Document:

Exhibit
10.25

EXECUTION
COPY

 

EMPLOYMENT
AGREEMENT

 

This
Employment Agreement (the “Agreement”) is
made as of this 1st day of January, 2004, by and between DISCOVERY LABORATORIES,
INC., a Delaware corporation (the “Company”), and
CHRISTOPHER J. SCHABER, PH.D. (the “Executive”).

 

WHEREAS,
the Executive is currently employed by the Company as its Executive Vice
President and Chief Operating Officer pursuant to that certain employment
agreement dated as of June 16, 2001, by and between the Company and the
Executive (the “Employment
Agreement”);
and

 

WHEREAS,
the Company and the Executive desire to amend and restate the Employment
Agreement as set forth herein.

 

NOW,
THEREFORE, in consideration of the covenants contained herein, and for other
valuable consideration, the Company and the Executive hereby agree to amend and
restate the Employment Agreement in its entirety to read as
follows:

 

1.  Certain
Definitions. Certain
definitions used herein shall have the meanings set forth on Exhibit A attached
hereto. 

 

2.  Term
of the Agreement. The
term (“Term”) of
this Agreement shall commence on the date first above written and shall continue
through December 31, 2005; provided, however, that commencing on January 1,
2006, and on each January 1st thereafter, the term of this Agreement shall
automatically be extended for one additional year, unless at least 90 days prior
to such January 1st date, the Company or the Executive shall have given notice
that it does not wish to extend this Agreement. Upon the occurrence of a Change
of Control during the term of this Agreement, including any extensions thereof,
this Agreement shall automatically be extended until the end of the Effective
Period if the end of the Effective Period is after the then current expiration
date of the Term. Notwithstanding the foregoing, this Agreement shall terminate
prior to the scheduled expiration date of the Term on the Date of Termination.

 

3.  Executive’s
Duties and Obligations.

 

(a)  Duties. The
Executive shall continue to serve as the Company’s Executive Vice President and
Chief Operating Officer. The Executive shall continue to be responsible for all
duties customarily associated with this title. The Executive shall at all times
report directly to the Company’s Chief Executive Officer.

 

(b)  Location
of Employment. The
Executive’s principal place of business shall continue to be at the Company’s
headquarters to be located within thirty (30) miles of Doylestown, Pennsylvania;
provided, that the Executive acknowledges and agrees that the performance by the
Executive of his duties shall require frequent travel including, without
limitation, overseas travel from time to time.

 

 

 

(c)  Proprietary
Information and Inventions Agreement. The
Executive has executed the Company’s standard form of Intellectual Property and
Confidential Information Agreement (the “Confidentiality
Agreement. The
Executive shall comply at all times with the terms and conditions of the
Confidentiality Agreement and all other reasonable policies of the Company
governing its confidential and proprietary information.

 

4.  Devotion
of Time to Company’s
Business.

 

(a)  Full-Time
Efforts. During
his employment with the Company, the Executive shall devote substantially all of
his time, attention and efforts to the proper performance of his implicit and
explicit duties and obligations hereunder to the reasonable satisfaction of the
Company.

 

(b)  No
Other Employment. During
his employment with the Company, the Executive shall not, except as otherwise
provided herein, directly or indirectly, render any services of a commercial or
professional nature to any other person or organization, whether for
compensation or otherwise, without the prior written consent of the Executive
Committee or the Board.

 

(c)  Non-Competition
During and After Employment. During
the Term and for 12 months from the Date of Termination, the Executive shall
not, directly or indirectly, without the prior written consent of the Company,
either as an employee, employer, consultant, agent, principal, partner,
stockholder, corporate officer, director, or in any other individual or
representative capacity (X) compete with the Company in the business of
developing or commercializing pulmonary surfactants or any other category of
compounds which forms the basis of the Company’s material products or any
material products under development on the Date of Termination, or (Y) solicit,
encourage, induce or endeavor to entice away from the Company, or otherwise
interfere with the relationship of the Company with, any person who is employed
or engaged by the Company as an employee, consultant or independent contractor
or who was so employed or engaged at any time during the preceding six (6)
months; provided, that
nothing herein shall prevent the Executive from engaging in discussions
regarding employment, or employing, any such employee, consultant or independent
contractor (i) if such person shall voluntarily initiate such discussions
without any such solicitation, encouragement, enticement or inducement prior
thereto on the part of the Executive or (ii) if such discussions shall be held
as a result of or employment be the result of the response by any such person to
a written employment advertisement placed in a publication of general
circulation, general solicitation conducted by executive search firms,
employment agencies or other general employment services, not directed
specifically at any such employee, consultant or independent contractor.
Notwithstanding the foregoing, the 12 month period described in the preceding
sentence shall be extended to 24 months in the event of any termination of the
Executive’s employment described in Section 7(c). 

 

(d)  Injunctive
Relief. In the
event that the Executive breaches any provisions of Section 4(c) or of the
Confidentiality Agreement or there is a threatened breach thereof, then, in
addition to any other rights which the Company may have, the Company shall be
entitled, without the posting of a bond or other security, to injunctive relief
to enforce the restrictions contained therein. In the event that an actual
proceeding is brought in equity to enforce the provisions of Section 4(c) or the
Confidentiality Agreement, the Executive shall not urge as a defense that there
is an adequate remedy at law nor shall the Company be prevented from seeking any
other remedies which may be available.

 

 

2

 

(e)  Reformation. To the
extent that the restrictions imposed by Section 4(c) are interpreted by any
court to be unreasonable in geographic and/or temporal scope, such restrictions
shall be deemed automatically reduced to the extent necessary to coincide with
the maximum geographic and/or temporal restrictions deemed by such court not to
be unreasonable.

 

5.  Compensation
and Benefits.

 

(a)  Base
Compensation. During
the Term, the Company shall pay to the Executive (i) base annual compensation
(“Base
Salary”) of at
least $250,000, payable in accordance with the Company’s regular payroll
practices and less all required withholdings and (ii) additional compensation,
if any, and benefits as hereinafter set forth in this Section 5. The Base Salary
shall be reviewed at least annually at the start of each calendar year for the
purposes of determining increases, if any, based on the Executive’s performance,
the performance of the Company, inflation, the then prevailing salary scales for
comparable positions and other relevant factors. 

 

(b)  Bonuses. During
the Term, the Executive shall be eligible for such year-end bonus, which may be
paid in either cash or equity, or both, as is awarded solely at the discretion
of the Compensation Committee of the Board after consultation with the Company’s
Chief Executive Officer, provided, that
the Company shall be under no obligation whatsoever to pay such discretionary
year-end bonus for any year. Any such equity bonus shall contain such rights and
features as are typically afforded to other Company employees of similar level
in connection with comparable equity bonuses awarded by the Company.

 

(c)  Benefits. During
the Term, the Executive shall be entitled to participate in all employee benefit
plans, programs and arrangements made available generally to the Company’s
senior executives or to its employees on substantially the same basis that such
benefits are provided to such executives or employees (including, without
limitation profit-sharing, savings and other retirement plans (e.g., a 401(k)
plan) or programs, medical, dental, hospitalization, vision, short-term and
long-term disability and life insurance plans or programs, accidental death and
dismemberment protection, travel accident insurance, and any other employee
welfare benefit plans or programs that may be sponsored by the Company from time
to time, including any plans or programs that supplement the above-listed types
of plans or programs, whether funded or unfunded); provided,
however, that
nothing in this Agreement shall be construed to require the Company to establish
or maintain any such plans, programs or arrangements. Anything contained herein
to the contrary notwithstanding, throughout the Term, the Executive shall be
entitled to receive term life insurance on behalf of the Executive’s named
beneficiaries in the amount of $500,000 (subject to an annual premium cap of
$1,000 for 2004, which cap shall be increased by 5% for each successive calendar
year of the Term), at no cost to the Executive, except the Company shall have no
liability whatsoever for any taxes (whether based on income or otherwise)
imposed upon or incurred by the Executive in connection with any such life
insurance.

 

(d)  Vacations. During
the Term, the Executive shall be entitled to 15 days paid vacation per year, to
be earned ratably throughout the year, 5 days of which may be carried over from
year to year (provided, that in
no event shall the aggregate number of such vacation days carried over to any
succeeding year exceed 10 days).

 

 

3

 

(e)  Reimbursement
of Business Expenses. The
Executive is authorized to incur reasonable expenses in carrying out his duties
and responsibilities under this Agreement and the Company shall reimburse him
for all such expenses, in accordance with reasonable policies of the
Company.

 

6.  Change
of Control Benefits.

 

(a)  Bonus. The
Executive shall be awarded an annual cash bonus for each fiscal year of the
Company ending during the Effective Period at least equal to the Highest Annual
Bonus.

