Corporate Governance Report
To the MorphoSys Group, corporate governance builds the framework for the management and supervision of a company, including its organization, commercial principles and regulatory and monitoring measures. The internal guidelines at MorphoSys are aligned with the German Corporate Governance Code, which contains internationally recognized standards for good and responsible governance. The aim of such transparent and coherent management principles is to strengthen the confidence of the financial markets, business partners, employees and the public in the Company.
In order to guarantee good corporate governance, open and comprehensive communication on a regular basis is a guiding principle for the Management and Supervisory Boards of MorphoSys AG. The underlying two-tier system required by the German Stock Corporation Act explicitly differentiates between management and supervision. The responsibilities of both boards are clearly defined by law, by the Articles of Association and the rules of procedure. MorphoSys AG’s boards work together closely and act and decide in the best interest of the Company; their dedicated goal is to sustainably increase the Company’s value.
Declaration about Corporate Management in Accordance
with Sec. 289a hgb for the 2010 Business Year
A description of the principles of corporate management and the declaration of conformity pursuant to sec. 161 of the German Stock Corporation Act (Aktiengesetz – AktG) can be found on MorphoSys’s corporate website.
Internal Controls
Introduction
MorphoSys updated its documentation regarding the internal control system that was established and used over the years for maintaining adequate internal control over financial reporting. In accordance with sec. 289 (5) and sec. 315 (2), para. 5 HGB (German Commercial Code), MorphoSys described the key characteristics of its accounting-related internal control system that ensures that all controls are in place to be able to report the financial figures as precisely as possible. These internal controls over financial reporting are documented and structured based on the most commonly used COSO framework (“Internal Control – Integrated Framework”) as defined by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements, and can only provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes, in accordance with IFRS (International Financial Reporting Standards) as adopted by the European Union.
Also, projections relating to future periods are not part of the internal control system.
Description of the Internal Control System at MorphoSys
Internal control over financial reporting, i.e. control activities performed in the financial statement close process, is part of the Company-wide internal control system. The control environment comprises the following elements:
- General policies and guidelines applicable to all employees as well as
- Processes that include controls to report adequate figures in the financial statements.
Risk Assessment
MorphoSys regards risk management as an activity directed towards identifying, evaluating and mitigating risks (to an acceptable level) as well as monitoring identified risks. Risk management entails organized activity to manage uncertainty and threats and involves people following procedures and using tools in order to ensure conformance with the risk management policy.
MorphoSys has a risk identification and evaluation process in place encompassing all business risks, in particular those which may put the existence of the Company at risk.
Information and Communication
MorphoSys uses ERP (enterprise resource planning) software to make information available for processes and internal control procedures and for reporting purposes. Furthermore, regular communication takes place between the finance teams, local entities and finance headquarters.
Considering the relevance of its information systems, MorphoSys has IT policies in place, governing the use of information technology and communication media in order to reduce any outside risk. Furthermore, a communication policy is in place which defines classification for the distribution of internal documents to make sure that any information is distributed to an adequate audience. Wherever applicable, parameters of applications and systems are set in such a way that the security of information is enhanced.
Control Activities
MorphoSys has implemented control activities in all of its processes, wherever there is an unmitigated risk of (unwarranted or intentional) errors and misstatements. The head of each functional department is responsible for the application of the respective controls in her/his area of responsibility.
Control activities at MorphoSys – including the internal control over financial reporting in the narrower sense – are based on the following general principles:
- Control activities are based on policies and procedures, including a general “presentation and signature policy” which is applicable to all processes and governs authorization and approval levels.
- Documentation of transactions is required, where applicable.
- Segregation of duties (four eyes principle) is implemented where applicable, e.g. between the purchasing and finance departments.
- Information systems are secured by access controls at various levels.
Control activities include both controls before the fact, which are designed to avoid errors and misstatements, as well as controls being performed after the fact, which are designed to detect errors.
Monitoring
MorphoSys tested the compliance with its internal controls with the assistance of an external consultant in 2010. The results have been discussed within the Management Board and will be presented to the Supervisory Board.
