As required by SEC rules, we are providing our shareholders the opportunity to vote to approve, on an advisory and non-binding basis, the compensation of our named executive officers as disclosed in this Proxy Statement in accordance with the SEC’s rules.
The Compensation Committee annually reviews the compensation programs for our named executive officers to ensure they achieve the desired goal of striking a balance between recognition of recent achievements and aligning the interests of management on a longer-term basis with that of the Company’s shareholders. We are asking our shareholders to indicate their support for our named executive officer compensation as described in this Proxy Statement by voting for this proposal. This proposal, commonly known as a “say-on-pay” proposal, gives our shareholders the opportunity to express their views on our named executive officers’ compensation. This vote is not intended to address any specific item of compensation, but rather the overall compensation of our named executive officers and the philosophy, policies and practices described in this Proxy Statement. Accordingly, we are asking our shareholders to vote “FOR” the following resolution at the Annual Meeting:
“RESOLVED, that the Company’s shareholders approve, on an advisory basis, the compensation of the named executive officers, as disclosed in the Company’s Proxy Statement for the 20192020 Annual Meeting of Shareholders pursuant to the compensation disclosure rules of the Securities and Exchange Commission, including the Compensation Discussion and Analysis, compensation tables and related disclosure.”
This say-on-pay vote is advisory, and therefore not binding on the Company, the Compensation Committee or the Board of Directors. The Board of Directors and the Compensation Committee value the opinions of our shareholders and we will consider our shareholders’ concerns and the outcome of this vote when making future compensation decisions regarding our executive officers.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR APPROVAL OF THE COMPENSATION OF OUR NAMED EXECUTIVE OFFICERS, AS DISCLOSED IN THIS PROXY STATEMENT PURSUANT TO THE COMPENSATION DISCLOSURE RULES OF THE SEC.
PROPOSAL THREE
APPROVAL OF AN AMENDMENT TO THE COMPANY'S ARTICLES OF INCORPORATION TO EFFECT A REVERSEDYNEX CAPITAL, INC. 2020 STOCK SPLIT OF THE COMPANY’S COMMON STOCK AT A RATIO OF 1-FOR-3AND INCENTIVE PLAN
The Company is asking shareholders to approve an amendmentthe Dynex Capital, Inc. 2020 Stock and Incentive Plan (also referred to in this Proxy Statement as the “2020 Plan”), which was adopted by the Board of Directors on April 27, 2020, subject to shareholder approval, based on the recommendation of the Compensation Committee (for purposes of this discussion, the “Committee”). If approved by shareholders, the 2020 Plan, which reserves 2,300,000 shares of common stock for issuance, will become effective as of June 9, 2020 and will replace the Dynex Capital, Inc. 2018 Stock and Incentive Plan (the “2018 Plan”). If shareholders do not approve the 2020 Plan at the Annual Meeting, the Company may continue to grant awards under the 2018 Plan until May 14, 2028, although the shares remaining available under the 2018 Plan may not be sufficient for the Company’s anticipated future needs.
As of March 31, 2020, the Company had 857,504 shares of common stock remaining available for grants under the 2018 Plan. If the 2020 Plan is approved by shareholders, no new awards will be granted under the 2018 Plan or any other prior equity plan (together with the 2018 Plan, a “Prior Plan”) after the Annual Meeting. Awards previously granted under a Prior Plan will remain outstanding in accordance with their terms, but none of the remaining shares of common stock authorized under a Prior Plan will be transferred to or used under the 2020 Plan. Awards under a Prior Plan that are forfeited will not be available for awards under the 2020 Plan.
The Company may continue to grant awards under the 2018 Plan prior to the Company’s ArticlesAnnual Meeting. As noted above, prior to the novel coronavirus, or COVID-19, pandemic, the Committee agreed upon granting an equity award to the named executive officers in recognition of Incorporation, the full textfact that they are below competitive total compensation market levels of which is attached as Appendix Athe Size-Based Peer Group. The Committee intends to this proxy statement (the “Split Articles Amendment”),grant restricted stock awards in May 2020 to effectMr. Boston, Ms. Popenoe and Mr. Benedetti in the amounts of $1 million, $500,000 and $500,000, respectively, vesting ratably over three years, to bring each named executive officer to a reverse stock splitmore competitive range within the peer group. The number of shares granted will be based on either the closing price of the Company’s common stock on the grant date or a weighted-average closing price for a period prior to the grant date. If these restricted stock awards are granted in May 2020 as anticipated, the number of shares remaining available for grants under the 2018 Plan will be lower than the 857,504 shares of common stock remaining available as of March 31, 2020.
The more significant features of the 2020 Plan are described below. The summary below is not complete and is subject to, and qualified in its entirety by, the provisions of the 2020 Plan. To aid your understanding, the full text of the 2020 Plan, as proposed for approval by shareholders, is provided in Appendix A to this Proxy Statement.
