Mercer Insurance Group, Inc. Stock Compensation Program Agreement

Summary

This agreement establishes the Mercer Insurance Group, Inc. Stock Compensation Program, which provides stock-based incentives to selected executives, key employees, and directors. The program includes stock options, stock appreciation rights, and performance shares to attract and retain top personnel and encourage their contribution to the company's success. The program is administered by the Compensation Committee and is subject to shareholder approval within 12 months of adoption. Only full-time employees and certain directors are eligible, and the program will remain in effect for up to 10 years unless terminated earlier.

EX-10.12 7 e85343a1exv10w12.txt 2003 STOCK-BASED INCENTIVE PLAN EXHIBIT 10.12 MERCER INSURANCE GROUP, INC. STOCK COMPENSATION PROGRAM 1. Purpose. The Mercer Insurance Group, Inc. Stock Compensation Program ("Program") is intended to secure for Mercer Insurance Group, Inc. (the "Company") and its shareholders the benefits arising from ownership of the Company's common stock, no par value per share ("Common Stock"), by those selected executives and other key employees and directors of the Company who will be responsible for its future growth. The Program is designed to help attract and retain superior personnel for positions of substantial responsibility with the Company, and to provide key employees with an additional incentive to contribute to the success of the Company. 2. Elements of the Program. In order to maintain flexibility in the award of stock benefits, the Program is comprised of four parts. The first part is the Incentive Stock Option Plan ("Incentive Plan"). The second part is the Compensatory Stock Option Plan ("Compensatory Plan"). The third part is the Stock Appreciation Rights Plan ("S.A.R. Plan"). The fourth part is the Performance Shares Plan ("Performance Plan"). Copies of the Incentive Plan, Compensatory Plan, S.A.R. Plan, and Performance Plan are attached hereto as Part I, Part II, Part III and Part IV, respectively, and are collectively referred to herein as the "Plans." The grant of an option, appreciation right or performance share under one of the Plans shall not be construed to prohibit the grant of an option, appreciation right or performance share under any of the other Plans. 3. Applicability of General Provisions. Unless any Plan specifically indicates to the contrary, all Plans shall be subject to the General Provisions of the Stock Compensation Program set forth below. 4. Administration of the Plans. The Plans shall be administered, construed, governed and amended in accordance with their respective terms. GENERAL PROVISIONS OF STOCK COMPENSATION PROGRAM Article 1. Administration. The Program shall be administered by the Compensation Committee of the Board of Directors of the Company. The committee, when acting to administer the Program, is referred to as the "Program Administrators." Any action of the Program Administrators shall be taken by majority vote or the unanimous written consent of the Program Administrators. The Board of Directors, with the Program Administrators not voting, shall administer the Program with respect to the options granted to the Program Administrators in accordance with the provisions of Plan II. No Program Administrator or member of the Board of Directors of the Company or any parent or subsidiary, shall be liable for any action or determination made in good faith with respect to the Program or to any option, stock appreciation right, or performance share granted thereunder. Article 2. Authority of Program Administrators. Subject to the other provisions of this Program, and with a view to effecting its purpose, the Program Administrators shall have sole authority in their absolute discretion: (a) to construe and interpret the Program; (b) to define the terms used herein; (c) to prescribe, amend, and rescind rules and regulations relating to the Program; (d) to determine the employees to whom options, appreciation rights and performance shares shall be granted under the Program; (e) to determine the time or times at which options, appreciation rights and performance 1 shares shall be granted under the Program; (f) to determine the number of shares subject to any option or stock appreciation right under the Program and the number of shares to be awarded as performance shares under the Program as well as the option price, and the duration of each option, appreciation right and performance share, and any other terms and conditions of options, appreciation rights and performance shares; (g) to make any other determinations necessary or advisable for the administration of the Program and to do everything necessary or appropriate to administer the Program. All decisions, determinations, and interpretations made by the Program Administrators shall be binding and conclusive on all participants in the Program and on their legal representatives, heirs and beneficiaries. Article 3. Maximum Number of Shares Subject to the Program. The maximum aggregate number of shares of Common Stock available pursuant to the Plans, subject to adjustment as provided in Article 6 hereof, shall be equal to the number of shares that represent 10% of the Company's initial issuance of Common Stock. If any of the options granted under this Program expire or terminate for any reason before they have been exercised in full, the unpurchased shares subject to those expired or terminated options shall again be available for the purposes of the Program. If the performance objectives associated with the grant of any performance share(s) are not achieved within the specified performance period or if the performance share grant terminates for any reason before the performance objective date arrives, the shares of Common Stock associated with such performance shares shall again be available for the purposes of the Program. Article 4. Eligibility and Participation. Only regular full-time employees of the Company, including officers whether or not directors of the Company, or of any parent or any subsidiary, shall be eligible for selection by the Program Administrators to participate in the Program. Directors who are not full-time employees of the Company shall only be eligible to participate in Plan II of the Program. Article 5. Effective Date and Term of Program. The Program shall become effective upon its adoption by the Board of Directors of the Company and subsequent approval of the Program by a majority of the total votes eligible to be cast at a meeting of shareholders, which vote shall be taken within 12 months of adoption of the Program by the Company's Board of Directors; provided, however, that options, appreciation rights, and performance