 

(b)  Options.
Notwithstanding any provision to the contrary in the Company’s Amended and
Restated 1998 Stock Incentive Plan or any stock option agreement between the
Company and the Executive, all options to acquire Company stock held by the
Executive shall accelerate and become fully vested upon the Change of Control
Date and, in the case of any Change of Control in which the Company’s common
stockholders receive cash, securities or other consideration in exchange for, or
in respect of, their Company common stock, (i) the Executive shall be permitted
to exercise his options at a time and in a fashion that will entitle him to
receive, in exchange for any shares acquired pursuant to any such exercise, the
same per share consideration as is received by the other holders of the
Company’s common stock, and (ii) if the Executive shall elect not to exercise
all or any portion of such options, any such unexercised options shall terminate
and cease to be outstanding following such Change of Control, except to the
extent assumed by a successor corporation (or its parent) or otherwise expressly
continued in full force and effect pursuant to the terms of such Change of
Control.

 

7.  Termination
of Employment.

 

(a)  Termination
by the Company for Cause or Termination by the Executive without Good Reason,
Death or Disability.

 

(i)
  In the
event of a termination of the Executive’s employment by the Company for Cause, a
termination by the Executive without Good Reason, or in the event this Agreement
terminates by reason of the death or Disability of the Executive, the Executive
shall be entitled to any unpaid compensation accrued through the last day of the
Executive’s employment, a lump sum payment in respect of all accrued but unused
vacation days (provided, that in
no event shall the aggregate number of such accrued vacation days exceed 10
days) at his Base Salary in effect on the date such vacation was earned, and
payment of any other amounts owing to the Executive but not yet paid. The
Executive shall not be entitled to receive any other compensation or benefits
from the Company whatsoever (except as and to the extent the continuation of
certain benefits is required by law). 

 

(ii)
  In the
case of a termination due to death or disability, notwithstanding any provision
to the contrary in any stock option agreement between the Company and the
Executive, all options to acquire Company stock held by the Executive shall
accelerate and become fully vested upon the Date of Termination (and all options
shall thereupon become fully exercisable), and all stock options shall continue
to be exercisable for one year from the Date of Termination (or, if shorter,
until the expiration of their stated terms).

 

 

4

 

(b)  Termination
by the Company without Cause or by the Executive for Good Reason. If (x)
the Executive’s employment is terminated by the Company other than for Cause,
death or Disability (i.e., without Cause) or (y) the Executive terminates
employment with Good Reason, then the Executive shall be entitled to receive the
following from the Company:

 

(i)
  The
amounts set forth in Section 7(a)(i); 

 

(ii)
  Within 10
days after the Date of Termination, a lump sum cash payment equal to the Highest
Annual Bonus multiplied by the fraction obtained by dividing the number of days
in the year through the Date of Termination by 365; 

 

(iii)
  Within 10
days after the Date of Termination, a lump sum cash payment in an amount equal
to the sum of (A) the Executive’s Base Salary then in effect (determined without
regard to any reduction in such Base Salary constituting Good Reason) and (B)
the Highest Annual Bonus;

 

(iv)
  For one
year from the Date of Termination, the Company shall either (A) arrange to
provide the Executive and his dependents, at the Company’s cost (except to the
extent such cost was borne by the Executive prior to the Date of Termination),
with life, disability, medical and dental coverage, whether insured or not
insured, providing substantially similar benefits to those which the Executive
and his dependents were receiving immediately prior to the Date of Termination,
or (B) in lieu of providing such coverage, pay to the Executive no less
frequently than quarterly in advance an amount which, after taxes, is sufficient
for the Executive to purchase equivalent benefits coverage referred to in clause
(A); provided,
however, that
the Company’s obligation under this Section 7(b)(iv) shall be reduced to the
extent that substantially similar coverages (determined on a benefit-by-benefit
basis) are provided by a subsequent employer; 

 

(v)
  Any other
additional benefits then due or earned in accordance with applicable plans and
programs of the Company; and

 

(vi)
  The
Company will provide out-placement counseling assistance in the form of
reimbursement of the reasonable expenses incurred for such assistance within the
12-month period following the Date of Termination. Such reimbursement amount
shall not exceed $40,000.

 

(c)  Termination
in connection with a Change of Control. If the
Executive’s employment is terminated by the Company other than for Cause or by
the Executive for Good Reason during the Effective Period, then the Executive
shall be entitled to receive the following from the Company:

 

(i)
  All
amounts and benefits described in Section 7(a)(i) above;

 

(ii)
  Within 10
days after the Date of Termination, a lump sum cash payment equal to the Highest
Annual Bonus multiplied by the fraction obtained by dividing the number of days
in the year through the Date of Termination by 365;

 

 

5

 

(iii)
  Within 10
days after the Date of Termination, a lump sum cash payment in an amount equal
to the product of two (2) times the sum of (A) the Executive’s Base Salary then
in effect (determined without regard to any reduction in such Base Salary
constituting Good Reason) and (B) the Highest Annual Bonus;

 

(iv)
  For two
years from the Date of Termination, the Company shall either (A) arrange to
provide the Executive and his dependents, at the Company’s cost (except to the
extent such cost was borne by the Executive prior to the Date of Termination),
with life, disability, medical and dental coverage, whether insured or not
insured, providing substantially similar benefits to those which the Executive
and his dependents were receiving immediately prior to the Date of Termination,
or (B) in lieu of providing such coverage, pay to the Executive no less
frequently than quarterly in advance an amount which, after taxes, is sufficient
for the Executive to purchase equivalent benefits coverage referred to in clause
(A); provided,
however, that
the Company’s obligation under this Section 7(c)(iv) shall be reduced to the
extent that substantially similar coverages (determined on a benefit-by-benefit
basis) are provided by a subsequent employer;

 

(v)
  Notwithstanding
any provision to the contrary in any stock option agreement between the Company
and the Executive, all options to acquire Company stock held by the Executive
shall accelerate and become fully vested upon the Date of Termination (and all
options shall thereupon become fully exercisable), and all stock options shall
continue to be exercisable for the remainder of their stated terms;

 

(vi)
  Any other
additional benefits then due or earned in accordance with applicable plans and
programs of the Company; and

 

(vii)
  The
Company will provide out-placement counseling assistance in the form of
reimbursement of the reasonable expenses incurred for such assistance within the
12-month period following the Date of Termination. Such reimbursement amount
shall not exceed $40,000.

 

8.  Notice
of Termination.

 

(a)  Any
termination of the Executive’s employment by the Company for Cause, or by the
Executive for Good Reason shall be communicated by a Notice of Termination to
the other party hereto given in accordance with Section 12. For purposes of this
Agreement, a “Notice of Termination” means a written notice which: (i) is given
at least 10 days prior to the Date of Termination, (ii) indicates the specific
termination provision in this Agreement relied upon, (iii) to the extent
applicable, sets forth in reasonable detail the facts and circumstances claimed
to provide a basis for termination of the Executive’s employment under the
provision so indicated, and (iv) specifies the employment termination date. The
failure to set forth in the Notice of Termination any fact or circumstance which
contributes to a showing of Good Reason or Cause will not waive any right of the
party giving the Notice of Termination hereunder or preclude such party from
asserting such fact or circumstance in enforcing its rights
hereunder.

 

(b)  A
Termination of Employment of the Executive will not be deemed to be for Good
Reason unless the Executive gives the Notice of Termination provided for herein
within 12 months after the Executive has actual knowledge of the act or omission
of the Company constituting such Good Reason.

 

 

6

 

9.  Mitigation
of Damages. The
Executive will not be required to mitigate damages or the amount of any payment
or benefit provided for under this Agreement by seeking other employment or
otherwise. Except as otherwise provided in Sections 7(b)(iv) and 7(c)(iv), the
amount of any payment or benefit provided for under this Agreement will not be
reduced by any compensation or benefits earned by the Executive as the result of
self-employment or employment by another employer or otherwise.

 

10.  Excise
Tax Gross-Up.

 

(a)  Anything
in this Agreement to the contrary notwithstanding, in the event it shall be
determined that any payment, award, benefit or distribution (including any
acceleration) by the Company or any entity which effectuates a transaction
described in Section 280G(b)(2)(A)(i) of the Code to or for the benefit of the
Executive (whether pursuant to the terms of this Agreement or otherwise, but
determined without regard to any additional payments required under this Section
10) (a “Payment”) would
be subject to the excise tax imposed by Section 4999 of the Code or any
interest or penalties are incurred with respect to such excise tax by the
Executive (such excise tax, together with any such interest and penalties, are
hereinafter collectively referred to as the “Excise
Tax”), then
the Executive shall be entitled to receive an additional payment (a
“Gross-Up
Payment”) in an
amount such that after payment by the Executive of all taxes, including, without
limitation, any income taxes (and any interest and penalties imposed with
respect thereto) and Excise Taxes imposed upon the Gross-Up Payment, the
Executive retains an amount of the Gross-Up Payment equal to the Excise Tax
imposed upon the Payments. For purposes of this Section 10, the Executive shall
be deemed to pay federal, state and local income taxes at the highest marginal
rate of taxation for the calendar year in which the Gross Up Payment is to be
made, taking into account the maximum reduction in federal income taxes which
could be obtained from the deduction of state and local income
taxes.