2020 Plan Highlights
The 2020 Plan provides for the grant to key employees, non-employee directors, consultants and advisors of awards that may include one or more of the following: stock options, restricted stock, restricted stock units, stock appreciation rights (“SARs”), performance units and performance cash awards (collectively, the “awards”).
The Board of Directors believes a competitive equity incentive program is essential to offer compensation that aligns participants’ interests with those of our shareholders, based on a pay-for-performance philosophy that is consistent with prudent risk management. The Board of Directors believes the 2020 Plan, as a replacement of the 2018 Plan, is an important factor in maintaining a compensation program that emphasizes pay-for-performance and places a meaningful portion of an executive officer’s total compensation at a reverse stock split ratiorisk, tied to our annual and long-term performance as well as to the creation and protection of 1-for-3 (the “Reverse Stock Split”). Approval of Proposal Three will permit, but not require,shareholder value. Additionally, the Board of Directors to effect,and the Company believe strongly in its discretion, the Reverse Stock Split, provideda shareholder-friendly structure that the Board of Directors may not effect the Reverse Stock Split later than May 14, 2020.
emphasizes an owner-operator mentality. The Board of Directors recommendsbelieves that shareholders approve the Reverse Stock Split in this Proposal Three. On February 26, 2019, the Board of Directors approved the Split Articles Amendment subjecta robust equity and performance-related plan is key to approval by the Company’s shareholders, and further subject tomaintaining shareholder approvalalignment.
Some of the Share Reduction, which is presented in Proposal Four of this proxy statement. In other words, if approved by shareholders, implementationkey features of the proposed Reverse Stock Split under this Proposal Three is contingent on shareholder approval of the Share Reduction Articles Amendment inProposal Four in this proxy statement.
The Board has determined2020 Plan that together the Split Articles Amendment and the Shares Reduction Articles Amendment are in the best interests of the Company and its shareholders. Because the amendments are designed to work together, the implementation of the Reverse Stock Split in Proposal Three is contingent upon shareholder approval of the Share Reduction in Proposal Four. Accordingly, unless Proposal Four is approved, the Reverse Stock Split in this Proposal Three will not be implemented regardless of the outcome of the vote thereon.
If Proposals Three and Four are approved by shareholders, the Board of Directors will be authorized, in its discretion, to cause the Split Articles Amendment to be filed with the Virginia State Corporation Commission and to effect the Reverse Stock Split. The Board of Directors may determine in its discretion not to effect the Reverse Stock Split. If approved by shareholders, the Board of Directors will have authority to implement the Reverse Stock Split until the close of business on May 14, 2020. After May 14, 2020, the Board of Directors will cease to have authority to implement the Reverse Stock Split based on such approval. After approval of Proposal Three and Proposal Four, no further action on the part of shareholders will be required forenable the Company to either implementmaintain sound governance practices in granting awards include:
•No “Evergreen” Provision: Shares authorized for issuance under the 2020 Plan are not automatically replenished.
•Annual Limits: The 2020 Plan imposes an annual limit on equity awards to participants of 400,000 shares and cash awards to participants of $5,000,000.
•No Discounted Stock Options or abandonSARs: The 2020 Plan prohibits the Reverse Stock Split prior to May 15, 2020.
Ifgrant of stock options or SARs with an exercise price less than the Reverse Stock Split is implemented, all holders of the Company's common stock will be affected proportionately.
The Reverse Stock Split will not reduce the number of authorized shares of the Company’s common stock. Such a reduction will occur, however, as set forth in Proposal Four if both Proposal Three and Proposal Four are approved by shareholders; however, such reduction will not be proportional to the Reverse Stock Split ratio of 1-for-3. Neither the Reverse Stock Split nor Proposal Four will change the number of authorized shares of preferred stock of the Company. The Reverse Stock Split will not change the parfair market value of either the common stock or the preferred stock of the Company. See “Effects of the Reverse Stock Split.”
No fractional shares of common stock will be issued as a result of the Reverse Stock Split. Instead, any shareholder who would have been entitled to receive a fractional share as a result of the Reverse Stock Split will receive a cash payment in lieu of a fractional share. Each holder of the Company’s common stock will holdon the same percentagegrant date.
•No Repricing of Stock Options or SARs: The 2020 Plan generally prohibits the outstanding commonrepricing of stock immediately followingoptions or SARs without shareholder approval.
•No Liberal Share Recycling: Under the Reverse Stock Split as that shareholder did immediately prior to the Reverse Stock Split, except to the extent that the Reverse Stock Split results in shareholders receiving cash in lieu of a fractional share.