shares may be granted under this Program prior to obtaining shareholder approval of the Program, but after the Company's original issuance of Common Stock, but any such options or appreciation rights or performance shares shall be contingent upon such shareholder approval being obtained and may not be exercised prior to such approval. The Program shall continue in effect for a term of 10 years unless sooner terminated under Article 2 of the General Provisions. Article 6. Adjustments. If the shares of Common Stock of the Company as a whole are increased, decreased, changed into, or exchanged for a different number or kind of shares or securities through merger, consolidation, combination, exchange of shares, other reorganization, recapitalization, reclassification, stock dividend, stock split or reverse stock split, an appropriate and proportionate adjustment shall be made in the maximum number and kind of shares as to which options, appreciation rights and performance shares may be granted under this Program. A corresponding adjustment changing the number or kind of shares allocated to unexercised options, appreciation rights, performance shares, or portions thereof, which shall have been 2 granted prior to any such change, shall likewise be made. Any such adjustment in outstanding options and appreciation rights shall be made without change in the aggregate purchase price applicable to the unexercised portion of the option or appreciation right, but with a corresponding adjustment in the price for each share or other unit of any security covered by the option or appreciation right. In making any adjustment pursuant to this Article 6, any fractional shares shall be disregarded. Article 7. Termination and Amendment of Program. The Program shall terminate no later than 10 years from the date such Program is adopted by the Board of Directors, or the date such Program is approved by the shareholders, whichever is earlier. No options, appreciation rights, or performance shares shall be granted under the Program after that date. The Board of Directors may terminate the Program at any time. Subject to the limitation contained in Article 8 of the General Provisions, the Program Administrators may at any time amend or revise the terms of the Program, including the form and substance of the option, appreciation right, and performance shares agreements to be used hereunder; provided that no amendment or revision shall (a) increase the maximum aggregate number of shares that may be sold, subjected to appreciation, or distributed pursuant to options, appreciation rights, or performance shares granted under this Program, except as permitted under Article 6 of the General Provisions; (b) change the minimum purchase price for shares under Section 4 of Plans I and II; (c) increase the maximum term established under the Plans for any option, appreciation right, or performance share; or (d) permit the granting of an option, appreciation right, or performance share to anyone other than as provided in Article 4 of the General Provisions. Article 8. Prior Rights and Obligations. No amendment, suspension, or termination of the Program shall, without the consent of the employee who has received an option, appreciation right, or performance share, alter or impair any of that employee's rights or obligations under any option, appreciation right or performance share granted under the Program prior to such amendment, suspension, or termination. Article 9. Privileges of Stock Ownership. Notwithstanding the exercise of any options granted pursuant to the terms of this Program or the achievement of any performance objective specified in any performance share granted pursuant to the terms of this Program, no employee shall have any of the rights or privileges of a shareholder of the Company in respect of any shares of stock issuable upon the exercise of his or her option or achievement of his or her performance goal until certificates representing the shares have been issued and delivered. No shares shall be required to be issued and delivered upon exercise of any option or achievement of any performance goal as specified in a performance share unless and until all of the requirements of law and of all regulatory agencies having jurisdiction over the issuance and delivery of the securities shall have been fully complied with. No adjustment shall be made for dividends or any other distributions for which the record date is prior to the date on which such stock certificate is issued. Article 10. Reservation of Shares of Common Stock. The Company, during the term of this Program, will at all times reserve and keep available such number of shares of its Common Stock as shall be sufficient to satisfy the requirements of the Program. In addition, the Company will from time to time, as is necessary to accomplish the purposes of this Program, seek to obtain from any regulatory agency having jurisdiction, any requisite authority in order to issue and sell shares of Common Stock hereunder. The inability of the Company to obtain from any regulatory 3 agency having jurisdiction the authority deemed, by the Company's counsel, to be necessary to the lawful issuance and sale of any shares of its stock hereunder shall relieve the Company of any liability in respect of the non-issuance or sale of the stock as to which the requisite authority shall not have been obtained. Article 11. Tax Withholding. The exercise of any option, appreciation right, or performance share granted under the Program is subject to the condition that if at any time the Company shall determine, in its discretion, that the satisfaction of withholding tax or other withholding liabilities under any state or federal law is necessary or desirable as a condition of, or in any connection with, such exercise or the delivery or purchase of shares pursuant thereto, then in such event, the exercise of the option, appreciation right or performance share shall not be effective unless such withholding tax or other withholding liabilities shall have been satisfied in a manner acceptable to the Company. Article 12. Employment. Nothing in the Program or in any option, stock appreciation right, or performance share award, shall confer upon any eligible employee any right to continued employment by the Company, or by any parent or subsidiary corporation, or limit in any way the right of the Company or any parent or subsidiary corporation at any time to terminate or alter the terms of that employment. PART I MERCER INSURANCE GROUP, INC. INCENTIVE STOCK OPTION PLAN Section 1. Purpose. The purpose of the Mercer Insurance Group, Inc. Incentive Stock Option Plan ("Incentive Plan") is to promote the growth and general prosperity of the Company by