 

(b)  All
determinations required to be made under this Section 10, including whether and
when a Gross-Up Payment is required and the amount of such Gross-Up Payment and
the assumptions to be utilized in arriving at such determination, shall be made
by the Company’s independent auditors or such other certified public accounting
firm of national standing reasonably acceptable to the Executive as may be
designated by the Company (the “Accounting
Firm”) which
shall provide detailed supporting calculations both to the Company and the
Executive within 15 business days of the receipt of notice from the
Executive that there has been a Payment, or such earlier time as is requested by
the Company. All fees and expenses of the Accounting Firm shall be borne solely
by the Company. Any Gross-Up Payment, as determined pursuant to this Section 10,
shall be paid by the Company to the Executive within five days of the later of
(i) the due date for the payment of any Excise Tax, and (ii) the
receipt of the Accounting Firm’s determination. If the Accounting Firm
determines that no Excise Tax is payable by the Executive, it shall furnish the
Executive with a written opinion to such effect, and to the effect that failure
to report the Excise Tax, if any, on the Executive’s applicable federal income
tax return will not result in the imposition of a negligence or similar penalty.
Any determination by the Accounting Firm shall be binding upon the Company and
the Executive. As a result of the uncertainty in the application of
Section 4999 of the Code at the time of the initial determination by the
Accounting Firm hereunder, it is possible that Gross-Up Payments which will not
have been made by the Company should have been made (“Underpayment”) or
Gross-up Payments are made by the Company which should not have been made
(“Overpayments”),
consistent with the calculations required to be made hereunder. In the event the
Executive is required to make a payment of any Excise Tax, the Accounting Firm
shall determine the amount of the Underpayment that has occurred and any such
Underpayment shall be promptly paid by the Company to or for the benefit of the
Executive. In the event the amount of Gross-up Payment exceeds the amount
necessary to reimburse the Executive for his Excise Tax, the Accounting Firm
shall determine the amount of the Overpayment that has been made and any such
Overpayment shall be promptly paid by the Executive (to the extent he has
received a refund if the applicable Excise Tax has been paid to the Internal
Revenue Service) to or for the benefit of the Company. The Executive shall
cooperate, to the extent his expenses are reimbursed by the Company, with any
reasonable requests by the Company in connection with any contests or disputes
with the Internal Revenue Service in connection with the Excise
Tax.

 

 

7

 

11.  Legal
Fees. All
reasonable legal fees and related expenses (including costs of experts, evidence
and counsel) paid or incurred by the Executive pursuant to any claim, dispute or
question of interpretation relating to this Agreement shall be paid or
reimbursed by the Company if the Executive is successful on the merits pursuant
to a legal judgment or arbitration. Except as provided in this Section 11, each
party shall be responsible for its own legal fees and expenses in connection
with any claim or dispute relating to this Agreement.

 

12.  Notices.
All
notices, requests, demands and other communications hereunder shall be in
writing and shall be deemed to have been duly given if delivered by hand or
mailed within the continental United States by first class certified mail,
return receipt requested, postage prepaid, addressed as follows:

 

(a)  if to the
Board or the Company:

 

Discovery
Laboratories, Inc. 
350 South
Main Street, Suite 307 
Doylestown,
PA 18901 
Attn:
David Lopez, Esq.

 

(b)  if to the
Executive:

 

Christopher
J. Schaber, Ph.D. 

The
address on file with the records of the Company

 

Addresses
may be changed by written notice sent to the other party at the last recorded
address of that party.

 

 

13.  Withholding.
The
Company shall be entitled to withhold from payments due hereunder any required
federal, state or local withholding or other taxes.

 

14.  Entire
Agreement. This Agreement contains the entire agreement between the parties
with respect to the subject matter hereof and supercedes the Employment
Agreement and all other prior agreements, written or oral, with respect
thereto.

 

15.  Arbitration.

 

(a)  If the
parties are unable to resolve any dispute or claim relating directly or
indirectly to this agreement (a “Dispute”), then
either party may require the matter to be settled by final and binding
arbitration by sending written notice of such election to the other party
clearly marked “Arbitration Demand”. Thereupon such Dispute shall be arbitrated
in accordance with the terms and conditions of this Section 15. Notwithstanding
the foregoing, either party may apply to a court of competent jurisdiction for a
temporary restraining order, a preliminary injunction, or other equitable relief
to preserve the status quo or prevent irreparable harm.

 

 

8

 

(b)  The
arbitration panel will be composed of three arbitrators, one of whom will be
chosen by the Company, one by the Executive, and the third by the two so chosen.
If both or either of the Company or the Executive fails to choose an arbitrator
or arbitrators within 14 days after receiving notice of commencement of
arbitration, or if the two arbitrators fail to choose a third arbitrator within
14 days after their appointment, the American Arbitration Association shall,
upon the request of both or either of the parties to the arbitration, appoint
the arbitrator or arbitrators required to complete the panel. The arbitrators
shall have reasonable experience in the matter under dispute. The decision of
the arbitrators shall be final and binding on the parties, and specific
performance giving effect to the decision of the arbitrators may be ordered by
any court of competent jurisdiction.

 

(c)  Nothing
contained herein shall operate to prevent either party from asserting
counterclaim(s) in any arbitration commenced in accordance with this Agreement,
and any such party need not comply with the procedural provisions of this
Section 15 in order to assert such counterclaim(s).

 

(d)  The
arbitration shall be filed with the office of the American Arbitration
Association (“AAA”)
located in New York, New York or such other AAA office as the parties may agree
upon (without any obligation to so agree). The arbitration shall be conducted
pursuant to the Commercial Arbitration Rules of AAA as in effect at the time of
the arbitration hearing, such arbitration to be completed in a 60-day period. In
addition, the following rules and procedures shall apply to the
arbitration:

 

(i)
  The
arbitrators shall have the sole authority to decide whether or not any Dispute
between the parties is arbitrable and whether the party presenting the issues to
be arbitrated has satisfied the conditions precedent to such party’s right to
commence arbitration as required by this Section 15. 

 

(ii)
  The
decision of the arbitrators, which shall be in writing and state the findings,
the facts and conclusions of law upon which the decision is based, shall be
final and binding upon the parties, who shall forthwith comply after receipt
thereof. Judgment upon the award rendered by the arbitrator may be entered by
any competent court. Each party submits itself to the jurisdiction of any such
court, but only for the entry and enforcement to judgment with respect to the
decision of the arbitrators hereunder.

 

(iii)
  The
arbitrators shall have the power to grant all legal and equitable remedies
(including, without limitation, specific performance) and award compensatory
damages provided by applicable law, but shall not have the power or authority to
award punitive damages. No party shall seek punitive damages in relation to any
matter under, arising out of, or in connection with or relating to this
Agreement in any other forum.

 

 

9

 

(iv)
  Except as
provided in Section 11, the parties shall bear their own costs in preparing for
and participating in the resolution of any Dispute pursuant to this Section 15,
and the costs of the arbitrator(s) shall be equally divided between the
parties.

 

(v)
  Except as
provided in the last sentence of Section 15(a), the provisions of this Section
15 shall be a complete defense to any suit, action or proceeding instituted in
any federal, state or local court or before any administrative tribunal with
respect to any Dispute arising in connection with this Agreement. Any party
commencing a lawsuit in violation of this Section 15 shall pay the costs of the
other party, including, without limitation, reasonable attorney’s fees and
defense costs.

 

16.  Miscellaneous.

 

(a)  Governing
Law. This
Agreement shall be interpreted, construed, governed and enforced according to
the laws of the State of New York without regard to the application of choice of
law rules.

 

(b)  Amendments. No
amendment or modification of the terms or conditions of this Agreement shall be
valid unless in writing and signed by the parties hereto.

 

(c)  Severability. If one
or more provisions of this Agreement are held to be invalid or unenforceable
under applicable law, such provisions shall be construed, if possible, so as to
be enforceable under applicable law, or such provisions shall be excluded from
this Agreement and the balance of the Agreement shall be interpreted as if such
provision were so excluded and shall be enforceable in accordance with its
terms.

 

(d)  Binding
Effect. This
Agreement shall be binding upon and inure to the benefit of the beneficiaries,
heirs and representatives of the Executive (including the Beneficiary) and the
successors and assigns of the Company. The Company shall require any successor
(whether direct or indirect, by purchase, merger, reorganization, consolidation,
acquisition of property or stock, liquidation, or otherwise) to all or
substantially all of its assets, by agreement in form and substance satisfactory
to the Executive, expressly to assume and agree to perform this Agreement in the
same manner and to the same extent that the Company would be required to perform
this Agreement if no such succession had taken place. Regardless whether such
agreement is executed, this Agreement shall be binding upon any successor of the
Company in accordance with the operation of law and such successor shall be
deemed the Company for purposes of this Agreement.

 

(e)  Successors
and Assigns. Except
as provided in Section16(d) in the case of the Company, or to the Beneficiary in
the case of the death of the Executive, this Agreement is not assignable by any
party and no payment to be made hereunder shall be subject to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance or other
charge.