Directors’ Holdings
The members of the Management Board and the Supervisory Board own more than 1 % of the shares issued by the Company. For the disclosure of Company stocks held or financial instruments relating to them, please refer to section 28 (Related Parties) of the Notes to the Consolidated Financial Statements. This list details all stocks, stock options and convertible bonds held by each member of the Management Board and the Supervisory Board.
Directors’ Dealings
Under the German Securities Trading Act (Wertpapierhandelsgesetz – WpHG), the members of MorphoSys AG’s Management Board and Supervisory Board and persons who have a “close relationship” with such members are obligated to disclose any trading in MorphoSys stock.
In the reporting year, we received the following notifications pursuant to sec. 15a of the WpHG. Each sale of shares listed below was preceded directly by the exercise of stock options to purchase an identical number of shares.
Sales of the stock options were in conjunction with the scheduled expiration of these bonds in 2010 and 2011.
|
Member of the |
Function |
Date of Transaction in 2010 |
Type of |
Number of Stocks/ |
Average Share Price in € |
Transaction Volume in €* |
||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Dr. Arndt Schottelius |
CDO |
January 26 |
Purchase |
500 |
17.00 |
8,500.00 |
||||||
|
Dr. Arndt Schottelius |
CDO |
March 26 |
Purchase |
500 |
16.375 |
8,187.50 |
||||||
|
Dr. Simon E. Moroney |
CEO |
July 08 |
Sale |
108,000 |
14.30 |
1,544,400.00 |
||||||
|
Dave Lemus |
CFO |
July 09 |
Sale |
7,305 |
15.19 |
110,962.95 |
||||||
|
Dr. Marlies Sproll |
CSO |
December 13 |
Purchase |
3,000 |
14.71** |
44,130.00 |
||||||
|
Dr. Marlies Sproll |
CSO |
December 13 |
Sale |
58,569 |
17.81 |
1,043,113.89 |
||||||
|
Dr. Marlies Sproll |
CSO |
December 14 |
Sale |
13,431 |
17.26 |
231,819.06 |
- * Differences due to rounding
- ** Strike price of stock options
Preventing Conflicts of Interest
Members of both boards are obliged to avoid any actions that could cause conflicts of interest with their functions at MorphoSys AG. Such transactions or ancillary activities of the Management Board have to be immediately reported to and approved by the Supervisory Board. The Supervisory Board in turn shall inform the Annual Shareholders’ Meeting of any conflicts of interest which have occurred along with their solutions. In 2010, Dr. Gerald Möller disclosed his conflict of interest in connection with the negotiations with Sloning BioTechnology GmbH. Dr. Möller is investment advisor at HBM Partners, one of the major investors of Sloning BioTechnology GmbH. Dr. Möller did not participate in any of the Supervisory Board’s discussions regarding the acquisition.
Annual General Meeting
The Annual General Meeting took place in Munich on May 21, 2010. Approximately 35 % of total voting stock was represented at the meeting, a decrease compared to the attendance in 2009 (approximately 46 %). MorphoSys assisted the shareholders in the use of proxies and arranged the appointment of a representative to exercise shareholders’ voting rights in accordance with instructions. This representative was also available until the end of the general debate of the Annual General Meeting. MorphoSys’s shareholders approved all management proposals put to vote at the meeting. MorphoSys provided an online webcast of the Management Board’s presentation and published all documents in a timely manner on the Company’s website.
Risk Management
The Management Board ensures responsible risk handling at all times and keeps the Supervisory Board informed about existing risks and their development. This part of corporate governance includes an appropriate risk management and risk control system in the Company. Detailed information about the opportunities and risks at MorphoSys can be found on page 36 et seq. of this report. The systematic risk management activities, performed as part of the Company’s value-based management approach, identify and assess risks at an early stage and minimize risk exposure. As conditions change, the Company’s risk management system is developed further.
Corporate Communications and Investor Relations
Transparency and an open dialog are important principles for MorphoSys’s communication policy. The Company strictly adheres to the concept that no shareholder receives preferential information. Therefore, all communication activities are aimed at providing shareholders with the same level of information at the same time.