permitting the Company to grant options to purchase shares of its Common Stock. The Incentive Plan is designed to help attract and retain superior personnel for positions of responsibility with the Company and any parent or subsidiary, and to provide key employees with an additional incentive to contribute the success of the Company. The Company intends that options granted pursuant to the provisions of the Incentive Plan will qualify and will be identified as "incentive stock options" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended ("Code"). This Incentive Plan is Part I of the Company's Stock Compensation Program ("Program"). Unless any provision herein indicates to the contrary, this Incentive Plan shall be subject to the General Provisions of the Program. Section 2. Option Terms and Conditions. The terms and conditions of options granted under the Incentive Plan may differ from one another as the Program Administrators shall, in their discretion, determine, as long as all options granted under the Incentive Plan satisfy the requirements of the Incentive Plan. Section 3. Duration of Options. Each option and all rights thereunder granted pursuant to the terms of the Incentive Plan shall expire on the date determined by the Program Administrators, but in no event shall any option granted under the Incentive Plan expire later than 10 years from the date on which the option is granted, except that any employee who owns more than 10% of the combined voting power of all classes of stock of the Company, or of any parent or subsidiary, must exercise any options within five years from the date of grant. In addition, each option shall be subject to early termination as provided in the Incentive Plan. 4 Section 4. Purchase Price. The purchase price for shares acquired pursuant to the exercise, in whole or in part, of any option shall not be less than the fair market value of the shares at the time of the grant of the option; except that for any employee who owns more than 10% of the combined voting power of all classes of stock of the Company, or of any parent or subsidiary, the purchase price shall not be less than 110% of fair market value. Fair market value shall be determined by the Program Administrators on the basis of such factors as they deem appropriate; provided, however, that fair market value shall be determined without regard to any restriction other than a restriction which, by its terms, will never lapse, and further provided, however, that if at the time the determination of fair market value is made, those shares are subject to trading on a national securities exchange for which sale prices are regularly reported, the fair market value of those shares shall not be less than the mean of the high and low asked or closing sales prices reported for the Common Stock on that exchange on the day or most recent trading day preceding the date on which the option is granted. For purposes of this Section 4, the term "national securities exchange" shall include the National Association of Securities Dealers Automated Quotation System and the over-the-counter market. Section 5. Maximum Amount of Options in Any Calendar Year. The aggregate fair market value (determined as of the time the option is granted), of the Common Stock with respect to which incentive stock options are first exercisable by any Optionee during any calendar year under the terms of this Plan and all such plans of the Company and any parent or subsidiary corporation, shall not exceed $100,000. Any option in excess of the foregoing limitations shall be granted pursuant to the Company's Compensatory Stock Option Plan (Plan II), and shall be clearly and specifically designated as not being an incentive stock option. Commencing January 1, 2003, grants to any employee under the Incentive Plan shall not exceed in the aggregate 100,000 options during any period of 12 consecutive months. Such limitation shall be subject to adjustments in the manner described in Article 6 of the General Provisions of this Program. Section 6. Exercise of Options. Each option shall be exercisable in one or more installments during its term, and the right to exercise may be cumulative as determined by the Program Administrators. No option may be exercised for a fraction of a share of Common Stock. The purchase price of any shares purchased shall be paid in full, in cash or by certified or cashier's check payable to the order of the Company or by shares of Common Stock, if permitted by the Program Administrators, or by a combination of cash, check, or shares of Common Stock, at the time of exercise of the option; provided that the form(s) of payment allowed the employee shall be established when the option is granted. If any portion of the purchase price is paid in shares of Common Stock, those shares shall be tendered at their then fair market value as determined by the Program Administrators in accordance with Section 4 of this Incentive Plan. Notwithstanding the foregoing, Common Stock acquired pursuant to the exercise of an incentive stock option may not be tendered as payment unless the holding period requirements of Code Section 422(a)(1) have been satisfied, and Common Stock not acquired pursuant to the exercise of an incentive stock option may not be tendered as payment unless it has been held, beneficially and of record, for at least one year. Section 7. Acceleration of Right of Exercise of Installments. Notwithstanding the first sentence of Section 6 of this Incentive Plan, in the event the Company or its shareholders enter into an agreement to dispose of all or substantially all of the assets or stock of the Company 5 by means of a sale, merger or other reorganization, liquidation, or otherwise, any option granted pursuant to the terms of the Incentive Plan shall become immediately exercisable with respect to the full number of shares subject to that option during the period commencing as of the date of the agreement to dispose of all or substantially all of the assets or stock of the Company and ending when the disposition of assets or stock contemplated by that agreement is consummated or the option is otherwise terminated in accordance with its provisions or the provisions of this Incentive Plan, whichever occurs first; provided, however, that no option shall be immediately exercisable under this Section 7 on account of any agreement to dispose of all or substantially all of the assets or stock of the Company by means of a sale, merger or other reorganization, liquidation, or otherwise where the shareholders of the Company immediately before the consummation of the transaction will own at least 50% of the total combined voting power of all classes of stock entitled to vote of the surviving entity, whether