From the viewpoint of enhancing corporate value and increasing the transparency of management, the Company adopts a system of linking executive compensation more closely to consolidated financial results.
Based on this executive compensation system, TEL announced that the company resolved at the meeting of its board of directors held on May 12, 2006 that the Company will seek the General Meeting of Shareholders(take place on June 23, 2006) approval for leaving to the Board of Directors decisions on matters related to invitation of applications for the right to subscribe to new shares to be issued to implement the so-called stock compensation-based stock options in accordance with the provisions of Articles 236, 238 and 239 of the Corporation Law.
1. Reason for granting share subscription rights under particularly favorable conditions to non-shareholders
(Background to Introduction and Overview of the System)
In the past, TEL and its subsidiaries have actively introduced incentive systems, such as compensation that varies according to business performance and stock options. However, TEL has changed in last year its executive compensation system in order to link executive compensation more closely to its stock prices, consolidated net income, and shareholder value, while also improving the transparency of its management and enhancing its competitive strength.
Under the new executive compensation system, payment of retirement allowances, which constitute part of the fixed compensation, were abolished. In addition, executive compensation will be more closely linked to consolidated financial results and stock prices by clearly tying the portion of compensation linked to business performance to consolidated net income. With this change, the new executive compensation system will consist of fixed monthly compensation, cash compensation linked to business performance (annual bonus), and stock compensation (stock options for stock linked compensation).
The total portion of compensation for corporate directors, executive officers of TEL and its subsidiaries (excluding a public share offering subsidiary) that is linked to business performance will be determined up to 3% of consolidated net income. The ratio of cash compensation linked to business performance (annual bonus) (not paid to statutory auditors) to stock compensation will be approximately 2:1.
With this change, a greater percentage of compensation will be linked to business performance and stock prices. The executives will share with shareholders not only benefits from better business performance and higher stock prices, but also risks involved in declining business performance and falling stock prices. TEL firmly believes in greater incentives for better business performance and higher stock prices being given to the executives.
For executives (including corporate officers) and senior executive employees of TEL's overseas subsidiaries not implemented as a series of consolidated net income-linked compensation systems, TEL granted traditional stock options that can be exercised at market price in last year, but TEL has decided to grant Share Subscription Rights as Stock Options for Stock linked Compensation with the aim of maintaining its competitive strength to secure superior personnel in this year.
2. Stock options for stock-linked compensation to be implemented as a series of consolidated net income-linked compensation systems to the corporate directors and executive officers, etc. of the Company and its subsidiaries
Outline of the Issuance of Share Subscription Rights (the "Options")
(1) Eligible persons:
Corporate directors and executive officers of Tokyo Electron Limited (the "Company") and its domestic subsidiaries, and chairmen, presidents, and vice presidents of overseas subsidiaries in office as of March 31, 2006 (the end of the 43rd FY)
(2) Total number and type of shares to be issued or transferred by exercise of Options:
Not more than 65,000 shares of common stock of the Company
In the event of share splitting or consolidation, the number of shares will be adjusted pursuant to the formula below; provided, however, that this adjustment will be made only with respect to shares not yet exercised at the time of splitting or consolidation. In this calculation, any fraction of a share smaller than one share will be disregarded.
Adjusted number of shares= Number of shares before adjustment x Ratio applicable to the splitting or consolidation of shares
In the event it becomes necessary to adjust the number of shares for any other reason, the Company will make adjustments to the number of shares to a reasonable extent from time to time based on a resolution of a meeting of the Board of Directors of the Company.
(3) Number units of Options:
Not more than 650 (units)
(100 shares will be equivalent to one Option. The Company will otherwise adjust the number of shares as described in paragraph (2) above.)
(4) Amount paid for Options:
The Company will grant the Options to eligible persons without charge.
(5) Value of assets to be contributed for the exercise of each Option:
The value of the assets to be contributed for the exercise of each Option shall be 1 yen per share, multiplied by the number of shares to be issued or transferred for each Option as described in paragraph (3) above.
(6) Exercise period of Options:
Not longer than twenty years after the day of issue of the Options and to be determined at a meeting of the Board of Directors of the Company
(7) Capital and capital reserve to be increased upon issuance of shares by exercise of Options:
a) The amount of capital to be increased upon the issuance of shares by the exercise of the Options shall be one-half of the maximum limit for the increase in capital, etc. computed in accordance with Article 40, Paragraph 1 of the Company Calculation Regulations (Ordinance of the Ministry of Justice No. 13 of 2006), and any fraction of a yen arising from such calculation shall be rounded up.
b) The amount of capital reserve to be increased upon the issuance of shares by the exercise of the Options shall be the amount obtained by subtracting the amount of capital to be increased as referred to in paragraph (7)a) above from the maximum limit for the increase in capital, etc. as referred to in paragraph (7)a) above.