As of March 11, 2019, [•]2020 Plan, shares of the Company’s common stock were outstanding. Based on suchused to pay the exercise price of a stock option or SAR or to satisfy tax withholding obligations in connection with an award will not be added back (recycled) to the aggregate plan limit. In addition, the gross number of shares associated with a stock option or SAR exercise, and not just the net shares issued upon exercise, will count against the aggregate plan limit.
•Minimum Vesting Periods: Subject to accelerated vesting under certain circumstances, the 2020 Plan requires a minimum vesting period of one year for awards subject to time-based conditions and a minimum performance period of one year for awards subject to achievement or satisfaction of performance goals, with the exception of up to 5% of the shares available for grant under the 2020 Plan and certain other limited exceptions.
•Protective Provisions and Clawback: The 2020 Plan provides for the forfeiture of outstanding awards upon a participant’s termination for cause and subjects all awards under the 2020 Plan to repayment as required by the terms of any recoupment or clawback policy in effect at the Company from time to time or as required by applicable law, regulation or stock exchange requirement.
•Independent Committee Administration: Awards under the 2020 Plan are granted by the Committee, which is composed entirely of independent directors.
•Term of the 2020 Plan: No awards may be granted under the 2020 Plan more than ten years from the date of shareholder approval.
Historically, the Company has granted equity awards in connection with its annual compensation program for non-employee directors and incentive compensation for executives and other employees. A key feature of the Company’s executive compensation program is alignment of management compensation with shareholder interests, which includes paying a significant portion of executive compensation in equity and in dividends on unvested restricted stock. Payouts under the Executive Incentive Plan comprise both the executive officer’s cash and equity incentive awards in any given year. No separate awards of stock were granted to the executive officers and employees for 2019 performance outside of the Executive Incentive Plan bonus awards that were paid partly in shares of stock. As noted above, the Compensation Committee anticipates granting awards beginning in 2020 under a new Long-Term EIP, the exact details of which are still being determined. As discussed further below under “Key Data,” the Company believes it takes a responsible approach to equity compensation.
In determining the number of shares to be available for awards under the 2020 Plan, the Company considered a number of factors. Important considerations included the ability to compensate management and employees in an adequate amount of shares of Company stock to further alignment with shareholders, the intention to adopt the Long-Term EIP in 2020, and the anticipated growth of the Company given the current and expected opportunities to expand the Company's future business. Also considered were the levels of past share usage, potential dilution to shareholders, and published positions of certain of the Company’s largest shareholders. The Committee anticipates that the shares of common stock outstanding, immediately followingthat will be available for awards under the completion of the Reverse Stock Split (and without giving any effect to the payment of cash in lieu of fractional shares),2020 Plan if shareholders approve this proposal will provide the Company will have approximately [•] common shares outstanding.
Board Discretionwith flexibility to Implementgrant awards under the Reverse Stock Split
If2020 Plan for the next 3-5 years, based on the Company’s shareholders approve Proposal Three and Proposal Four,current evaluation of expected future needs. The total number of shares awarded in any one year or from year to year may change based on any number of variables, such as the Board of Directors will have the authority, in its discretion, through May 14, 2020 to implement the Reverse Stock Split or to abandon the Reverse Stock Split. The Board of Directors’ determination as to whether the Reverse Stock Split will be implemented and, if so, the effective time of the Reverse Stock Split, will be based upon several factors, including existing and expected marketability and liquidityvalue of the Company’s common stock prevailing(because higher stock prices generally require that fewer shares be issued to produce awards with the same grant date fair market value, whereas lower stock prices generally require that more shares be issued to produce awards with the same grant date fair market value, changes in the number of Company employees and/or non-employee directors, whether and to what extent vesting conditions are satisfied, any acquisition activity, the number of shares that become available for new awards pursuant to the terms of the 2020 Plan (for example, as a result of forfeitures) and changes in how the Company elects to balance total compensation between cash and equity-based awards.
Key Data
As of March 31, 2020, the Company had 22,981,978 shares of common stock issued and outstanding, and the likely effect on the marketper share closing price of the Company’s common stock.
Reasons for the Reverse Stock Split
The Board of Directors has determined that it is in the best interests of the Company and its shareholders to implement the Reverse Stock Split. Immediately following the completion of the Reverse Stock Split, the number of shares of common stock outstanding will be reduced proportionately based on the 1-for-3 split ratio.
In evaluating the Reverse Stock Split, the Board of Directors considered that the implementation of the Reverse Stock Split is likely to increase the trading price for the Company’s common stock as a result of the reduction in the number of shares outstanding. The Board of Directors also believes that the increased trading price of the Company’s common stock that is expected as a result of the Reverse Stock Split may improve marketability and liquidity of the Company’s common stock which may facilitate trading in the Company’s common stock.