the Company or some other entity, immediately after the consummation of the transaction. In the event the transaction contemplated by the agreement referred to in this Section 7 is not consummated, but rather is terminated, cancelled, or expires, the options granted pursuant to the Incentive Plan shall thereafter be treated as if such agreement had never been entered into. Notwithstanding the first sentence of Section 6 of this Incentive Plan, in the event of a change in control of the Company or threatened change in control of the Company as determined by a vote of not less than a majority of the Board of Directors of the Company, all options granted prior to such change in control or threatened change of control shall become immediately exercisable. The term "control" for purposes of this Section shall refer to the acquisition of 10% or more of the voting securities of the Company by any person or by persons acting as a group within the meaning of Section 13(d) of the Securities Exchange Act of 1934, as amended; provided, however, that for purposes of the Incentive Plan, no change in control or threatened change in control shall be deemed to have occurred if prior to the acquisition of, or offer to acquire, 10% or more of the voting securities of the Company, the full Board of Directors of the Company shall have adopted, by not less than two-thirds vote, a resolution specifically approving such acquisition or offer. The term "person" for purposes of this Section refers to an individual or a corporation, partnership, trust, association, joint venture, pool, syndicate, sole proprietorship, unincorporated organization or any other form of entity not specifically listed herein. Section 8. Written Notice Required. Any option granted pursuant to the terms of the Incentive Plan shall be exercised when written notice of that exercise has been given to the Company at its principal office by the person entitled to exercise the option and full payment for the shares with respect to which the option is exercised has been received by the Company. Section 9. Additional Exercise Provisions. An employee granted and holding more than one option granted pursuant to the terms of the Incentive Plan at any relevant time may, in accordance with the provisions of the Incentive Plan, elect to exercise such options in any order. In addition, at the request of the employee and to the extent permitted by applicable law, the Company may, in its sole discretion, selectively approve arrangements with a brokerage firm under which such brokerage firm, on behalf of the employee, shall pay to the Company the exercise price of the options being exercised, and the Company, pursuant an irrevocable notice from the employee, shall promptly deliver the shares being purchased to such brokerage firm. 6 Section 10. Compliance With Securities Laws. Shares of Common Stock shall not be issued with respect to any option granted under the Incentive Plan unless the exercise of that option and the issuance and delivery of those shares pursuant to that exercise shall comply with all relevant provisions of state and federal law including, without limitation, the Securities Act of 1933, as amended, the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. The Program Administrators may also require an employee to whom an option has been granted under the Incentive Plan ("Optionee") to furnish evidence satisfactory to the Company, including a written and signed representation letter and consent to be bound by any transfer restriction imposed by law, legend, condition, or otherwise, that the shares are being purchased only for investment and without any present intention to sell or distribute the shares in violation of any state or federal law, rule, or regulation. Further, each Optionee shall consent to the imposition of a legend on the shares of Common Stock subject to his or her option restricting their transferability as required by law or by this Section 10. Section 11. Employment of Optionee. Each Optionee, if requested by the Program Administrators when the option is granted, must agree in writing as a condition of receiving his or her option, that he or she will remain in the employ of the Company, or any parent or subsidiary corporation of the Company (or a corporation or a parent or subsidiary of such corporation issuing or assuming a stock option in a transaction to which section 424(a) of the Code applies), as the case may be, following the date of the granting of that option for a period specified by the Program Administrators, which period shall in no event exceed three years. Nothing in the Plan or in any option granted hereunder shall confer upon any Optionee any right to continued employment by the Company, or any parent or subsidiary corporation, or limit in any way the right of the Company or any parent or subsidiary corporation at any time to terminate or alter the terms of that employment. Section 12. Option Rights Upon Termination of Employment. If an Optionee ceases to be employed by the Company, or any parent or subsidiary corporation (or a corporation or a parent or subsidiary of such corporation issuing or assuming a stock option in a transaction to which section 424(a) of the Code applies), for any reason other than death or disability, his or her option shall immediately terminate; provided, however, that the Program Administrators may, at the time an option is granted, in their discretion, allow such option to be exercised (to the extent exercisable on the date of termination of employment) at any time within three months after the date of termination of employment, unless either the option or the Incentive Plan otherwise provides for earlier termination. Section 13. Option Rights Upon Disability. If an Optionee becomes permanently and totally disabled within the meaning of Section 22(e)(3) of the Code while employed by the Company, or any parent or subsidiary corporation (or a corporation or a parent or subsidiary of such corporation issuing or assuming a stock option in a transaction to which section 424(a) of the Code applies), the option may be exercised, to the extent exercisable on the date of termination of employment, at any time within one year after the date of termination of employment due to disability, unless either the option or the Incentive Plan otherwise provides for earlier termination. 