(8) Conditions for exercising Options:
a) The eligible persons for the Options may not exercise a part of an Option by separating the Options he/she has.
b) Other conditions related to the exercise of the Options not specified herein shall be set out based on a resolution adopted at a meeting of the Board of Directors of the Company that determines the matters regarding an offer of the Options or in a respective agreement concerning the grant of the Options entered into between each eligible person and the Company in accordance with the board resolution (the "Stock Option Agreement").
(9) Acquisition of Options:
The Company may acquire the Options without payment when the Company approves at its meeting of shareholders (if approval at a meeting of shareholders is unnecessary, then a meeting of the Board of Directors) (i) a merger agreement causing the Company to cease to exist, (ii) a demerger agreement or demerger plan making the Company a demerging company, (iii) a stock-for-stock exchange agreement making the Company a wholly-owned subsidiary, or (iv) a stock-transfer plan.
(10) Restriction of transfer:
The acquisition of the Options by way of a transfer requires approval being granted at a meeting of the Board of Directors of the Company.
(11) Delivery of share subscription rights of the surviving company, etc. upon merger, etc.:
a) In the event that a merger occurs (only if the Company will extinguish due to the merger), absorption-type demerger, incorporation-type demerger, stock-for-stock exchange, or stock-transfer (the "Merger, etc."), the share subscription rights (the "New Options") of the joint stock company(ies) (kabushiki kaisha) listed in Article 236, Paragraph 1, Items 8 (i) through 8 (ho) of the Company Law (the "Surviving Company, etc.") may be delivered to eligible persons according to each case pursuant to the following conditions.
b) Number of New Options to be delivered
The same number as the number of the Options held by eligible persons.
c) Type and number of shares for which New Options will be exercised
The type of shares for which the New Options will be exercised are the common stock of the Surviving Company, etc., and the number of shares shall be calculated by multiplying the number described in paragraph (2) above (if adjusted, then the number of shares after the adjustment) by the share allotment ratio number of the shares of the Surviving Company, etc. applicable to one share of the Company, or shall be reasonably determined taking into consideration the conditions of the Merger, etc. In this calculation, any fraction of a share smaller than one share will be disregarded.
d) Value of assets to be contributed for exercise of each New Option of Surviving Company, etc.:
The value of the assets to be contributed for the exercise of each New Option of the Surviving Company, etc. shall be 1 yen per share, multiplied by the number of shares to be issued or transferred for each New Option as described in paragraph (11)c) above.
e) Exercise period of New Options of Surviving Company, etc.:
As set forth in paragraph (6) above; provided, however, if the Options are already within the exercisable period at the time of delivery of the New Options, they may be exercisable only from the effective date of the Merger, etc. to the end of the period set forth in paragraph (6).
f) Capital and capital reserve to be increased upon issuance of shares by exercise of New Options:
As set forth in paragraph (7) above.
g) Conditions for exercising New Options of Surviving Company, etc. and acquisition:
As set forth in paragraphs (8) and (9) above.
h) Transfer restriction of New Options of Surviving Company, etc.:
The acquisition of the New Options of the Surviving Company, etc. by way of a transfer requires approval being granted at a meeting of the Board of Directors of the Surviving Company, etc.
(12) Entrustment of determination of matters regarding an offer:
In addition to those matters provided above, further matters including matters regarding an offer and any details of the Options shall be determined at a meeting of the Board of Directors of the Company scheduled to be held after the Fiscal Year 2006 (the 43rd FY) General Meeting of Shareholders.
Note: Pursuant to Article 361 of the Company Law, a proposal is also scheduled for the 43rd FY General Meeting of Shareholders to set the maximum limit on non-pecuniary compensation for the directors of the Company as an annual amount of 120 million yen and a total number of 160 Options (equivalent to 16,000 shares).
3. Stock options for stock-linked compensation with the aim of maintaining its competitive strength to secure superior personnel to executives (including corporate officers) of TEL's overseas subsidiaries
Outline of the Issuance of Share Subscription Rights (the "Options")
(1) Eligible persons:
Executives (including corporate officers) and senior executive employees of the Company's overseas subsidiaries
(2) Total number and type of shares to be issued or transferred by exercise of Options:
Not more than 8,000 shares of common stock of the Company
In the event of share splitting or consolidation, the number of shares will be adjusted pursuant to the formula below; provided, however, that this adjustment will be made only with respect to shares not yet exercised at the time of splitting or consolidation. In this calculation, any fraction of a share smaller than one share will be disregarded.
Adjusted number of shares= Number of shares before adjustment x Ratio applicable to the splitting or consolidation of shares
In the event it becomes necessary to adjust the number of shares for any other reason, the Company will make adjustments to the number of shares to a reasonable extent from time to time based on a resolution of a meeting of the Board of Directors of the Company.