A decisive part of MorphoSys’s relations with its investors are frequent meetings with analysts and institutional investors at road shows and in one-on-one discussions. Conference calls accompany the publication of the quarterly figures to enable immediate queries on the development of the Company for analysts and investors. In 2010, MorphoSys hosted for the first time a R&D day in London and New York to provide an extensive update on its partnered pipeline, proprietary portfolio and recent technology developments.
The Company’s presentations at on-site events are accessible for any interested party on the corporate website. Video and audio recordings of key events can be replayed on the website at any time and transcripts of the conference calls are provided in English and German.
MorphoSys’s financial calendar lists the dates of all regular financial publications and the next Annual General Meeting well in advance. MorphoSys’s boards attach great importance to transparent and timely information for all shareholders. Hence, MorphoSys even exceeds the requirements of the German Corporate Governance Code by reporting its year-end results within 60 days and the quarterly results within 30 days of the end of the respective reporting periods.
Diversity
Diversity and its conscious promotion with the aim of enhancing a company’s success becomes more and more critical in today’s global business environment. The stakeholders’s individuality is a valuable asset for MorphoSys. To limit opportunity based on gender, race, age, lifestyle or political affiliation would limit MorphoSys’s potential achievements as a company. Having a broad mix of people helps to understand different perspectives, to be open to others’ ideas and promotes a high level of mutual respect within the Company.
In 2010, the German Corporate Governance Code recommended that the Supervisory Board should specify concrete objectives regarding its composition which also take into account diversity aspects, in particular according adequate importance to the inclusion of women. Since there were no elections to MorphoSys’s Supervisory Board at the time of the introduction of this recommendation, the Supervisory Board will address this issue in 2011 (see declaration of compliance on our corporate website)
Financial Statement Audit by KPMG
MorphoSys prepares its consolidated financial statements and quarterly financial statements in accordance with International Financial Reporting Standards (IFRS). MorphoSys AG’s financial statements are prepared in accordance with the German Commercial Code (HGB). The Audit Committee of the Supervisory Board proposes the selection of the Company’s external auditor. At the Annual General Meeting, KPMG AG Wirtschaftsprüfungsgesellschaft was appointed as auditor for the 2010 fiscal year. In order to ensure the auditor’s autonomy, the Audit Committee obtained a declaration of independence from the auditor.
Remuneration Report
The Remuneration Report reflects the applicable provisions of the laws relating to the disclosure of the remuneration of the Management Board members and the respective principles of the German Corporate Governance Code.
Remuneration of the Management Board
GENERAL
The aggregate annual compensation paid to Management Board members consists of several components. These include a fixed compensation, a yearly cash bonus based on the achievement of company and individual goals, a medium- and long-term incentive component and additional benefits. Each year, the structure and appropriateness of the aggregate annual compensation packages are reviewed by the Remuneration & Nomination Committee. The amount of compensation payable to the Management Board members is dependent in particular on the achievement of the duties and goals of the individual Management Board member, and on the business situation, success and prospects of the Company relative to its competitive environment. The aggregate annual compensation packages are compared to the outcome of a comparative international industry study performed in 2010 by an internationally acclaimed consultant firm on the specific instruction of the Supervisory Board. Also other available international benchmark sources are taken into consideration. The adjustments to the aggregate annual compensation packages are adopted by the plenum of the Supervisory Board. The last occasion on which salaries of the Management Board members were adjusted was in July 2010.