7 Section 14. Option Rights Upon Death of Optionee. Except as otherwise limited by the Program Administrators at the time of the grant of an option, if an Optionee dies while employed by the Company, or any parent or subsidiary corporation (or a corporation or a parent or subsidiary of such corporation issuing or assuming a stock option in a transaction to which section 424(a) of the Code applies), or within three months after ceasing to be an employee thereof, his or her option shall expire one year after the date of death unless by its term it expires sooner. During this one year or shorter period, the option may be exercised, to the extent that it remains unexercised on the date of death, by the person or persons to whom the Optionee's rights under the option shall pass by will or by the laws of descent and distribution, but only to the extent that the Optionee is entitled to exercise the option at the date of death. Section 15. Options Not Transferable. Options granted pursuant to the terms of the Incentive Plan may not be sold, pledged, assigned, or transferred in any manner otherwise than by will or the laws of descent or distribution and may be exercised during the lifetime of an Optionee only by that Optionee. Section 16. Adjustments to Number and Purchase Price of Optioned Shares. All options granted pursuant to the terms of this Incentive Plan shall be adjusted in the manner prescribed by Article 6 of the General Provisions of this Program. PART II MERCER INSURANCE GROUP, INC. COMPENSATORY STOCK OPTION PLAN Section 17. Purpose. The purpose of the Mercer Insurance Group, Inc. Compensatory Stock Option Plan ("Compensatory Plan") is to permit the Company to grant options to purchase shares of its Common Stock to selected executive officers, full-time, key employees and to directors of the Company. The Compensatory Plan is designed to help attract and retain superior personnel for positions of substantial responsibility with the Company and any parent or subsidiary, and to provide key employees with an additional incentive to contribute to the success of the Company. Any option granted pursuant to this Compensatory Plan shall be clearly and specifically designated as not being an incentive stock option, as defined in Section 422(b) of the Internal Revenue Code of 1986, as amended ("Code"). This Compensatory Plan is Part II of the Company's Stock Compensation Program ("Program"). Unless any provision herein indicates to the contrary, this Compensatory Plan shall be subject to the General Provisions of the Program. Section 18. Option Terms and Conditions. The terms and conditions of options granted under this Compensatory Plan may differ from one another as the Program Administrators shall, in their discretion, determine as long as all options granted under the Compensatory Plan satisfy the requirements of the Compensatory Plan. The maximum number of shares of common stock for which options may be granted under this Compensatory Plan to all directors who are not full-time salaried employees of the Company or any parent or subsidiary shall not exceed 50 percent of the shares of common stock covered by the Program. 8 Section 19. Duration of Options. Each option and all rights thereunder granted pursuant to the terms of this Compensatory Plan shall expire on the date determined by the Program Administrators, but in no event shall any option granted under the Compensatory Plan expire later than 10 years and one month from the date on which the option is granted. In addition, each option shall be subject to early termination as provided in the Compensatory Plan. Section 20. Purchase Price. The purchase price for shares acquired pursuant to the exercise, in whole or in part, of any option shall be equal to or less than the fair market value of the shares at the time of the grant of the option, as determined by the Program Administrators at the time of grant on the basis of such factors as they deem appropriate; provided, however, that fair market value shall be determined without regard to any restriction other than a restriction which, by its terms, shall never lapse. If at the time of the determination, the shares of the Company are admitted to trading on a national securities exchange for which sales prices are regularly reported, the fair market value of those shares shall not be less than the mean of the high and low asked or closing sales prices reported for the Common Stock on that exchange on the day or most recent trading day preceding the date on which the option is granted. For purposes of this Section 4, the term "national securities exchange" shall include the National Association of Securities Dealers Automated Quotation System and the over-the-counter market. Section 21. Exercise of Options. Each option shall be exercisable in one or more installments during its term and the right to exercise may be cumulative as determined by the Program Administrators (or the Board of Directors with respect to the Program Administrators). No options may be exercised for a fraction of a share of Common Stock. The purchase price of any shares purchased shall be paid in full in cash or by certified or cashier's check payable to the order of the Company or by shares of Common Stock, if permitted by the Program Administrators (or the Board of Directors with respect to the Program Administrators), or by a combination of cash, check or shares of Common Stock, at the time of exercise of the option. If any portion of the purchase price is paid in shares of Common Stock, those shares shall be tendered at their then fair market value as determined by the Program Administrators (or the Board of Directors with respect to the Program Administrators) in accordance with Section 4 of this Compensatory Plan. Notwithstanding the foregoing, Common Stock acquired pursuant to the exercise of an incentive stock option may not be tendered as payment unless the holding period requirements of Code Section 422(a)(1) have been satisfied, and Common Stock not acquired pursuant to the exercise of an incentive stock option may not be tendered as payment unless it has been held, beneficially and of record, for at least one year. Section 22. Acceleration of Right of Exercise of Installments. Notwithstanding the first sentence of Section 5 of this Compensatory Plan, if the Company or its shareholders enter into an agreement to dispose of all or substantially all of the assets or stock of the Company by means of a sale, merger or other reorganization, liquidation, or otherwise, any option granted pursuant to the terms of this Compensatory Plan shall become immediately exercisable with respect to the full number of shares subject to that option during the period commencing as of the date of the agreement to dispose of all or substantially all of the assets or stock of the Company and ending when the disposition of assets or stock contemplated by that agreement is consummated, or the option is otherwise terminated in accordance with its provisions or the provisions of this Compensatory Plan, whichever occurs first; provided, however, that no option shall be immediately