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Employee Retention Agreement - Cyberonics Inc. and John K. Bakewell

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                          EMPLOYEE RETENTION AGREEMENT


         THIS EMPLOYEE RETENTION AGREEMENT ("Agreement") is made as of this 30th
day of September 1995 (the "Effective Date"), by and between John K. Bakewell,
an individual ("Employee"), and CYBERONICS, INC., a Delaware corporation
("Company"), with reference to the following facts:

                                    RECITALS

         A. It is expected that the Company may from time to time consider the
possibility of an acquisition by another company or other change of control. The
Board of Directors of the Company (the "Board") recognizes that such
consideration can be a distraction to the Employee and can cause the Employee to
consider alternative employment opportunities. The Board has determined that it
is in the best interests of the Company and its stockholders to assure that the
Company will have the continued dedication and objectivity of the Employee,
notwithstanding the possibility, threat or occurrence of a Change of Control (as
defined below) of the Company.

         B. The Board believes that it is in the best interests of the Company
and its stockholders to provide the Employee with an incentive to continue his
employment and to motivate the Employee to maximize the value of the Company
upon a Change of Control for the benefit of its stockholders.

         In consideration of the mutual covenants herein contained, and in
consideration of the continuing employment of Employee by the Company, the
parties agree as follows:

         1. Cash Retention Bonus.

                  1.1 Retention Bonus Trigger. In the event of a Change of
Control (as defined below) occurring within twelve (12) months of the Effective
Date of this Agreement, provided that the Employee meets the eligibility
requirements set forth in Section 1.2 hereof, Employee shall be entitled to
receive a lump sum cash payment equal to Two Hundred Thousand Dollars ($200,000)
(the "Retention Bonus").

                  1.2 Retention Bonus Eligibility. Employee shall be eligible to
receive the Retention Bonus if: (i) Employee is employed by the Company as of
the date of closing (the "Closing Date") of an event which constitutes a Change
of Control (regardless of whether the Employee is terminated by the Company or
its successor, or terminates his or her employment with the Company or its
successor, following the Closing Date); (ii) if Employee's employment is
terminated by the Company without Cause (as defined below) prior to the Closing
Date; or (iii) in the event Employees employment is terminated prior to the
Closing Date as a result of the death or permanent disability of Employee.

                  1.3 Payment of Retention Bonus. The Retention Bonus will be
paid to Employee not later than five (5) business days after the Closing Date.

                  1.4 "Change of Control" Defined. For purposes of this
Agreement, the term "Change of Control" shall mean (i) a corporate
reorganization of the Company which results in the stockholders of the Company
immediately prior to such reorganization owning less than 50% of the
<PAGE>   2
combined voting power of the capital stock of the surviving company immediately
following such reorganization, or (ii) the sale of all or substantially all of
the assets of the Company.

                  1.5 Termination for "Cause" Defined. For purposes of this
Agreement, the term "Cause" shall mean:

                           (a) Conviction of a crime involving moral turpitude;

                           (b) Employee's neglect or inadequate performance of
his duties as determined at any time in the sole and absolute discretion of the
Board of Directors;

                           (c) Employee's breach of this Agreement or
malfeasance in connection with his employment; or

                           (d) Employee personally engaging in knowing and
intentional illegal conduct which is seriously injurious to the Company or its
affiliates.

         2. Miscellaneous.

                  2.1 Term of Agreement. The terms of this Agreement shall be
effective for one year from the Effective Date; provided, however, that if the
Employee is terminated by the Company for Cause or voluntarily terminates his
employment with the Company at any time prior to the Closing Date, this
Agreement shall expire on the effective date of such termination and the Company
shall have no further obligations under this Agreement, including no obligation
to pay the Retention Bonus pursuant to Section 1.

                  2.2 Withholding, Etc. The Company shall make such deductions,
withholdings and other payments from all sums payable to Employee pursuant to
this Agreement which are required by law or as Employee requests for taxes and
other charges.

                  2.3 Arbitration. If any dispute between the parties arises out
of this agreement, such dispute shall be finally resolved by binding arbitration
conducted in Webster, Texas in accordance with the commercial rules of the
American Arbitration Association then in effect. Any such arbitration shall be
conducted before a single arbitrator. Judgment upon the award rendered by the
arbitrator may be entered in any court having jurisdiction thereof.

                  2.4 Assignment. This Agreement shall inure to the benefit of
and shall be binding upon the successors and the assigns of the Company. This
Agreement is personal to Employee and may not be assigned by him.