The Board of Directors believes that the Reverse Stock Split, if implemented, will make the Company’s common stock more attractive to a broader range of institutional and other investors, as the Board of Directors believes that the current market price of the Company’s common stock may affect its acceptability to certain institutional investors, professional investors and other members of the investing public. Many brokerage houses and institutional investors have internal policies and practices that either prohibit them from investing in low-priced stocks or tend to discourage individual brokers from recommending low-priced stocks to their customers. In addition, some of those policies and practices may function to make the processing of trades in low-priced stocks economically unattractive to brokers. Moreover, because brokers’ commissions on low-priced stocks generally represent a higher percentage of the stock price than commissions on higher-priced stocks, the current average price per share of the Company’s common stock can result in individual shareholders paying transaction costs representing a higher percentage of their total share value than would be the case if the share price were higher. The Board of Directors believes that, if approved and implemented by the Board of Directors, the Reverse Stock Split will make the Company’s common stock a more attractive and cost-effective investment for many investors, which will enhance the liquidity of the holders of the Company’s common stock.
If the shareholders approve Proposal Three and Proposal Four at the Annual Meeting, the Board of Directors will have authority to implement the Reverse Stock Split until the close of business on May 14, 2020. After May 14, 2020, the Board of Directors will cease to have authority to implement the Reverse Stock Split based on such approval.
Effective Time
The effective time of the Reverse Stock Split (the “Effective Time”), if approved by shareholders and implemented by the Board of Directors, will be the date and time specified in the Split Articles Amendment filed with the Virginia State Corporation Commission and will be chosen in the discretion of the Board of Directors, but will be no later than the close of business on May 14, 2020.
If, at any time prior to the filing of the Split Articles Amendment with the Virginia State Corporation Commission, the Board of Directors, in its discretion, determines that it is in the Company’s best interests and the best interests of the Company’s shareholders to delay the filing of the Split Articles Amendment or abandon the Reverse Stock Split, the Reverse Stock Split may be delayed or abandoned, without any further action by the Company’s shareholders.
Certain Risks Associated with the Reverse Stock Split
Reducing the number of outstanding shares of the Company’s common stock through the Reverse Stock Split is intended, absent other factors, to increase the per share market price of the Company’s common stock. However, other factors, such as the Company’s financial results, market conditions and the market perception of the Company’s business may adversely affect the market price of the common stock. As a result, there can be no assurance that the Reverse Stock Split, if implemented, will result in the intended benefits described above, that the market price of the Company’s common stock will increase following the Reverse Stock Split or that the market price of the common stock will not decrease in the future. Additionally, the Company cannot assure you that the market price per share of the common stock after a Reverse Stock Split will increase in proportion to the reduction in the number of shares of the Company’s common stock outstanding before the Reverse Stock Split. Accordingly, the total market capitalization of the Company’s common stock after the Reverse Stock Split may be lower than the total market capitalization before the Reverse Stock Split. The Company does not have any plans to issue any new shares of its common stock as part of the Reverse Stock Split.
Fractional Shares
Shareholders will not receive fractional shares of common stock in connection with the Reverse Stock Split. Shareholders who otherwise would hold fractional shares because the number of shares of common stock they held before the Reverse Stock Split would not be evenly divisible based upon the reverse split ratio will be entitled to receive cash (without interest or deduction) from the Company in lieu of such fractional share in an amount equal to the product of (i) the closing price per share of the common stock as reported on the NYSE was $10.44. If the 2020 Plan is approved by shareholders, no new awards will be granted under the 2018 Plan after the Annual Meeting.
Overhang and Potential Dilution. The following table provides certain additional information regarding total time-based restricted stock awards outstanding under the 2018 Plan as of December 31, 2019 and March 31, 2020. There were no other equity awards outstanding on such dates.
| | | | | | | | | | | | | | |
Overhang | | December 31, 2019 | | March 31, 2020 |
Outstanding, unvested shares of restricted stock under the 2018 Plan | | 119,213 | | 138,155 |
Shares available for grant under the 2018 Plan | | 919,688 | | 857,504 |
Potential dilution is a ratio representing the daysum of (1) the total number of shares underlying outstanding equity awards and (2) the total number of shares available for future awards, divided by the sum of (a) the total number of shares underlying outstanding equity awards, (b) the total number of shares available for future awards and (c) the total number of shares of common stock outstanding. As of March 31, 2020, the Company’s potential dilution under the 2018 Plan was approximately 4.2%. If the 2020 Plan is approved by shareholders, no new awards will be granted under the 2018 Plan and only the 2,300,000 shares of stock reserved under the 2020 Plan will be available for future awards. If the 2020 Plan had been in effect on March 31, 2020 under these circumstances, the Company’s potential dilution would be approximately 9.6%.