exercisable under this Section 6 on account of any agreement to dispose of all or substantially all of the assets or stock of the Company by means of a sale, merger or other 9 reorganization, liquidation, or otherwise where the shareholders of the Company immediately before the consummation of the transaction will own at least 50% of the total combined voting power of all classes of stock entitled to vote of the surviving entity whether the Company or some other entity, immediately after the consummation of the transaction. In the event the transaction contemplated by the agreement referred to in this Section 6 is not consummated, but rather is terminated, cancelled or expires, the options granted pursuant to this Compensatory Plan shall thereafter be treated as if such agreement had never been entered into. Notwithstanding the first sentence of Section 5 of this Compensatory Plan, in the event of a change in control of the Company, or threatened change in control of the Company as determined by a vote of not less than a majority of the Board of Directors of the Company, all options granted prior to such change in control or threatened change in control shall become immediately exercisable. The term "control" for purposes of this Section shall refer to the acquisition of 10% or more of the voting securities of the Company by any person or by persons acting as a group within the meaning of Section 13(d) of the Securities Exchange Act of 1934, as amended; provided, however, that for purposes of this Compensatory Plan, no change in control or threatened change in control shall be deemed to have occurred if prior to the acquisition of, or offer to acquire, 10% or more of the voting securities of the Company, the full Board of Directors of the Company shall have adopted, by not less than two-thirds vote, a resolution specifically approving such acquisition or offer. The term "person" for purposes of this Section refers to an individual or a corporation, partnership, trust, association, joint venture, pool, syndicate, sole proprietorship, unincorporated organization or any other form of entity not specifically listed herein. Section 23. Written Notice Required. Any option granted pursuant to the terms of this Compensatory Plan shall be exercised when written notice of that exercise has been given to the Company at its principal office by the person entitled to exercise the option and full payment for the shares with respect to which the option is exercised has been received by the Company. Section 24. Compliance With Securities Laws. Shares shall not be issued with respect to any option granted under the Compensatory Plan unless the exercise of that option and the issuance and delivery of the shares pursuant thereto shall comply with all relevant provisions of state and federal law, including, without limitation, the Securities Act of 1933, as amended, the rules and regulations promulgated thereunder and the requirements of any stock exchange upon which the shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. The Program Administrators may also require an employee to whom an option has been granted ("Optionee") to furnish evidence satisfactory to the Company, including a written and signed representation letter and consent to be bound by any transfer restrictions imposed by law, legend, condition, or otherwise, that the shares are being purchased only for investment purposes and without any present intention to sell or distribute the shares in violation of any state or federal law, rule, or regulation. Further, each Optionee shall consent to the imposition of a legend on the shares of Common Stock subject to his or her option restricting their transferability as required by law or by this Section 8. Section 25. Employment of Optionee. Each Optionee, if requested by the Program Administrators, must agree in writing as a condition of the granting of his or her option, to remain in the employment of the Company or any parent or subsidiary (or a corporation or a parent or subsidiary of such corporation issuing or assuming a stock option in a transaction to 10 which Code Section 424(a) applies), following the date of the granting of that option for a period specified by the Program Administrators, which period shall in no event exceed three years. Nothing in this Compensatory Plan or in any option granted hereunder shall confer upon any Optionee any right to continued employment by the Company or any parent or subsidiary, or limit in any way the right of the Company or any parent or subsidiary at any time to terminate or alter the terms of that employment. Section 26. Option Rights Upon Termination of Employment. If any Optionee under this Compensatory Plan ceases to be employed by the Company or any parent or subsidiary (or a corporation or a parent or subsidiary of such corporation issuing or assuming a stock option in a transaction to which Code Section 424(a) applies), for any reason other than disability or death, his or her option shall immediately terminate; provided, however, that the Program Administrators (or the Board of Directors with respect to the Program Administrators) may, in their discretion, allow the option to be exercised, to the extent exercisable on the date of termination of employment, at any time within three months after the date of termination of employment, unless either the option or this Compensatory Plan otherwise provides for earlier termination. Section 27. Option Rights Upon Disability. If an Optionee becomes permanently and totally disabled within the meaning of Code Section 22(e)(3) while employed by the Company, or any parent or subsidiary corporation (or a corporation or a parent or subsidiary of such corporation issuing or assuming a stock option in a transaction to which Code Section 424(a) applies), the Program Administrators (or the Board of Directors with respect to the Program Administrators), in their discretion, may allow the option to be exercised, to the extent exercisable on the date of termination of employment, at any time within one year after the date of termination of employment due to disability, unless either the option or the Incentive Plan otherwise provides for earlier termination. Section 28. Option Rights Upon Death of Optionee. Except as otherwise limited by the Program Administrators (or the Board of Directors with respect to the Program Administrators) at the time of the grant of an option, if an Optionee dies while employed by the Company, or any parent or subsidiary, (or a corporation or a parent or subsidiary of such corporation issuing or assuming a stock option in a transaction to which Code Section 424(a) applies), his or her option shall expire one year after the date of death unless by its