 

(f)  Remedies
Cumulative; No Waiver. No
remedy conferred upon either party by this Agreement is intended to be exclusive
of any other remedy, and each and every such remedy shall be cumulative and
shall be in addition to any other remedy given hereunder or now or hereafter
existing at law or in equity. No delay or omission by either party in exercising
any right, remedy or power hereunder or existing at law or in equity shall be
construed as a waiver thereof, and any such right, remedy or power may be
exercised by such party from time to time and as often as may be deemed
expedient or necessary by such party in such party’s sole
discretion.

 

 

10

 

(g)  Survivorship.
Notwithstanding anything in this Agreement to the contrary, all terms and
provisions of this Agreement that by their nature extend beyond the termination
of this Agreement shall survive such termination.

 

(h)  Entire
Agreement. This
Agreement sets forth the entire agreement of the parties hereto with respect to
the subject matter contained herein and supersedes all prior agreements,
promises, covenants or arrangements, whether oral or written, with respect
thereto. 

 

(i)  Counterparts. This
Agreement may be executed in two or more counterparts, each of which shall
constitute an original, but all of which, when taken together, shall constitute
one document.

 

17.  No
Contract of Employment. Nothing
contained in this Agreement will be construed as a right of the Executive to be
continued in the employment of the Company, or as a limitation of the right of
the Company to discharge the Executive with or without Cause.

 

18.  Executive
Acknowledgement. The
Executive hereby acknowledges that he has read and understands the provisions of
this Agreement, that he has been given the opportunity for his legal counsel to
review this Agreement, that the provisions of this Agreement are reasonable and
that he has received a copy of this Agreement. 

 

 

11

 

IN
WITNESS WHEREOF, the parties hereto have caused this Employment Agreement to be
executed as of the date first above written.

 

DISCOVERY
LABORATORIES, INC. 

 

	 	 
	
       By:   
	/s/ Robert J.
      Capetola   
	 	
      

    
	 	
      Name: Robert J. Capetola, Ph.D.

      Title:
      President and Chief Executive Officer

 

 

	 	 
	
            
	/s/ Christopher J.
    Schaber  
	 	
      

    
	 	Christopher J. Schaber,
Ph.D.

 

 

12

 

EXHIBIT
A

 

(a)  “Beneficiary” means
any individual, trust or other entity named by the Executive to receive the
payments and benefits payable hereunder in the event of the death of the
Executive. The Executive may designate a Beneficiary to receive such payments
and benefits by completing a form provided by the Company and delivering it to
the General Counsel of the Company. The Executive may change his designated
Beneficiary at any time (without the consent of any prior Beneficiary) by
completing and delivering to the Company a new beneficiary designation form. If
a Beneficiary has not been designated by the Executive, or if no designated
Beneficiary survives the Executive, then the payment and benefits provided under
this Agreement, if any, will be paid to the Executive’s estate, which shall be
deemed to be the Executive’s Beneficiary.

 

(b)  “Cause” means:
(i) the Executive’s willful and continued neglect of the Executive’s duties with
the Company (other than as a result of the Executive’s incapacity due to
physical or mental illness), after a written demand for substantial performance
is delivered to the Executive by the Company which specifically identifies the
manner in which the Company believes that the Executive has neglected his
duties; (ii) the final conviction of the Executive of, or an entering of a
guilty plea or a plea of no contest by the Executive to, a felony; or (iii) the
Executive’s willful engagement in illegal conduct or gross misconduct which is
materially and demonstrably injurious to the Company. 

 

For
purposes of this definition, no act or failure to act on the part of the
Executive shall be considered “willful” unless it is done, or omitted to be
done, by the Executive in bad faith or without a reasonable belief that the
action or omission was in the best interests of the Company. Any act, or failure
to act, based on authority given pursuant to a resolution duly adopted by the
Board of Directors of the Company (the “Board”), or
the advice of counsel to the Company, will be conclusively presumed to be done,
or omitted to be done, by the Executive in good faith and in the best interests
of the Company.

 

(c)  “Change
of Control” means
the occurrence of any one of the following events: 

 

(i)
  any
“person” (as defined in Sections 13(d) and 14(d) of the Securities Exchange Act
of 1934 (the “Exchange
Act”)),
other than the Company, any trustee or other fiduciary holding securities under
an employee benefit plan of the Company, an underwriter temporarily holding
securities pursuant to an offering of such securities or any corporation owned,
directly or indirectly, by the stockholders of the Company in substantially the
same proportions as their ownership of stock of the Company, directly or
indirectly acquires “beneficial ownership” (as defined in Rule 13d-3 under the
Exchange Act) of securities representing 35% of the combined voting power of the
Company’s then outstanding securities;

 

(ii)
  persons
who, as of the date of this Agreement constitute the Board (the “Incumbent
Directors”) cease
for any reason, including without limitation, as a result of a tender offer,
proxy contest, merger or similar transaction, to constitute at least a majority
thereof; provided, that
any person becoming a director of the Company subsequent to the date of this
Agreement shall be considered an Incumbent Director if such person’s election or
nomination for election was approved by a vote of at least two-thirds (2/3) of
the Incumbent Directors in an action taken by the Board or a Committee thereof;
provided,
further, that
any such person whose initial assumption of office is in connection with an
actual or threatened election contest relating to the election of members of the
Board or other actual or threatened solicitation of proxies or consents by or on
behalf of a “person” (as defined in Section 13(d) and 14(d) of the Exchange
Act) other than the Board, including by reason of agreement intended to avoid or
settle any such actual or threatened contest or solicitation, shall not be
considered an Incumbent Director;

 

 

13

 

(iii)
  the
consummation of a reorganization, merger, statutory share exchange,
consolidation or similar corporate transaction (each, a “Business
Combination”) other
than a Business Combination in which all or substantially all of the individuals
and entities who were the beneficial owners of the Company’s voting securities
immediately prior to such Business Combination beneficially own, directly or
indirectly, more than 50% of the combined voting power of the voting securities
of the entity resulting from such Business Combination (including, without
limitation, an entity which as a result of the Business Combination owns the
Company or all or substantially all of the Company’s assets either directly or
through one or more subsidiaries) in substantially the same proportions as their
ownership of the Company’s voting securities immediately prior to such Business
Combination; or

 

(iv)
  the
Company consummates a sale of all or substantially all of the assets of the
Company or the stockholders of the Company approve a plan of complete
liquidation of the Company.

 

(d)  “Change
of Control Date” means
any date after the date hereof on which a Change of Control occurs; provided,
however, that if a Change of Control occurs and if the Executive’s employment
with the Company is terminated or an event constituting Good Reason (as defined
below) occurs prior to the Change of Control, and if it is reasonably
demonstrated by the Executive that such termination or event (i) was at the
request of a third party who has taken steps reasonably calculated to effect the
Change of Control, or (ii) otherwise arose in connection with or in anticipation
of the Change of Control then, for all purposes of this Agreement, the Change of
Control Date shall mean the date immediately prior to the date of such
termination or event. 

 

(e)  “Code” means
the Internal Revenue Code of 1986, as amended and the regulations promulgated
thereunder.

 

(f)  “Date
of Termination” means
the date specified in a Notice of Termination pursuant to Section 8 hereof, or
the Executive’s last date as an active employee of the Company before a
termination of employment due to death, Disability or other reason, as the case
may be.

 

(g)  “Disability” means a
mental or physical condition that renders the Executive substantially incapable
of performing his duties and obligations under this Agreement, after taking into
account provisions for reasonable accommodation, as determined by a medical
doctor (such doctor to be mutually determined in good faith by the parties) for
three or more consecutive months or for a total of six months during any 12
consecutive months; provided, that
during such period the Company shall give the Executive at least 30 days’
written notice that it considers the time period for disability to be running.

 

 

14

 

(h)  “Effective
Period” means
the period beginning on the Change of Control Date and ending 24 months after
the date of the related Change of Control.

 

(i)  “Good
Reason” means,
unless the Executive has consented in writing thereto, the occurrence of any of
the following: (i) the assignment to the Executive of any duties inconsistent
with the Executive’s position, including any change in status, title, authority,
duties or responsibilities or any other action which results in a material
diminution in such status, title, authority, duties or responsibilities; (ii) a
reduction in the Executive’s Base Salary by the Company; (iii) the relocation of
the Executive’s office to a location more than 30 miles from Doylestown,
Pennsylvania; (iv) the failure of the Company to comply with the provisions of
Section 6(a); (v) following a Change of Control, unless a plan providing a
substantially similar compensation or benefit is substituted, (A) the failure by
the Company to continue in effect any material fringe benefit or compensation
plan, retirement plan, life insurance plan, health and accident plan or
disability plan in which the Executive was participating prior to the Change of
Control, or (B) the taking of any action by the Company which would adversely
affect the Executive’s participation in or materially reduce his benefits under
any of such plans or deprive him of any material fringe benefit; or (vi) the
failure of the Company to obtain the assumption in writing of the Company’s
obligation to perform this Agreement by any successor to all or substantially
all of the assets of the Company within 15 days after a Business Combination or
a sale or other disposition of all or substantially all of the assets of the
Company.