Burn Rate. The following table provides certain additional information regarding the Company’s burn rate under the 2018 Plan for the last three years.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | | | | Three-Year Average Burn Rate |
| | 2017(1) | | 2018(1) | | 2019(1) | | |
Shares of restricted stock granted | | 46,056 | | | 71,053 | | | 68,004 | | | |
Shares of unrestricted stock granted | | — | | | — | | | — | | | |
Total shares granted | | 46,056 | | | 71,053 | | | 68,004 | | | |
Weighted average common shares outstanding | | 16,806,000 | | | 19,234,939 | | | 23,620,125 | | | |
Burn rate | | 0.274 | % | | 0.369 | % | | 0.288 | % | | 0.310 | % |
(1)(1) Amounts have been adjusted to reflect the Reverse Stock Split.
While the Company is aware of the Effective Timepotential dilutive effect of equity awards, the use of equity is a key component of the Company’s compensation program, and (ii) the fractionCompany remains mindful of its responsibility to shareholders in granting equity awards.
Purpose of the 2020 Plan
The purpose of the 2020 Plan is to promote the success of the Company by providing greater incentive to key employees, non-employee directors, consultants and advisors to associate their personal interests with the long-term financial success of the Company, including its subsidiaries, and with growth in shareholder value, consistent with the Company’s risk management practices. The 2020 Plan is designed to provide flexibility to the Company in its ability to attract, retain the services of and motivate key employees, non-employee directors, consultants and advisors upon whose judgment, experience, interest and special effort the successful conduct of the Company’s operations largely depends.
Administration
The 2020 Plan will be administered by the Committee, which will be the Compensation Committee (or an appropriate sub-committee thereof) unless the Board of Directors determines otherwise. The Committee has the power to select plan participants and to grant awards on terms the Committee considers appropriate. In addition, subject to the terms of the 2020 Plan, the Committee has the authority, among other things, to construe and interpret the plan, to establish, amend or waive rules or regulations for the plan’s administration, to accelerate the exercisability of any award or the termination of any restrictions applicable to any award, and to make all other determinations for administration of the 2020 Plan. The Committee may delegate authority under the 2020 Plan to the Company’s Chief Executive Officer and Chief Financial Officer acting jointly, except in the case of awards to the Company’s executive officers or any individual who is subject to Section 16 of the Exchange Act.
Eligibility
The 2020 Plan provides that awards may be granted to key employees, non-employee directors, and consultants and advisors of the Company and certain of its subsidiaries. Key employees include officers or other employees of the Company and certain of its subsidiaries who, in the opinion of the Committee, can contribute significantly to the growth and profitability of, or perform services of major importance to, the Company and its subsidiaries. Consultants and advisors include certain individuals providing bona fide consulting or advisory services to the Company or certain of its subsidiaries. If shareholders approve this proposal, as of March 31, 2020, approximately 20 employees, five non-employee directors, two individual consultants and three advisors would be eligible to receive awards under the 2020 Plan. The Committee would consider, on a case-by-case basis, whether individual consultants or advisors would be eligible for awards under the 2020 Plan.
No Repricing
The 2020 Plan prohibits stock option and SAR repricing, including by way of exchange for another award (except in connection with a corporate transaction such as a change of control or an event referred to in the “Changes in Capitalization and Similar Changes” section below) unless the repricing is submitted to and approved by shareholders.
Shares Subject to the 2020 Plan
Subject to approval by shareholders, the aggregate number of shares reserved for issuance under the 2020 Plan is 2,300,000.
In general, if any award granted under the 2020 Plan terminates, expires or lapses for any reason other than as a result of exercise or settlement, or if shares issued pursuant to an award are forfeited, the shares associated with such award will not be available for future awards under the 2020 Plan. Additionally, any shares withheld by the Company, delivered by the participant, or otherwise used to pay the exercise price of an option or SAR or to satisfy withholding taxes associated with an award will not be available for future awards under the 2020 Plan. Further, in the event shares are withheld or delivered in connection with an option or SAR exercise, the number of shares available for future awards will be reduced by the gross number of shares to which the exercise relates, rather than the net number of new shares issued upon the exercise.
Annual Limits on Awards
Under the 2020 Plan, the maximum aggregate number of shares with respect to which equity awards may be granted in any calendar year to a participant will be 400,000 and the maximum aggregate dollar amount of cash awards granted in any calendar year to a participant will be $5,000,000.
Minimum Vesting
Subject to accelerated vesting under certain circumstances approved by the Committee, the 2020 Plan requires a minimum vesting period of one share ownedyear for awards subject to time-based conditions and a minimum performance period of one year for awards subject to achievement or satisfaction of performance goals, with the exception of up to 5% of the shares available for grant under the 2020 Plan and certain other limited exceptions.