terms it expires sooner. During this one year or shorter period, the option may be exercised, to the extent that it remains unexercised on the date of death, by the person or persons to whom the Optionee's rights under the option shall pass by will or by the laws of descent and distribution, but only to the extent that the Optionee is entitled to exercise the option at the date of death. Section 29. Transferability. Except as provided below, options granted pursuant to the terms of this Compensatory Plan may not be sold, pledged, assigned, or transferred in any manner otherwise than by will or the laws of descent or distribution and may be exercised during the lifetime of an Optionee only by that Optionee. However, if the Program Administrators so determine at the time the option is granted, the option may be transferable to members of the Optionee's "immediate family" (as hereinafter defined), to a partnership whose members are only the Optionee and/or members of the Optionee's immediate family, or to a trust for the benefit of only the Optionee and/or members of the Optionee's immediate family. For purposes of this Section 13, an Optionee's "immediate family" includes only his or her spouse, parents or other 11 ancestors, and children and other direct descendants of the Optionee or of his or her spouse (including such ancestors and descendants by adoption). Section 30. Adjustments to Number and Purchase Price of Optioned Shares. All options granted pursuant to the terms of this Compensatory Plan shall be adjusted in a manner prescribed by Article 6 of the General Provisions of the Program. PART III MERCER INSURANCE GROUP, INC. STOCK APPRECIATION RIGHTS PLAN Section 31. Purpose. The purpose of the Mercer Insurance Group, Inc. Stock Appreciation Rights Plan ("S.A.R. Plan") is to permit the Company to grant stock appreciation rights for its Common Stock to its full-time, key employees. The S.A.R. Plan is designed to help attract and retain superior personnel for positions of substantial responsibility with the Company and any parent or subsidiary and to provide key employees with an additional incentive to contribute to the success of the Company. This S.A.R. Plan is Part III of the Company's Stock Compensation Program ("Program"). Section 32. Terms and Conditions. The Program Administrators may, but shall not be obligated to, authorize, on such terms and conditions as they deem appropriate in each case, the Company to accept the surrender by the recipient of a stock option granted under Plan I or Plan II of the right to exercise that option, or portion thereof, in consideration for the payment by the Company of an amount equal to the excess of the fair market value of the shares of Common Stock subject to such option, or portion thereof surrendered, over the option price of such shares. Such payment, at the discretion of the Program Administrators, may be made in shares of Common Stock valued at the then fair market value thereof, determined as provided in Section 4 of Plan I, or in cash or partly in cash and partly in shares of Common Stock; provided that with respect to rights granted in tandem with incentive stock options, the Program Administrators shall establish the form(s) of payment allowed the Optionee at the date of grant. The Program Administrators shall not be authorized to make payment to any optionee in shares of the Company's Common Stock unless Section 83 of the Internal Revenue Code of 1986, as amended ("Code") would apply to the Common Stock transferred to the Optionee. Notwithstanding the foregoing, the Company may not permit the exercise and cancellation of a stock appreciation right issued pursuant to this S.A.R. Plan until the Company has been subject to the reporting requirements of Section 13 of the Securities Exchange Act of 1934, as amended ("Exchange Act") for a period of at least one year prior to the exercise and cancellation of any such stock appreciation right. Section 33. Time Limitations. Any election by an Optionee to exercise the stock appreciation rights provided in this S.A.R. Plan shall be made during the period beginning on the third business day following the release for publication of quarterly or annual financial information required to be prepared and disseminated by the Company pursuant to the requirements of the Exchange Act and ending on the twelfth business day following such date. The required release of information shall be deemed to have been satisfied when the specified financial data appears on or in a wire service, financial news service or newspaper of general circulation or is otherwise first made publicly available. 12 Section 34. Exercise of Stock Appreciation Rights; Effect on Stock Options and Vice-Versa. Upon the exercise of a stock appreciation right, the number of shares available under the stock option to which it relates shall decrease by a number equal to the number of shares for which the right was exercised. Upon the exercise of a stock option, any related stock appreciation right shall terminate as to any number of shares subject to the right that exceeds the total number of shares for which the stock option remains unexercised. Section 35. Time of Grant. With respect to options granted under Plan I, stock appreciation rights must be granted concurrently with the stock options to which they relate; with respect to options granted under Plan II, stock appreciation rights may be granted concurrently or at any time thereafter prior to the exercise or expiration of such options. Section 36. Non-Transferable. The holder of a stock appreciation right may not transfer or assign the right otherwise than by will or in accordance with the laws of descent and distribution. Furthermore, in the event of the termination of his or her service with the Company as a director, officer and/or employee, the right may be exercised only within the period, if any, which the option to which it relates may be exercised. Section 37. Tandem Incentive Stock Option - Stock Appreciation Right. Whenever an incentive stock option, granted pursuant to Plan I and a stock appreciation right authorized hereunder are granted together and the exercise of one affects the right to exercise the other, the following requirements shall apply: (1) The stock appreciation right will expire no later than the expiration of the underlying incentive stock option; (2) The stock appreciation right may be for no more than the difference between the exercise price of the underlying option and the market price of the stock subject to the underlying option at the time the stock appreciation right is exercised; (3) The stock appreciation right is transferable only when the underlying incentive stock option is transferable, and under the same