisions of this Agreement.

          (d) Successors and Assigns. This Agreement shall be binding upon and shall inure to
the benefit of the respective successors and permitted assigns of the parties hereto as
contemplated herein, and any successor to the Company by way of merger or otherwise shall
specifically agree to be bound by the terms hereof.

          (e) Counterparts. This Agreement may be executed in one or more counterparts, each
of which shall constitute an original but all of which shall constitute but one and the same
instrument. One or more counterparts of this Agreement may be delivered via telecopier or other
electronic means, with the intention that they shall have the same effect as an original
counterpart hereof.

          (f) Effect of Heading. The Section headings herein are for convenience only and
shall not affect the construction hereof.

          (g) Governing Law. This Agreement shall be deemed a contract made under the laws of
the State of Delaware and together with the rights and obligations of the parties hereunder,
shall be construed under and governed by the laws of the State of Delaware, without giving effect
to its conflict of laws principles.

          (h) Jurisdiction; Venue; Waiver Of Jury Trial.

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               (i) Each of the parties to this Agreement hereby agrees that the state and federal courts of
the State of Illinois shall have exclusive jurisdiction to hear and determine any claims or
disputes between the parties hereto pertaining directly or indirectly to this Agreement, and all
documents, instruments and agreements executed pursuant hereto or thereto, or to any matter arising
herefrom (unless otherwise expressly provided for herein or therein). To the extent permitted by
law, each party hereby expressly submits and consents in advance to such jurisdiction in any action
or proceeding commenced by the other party hereto in any of such courts, and agrees that service of
such summons and complaint or other process or papers may be made by registered or certified mail
addressed to such party at the address to which notices are to be sent pursuant to this Agreement.
Each of the parties waives any claim that Chicago, Illinois is an inconvenient forum or an improper
forum based on lack of venue. The choice of forum set forth in this Section shall not be deemed to
preclude the enforcement of any judgment obtained in such forum or the taking of any action to
enforce the same in any other appropriate jurisdiction.

               (ii) Each party hereto hereby waives, to the fullest extent permitted by applicable law, any
right it may have to a trial by jury in respect of any litigation directly or indirectly arising
out of, under or in connection with this Agreement. Each party hereto (a) certifies that no
representative, agent or attorney of the other party has represented, expressly or otherwise, that
the other party would not, in the event of litigation, seek to enforce the foregoing waiver and (b)
acknowledges that it and the other party hereto have been induced to enter into this Agreement by,
among other things, the mutual waivers and certifications in this Section.

          (i) Further Assurances. From and after the date of this Agreement, upon the request
of either party hereto, the other party shall execute and deliver such instruments, documents and
other writings as may be reasonably necessary or desirable to confirm and carry out and to
effectuate fully the intent and purposes of this Agreement.

          (j) Term. The provisions contained in Sections 2, 3 and 4 shall terminate ten (10)
years from the date of the Company’s Initial Public Offering or the date on which all Registrable
Securities held by and issuable to a Holder may be sold without restriction pursuant to Rule 144
of the Securities Act following the Company’s Initial Public Offering, whichever is later.

          (k) Integration. This Agreement, including the exhibits, documents and instruments
referred to herein or therein, constitutes the entire agreement, and supersedes all other prior
agreements and understandings, both written and oral, between the parties with respect to the
subject matter hereof.

[SIGNATURE PAGE FOLLOWS]

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          IN WITNESS WHEREOF, the parties hereto have caused this Registration Rights Agreement to be
duly executed as of the date first set forth above.

	 	 	 	 	 	 	 	 	 
	 	 	COMPANY:	 	 
	 
	 	 	 	 	 	 	 	 
	 	 	FIRST MERCURY FINANCIAL CORPORATION	 	 
	 
	 	 	 	 	 	 	 	 
	 

	 	By:	 	 	 	/s/   Richard H. Smith	 	 
	 	 	 	 	 	 	 
	 

	 	 	 	Name:	 	  Richard H. Smith	 	 
	 

	 	 	 	 	 	 

	 	 
	 

	 	 	 	Title:	 	  President	 	 
	 

	 	 	 	 	 	 

	 	 
	 
	 	 	 	 	 	 	 	 
	 	 	INVESTOR:	 	 
	 
	 	 	 	 	 	 	 	 
	 	 	FMFC HOLDINGS, LLC	 	 
	 
	 	 	 	 	 	 	 	 
	 	 	By: Glencoe Capital, LLC	 	 
	 	 	Its: Manager	 	 
	 
	 	 	 	 	 	 	 	 
	 

	 	 	 	By:	 	/s/   Louis J. Manetti	 	 
	 

	 	 	 	 	 	 

	 	 
	 

	 	 	 	Name:	 	  Louis J. Manetti	 	 
	 

	 	 	 	 	 	 

	 	 
	 

	 	 	 	Title:

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