Performance Goals
For any award granted under the 2020 Plan subject to performance-based vesting, exercisability or other conditions, the Committee will determine the performance period during which a performance goal must be met. The performance period will generally be at least one year, subject to applicable provisions of the 2020 Plan regarding accelerated vesting events. Attainment of any performance goal is subject to certification by such shareholder.the Committee. Performance goals may include a threshold level of performance below which no payment or vesting will occur, levels of performance at which specified payments or specified vesting will occur, and a maximum level of performance above which no additional payment or vesting will occur.
If you believeshareholders approve this proposal, then under the 2020 Plan, at the Committee’s discretion, the performance goals for any performance period may include, but are not limited to, one or more of the following: (i) stock value or increases therein, (ii) total shareholder return, relative total shareholder return or comparative total shareholder return, (iii) total shareholder equity, (iv) operating revenue, (v) commodity revenue, (vi) book value or book value growth, book value per share or per common share or growth in book value per share or per common share, (vii) tangible book value or tangible book value growth, tangible book value per share or growth in tangible book value per share, (viii) dividends, (ix) dividends paid, (x) earnings per share or earnings per share growth (before or after one or more of taxes, interest, depreciation and/or amortization), (xi) diluted and basic earnings per share or diluted earnings per share growth (before or after one or more of taxes, interest, depreciation and/or amortization), including fully diluted earnings per share after extraordinary events, (xii) net earnings, (xiii) earnings and/or earnings growth (before or after one or more of taxes, interest, depreciation and/or amortization), operating earnings and/or operating earnings growth, (xiv) profits or profit growth (net profit, gross profit, operating profit, net operating profit, economic profit, profit margins or other corporate profit measures), (xv) cash flow, operating cash flow and/or free cash flow (either before or after dividends), (xvi) cash from operations, (xvii) operating or other expenses or growth thereof, (xviii) operating efficiency, (xix) return on equity, (xx) return on tangible equity or return on tangible common equity, (xxi) return on assets, portfolio assets, net assets, capital or investments (including return on total capital or return on invested capital), (xxii) return on operating revenue, (xxiii) sales or revenues or growth thereof, (xxiv) portfolio growth, (xxv) servicing volume, (xxvi) production volume, (xxvii) improvement in or attainment of working capital levels, (xxviii) improvement in or attainment of expense levels, (xxix) assets under management or growth thereof, (xxx) cost control measures, (xxxi) regulatory compliance, (xxxii) gross, operating or other margins, (xxxiii) efficiency ratio (as generally recognized and used for financial reporting and analysis), (xxxiv) operating ratio, (xxxv) income or net income (either before or after taxes), (xxxvi) operating income, net operating income, or core net operating income, (xxxvii) interest income, (xxxviii) net interest income, (xxxix) net interest margin, (xl) non-interest income, (xli) non-interest expense, (xlii) delinquency ratios, (xliii) credit loss levels, (xliv) credit quality, net charge-offs and/or non-performing assets, (xlv) provision expense, (xlvi) productivity, (xlvii) satisfactory internal or external audits, (xlviii) improvement of financial ratings, (xlix) achievement of balance sheet or income statement objectives, (l) quality measures, (li) peer ranking or peer performance based on a public index, (lii) peer ranking or peer performance based on a Committee-determined group of peers, (liii) number or dollar amount of securities sold, (liv) debt reduction, (lv) gain on sale of investments, (lvi) achievement of risk management objectives, (lvii) achievement of strategic performance objectives or other strategic objectives, (lviii) achievement of merger or acquisition objectives, (lix) implementation, management or completion of critical projects or processes, (lx) market capitalization, (lxi) total enterprise value (market capitalization plus debt), (lxii) economic value added, (lxiii) total economic return, (lxiv) general and administrative expense (either including or excluding litigation costs), (lxv) debt leverage (debt to capital), (lxvi) market share or (lxvii) any component or components of the foregoing (including, without limitation, determination thereof, in the Committee’s sole discretion, with or without the effect of discontinued operations and dispositions of business units or segments, non-recurring items, material extraordinary items that youare both unusual and infrequent, non-budgeted items, special charges, accruals for acquisitions, reorganization and restructuring programs and/or changes in tax law, accounting principles or other such laws or provisions affecting the Company’s reported results). In the Committee’s discretion, the performance goals may not hold sufficientbe particular to a participant and applied either individually, alternatively, or in any combination, subset or component, to the performance of the Company as a whole or to the performance of a subsidiary, division, strategic business unit, line of business or business segment, measured either quarterly, annually or cumulatively over a period of years or partial years, in each case as specified by the Committee in the award. In addition, the performance goals may be absolute in their terms or measured against or in relationship to a pre-established target, the Company’s budget or budgeted results, previous period results, a market index, a designated comparison group of other companies comparably, similarly or otherwise situated, or any combination thereof.