OVERVIEW
In the fiscal year 2010, the total cash remuneration paid to the members of the Management Board amounted to € 2,216,976 (previous year: € 2,081,756). The table below shows a detailed breakdown of the compensation paid to the members of the Management Board:
|
Fixed Compensation |
Variable Compensation |
Other |
Total Compensation |
||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
in € |
2010 |
2009 |
2010 |
2009 |
2010 |
2009 |
2010 |
2009 |
|||||||||
|
Dr. Simon E. Moroney |
368,498 |
356,011 |
208,570 |
192,246 |
130,1781 |
124,198 |
707,246 |
672,455 |
|||||||||
|
Dave Lemus |
259,157 |
250,375 |
152,902 |
135,203 |
156,6392 |
141,055 |
568,698 |
526,633 |
|||||||||
|
Dr. Arndt Schottelius |
231,000 |
220,000 |
132,594 |
118,800 |
90,1583 |
84,513 |
453,752 |
423,313 |
|||||||||
|
Dr. Marlies Sproll |
249,623 |
241,164 |
146,778 |
130,229 |
90,8794 |
87,963 |
487,280 |
459,356 |
|||||||||
|
Total |
1,108,278 |
1,067,550 |
640,844 |
576,478 |
467,854 |
437,728 |
2,216,976 |
2,081,756 |
|||||||||
- Includes € 103,844 annual contributions to private pension fund and allowances for insurances (prior year: € 101,555)
- Includes € 74,605 annual contributions to private pension fund and allowances for insurances (prior year: € 72,743)
- Includes € 68,837 annual contributions to private pension fund and allowances for insurances (prior year: € 66,753)
- Includes € 72,371 annual contributions to private pension fund and allowances for insurances (prior year: € 70,695)
NON-PERFORMANCE RELATED COMPENSATION
The non-performance related compensation consists of the fixed compensation and additional benefits which encompass primarily the use of company cars, allowances for health, social care and invalidity insurances as well as special allowances and benefits received for working outside of the home country. Furthermore, all members of the Management Board participate in private pension funds or another means of pension schemes (“Alterversorgung”). MorphoSys pays the monthly contribution to these funds or other means of pension schemes. These payments amount to a maximum of 10 % of the annual fixed salary of each Management Board member plus tax contribution and are included in the non-performance related compensation. In addition, all Management Board members participate in a pension scheme which was established in cooperation with Allianz Pensions-Management e.V. Allianz Pensions-Management e.V. serves as a so-called “Unterstützungskasse,” which means pension commitments have to be fulfilled by Allianz Pensions-Management e.V.
PERFORMANCE RELATED COMPENSATION
Each Management Board member is eligible to receive performance-related compensation in the form of an annual cash bonus payment. Such bonus payments are dependent on the achievement of Company-related and individual goals, which are determined by the Supervisory Board at the beginning of each fiscal year. The Company-related goals account for up to two third of the payment and are based on the operating performance of the Company as measured by revenues and net income, progress in the proprietary pipeline and other measures including performance of the Company’s stock, or the completion and/or extension of important collaborations. The individual goals account for up to one third of the payment and comprise operational objectives which the Management Board member is responsible for fulfilling. At the end of the year, the Supervisory Board evaluates the level of attainment of the Company and the individual goals and sets the bonus payment accordingly. The bonus for the fiscal year 2010 will be paid out in March 2011.
LONG-TERM INCENTIVISING COMPENSATION
The long-term performance-related remuneration consists of convertible bonds and stock options pursuant to the respective incentive plans as resolved by the Annual General Meeting.
The current employee convertible bond programs provide for the issuance of non-interest-bearing convertible bonds with a par/nominal value of € 0.33 each to employees and to the Management Board members. The beneficiaries may only exercise the conversion rights following the expiration of a waiting period of four years after the grant date. Each convertible bond with a nominal value of € 0.33 can be exchanged for one share of ordinary no-par value common stock of the Company against payment of the exchange price. Furthermore, exercising of the convertible bonds is subject to the performance target that the value of the underlying stock should have exceeded the stock price at the time of the grant by at least 10 % on any one trading day before the exercise.
In 2011, MorphoSys plans to switch to a long-term incentive program based on the issuance of performance shares. The respective underlying shares will be bought back by the Company from the stock market, based on the resolution of the Annual Shareholders’ Meeting 2010. Under the new long-term incentive plan each member of the Management Board will be allocated on an annual basis a certain number of stocks. Such stocks are subject to a four-year waiting period. After the lapse of the waiting period, the allocated stocks will be finally granted to the relevant member of the Management Board subject to his/her achievement of predefined success criteria and therewith become exercisable.