 

(j)  “Highest
Annual Bonus” means
the largest annual cash bonus paid to the Executive by the Company with respect
to the three fiscal years of the Company immediately preceding the year
containing the Change of Control Date or the Date of Termination, as applicable
(annualized for any fiscal year consisting of less than 12 full
months).

 

 

15Exhibit
10.26

 

EXECUTION
COPY

EMPLOYMENT
AGREEMENT

 

This
Employment Agreement (the “Agreement") is
made as of this 1st day of January 2004, by and between DISCOVERY LABORATORIES,
INC., a Delaware corporation (the "Company"), and
ROBERT
SEGAL, MD (the
"Executive").

 

WHEREAS,
the Executive is currently employed by the Company as its Senior Vice President,
Clinical Research and Chief Medical Officer pursuant to that certain employment
agreement dated as of June 1, 2000, by and between the Company and the Executive
(the “Employment
Agreement”);
and

 

WHEREAS,
the Company and the Executive desire to amend and restate the Employment
Agreement as set forth herein.

 

NOW,
THEREFORE, in consideration of the covenants contained herein, and for other
valuable consideration, the Company and the Executive hereby agree to amend and
restate the Employment Agreement in its entirety to read as follows

 

1.  Certain
Definitions. Certain
definitions used herein shall have the meanings set forth on Exhibit A attached
hereto. 

 

 

2.  Term
of the Agreement. The
term (“Term”) of
this Agreement shall commence on the date first above written and shall continue
through December 31, 2005; provided, however, that commencing on January 1,
2006, and on each January 1st thereafter, the term of this Agreement shall
automatically be extended for one additional year, unless at least 90 days prior
to such January 1st date, the Company or the Executive shall have given notice
that it does not wish to extend this Agreement. Upon the occurrence of a Change
of Control during the term of this Agreement, including any extensions thereof,
this Agreement shall automatically be extended until the end of the Effective
Period if the end of the Effective Period is after the then current expiration
date of the Term. Notwithstanding the foregoing, this Agreement shall terminate
prior to the scheduled expiration date of the Term on the Date of Termination.

 

3.  Executive's
Duties and Obligations.

 

(a)  Duties. The
Executive shall continue to serve as the Company's Senior Vice President,
Clinical Research and Chief Medical Officer. The Executive shall continue to be
responsible for all duties customarily associated with this title. The Executive
shall at all times report directly to the Company’s Chief Operating
Officer.

 

(b)  Location
of Employment. The
Executive's principal place of business shall continue to be at the Company's
headquarters to be located within thirty (30) miles of Doylestown, Pennsylvania;
provided, that the Executive acknowledges and agrees that the performance by the
Executive of his duties shall require frequent travel including, without
limitation, overseas travel from time to time.

 

1

 

(c)  Proprietary
Information and Inventions Agreement. The
Executive has executed the Company's standard form of Intellectual Property and
Confidential Information Agreement (the "Confidentiality
Agreement") a copy
of which is attached to this Agreement as Exhibit B. The Executive shall comply
at all times with the terms and conditions of the Confidentiality Agreement and
all other reasonable policies of the Company governing its confidential and
proprietary information.

 

4.  Devotion
of Time to Company's Business.

 

(a)  Full-Time
Efforts. During
his employment with the Company, the Executive shall devote substantially all of
his time, attention and efforts to the proper performance of his implicit and
explicit duties and obligations hereunder to the reasonable satisfaction of the
Company.

 

(b)  No
Other Employment. During
his employment with the Company, the Executive shall not, except as otherwise
provided herein, directly or indirectly, render any services of a commercial or
professional nature to any other person or organization, whether for
compensation or otherwise, without the prior written consent of the Executive
Committee or the Board.

 

(c)  Non-Competition
During and After Employment. During
the Term and for 6 months from the Date of Termination, the Executive shall not,
directly or indirectly, without the prior written consent of the Company, either
as an employee, employer, consultant, agent, principal, partner, stockholder,
corporate officer, director, or in any other individual or representative
capacity (X) compete with the Company in the business of developing or
commercializing pulmonary surfactants or any other category of compounds which
forms the basis of the Company's material products or any material products
under development on the Date of Termination, or (Y) solicit, encourage, induce
or endeavor to entice away from the Company, or otherwise interfere with the
relationship of the Company with, any person who is employed or engaged by the
Company as an employee, consultant or independent contractor or who was so
employed or engaged at any time during the preceding six (6) months;
provided, that
nothing herein shall prevent the Executive from engaging in discussions
regarding employment, or employing, any such employee, consultant or independent
contractor (i) if such person shall voluntarily initiate such discussions
without any such solicitation, encouragement, enticement or inducement prior
thereto on the part of the Executive or (ii) if such discussions shall be held
as a result of or employment be the result of the response by any such person to
a written employment advertisement placed in a publication of general
circulation, general solicitation conducted by executive search firms,
employment agencies or other general employment services, not directed
specifically at any such employee, consultant or independent contractor.
Notwithstanding the foregoing, the 6 month period described in the preceding
sentence shall be extended to 12 months in the event of any termination of the
Executive’s employment described in Section 7(c). 

 

(d)  Injunctive
Relief. In the
event that the Executive breaches any provisions of Section 4(c) or of the
Confidentiality Agreement or there is a threatened breach thereof, then, in
addition to any other rights which the Company may have, the Company shall be
entitled, without the posting of a bond or other security, to injunctive relief
to enforce the restrictions contained therein. In the event that an actual
proceeding is brought in equity to enforce the provisions of Section 4(c) or the
Confidentiality Agreement, the Executive shall not urge as a defense that there
is an adequate remedy at law nor shall the Company be prevented from seeking any
other remedies which may be available.

 

2

(e)  Reformation. To the
extent that the restrictions imposed by Section 4(c) are interpreted by any
court to be unreasonable in geographic and/or temporal scope, such restrictions
shall be deemed automatically reduced to the extent necessary to coincide with
the maximum geographic and/or temporal restrictions deemed by such court not to
be unreasonable.

 

5.  Compensation
and Benefits.

 

(a)  Base
Compensation. During
the Term, the Company shall pay to the Executive (i) base annual compensation
("Base
Salary") of at
least $237,000, payable in accordance with the Company's regular payroll
practices and less all required withholdings and (ii) additional compensation,
if any, and benefits as hereinafter set forth in this Section 5. The Base Salary
shall be reviewed at least annually at the start of each calendar year for the
purposes of determining increases, if any, based on the Executive's performance,
the performance of the Company, inflation, the then prevailing salary scales for
comparable positions and other relevant factors. 

 

(b)  Bonuses. During
the Term, the Executive shall be eligible for such year-end bonus, which may be
paid in either cash or equity, or both, as is awarded solely at the discretion
of the Compensation Committee of the Board after consultation with the Company’s
Chief Executive Officer, provided, that
the Company shall be under no obligation whatsoever to pay such discretionary
year-end bonus for any year. Any such equity bonus shall contain such rights and
features as are typically afforded to other Company employees of similar level
in connection with comparable equity bonuses awarded by the Company.

 

(c)  Benefits. During
the Term, the Executive shall be entitled to participate in all employee benefit
plans, programs and arrangements made available generally to the Company's
senior executives or to its employees on substantially the same basis that such
benefits are provided to such executives or employees (including, without
limitation profit-sharing, savings and other retirement plans (e.g., a 401(k)
plan) or programs, medical, dental, hospitalization, vision, short-term and
long-term disability and life insurance plans or programs, accidental death and
dismemberment protection, travel accident insurance, and any other employee
welfare benefit plans or programs that may be sponsored by the Company from time
to time, including any plans or programs that supplement the above-listed types
of plans or programs, whether funded or unfunded); provided,
however, that
nothing in this Agreement shall be construed to require the Company to establish
or maintain any such plans, programs or arrangements.

 

(d)  Vacations. During
the Term, the Executive shall be entitled to 15 days paid vacation per year, to
be earned ratably throughout the year, 5 days of which may be carried over from
year to year (provided, that in
no event shall the aggregate number of such vacation days carried over to any
succeeding year exceed 10 days).

 

(e)  Reimbursement
of Business Expenses. The
Executive is authorized to incur reasonable expenses in carrying out his duties
and responsibilities under this Agreement and the Company shall reimburse him
for all such expenses, in accordance with reasonable policies of the
Company.

 

3

6.  Change
of Control Benefits.

 

(a)  Bonus. The
Executive shall be awarded an annual cash bonus for each fiscal year of the
Company ending during the Effective Period at least equal to the Highest Annual
Bonus.