Types of Awards under the 2020 Plan
Stock Options. A stock option entitles the participant to purchase shares of the Company’s common stock at the Effective Timeexercise price. Stock options granted under the 2020 Plan may be incentive stock options or non-qualified stock options, although non-employee directors, consultants and advisors are not eligible to receive incentive stock options. The Committee will fix the exercise price at least one sharethe time the stock option is granted, but the exercise price cannot be less than 100% of the shares’ fair market value on the grant date (or, in the Reverse Stock Split and you wantcase of an incentive stock option granted to continuea 10% shareholder of the Company, 110% of the shares’ fair market value on the grant date). The value in incentive stock options, based on the shares’ fair market value on the grant date, that can be exercisable for the first time in any calendar year under the 2020 Plan or any other similar plan maintained by the Company is limited to hold Company$100,000 per participant. To the extent approved by the Committee, the exercise price may be paid in cash, by delivery of shares of common stock having a fair market value at the time of exercise equal to the exercise price, by the Company withholding shares otherwise issuable upon the exercise having a fair market value at the time of exercise equal to the exercise price, through a “cashless exercise” involving a broker, or by a combination of the foregoing. Stock options may be exercised at such times and subject to such conditions as may be prescribed by the Committee, including the requirement that stock options will not be exercisable after ten years from the Reverse Stock Split, you may do so by either:
•Purchasinggrant date (or, in the case of an incentive stock option granted to a sufficient10% shareholder of the Company, five years from the grant date). The number of shares of common stock issued under the 2020 Plan upon the exercise of incentive stock options will not exceed 2,300,000.
Restricted Stock Awards. Restricted stock is stock that is subject to forfeiture and may not be transferred by a participant until the restrictions established by the Committee lapse. The restrictions may take the form of a period of restriction during which the participant must remain employed, engaged or serving on the applicable board or may require the achievement of one or more pre-established performance goals. Holders of restricted stock will have voting and, unless otherwise provided by the Committee, dividend rights, except that any dividends for restricted stock subject to performance goals may only be accumulated but not paid unless and until the applicable period of restriction has ended and the performance goals have been met.
Restricted Stock Unit Awards. A restricted stock unit is an award that is the right to receive shares of common stock or the cash equivalent thereof. Payment of the value of restricted stock units will not be made until the restrictions established by the Committee lapse. The restrictions may take the form of a period of restriction during which the participant must remain employed, engaged or serving on the applicable board or may require the achievement of one or more pre-established performance criteria, in which case the award may be called a “performance stock unit.”
Holders of restricted stock units have no right to vote the shares represented by the units unless and until the underlying shares are issued. While holders of restricted stock units are not eligible to receive dividend payments on the units (because dividend payments are only available for shares that have been issued and are outstanding), the Committee may provide for payment of deemed dividends or similar distributions with respect to a restricted stock unit award under such terms and subject to such limitations as the Committee deems appropriate, provided, however, that any deemed dividends or similar distributions for a restricted stock unit that is subject to performance goals may be accumulated but not paid unless and until the applicable period of restriction has ended and the performance goals have been met.
Payment for vested restricted stock units may be made, as determined by the Committee, in cash or shares of common stock or a combination thereof at the time of vesting or, if provided for in the award agreement, on a delayed basis either electively or mandatorily. If paid on a delayed basis, the payment amount may be adjusted for deemed interest or earnings or on such other basis as the Committee may provide.
Stock Appreciation Right Awards. A SAR is the right to the equivalent of the increase in the value of a specified number of shares over a specified period of time. The Committee will fix the exercise price at the time the SAR is granted, but the exercise price of a SAR cannot be less than 100% of the fair market value of the common stock on the grant date.
Each SAR award will entitle the holder, upon exercise, to receive the excess of the fair market value of the common stock subject to the award over the exercise price of the SAR. SARs may be exercised at such times and subject to such conditions as may be prescribed by the Committee, including the requirement that SARs will not be exercisable after ten years from the grant date. Payment of value shall be made at the time of exercise in cash or shares of common stock or a combination thereof as determined by the Committee.
Performance Unit Awards. A performance unit is a fixed dollar award or an award that is valued by reference to a share of common stock based on performance goals established and certified by the Committee. The Committee will determine the terms and conditions of each performance unit award, including the performance goals and performance period. Performance units may be paid in cash or shares of common stock or a combination thereof as determined by the Committee.
Holders of performance units have no right to vote the shares represented by the units unless and until the underlying shares are issued. While holders of performance units are not eligible to receive dividend payments on the units (because dividend payments are only available for shares that have been issued and are outstanding), the Committee may provide for payment of dividend equivalents with respect to a performance unit award under such terms and subject to such limitations as the Committee deems appropriate, provided, however, that any such dividend equivalents may be accumulated but not paid unless and until the applicable performance goals have been met.