(3) Number units of Options:
Not more than 80 (units)
(100 shares will be equivalent to one Option. The Company will otherwise adjust the number of shares as described in paragraph (2) above.)
(4) Amount paid for Options:
The Company will grant the Options to eligible persons without charge.
(5) Value of assets to be contributed for the exercise of each Option:
The value of the assets to be contributed for the exercise of each Option shall be 1 yen per share, multiplied by the number of shares to be issued or transferred for each Option as described in paragraph (3) above.
(6) Exercise period of Options:
Not longer than twenty years after the day of issue of the Options and to be determined at a meeting of the Board of Directors of the Company
(7) Capital and capital reserve to be increased upon issuance of shares by exercise of Options:
a) The amount of capital to be increased upon the issuance of shares by the exercise of the Options shall be one-half of the maximum limit for the increase in capital, etc. computed in accordance with Article 40, Paragraph 1 of the Company Calculation Regulations (Ordinance of the Ministry of Justice No. 13 of 2006), and any fraction of a yen arising from such calculation shall be rounded up.
b) The amount of capital reserve to be increased upon the issuance of shares by the exercise of the Options shall be the amount obtained by subtracting the amount of capital to be increased as referred to in paragraph (7)a) above from the maximum limit for the increase in capital, etc. as referred to in paragraph (7)a) above.
(8) Conditions for exercising Options:
a) The eligible persons for the Options may not exercise a part of an Option by separating the Options he/she has.
b) Other conditions related to the exercise of the Options not specified herein shall be set out based on a resolution adopted at a meeting of the Board of Directors of the Company that determines the matters regarding an offer of the Options or in a respective agreement concerning the grant of the Options entered into between each eligible person and the Company in accordance with the board resolution (the "Stock Option Agreement").
(9) Acquisition of Options:
The Company may acquire the Options without payment when the Company approves at its meeting of shareholders (if approval at a meeting of shareholders is unnecessary, then a meeting of the Board of Directors) (i) a merger agreement causing the Company to cease to exist, (ii) a demerger agreement or demerger plan making the Company a demerging company, (iii) a stock-for-stock exchange agreement making the Company a wholly-owned subsidiary, or (iv) a stock-transfer plan.
(10) Restriction of transfer:
The acquisition of the Options by way of a transfer requires approval being granted at a meeting of the Board of Directors of the Company.
(11) Delivery of share subscription rights of the surviving company, etc. upon merger, etc.:
a) In the event that a merger occurs (only if the Company will extinguish due to the merger), absorption-type demerger, incorporation-type demerger, stock-for-stock exchange, or stock-transfer (the "Merger, etc."), the share subscription rights (the "New Options") of the joint stock company(ies) (kabushiki kaisha) listed in Article 236, Paragraph 1, Items 8 (i) through 8 (ho) of the Company Law (the "Surviving Company, etc.") may be delivered to eligible persons according to each case pursuant to the following conditions.
b) Number of New Options to be delivered
The same number as the number of the Options held by eligible persons.
c) Type and number of shares for which New Options will be exercised
The type of shares for which the New Options will be exercised are the common stock of the Surviving Company, etc., and the number of shares shall be calculated by multiplying the number described in paragraph (2) above (if adjusted, then the number of shares after the adjustment) by the share allotment ratio number of the shares of the Surviving Company, etc. applicable to one share of the Company, or shall be reasonably determined taking into consideration the conditions of the Merger, etc. In this calculation, any fraction of a share smaller than one share will be disregarded.
d) Value of assets to be contributed for exercise of each New Option of Surviving Company, etc.:
The value of the assets to be contributed for the exercise of each New Option of the Surviving Company, etc. shall be 1 yen per share, multiplied by the number of shares to be issued or transferred for each New Option as described in paragraph (11)c) above.
e) Exercise period of New Options of Surviving Company, etc.:
As set forth in paragraph (6) above; provided, however, if the Options are already within the exercisable period at the time of delivery of the New Options, they may be exercisable only from the effective date of the Merger, etc. to the end of the period set forth in paragraph (6).
f) Capital and capital reserve to be increased upon issuance of shares by exercise of New Options:
As set forth in paragraph (7) above.
g) Conditions for exercising New Options of Surviving Company, etc. and acquisition:
As set forth in paragraphs (8) and (9) above.
h) Transfer restriction of New Options of Surviving Company, etc.:
The acquisition of the New Options of the Surviving Company, etc. by way of a transfer requires approval being granted at a meeting of the Board of Directors of the Surviving Company, etc.
(12) Entrustment of determination of matters regarding an offer:
In addition to those matters provided above, further matters including matters regarding an offer and any details of the Options shall be determined at a meeting of the Board of Directors of the Company scheduled to be held after the Fiscal Year 2006 (the 43rd FY) General Meeting of Shareholders.