 

(b)  Options.
Notwithstanding any provision to the contrary in the Company’s Amended and
Restated 1998 Stock Incentive Plan or any stock option agreement between the
Company and the Executive, all options to acquire Company stock held by the
Executive shall accelerate and become fully vested upon the Change of Control
Date and, in the case of any Change of Control in which the Company’s common
stockholders receive cash, securities or other consideration in exchange for, or
in respect of, their Company common stock, (i) the Executive shall be permitted
to exercise his options at a time and in a fashion that will entitle him to
receive, in exchange for any shares acquired pursuant to any such exercise, the
same per share consideration as is received by the other holders of the
Company’s common stock, and (ii) if the Executive shall elect not to exercise
all or any portion of such options, any such unexercised options shall terminate
and cease to be outstanding following such Change of Control, except to the
extent assumed by a successor corporation (or its parent) or otherwise expressly
continued in full force and effect pursuant to the terms of such Change of
Control.

 

7.  Termination
of Employment.

 

(a)  Termination
by the Company for Cause or Termination by the Executive without Good Reason,
Death or Disability.

 

(i)
  In the
event of a termination of the Executive’s employment by the Company for Cause, a
termination by the Executive without Good Reason, or in the event this Agreement
terminates by reason of the death or Disability of the Executive, the Executive
shall be entitled to any unpaid compensation accrued through the last day of the
Executive's employment, a lump sum payment in respect of all accrued but unused
vacation days (provided, that in
no event shall the aggregate number of such accrued vacation days exceed 10
days) at his Base Salary in effect on the date such vacation was earned, and
payment of any other amounts owing to the Executive but not yet paid. The
Executive shall not be entitled to receive any other compensation or benefits
from the Company whatsoever (except as and to the extent the continuation of
certain benefits is required by law). 

 

(ii)
  In the
case of a termination due to death or disability, notwithstanding any provision
to the contrary in any stock option agreement between the Company and the
Executive, all options to acquire Company stock held by the Executive shall
accelerate and become fully vested upon the Date of Termination (and all options
shall thereupon become fully exercisable), and all stock options shall continue
to be exercisable for one year from the Date of Termination (or, if shorter,
until the expiration of their stated terms).

 

(b)  Termination
by the Company without Cause or by the Executive for Good Reason. If (x)
the Executive’s employment is terminated by the Company other than for Cause,
death or Disability (i.e., without Cause) or (y) the Executive terminates
employment with Good Reason, then the Executive shall be entitled to receive the
following from the Company:

 

4

 

(i)
  The
amounts set forth in Section 7(a)(i); 

 

(ii)
  Within 10
days after the Date of Termination, a lump sum cash payment equal to the Highest
Annual Bonus multiplied by the fraction obtained by dividing the number of days
in the year through the Date of Termination by 365; 

 

(iii)
  Within 10
days after the Date of Termination, a lump sum cash payment in an amount equal
to fifty percent (50%) of the sum of (A) the Executive’s Base Salary then in
effect (determined without regard to any reduction in such Base Salary
constituting Good Reason) and (B) the Highest Annual Bonus;

 

(iv)
  For six
months from the Date of Termination, the Company shall either (A) arrange to
provide the Executive and his dependents, at the Company’s cost (except to the
extent such cost was borne by the Executive prior to the Date of Termination),
with life, disability, medical and dental coverage, whether insured or not
insured, providing substantially similar benefits to those which the Executive
and his dependents were receiving immediately prior to the Date of Termination,
or (B) in lieu of providing such coverage, pay to the Executive no less
frequently than quarterly in advance an amount which, after taxes, is sufficient
for the Executive to purchase equivalent benefits coverage referred to in clause
(A); provided,
however, that
the Company’s obligation under this Section 7(b)(iv) shall be reduced to the
extent that substantially similar coverages (determined on a benefit-by-benefit
basis) are provided by a subsequent employer; 

 

(v)
  Any other
additional benefits then due or earned in accordance with applicable plans and
programs of the Company; and

 

(vi)
  The
Company will provide out-placement counseling assistance in the form of
reimbursement of the reasonable expenses incurred for such assistance within the
12-month period following the Date of Termination. Such reimbursement amount
shall not exceed $40,000.

 

(c)  Termination
in connection with a Change of Control. If the
Executive’s employment is terminated by the Company other than for Cause or by
the Executive for Good Reason during the Effective Period, then the Executive
shall be entitled to receive the following from the Company:

 

(i)
  All
amounts and benefits described in Section 7(a)(i) above;

 

(ii)
  Within 10
days after the Date of Termination, a lump sum cash payment equal to the Highest
Annual Bonus multiplied by the fraction obtained by dividing the number of days
in the year through the Date of Termination by 365;

 

(iii)
  Within 10
days after the Date of Termination, a lump sum cash payment in an amount equal
to the sum of (A) the Executive’s Base Salary then in effect (determined without
regard to any reduction in such Base Salary constituting Good Reason) and (B)
the Highest Annual Bonus;

 

(iv)
  For one
year from the Date of Termination, the Company shall either (A) arrange to
provide the Executive and his dependents, at the Company’s cost (except to the
extent such cost was borne by the Executive prior to the Date of Termination),
with life, disability, medical and dental coverage, whether insured or not
insured, providing substantially similar benefits to those which the Executive
and his dependents were receiving immediately prior to the Date of Termination,
or (B) in lieu of providing such coverage, pay to the Executive no less
frequently than quarterly in advance an amount which, after taxes, is sufficient
for the Executive to purchase equivalent benefits coverage referred to in clause
(A); provided,
however, that
the Company’s obligation under this Section 7(c)(iv) shall be reduced to the
extent that substantially similar coverages (determined on a benefit-by-benefit
basis) are provided by a subsequent employer;

 

5

(v)
  Notwithstanding
any provision to the contrary in any stock option agreement between the Company
and the Executive, all options to acquire Company stock held by the Executive
shall accelerate and become fully vested upon the Date of Termination (and all
options shall thereupon become fully exercisable), and all stock options shall
continue to be exercisable for the remainder of their stated terms;

 

(vi)
  Any other
additional benefits then due or earned in accordance with applicable plans and
programs of the Company; and

 

(vii)
  The
Company will provide out-placement counseling assistance in the form of
reimbursement of the reasonable expenses incurred for such assistance within the
12-month period following the Date of Termination. Such reimbursement amount
shall not exceed $40,000.

 

8.  Notice
of Termination.

 

(a)  Any
termination of the Executive’s employment by the Company for Cause, or by the
Executive for Good Reason shall be communicated by a Notice of Termination to
the other party hereto given in accordance with Section 12. For purposes of this
Agreement, a “Notice of Termination” means a written notice which: (i) is given
at least 10 days prior to the Date of Termination, (ii) indicates the specific
termination provision in this Agreement relied upon, (iii) to the extent
applicable, sets forth in reasonable detail the facts and circumstances claimed
to provide a basis for termination of the Executive’s employment under the
provision so indicated, and (iv) specifies the employment termination date. The
failure to set forth in the Notice of Termination any fact or circumstance which
contributes to a showing of Good Reason or Cause will not waive any right of the
party giving the Notice of Termination hereunder or preclude such party from
asserting such fact or circumstance in enforcing its rights
hereunder.

 

(b)  A
Termination of Employment of the Executive will not be deemed to be for Good
Reason unless the Executive gives the Notice of Termination provided for herein
within 12 months after the Executive has actual knowledge of the act or omission
of the Company constituting such Good Reason.

 

9.  Mitigation
of Damages. The
Executive will not be required to mitigate damages or the amount of any payment
or benefit provided for under this Agreement by seeking other employment or
otherwise. Except as otherwise provided in Sections 7(b)(iv) and 7(c)(iv), the
amount of any payment or benefit provided for under this Agreement will not be
reduced by any compensation or benefits earned by the Executive as the result of
self-employment or employment by another employer or otherwise.

 

6

10.  Excise
Tax Gross-Up.

 

(a)  Anything
in this Agreement to the contrary notwithstanding, in the event it shall be
determined that any payment, award, benefit or distribution (including any
acceleration) by the Company or any entity which effectuates a transaction
described in Section 280G(b)(2)(A)(i) of the Code to or for the benefit of the
Executive (whether pursuant to the terms of this Agreement or otherwise, but
determined without regard to any additional payments required under this Section
10) (a “Payment”) would
be subject to the excise tax imposed by Section 4999 of the Code or any
interest or penalties are incurred with respect to such excise tax by the
Executive (such excise tax, together with any such interest and penalties, are
hereinafter collectively referred to as the “Excise
Tax”), then
the Executive shall be entitled to receive an additional payment (a
“Gross-Up
Payment”) in an
amount such that after payment by the Executive of all taxes, including, without
limitation, any income taxes (and any interest and penalties imposed with
respect thereto) and Excise Taxes imposed upon the Gross-Up Payment, the
Executive retains an amount of the Gross-Up Payment equal to the Excise Tax
imposed upon the Payments. For purposes of this Section 10, the Executive shall
be deemed to pay federal, state and local income taxes at the highest marginal
rate of taxation for the calendar year in which the Gross Up Payment is to be
made, taking into account the maximum reduction in federal income taxes which
could be obtained from the deduction of state and local income
taxes.