For a more detailed description of the various stock option and convertible bond programs currently in operation, see sections 17 and 18 of the Notes to the Consolidated Financial Statements.
The Supervisory Board decides each year on the number of stock options or convertible bonds to be allocated to the Management Board members. According to Company policy covering equity-based compensation programs, stock options or convertible bonds may only be issued on two preset dates each year. In 2010, 157,800 convertible bonds were granted to members of the Management Board. The value of convertible bonds granted to members of the Management Board attributable to the fiscal year 2010 totaled € 1,050,948 (2009: granting of 244,200 stock options and 90,000 convertible bonds with a total value of € 1,420,109). For further details see also Employee Convertible Bond Program sections 17 of the Notes to the Consolidated Financial Statements.
Convertible Bonds Granted to the Management Board in 2010
|
Member of the |
Number of Convertible Bonds |
Strike Price |
Grant Date |
Expiry Date |
Fair Value of One Convertible Bond in € |
Fair Value at The Time of the Grant in € |
||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Dr. Simon E. Moroney |
58,800 |
16.79 |
Apr 1, 2010 |
Dec 31, 2015 |
6.66 |
391,608 |
||||||
|
Dave Lemus |
33,000 |
16.79 |
Apr 1, 2010 |
Dec 31, 2015 |
6.66 |
219,780 |
||||||
|
Dr. Arndt Schottelius |
33,000 |
16.79 |
Apr 1, 2010 |
Dec 31, 2015 |
6.66 |
219,780 |
||||||
|
Dr. Marlies Sproll |
33,000 |
16.79 |
Apr 1, 2010 |
Dec 31, 2015 |
6.66 |
219,780 |
In 2010, members of the Management Board purchased MorphoSys shares and exercised stock options, which were subsequently partly sold. All transactions were reported as legally required and published on the Company’s website.
VARIA
No credit, loan or similar benefits were granted to members of the Management Board. In the year under review, the Management Board members received no benefits from third parties that were either promised or granted in view of their position as a member of the Management Board.
Act on the Appropriateness of Management Board Remuneration
In order to ensure the conformity of Management Board compensation with the Act on the Appropriateness of Management Board Remuneration (Gesetz zur Angemessenheit der Vorstandsvergütung – VorstAG), the Supervisory Board conducted in 2009 and 2010 a detailed review of the compensation system for the Management Board members. This review included the commissioning of a comparative study by an independent recognized consultant as well as discussions with external consultants; the review was completed in 2010. Following the review some amendments to the service agreements of the Management Board Members were implemented prior to the lapse of the transition period of the Act on the Appropriateness of Management Board Remuneration (Gesetz zur Angemessenheit der Vorstandsvergütung – VorstAG).
NON-REAPPOINTMENT/NON-PROLONGATION
The service agreements of the managing directors provide that in the event of a non-reappointment and non-prolongation of the service agreement, each member of the Management Board is entitled to receive a severance payment in the amount of one year’s fixed salary. Such severance payment shall be offset against any salary payments received in the event of a leave of absence of a Management Board member. If the Management Board member’s service contract is terminated by death, his/her spouse or life partner is entitled to the monthly fixed salary for the month of death and the following twelve months. In the event that (i) MorphoSys transfers its assets or material parts of its assets to a non-affiliated third party, (ii) MorphoSys is merged into a non-affiliated third party or (iii) a shareholder holds more than 30 % of the voting rights of MorphoSys, each member of the Management Board is allowed to extraordinarily terminate his/her service contract and may demand the outstanding fixed salary for the remaining contractually provided term of contract or for two years, whichever is greater. Furthermore, in such a case, all granted stock options and convertible bonds shall be treated as immediately vested.
Change in Management Board Composition
In September 2010, the Company concluded mutual agreements with its Chief Financial Officer, Mr. Dave Lemus, regarding the ending of his more than 13 years of serving as MorphoSys CFO, and subsequent seamless transfer of his functions to a successor. Pursuant to these agreements Mr. Lemus is entitled to the contractually agreed compensation under his service agreement until 30 June 2011. Further Mr. Lemus shall receive a contractually agreed further payment equal to his fixed gross annual salary in the amount of € 264,238 plus a bonus calculated as the average bonus in the years 2009 and 2010 in the amount of € 144,053. Additionally, Mr. Lemus’s unvested portion of outstanding stock options granted for the years 2008 and 2009 has been vested prematurely.