conditions; (4) The stock appreciation right may be exercised only when the underlying incentive stock option is eligible to be exercised; and (5) The stock appreciation right may be exercised only when the market price of the stock subject to the option exceeds the exercise price of the stock subject to the option. Section 38. Tandem Stock Option - Limited Stock Appreciation Right. The Program Administrators may provide that any tandem stock appreciation right granted pursuant to Section 8 hereof be a limited stock appreciation right, in which event: (1) The limited stock appreciation right shall be exercisable during the period beginning on the first day following the expiration of an Offer (as defined below) and ending on the thirtieth day following such date (but in no event less than six months after the date of grant of the right); 13 (2) Neither the option tandem to the limited stock appreciation right nor any other stock appreciation right tandem to such option may be exercised at any time that the limited stock appreciation right may be exercised, provided that this requirement shall not apply in the case of an incentive stock option tandem to a limited stock appreciation right if and to the extent that the Program Administrators determine that such requirement is not consistent with applicable statutory provisions regarding incentive stock options and the regulations issued thereunder; (3) Upon exercise of the limited stock appreciation right, the fair market value of the shares to which the right relates for purposes of Section 4 of Plan I shall be determined as the highest price per share paid in any Offer that is in effect at any time during the period beginning on the sixtieth day prior to the date on which the limited stock appreciation right is exercised and ending on such exercise date; provided, however, with respect to a limited stock appreciation right tandem to an incentive stock option, the Program Administrators shall determine fair market value of such shares in a different manner if and to the extent that the Program Administrators deem necessary or desirable to conform with applicable statutory provisions regarding incentive stock options and the regulations issued thereunder. The term "Offer" shall mean any tender offer or exchange offer for shares of the Company, provided that the person making the offer acquires shares of the Company's capital stock pursuant to such offer. Section 39. Exercise Restriction Effects. For the purposes of Section 9 of Plan I, a tandem incentive stock option - stock appreciation right will be considered exercised in full when either the underlying incentive stock option or the stock appreciation right is fully exercised. Section 40. Request for Reports. A copy of the Company's annual report to shareholders shall be delivered to each Optionee. Upon written request, the Company shall furnish to each Optionee a copy of its most recent Form 10-K Annual Report and each Form 10-Q Quarterly Report and Form 8-K Current Report filed with the Securities and Exchange Commission since the end of the Company's prior fiscal year. PART IV MERCER INSURANCE GROUP, INC. PERFORMANCE SHARE PLAN Section 41. Purpose. The purpose of the Mercer Insurance Group, Inc. Performance Share Plan ("Performance Plan") is to promote the growth and general prosperity of the Company by permitting the Company to grant performance shares to help attract and retain superior personnel for positions of substantial responsibility with the Company and any parent or subsidiary, and to provide key employees with an additional incentive to contribute to the success of the Company. This Performance Plan is Part IV of the Company's Stock Compensation Program ("Program"). Section 42. Terms and Conditions. The Program Administrators may grant performance shares to any employee eligible under Article 4 of the General Provisions. Each performance share grant confers upon the recipient thereof the right to receive a specified number of shares of Common Stock of the Company contingent upon the achievement of 14 specified performance objectives within a specified period. The Program Administrators shall specify the performance objective and the period of duration of the performance share grant at the time that such performance share is granted. Any performance shares granted under this Plan shall constitute an unfunded promise to make future payments to the affected employee upon the completion of specified conditions. The grant of an opportunity to receive performance shares shall not entitle the affected employee to any rights to specific fund(s) or assets of the Company, or any parent or subsidiary. Section 43. Cash in Lieu of Stock. In lieu of some or all of the shares earned by achievement of the specified performance objectives within the specified period, the Program Administrators may distribute cash in an amount equal to the fair market value of the Common Stock at the time that the employee achieves the performance objective within the specified period. Such fair market value shall be determined by Section 4 of Plans I and II, on the business day next preceding the date of payment. Section 44. Performance Objective Period. The duration of the period within which to achieve the performance objectives is to be determined by the Program Administrators. The period may not be less than one year nor more than five years from the date the performance share is granted. Section 45. Non-Transferable. A participating employee may not transfer or assign a performance share. Section 46. Performance Share Rights Upon Death or Termination of Employment. If a participating employee dies or terminates service with the Company or any parent or subsidiary (or a corporation or a parent or subsidiary of such corporation issuing or assuming a stock option in a transaction to which Section 424(a) of the Internal Revenue Code of 1986, as amended ("Code") applies), prior to the expiration of the performance objective period, any performance shares granted to him during that period are terminated. Section 47. Tax Consequences. No federal income tax consequences are incurred by the Company or the participating employee at the time a performance share is granted. However, if the specified performance objectives are met, the employee will realize ordinary income at the end of the award period equal to the amount of cash or the fair market value of the stock received by him or her. The Company will ordinarily be entitled to a deduction for federal income tax purposes at the same time and in the same amount. The Program Administrators shall be authorized to make payment in shares of Common Stock only if Code Section 83 would apply to the transfer of Common Stock to the employee. 15