 

(b)  All
determinations required to be made under this Section 10, including whether and
when a Gross-Up Payment is required and the amount of such Gross-Up Payment and
the assumptions to be utilized in arriving at such determination, shall be made
by the Company’s independent auditors or such other certified public accounting
firm of national standing reasonably acceptable to the Executive as may be
designated by the Company (the “Accounting
Firm”) which
shall provide detailed supporting calculations both to the Company and the
Executive within 15 business days of the receipt of notice from the
Executive that there has been a Payment, or such earlier time as is requested by
the Company. All fees and expenses of the Accounting Firm shall be borne solely
by the Company. Any Gross-Up Payment, as determined pursuant to this Section 10,
shall be paid by the Company to the Executive within five days of the later of
(i) the due date for the payment of any Excise Tax, and (ii) the
receipt of the Accounting Firm’s determination. If the Accounting Firm
determines that no Excise Tax is payable by the Executive, it shall furnish the
Executive with a written opinion to such effect, and to the effect that failure
to report the Excise Tax, if any, on the Executive’s applicable federal income
tax return will not result in the imposition of a negligence or similar penalty.
Any determination by the Accounting Firm shall be binding upon the Company and
the Executive. As a result of the uncertainty in the application of
Section 4999 of the Code at the time of the initial determination by the
Accounting Firm hereunder, it is possible that Gross-Up Payments which will not
have been made by the Company should have been made (“Underpayment”) or
Gross-up Payments are made by the Company which should not have been made
(“Overpayments”),
consistent with the calculations required to be made hereunder. In the event the
Executive is required to make a payment of any Excise Tax, the Accounting Firm
shall determine the amount of the Underpayment that has occurred and any such
Underpayment shall be promptly paid by the Company to or for the benefit of the
Executive. In the event the amount of Gross-up Payment exceeds the amount
necessary to reimburse the Executive for his Excise Tax, the Accounting Firm
shall determine the amount of the Overpayment that has been made and any such
Overpayment shall be promptly paid by the Executive (to the extent he has
received a refund if the applicable Excise Tax has been paid to the Internal
Revenue Service) to or for the benefit of the Company. The Executive shall
cooperate, to the extent his expenses are reimbursed by the Company, with any
reasonable requests by the Company in connection with any contests or disputes
with the Internal Revenue Service in connection with the Excise
Tax.

 

7

11.  Legal
Fees. All
reasonable legal fees and related expenses (including costs of experts, evidence
and counsel) paid or incurred by the Executive pursuant to any claim, dispute or
question of interpretation relating to this Agreement shall be paid or
reimbursed by the Company if the Executive is successful on the merits pursuant
to a legal judgment or arbitration. Except as provided in this Section 11, each
party shall be responsible for its own legal fees and expenses in connection
with any claim or dispute relating to this Agreement.

 

12.  Notices.
All
notices, requests, demands and other communications hereunder shall be in
writing and shall be deemed to have been duly given if delivered by hand or
mailed within the continental United States by first class certified mail,
return receipt requested, postage prepaid, addressed as follows:

 

(a) if to the
Board or the Company:

 

 

Discovery
Laboratories, Inc. 

350 South
Main Street, Suite 307 

Doylestown,
PA 18901 

Attn:
David Lopez, Esq.

 

(b) if to the
Executive:

 

Robert
Segal, MD 

The
address on file with the records of the Company

 

Addresses
may be changed by written notice sent to the other party at the last recorded
address of that party.

 

 

13.  Withholding.
The
Company shall be entitled to withhold from payments due hereunder any required
federal, state or local withholding or other taxes.

 

14.  Entire
Agreement. This Agreement contains the entire agreement between the parties
with respect to the subject matter hereof and supercedes the Employment
Agreement and all other prior agreements, written or oral, with respect
thereto.

 

15.  Arbitration.

 

(a)  If the
parties are unable to resolve any dispute or claim relating directly or
indirectly to this agreement (a “Dispute”), then
either party may require the matter to be settled by final and binding
arbitration by sending written notice of such election to the other party
clearly marked "Arbitration Demand". Thereupon such Dispute shall be arbitrated
in accordance with the terms and conditions of this Section 15. Notwithstanding
the foregoing, either party may apply to a court of competent jurisdiction for a
temporary restraining order, a preliminary injunction, or other equitable relief
to preserve the status quo or prevent irreparable harm.

 

8

(b)  The
arbitration panel will be composed of three arbitrators, one of whom will be
chosen by the Company, one by the Executive, and the third by the two so chosen.
If both or either of the Company or the Executive fails to choose an arbitrator
or arbitrators within 14 days after receiving notice of commencement of
arbitration, or if the two arbitrators fail to choose a third arbitrator within
14 days after their appointment, the American Arbitration Association shall,
upon the request of both or either of the parties to the arbitration, appoint
the arbitrator or arbitrators required to complete the panel. The arbitrators
shall have reasonable experience in the matter under dispute. The decision of
the arbitrators shall be final and binding on the parties, and specific
performance giving effect to the decision of the arbitrators may be ordered by
any court of competent jurisdiction.

 

(c)  Nothing
contained herein shall operate to prevent either party from asserting
counterclaim(s) in any arbitration commenced in accordance with this Agreement,
and any such party need not comply with the procedural provisions of this
Section 15 in order to assert such counterclaim(s).

 

(d)  The
arbitration shall be filed with the office of the American Arbitration
Association ("AAA")
located in New York, New York or such other AAA office as the parties may agree
upon (without any obligation to so agree). The arbitration shall be conducted
pursuant to the Commercial Arbitration Rules of AAA as in effect at the time of
the arbitration hearing, such arbitration to be completed in a 60-day period. In
addition, the following rules and procedures shall apply to the
arbitration:

 

(i)
  The
arbitrators shall have the sole authority to decide whether or not any Dispute
between the parties is arbitrable and whether the party presenting the issues to
be arbitrated has satisfied the conditions precedent to such party's right to
commence arbitration as required by this Section 15. 

 

(ii)
  The
decision of the arbitrators, which shall be in writing and state the findings,
the facts and conclusions of law upon which the decision is based, shall be
final and binding upon the parties, who shall forthwith comply after receipt
thereof. Judgment upon the award rendered by the arbitrator may be entered by
any competent court. Each party submits itself to the jurisdiction of any such
court, but only for the entry and enforcement to judgment with respect to the
decision of the arbitrators hereunder.

 

(iii)
  The
arbitrators shall have the power to grant all legal and equitable remedies
(including, without limitation, specific performance) and award compensatory
damages provided by applicable law, but shall not have the power or authority to
award punitive damages. No party shall seek punitive damages in relation to any
matter under, arising out of, or in connection with or relating to this
Agreement in any other forum.

 

(iv)
  Except as
provided in Section 11, the parties shall bear their own costs in preparing for
and participating in the resolution of any Dispute pursuant to this Section 15,
and the costs of the arbitrator(s) shall be equally divided between the
parties.

 

(v)
  Except as
provided in the last sentence of Section 15(a), the provisions of this Section
15 shall be a complete defense to any suit, action or proceeding instituted in
any federal, state or local court or before any administrative tribunal with
respect to any Dispute arising in connection with this Agreement. Any party
commencing a lawsuit in violation of this Section 15 shall pay the costs of the
other party, including, without limitation, reasonable attorney’s fees and
defense costs.

 

9

16.  Miscellaneous.

 

(a)  Governing
Law. This
Agreement shall be interpreted, construed, governed and enforced according to
the laws of the State of New York without regard to the application of choice of
law rules.

 

(b)  Amendments. No
amendment or modification of the terms or conditions of this Agreement shall be
valid unless in writing and signed by the parties hereto.

 

(c)  Severability. If one
or more provisions of this Agreement are held to be invalid or unenforceable
under applicable law, such provisions shall be construed, if possible, so as to
be enforceable under applicable law, or such provisions shall be excluded from
this Agreement and the balance of the Agreement shall be interpreted as if such
provision were so excluded and shall be enforceable in accordance with its
terms.

 

(d)  Binding
Effect. This
Agreement shall be binding upon and inure to the benefit of the beneficiaries,
heirs and representatives of the Executive (including the Beneficiary) and the
successors and assigns of the Company. The Company shall require any successor
(whether direct or indirect, by purchase, merger, reorganization, consolidation,
acquisition of property or stock, liquidation, or otherwise) to all or
substantially all of its assets, by agreement in form and substance satisfactory
to the Executive, expressly to assume and agree to perform this Agreement in the
same manner and to the same extent that the Company would be required to perform
this Agreement if no such succession had taken place. Regardless whether such
agreement is executed, this Agreement shall be binding upon any successor of the
Company in accordance with the operation of law and such successor shall be
deemed the Company for purposes of this Agreement.

 

(e)  Successors
and Assigns. Except
as provided in Section16(d) in the case of the Company, or to the Beneficiary in
the case of the death of the Executive, this Agreement is not assignable by any
party and no payment to be made hereunder shall be subject to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance or other
charge.