Remuneration of the Supervisory Board
The compensation of the members of the Supervisory Board is based on the provisions of the Articles of Association, the current version of which was adopted by the stockholders at the Annual General Meeting on May 21, 2010 and the respective resolutions of the stockholders at the Annual General Meetings regarding the remuneration of the members of the Supervisory Board. In 2010, the members of the Supervisory Board received a fixed compensation and an attendance fee per board and committee meeting attended. The overall compensation takes into account the responsibilities and range of tasks of the Supervisory Board members as well as the economic situation and performance of the Company.
In the 2010 fiscal year, the members of the Supervisory Board received a total of € 382,750 (2009: € 374,333), excluding reimbursement of travel expenses. This amount consists of fixed remuneration and variable compensation (attendance fees).
The table below shows a detailed breakdown of the compensation paid to the Supervisory Board:
|
Fixed Compensation |
Variable Compensation |
Total Compensation |
||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
in € |
2010 |
2009 |
2010 |
2009 |
2010 |
2009 |
||||||
|
Dr. Gerald Möller |
70,000 |
57,000 |
22,000 |
40,722 |
92,000 |
97,722 |
||||||
|
Prof. Dr. Jürgen Drews |
57,750 |
43,278 |
15,000 |
27,778 |
72,750 |
71,056 |
||||||
|
Dr. Walter Blättler |
39,500 |
29,556 |
18,000 |
11,000 |
57,500 |
40,556 |
||||||
|
Dr, Daniel Camus |
36,500 |
28,500 |
19,000 |
28,333 |
55,500 |
56,833 |
||||||
|
Dr, Metin Colpan |
36,500 |
28,500 |
10,000 |
21,333 |
46,500 |
49,833 |
||||||
|
Dr, Geoffrey N. Vernon |
39,500 |
30,000 |
19,000 |
28,333 |
58,500 |
58,333 |
||||||
|
Total |
279,750 |
216,834 |
103,000 |
157,499 |
382,750 |
374,333 |
||||||
Information Required under Takeover Law
The following information is presented in accordance with sec. 315 para. 4 of the German Commercial Code (HGB).
Composition of Capital Stock
As of December 31, 2010, the Company’s share capital amounted to € 22,890,252.00 and is divided into 22,890,252 no-par value bearer shares. With the exception of 79,896 Company-held shares, all issued shares are exclusively common shares with voting rights. The Management Board is not aware of any restrictions on the voting rights or the right to transfer. This also applies to restrictions which may result from shareholders’ agreements. The Company has not been notified of direct or indirect shareholdings in its share capital exceeding 10 % of the voting rights pursuant to sec, 21 of the German Securities Trading Act (WpHG). There are no owners of shares with privileged rights or other rights resulting in a right to control votes.
Shareholdings exceeding 10 % of the voting rights
There is no direct or indirect shareholding in the Company which exceeds 10 % of the voting rights.
Appointment and Dismissal of Management Board Members, Amendments to the Articles of Association
Pursuant to sec. 6 of the Company’s Articles of Association, the Management Board shall consist of at least two members, with the Supervisory Board defining the number of Management Board members. The Supervisory Board may appoint a Chief Executive Officer and one or several representatives of the CEO. Pursuant to sec. 20 of the Articles of Association, amendments to the Articles are subject to a majority of more than 50 % of the share capital represented in a shareholders’ meeting unless the law mandatorily requires a different majority.