                  2.5 Severability. If any provision of the Agreement shall be
found invalid by any court of competent jurisdiction, such findings shall not
affect the validity of the other provisions hereof and the invalid provisions
shall be deemed to have been severed herefrom.

                  2.6 Applicable Law. This Agreement is entered into and
executed in the State of Texas and shall be governed by the laws of such State.



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<PAGE>   3
                  2.7 Counterparts. This Agreement may be executed
simultaneously in any number of counterparts, each of which shall be deemed an
original but all of which together shall constitute one and the same instrument.

                  2.8 Attorneys' Fees. In the event any party hereto commences
arbitration or legal action to enforce this Agreement, the prevailing party
shall be entitled to its reasonable attorneys' fees, costs and expenses incurred
in such action.

                  2.9 Non-Integration. This Agreement shall be in addition to
any other agreements between the parties hereto.

         IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date set forth on the first page hereof.


                                      CYBERONICS, INC.


                                      By:  /s/ Robert P. Cummins
                                           -------------------------------------
                                           Robert P. Cummins
                                           President and Chief Executive Officer



                                      EMPLOYEE



                                      By:  /s/ John K. Bakewell
                                           -------------------------------------
                                           John K. Bakewell




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<PAGE>   4
                                  EXTENSION OF
                          EMPLOYEE RETENTION AGREEMENT


         This Extension of Employee Retention Agreement (the "Extension") is
made and entered into effective as of April 10, 1996 (the "Effective Date"), by
and between John K. Bakewell (the "Employee") and Cyberonics, Inc. (the
"Company").

                                 R E C I T A L S

         A. The Company and the Employee are parties to an Employee Retention
dated as of September 30, 1995 (the "Employee Retention Agreement") which
provides Employee with certain benefits in the event of a Change of Control of
the Company as defined therein. The Employee Retention Agreement expires by its
terms one year from the date of execution.

         B. The Company has announced the execution of an Agreement and Plan of
Merger pursuant to which the Company may be acquired by another company. The
Board of Directors of the Company (the "Board") recognizes that such
announcement can be a distraction to the Employee and can cause the Employee to
consider alternative employment opportunities. The Board has determined that it
is in the best interests of the Company and its stockholders to assure that the
Company will have the continued dedication and objectivity of the Employee,
notwithstanding the possibility or occurrence of a Change of Control (as defined
below) of the Company.

         3. The Board believes that it is in the best interests of the Company
and its stockholders to provide the Employee with an incentive to continue his
employment and to motivate the Employee to maximize the value of the Company
upon a Change of Control for the benefit of its stockholders.

         In consideration of the mutual covenants herein contained, and in
consideration of the continuing employment of Employee by the Company, the
parties agree that the Employee Retention Agreement is hereby amended as
follows:

         3.1      Section 1.1. Section 1.1 of the Employee Retention Agreement
                  is hereby amended in its entirety to read as follows:

                  "Retention Bonus Trigger. In the event of a Change of Control
         (as defined below) occurring on or before December 31, 1996 (the
         "Expiration Date"), provided that the Employee meets the eligibility
         requirements set forth in Section 1.2 hereof, Employee shall be
         entitled to receive a lump sum cash payment equal to Two Hundred
         Thousand Dollars ($200,000) (the "Retention Bonus")."

         3.2      Section 2.1. Section 2.1 of the Employee Retention Agreement
                  is hereby amended in its entirety to read as follows:

                  "Term of Agreement. The terms of this Agreement shall
         terminate upon the earlier of (i) the date that all obligations of the
         parties hereunder have been satisfied or (ii) the Expiration Date;
         provided, however, that if the Employee is terminated by the Company
         for Cause or voluntarily terminates his employment with the Company at
         any time prior to the Closing Date, this Agreement shall expire on the
         effective date of such termination and the
<PAGE>   5
         Company shall have no further obligations under this Agreement,
         including no obligation to pay the Retention Bonus pursuant to Section
         1.

         3.3 No Other Changes. Except as expressly provided in this Extension,
the terms of the Employee Retention Agreement shall remain in full force and
effect.

         3.4 Miscellaneous. The Miscellaneous provisions set forth in Section 2
of the Employee Retention Agreement shall apply to this Extension as if set
forth herein.

         IN WITNESS WHEREOF, each of the parties has executed this Extension, in
the case of the Company by its duly authorized officer, as of the day and year
first above written.


COMPANY:                                CYBERONICS, INC.



                                        By:   /s/ Robert P. Cummins
                                           -------------------------------------

                                        Title: President and CEO
                                               ---------------------------------



EMPLOYEE:                               /s/ John K. Bakewell
                                        ----------------------------------------
                                        JOHN K. BAKEWELL




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