 

(f)  Remedies
Cumulative; No Waiver. No
remedy conferred upon either party by this Agreement is intended to be exclusive
of any other remedy, and each and every such remedy shall be cumulative and
shall be in addition to any other remedy given hereunder or now or hereafter
existing at law or in equity. No delay or omission by either party in exercising
any right, remedy or power hereunder or existing at law or in equity shall be
construed as a waiver thereof, and any such right, remedy or power may be
exercised by such party from time to time and as often as may be deemed
expedient or necessary by such party in such party’s sole
discretion.

 

(g)  Survivorship.
Notwithstanding anything in this Agreement to the contrary, all terms and
provisions of this Agreement that by their nature extend beyond the termination
of this Agreement shall survive such termination.

 

10

(h)  Entire
Agreement. This
Agreement sets forth the entire agreement of the parties hereto with respect to
the subject matter contained herein and supersedes all prior agreements,
promises, covenants or arrangements, whether oral or written, with respect
thereto. 

 

(i)  Counterparts. This
Agreement may be executed in two or more counterparts, each of which shall
constitute an original, but all of which, when taken together, shall constitute
one document.

 

17.  No
Contract of Employment. Nothing
contained in this Agreement will be construed as a right of the Executive to be
continued in the employment of the Company, or as a limitation of the right of
the Company to discharge the Executive with or without Cause.

 

18.  Executive
Acknowledgement. The
Executive hereby acknowledges that he has read and understands the provisions of
this Agreement, that he has been given the opportunity for his legal counsel to
review this Agreement, that the provisions of this Agreement are reasonable and
that he has received a copy of this Agreement. 

11

IN
WITNESS WHEREOF, the parties hereto have caused this Employment Agreement to be
executed as of the date first above written.

 

 

DISCOVERY
LABORATORIES, INC. 

 

By:
/s/
Robert J. Capetola 

Name:
Robert J. Capetola, Ph.D.

Title:
President and Chief Executive Officer 

 

 

/s/
Robert Segal 

Robert
Segal, MD

 

 

12

EXHIBIT
A

 

 

(a)  “Beneficiary” means
any individual, trust or other entity named by the Executive to receive the
payments and benefits payable hereunder in the event of the death of the
Executive. The Executive may designate a Beneficiary to receive such payments
and benefits by completing a form provided by the Company and delivering it to
the General Counsel of the Company. The Executive may change his designated
Beneficiary at any time (without the consent of any prior Beneficiary) by
completing and delivering to the Company a new beneficiary designation form. If
a Beneficiary has not been designated by the Executive, or if no designated
Beneficiary survives the Executive, then the payment and benefits provided under
this Agreement, if any, will be paid to the Executive’s estate, which shall be
deemed to be the Executive’s Beneficiary.

 

(b)  “Cause” means:
(i) the Executive’s willful and continued neglect of the Executive’s duties with
the Company (other than as a result of the Executive’s incapacity due to
physical or mental illness), after a written demand for substantial performance
is delivered to the Executive by the Company which specifically identifies the
manner in which the Company believes that the Executive has neglected his
duties; (ii) the final conviction of the Executive of, or an entering of a
guilty plea or a plea of no contest by the Executive to, a felony; or (iii) the
Executive’s willful engagement in illegal conduct or gross misconduct which is
materially and demonstrably injurious to the Company. 

 

For
purposes of this definition, no act or failure to act on the part of the
Executive shall be considered “willful” unless it is done, or omitted to be
done, by the Executive in bad faith or without a reasonable belief that the
action or omission was in the best interests of the Company. Any act, or failure
to act, based on authority given pursuant to a resolution duly adopted by the
Board of Directors of the Company (the “Board”), or
the advice of counsel to the Company, will be conclusively presumed to be done,
or omitted to be done, by the Executive in good faith and in the best interests
of the Company.

 

(c)  “Change
of Control” means
the occurrence of any one of the following events: 

 

(i)
  any
“person” (as defined in Sections 13(d) and 14(d) of the Securities Exchange Act
of 1934 (the “Exchange
Act”)),
other than the Company, any trustee or other fiduciary holding securities under
an employee benefit plan of the Company, an underwriter temporarily holding
securities pursuant to an offering of such securities or any corporation owned,
directly or indirectly, by the stockholders of the Company in substantially the
same proportions as their ownership of stock of the Company, directly or
indirectly acquires “beneficial ownership” (as defined in Rule 13d-3 under the
Exchange Act) of securities representing 35% of the combined voting power of the
Company’s then outstanding securities;

 

(ii)
  persons
who, as of the date of this Agreement constitute the Board (the “Incumbent
Directors”) cease
for any reason, including without limitation, as a result of a tender offer,
proxy contest, merger or similar transaction, to constitute at least a majority
thereof; provided, that
any person becoming a director of the Company subsequent to the date of this
Agreement shall be considered an Incumbent Director if such person’s election or
nomination for election was approved by a vote of at least two-thirds (2/3) of
the Incumbent Directors in an action taken by the Board or a Committee thereof;
provided,
further, that
any such person whose initial assumption of office is in connection with an
actual or threatened election contest relating to the election of members of the
Board or other actual or threatened solicitation of proxies or consents by or on
behalf of a “person” (as defined in Section 13(d) and 14(d) of the Exchange
Act) other than the Board, including by reason of agreement intended to avoid or
settle any such actual or threatened contest or solicitation, shall not be
considered an Incumbent Director;

 

13

(iii)
  the
consummation of a reorganization, merger, statutory share exchange,
consolidation or similar corporate transaction (each, a “Business
Combination”) other
than a Business Combination in which all or substantially all of the individuals
and entities who were the beneficial owners of the Company’s voting securities
immediately prior to such Business Combination beneficially own, directly or
indirectly, more than 50% of the combined voting power of the voting securities
of the entity resulting from such Business Combination (including, without
limitation, an entity which as a result of the Business Combination owns the
Company or all or substantially all of the Company’s assets either directly or
through one or more subsidiaries) in substantially the same proportions as their
ownership of the Company’s voting securities immediately prior to such Business
Combination; or

 

(iv)
  the
Company consummates a sale of all or substantially all of the assets of the
Company or the stockholders of the Company approve a plan of complete
liquidation of the Company.

 

(d)  “Change
of Control Date” means
any date after the date hereof on which a Change of Control occurs; provided,
however, that if a Change of Control occurs and if the Executive’s employment
with the Company is terminated or an event constituting Good Reason (as defined
below) occurs prior to the Change of Control, and if it is reasonably
demonstrated by the Executive that such termination or event (i) was at the
request of a third party who has taken steps reasonably calculated to effect the
Change of Control, or (ii) otherwise arose in connection with or in anticipation
of the Change of Control then, for all purposes of this Agreement, the Change of
Control Date shall mean the date immediately prior to the date of such
termination or event. 

 

(e)  “Code” means
the Internal Revenue Code of 1986, as amended and the regulations promulgated
thereunder.

 

(f)  “Date
of Termination” means
the date specified in a Notice of Termination pursuant to Section 8 hereof, or
the Executive’s last date as an active employee of the Company before a
termination of employment due to death, Disability or other reason, as the case
may be.

 

(g)  “Disability” means a
mental or physical condition that renders the Executive substantially incapable
of performing his duties and obligations under this Agreement, after taking into
account provisions for reasonable accommodation, as determined by a medical
doctor (such doctor to be mutually determined in good faith by the parties) for
three or more consecutive months or for a total of six months during any 12
consecutive months; provided, that
during such period the Company shall give the Executive at least 30 days’
written notice that it considers the time period for disability to be running.

 

14

(h)  “Effective
Period” means
the period beginning on the Change of Control Date and ending 12 months after
the date of the related Change of Control.

 

(i)  “Good
Reason” means,
unless the Executive has consented in writing thereto, the occurrence of any of
the following: (i) the assignment to the Executive of any duties inconsistent
with the Executive’s position, including any change in status, title, authority,
duties or responsibilities or any other action which results in a material
diminution in such status, title, authority, duties or responsibilities; (ii) a
reduction in the Executive’s Base Salary by the Company; (iii) the relocation of
the Executive’s office to a location more than 30 miles from Doylestown,
Pennsylvania; (iv) the failure of the Company to comply with the provisions of
Section 6(a); (v) following a Change of Control, unless a plan providing a
substantially similar compensation or benefit is substituted, (A) the failure by
the Company to continue in effect any material fringe benefit or compensation
plan, retirement plan, life insurance plan, health and accident plan or
disability plan in which the Executive was participating prior to the Change of
Control, or (B) the taking of any action by the Company which would adversely
affect the Executive’s participation in or materially reduce his benefits under
any of such plans or deprive him of any material fringe benefit; or (vi) the
failure of the Company to obtain the assumption in writing of the Company’s
obligation to perform this Agreement by any successor to all or substantially
all of the assets of the Company within 15 days after a Business Combination or
a sale or other disposition of all or substantially all of the assets of the
Company.

 

(j)  “Highest
Annual Bonus” means
the largest annual cash bonus paid to the Executive by the Company with respect
to the three fiscal years of the Company immediately preceding the year
containing the Change of Control Date or the Date of Termination, as applicable
(annualized for any fiscal year consisting of less than 12 full
months).

 

15

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