Authorization of the Management Board to Issue Shares
The shareholders have provided the Management Board with the following authorizations to issue new shares or conversion rights or to purchase Company-held shares:
a. Pursuant to sec. 5 para. 5 of the Articles of Association and with the approval of the Supervisory Board, the Management Board is authorized to increase the Company’s share capital during the time period up to April 30, 2013, by the amount of up to € 8,864,103.00 and by issuing 8,864,103 young bearer shares with no-par value for contribution in cash and/or in kind on one or several occasions (Authorized Capital 2008-I). The Management Board may, with the approval of the Supervisory Board, exclude the preemptive rights of the shareholders under the following conditions:
i. in the case of a capital increase in cash to the extent that such exclusion is necessary to avoid fractional shares; or
ii. in the case of a capital increase in kind to the extent that the young shares are used for the acquisition of companies, shareholdings in companies, patents, licenses or other industrial property rights, or of assets which constitute a business in their entirety; or
iii. in the case of a capital increase in cash to the extent that young shares are placed on a stock exchange in context with a listing,
b. Pursuant to sec. 5 para. 6 of the Articles of Association and with the approval of the Supervisory Board, the Management Board is authorized to increase the Company’s share capital during the time period up to April 30, 2013, by the amount of up to € 2,216,025.00 and by issuing 2,216,025 young bearer shares with no-par value for contribution in cash (Authorized Capital 2008-II). The Management Board may, with the approval of the Supervisory Board, exclude the preemptive rights of the shareholders under the following conditions:
i. to the extent that such exclusion is necessary to avoid fractional shares; or
ii. the issuance price for the new shares is not substantially below the stock exchange price quoted for existing shares at the time of the issuance,
c. Pursuant to sec. 5 para. 6b of the Articles of Association, the Company’s share capital shall be conditionally increased by an amount of up to € 5,488,686.00, divided into up to 5,488,686 bearer shares with no-par value (Conditional Capital 2006-I). The conditional capital increase shall only be accomplished (i) to the extent that owners of options and/or convertible bonds make use of their option and/or conversion rights issued by the Company by April 30, 2011, in accordance with the resolution of the Annual General Meeting or (ii) to the extent that owners fulfill their duties to convert. The same shall apply to owners of options and/or convertible bonds issued by domestic or foreign affiliates which are wholly owned by the Company,
d. Furthermore, there exist Conditional Capital 1999-I in the amount of up to € 90,729.00 (sec. 5 para. 6a of the Articles of Association), Conditional Capital 2003-II in the amount of up to € 820,464.00 (sec. 5 para. 6c of the Articles of Association), Conditional Capital 2008-II in the amount of up to € 1,115,691.00 (sec. 5 para. 6d of the Articles of Association), and Conditional Capital 2008-III in the amount of up to € 450,000.00 (sec, 5, para, 6e of the Articles of Association). These conditional capitals may be used for the issuance of option and conversion rights to members of the Management Board and to employees of the Company or of its affiliates.
Authorization of the Management Board to Repurchase Stock
The authorization to repurchase treasury stock as provided by the resolution of the ordinary Annual General Meeting 2008 had expired on October 31, 2009. It was replaced by a resolution of the ordinary Annual General Meeting 2010 authorizing the Company to buy back up to 10 % of its existing share capital (i. e. up to 2,289,025 shares) by April 30, 2015.
Change of Control Provisions
Key Agreements Subject to Conditions
In 2007, the Company and Novartis Pharma AG extended their original 2004 collaboration agreement in the field of pharmaceutical research. According to this agreement, should certain changes in control occur involving certain types of companies, Novartis Pharma AG is permitted, but not obligated, to take several measures, including the partial or complete termination of the collaboration agreement.
A change in control is considered to be the acquisition of 30 % or more of the voting rights in the Company in accordance with sec. 29 and sec. 30 of the German Takeover Act (Wertpapiererwerbs- und Übernahmegesetz – WpÜG). Such termination of the collaboration agreement by Novartis Pharma AG could significantly affect future cash flows of the Company.
Change of Control Provisions For Management Board Members
After a change of control transaction, each member of the Management Board is allowed to terminate his/her service contract and may demand the outstanding fixed salary for the remaining contractually provided term of contract or for two years, whichever is greater.
Furthermore, in such a case, all granted stock options and convertible bonds shall be treated as immediately vested. The same applies to some of the directors of the Company to whom options or conversion rights have been granted.