Item 5.02
.
Departure of Directors or Certain Officers; Election of Directors;
Appointment of Certain Officers; Compensatory Arrangements of Certain
Officers.
Key Employee Agreements
On December 10, 2007, Graco Inc. (the Company) presented to
the Companys executive officers a new form of Key Employee Agreement, which has been
previously approved by the Management Organization and Compensation Committee (the
MOCC) of the Companys Board of Directors. The MOCC approved the new form
of agreement after reviewing current market practices related to severance arrangements
and benefit levels related thereto.
Summary of Revisions from Prior Arrangements:
The new agreement
will replace the existing Key Employee Agreements and the Companys severance
arrangements currently in effect for executive officers. The primary differences between
the new Key Employee Agreements and the prior arrangements include:
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Confirmation
of the details of severance for executive officers who are terminated without cause
before any change of control. Previously, the Company had similar severance practices
that were not reflected in a written plan or agreement.
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Modification
of the change of control trigger to include those events that are generally considered
changes of control and to exclude those that would generally not be regarded as changes
of control.
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Provide
severance benefits to executive officers that comply with (or, where possible, are
structured to fall outside the coverage of) the requirements of Internal Revenue Code
Section 409A.
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Require
that executive officers not compete with the Company and not solicit employees for two
years after leaving employment (except in the case where, within two years after a change
of control, the executive officers employment terminates involuntarily without
cause or voluntarily for good reason).
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Summary of New Key Employee Agreement:
The Key Employee Agreement
provides for payment of the following severance benefits if the executive officers
employment is terminated involuntarily by the Company without Cause (as defined below)
prior to a Change of Control (as defined below):
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Severance pay equal to one times (two times for CEO) base salary plus target bonus,
payable over the severance period
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Pro-rata
bonus for year of termination based on actual performance
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Continued medical, dental and
life insurance for the severance period
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Reimbursement of
reasonable legal fees incurred to enforce the agreement
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The Key Employee Agreement provides for payment of the following
severance benefits if, within two years after a Change of Control, the executive
officers employment is terminated involuntarily by the Company without Cause or if
the executive officer resigns for Good Reason:
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Severance pay equal to two times (three times for CEO) base salary plus target bonus,
payable in a lump sum
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Pro-rata bonus for year of termination based on target performance
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Continued medical, dental and life insurance for the severance period
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Attribution of two
years (three years for CEO) service credit for purposes of nonqualified excess
benefit retirement plan
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Reimbursement of reasonable legal fees incurred to enforce the
agreement
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Gross-up of taxes due under excess parachute provisions of the
Internal Revenue Code, subject to
reduction of benefits of up to $25,000 to avoid such taxes
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The definition of Change of Control in the Key Employee
Agreements generally includes: (i) acquisition of beneficial ownership by a person or
group which results in aggregate beneficial ownership of 30% or more of voting power or
common stock, subject to certain exceptions; (ii) change of 50% or more of the Board
members, without Board approval; and (iii) consummation of merger or other business
combination unless the Companys shareholders own a majority of voting power and
common stock of surviving corporation and other conditions are satisfied.
As used in the Key Employee Agreement, Cause means: (i)
conviction of, or guilty or no contest plea to, any felony or other criminal act involving
moral turpitude; (ii) gross misconduct or any act of fraud, disloyalty or dishonesty
related to or connected with the executive officers employment or otherwise likely
to cause material harm to the Company or its reputation; (iii) a willful and material
violation of the Companys written policies or codes of conduct; (iv) wrongful
appropriation of the Companys funds or property or other material breach of the
executive officers fiduciary duties to the Company; or (v) the willful and material
breach of the Key Employee Agreement by the executive officer.
As used in the Key Employee Agreement, Good Reason means:
(i) assignment of duties materially inconsistent with, or other material diminution of,
the executive officers position, duties or responsibilities as in effect immediately
prior to the Change of Control; (ii) material reduction, in the aggregate, to the
compensation and benefit plans, programs and perquisites applicable to the executive
officer as in effect immediately prior to the Change of Control; (iii) relocation of the
executive to a location more than 50 miles from where the executive officer was based
immediately prior to the Change of Control, or requiring the executive to travel to a
substantially greater extent; or (iv) failure by the Company to assign the Key Employee
Agreement to a successor.
Under the Key Employee Agreement, the executive officer agrees to
protect the Companys confidential information, and not to compete with the Company
or solicit employees for two years after termination of employment (or, if the executive
officers employment is terminated involuntarily other than for Cause prior to a
Change of Control, such shorter period during which the executive officer is receiving
severance payments). The non-compete restriction does not apply if the executive
officers employment is terminated involuntarily without Cause or voluntarily for
Good Reason within two years after a Change of Control. The executive officer also agrees
to assign all intellectual property rights to the Company. In order to receive severance,
the executive officer must sign a release of claims in favor of the Company and be in
compliance with the terms of the Key Employee Agreement. The term of the Key Employee
Agreement is three years, followed by automatic annual renewals, unless either party gives
six months notice of non-renewal.
Except as indicated above with respect to the CEO, the same form of
agreement was provided to all executive officers, except that (i) an executive officer who
is a resident of a foreign country will receive a version of the agreement that has been
modified as necessary to take into account local laws and prevent the duplication of any
benefits and (ii) an executive officer who does not report directly to the CEO will only
be entitled to the foregoing severance benefits upon termination following a Change of Control, as
described above, and will not be required to agree to the form of confidential
information, non-competition, non-solicitation and assignment of inventions provisions
applicable to other executive officers, but will be required to sign the Companys
standard employee confidentiality agreement.
Stock Option Agreements
On December 7, 2007, the MOCC approved an amendment to the
Companys forms of stock option agreements to be used for the grant of stock options
for executive officers occurring on or after that date. The amendments to the forms of
stock option agreements effect the following changes:
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The definition of Change of Control has been modified to be consistent with the definition
in the proposed Key Employee Agreements.
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A Fundamental Change provision was added that permits the Board to: (i)
accelerate vesting of all outstanding options in the event of certain mergers and business
combination transactions and then cancel the options upon payment of the spread between
the per share merger consideration and the per share exercise price of the options, or
(ii) substitute options for stock of the surviving corporation.
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Restricted Stock Agreements
On December 7, 2007, the MOCC approved grants of restricted stock to
certain executive officers of the Company. The restricted stock awards provide for a grant
of restricted shares, the restrictions on which lapse with respect to all restricted
shares on the third anniversary of the date of grant, subject to immediate vesting upon a
Change of Control or termination of the executive officers employment due to death
or disability. If, prior to a Change of Control, the executive officers employment terminates for any reason other
than death or disability prior to vesting, the shares will be forfeited.