Performance Cash Awards. A performance cash award is a cash award based on performance goals established and certified by the Committee.
Minimum Stock Ownership Guidelines and Holding Period
Consistent with the Company’s goal to build director and executive officer ownership in the Company and to align performance with shareholder interests, the Company has adopted stock ownership guidelines for our non-employee directors and executive officers, as discussed in more detail on pages 21 and 28. Until the minimum equity investment is met, each non-employee director and each executive officer must retain all after-tax shares of common stock;stock granted to him or her as compensation under the 2020 Plan (or any successor plan).
Transferability
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In general, stock options, restricted stock, restricted stock units, SARs, and performance units granted under the 2020 Plan may not be sold, transferred, pledged, assigned, or otherwise encumbered by a participant, other than upon the death of the participant or, if permitted by the Committee, pursuant to a domestic relations order. A participant may designate a beneficiary to receive any award that may be paid or exercised after his or her death. The 2020 Plan does permit the Committee to provide for non-qualified stock options that are transferable to certain family members (or certain related trusts, partnerships or entities), in accordance with applicable securities laws.
If you
Termination of Employment or Service
Unless otherwise provided by the Committee, in the event a participant terminates employment or service due to retirement (as defined in the applicable policy of the Company in effect at that time or as otherwise defined in the award agreement), then, provided that no cause exists to terminate such participant’s employment or service, and provided further that the participant is subject to a non-competition agreement on the date of retirement, all options or SARs that are not already vested or exercisable will be vested and exercisable, any remaining period of restriction applicable to the unvested portion of each time-based award of restricted stock or restricted stock units will lapse and such award will be vested, and the Committee will determine the extent, if any, to which awards subject to performance goals may vest.
Unless otherwise provided by the Committee, in the event a participant’s employment or service is terminated due to death or disability, all options or SARs that are not already vested or exercisable will be vested and exercisable, any remaining period of restriction applicable to the unvested portion of each time-based award of restricted stock or restricted stock units will lapse and such award will be vested, and the Committee will determine the extent, if any, to which awards subject to performance goals may vest.
Unless otherwise provided by the Committee, in the event a participant’s employment or service is terminated involuntarily not for cause, then, provided that the termination did not occur in connection with a “change of control” (as defined in the 2020 Plan), and provided further that the participant is subject to a non-competition agreement on the date of termination, all options or SARs that are not already vested or exercisable will be vested and exercisable, any remaining period of restriction applicable to the unvested portion of each time-based award of restricted stock or restricted stock units will lapse and such award will be vested, and the Committee will determine the extent, if any, to which awards subject to performance goals may vest.
Unless otherwise provided by the Committee, in the event a participant terminates his or her employment or service for “good reason” (as defined in the 2020 Plan), then, provided that the termination did not occur in connection with a “change of control” (as defined in the 2020 Plan), and provided further that the participant is subject to a non-competition agreement on the date of termination, the Committee may, in its sole discretion, waive the automatic forfeiture of some or all of the unvested portion of each award held by the participant and provide for such vesting as it deems appropriate.
Unless otherwise provided by the Committee, in the event a participant’s employment or service is terminated for cause, the unvested portion and the vested portion not yet paid or exercised of each award held by the participant will be automatically forfeited to the Company and no further exercise of an option or SAR will be allowed.
Unless otherwise provided by the Committee, in the event a participant terminates employment or service for any reason not described above, the unvested portion of each award held by the participant will be automatically forfeited to the Company.
Change of Control
In the event of a “change of control” (as defined in the 2020 Plan), the Committee may, as to any outstanding award, either at the time an award is made or any time thereafter, take any one or more of the following actions in its discretion and without the consent of the participant: (i) provide for acceleration of the vesting, delivery, and exercisability of, and the lapse of time-based and/or performance-based vesting restrictions with respect to, any award so that such award may be exercised or realized in full on or before a date initially fixed by the Committee; (ii) provide for the purchase, settlement, or cancellation of any award by the Company, for an amount of cash equal to the amount that could have been obtained upon the exercise of such award or realization of a participant’s rights had such award been currently exercisable or payable; (iii) provide for the replacement of any stock-settled award with a cash-settled award; (iv) make such adjustment to any such award then outstanding as the Committee deems appropriate to reflect such change of control and to retain the economic value of the award; or (v) cause any award then outstanding to be assumed, or new rights substituted therefor, by the acquiring or surviving corporation in such change of control.
Changes in Capitalization and Similar Changes
As is customary in equity compensation plans of this nature, in the event of any change in the outstanding shares of the Company’s common stock by reason of any stock dividend, stock split or combination, spin-off, recapitalization, merger, or similar transaction or change in the Company’s capital stock, the aggregate number and kind of shares reserved under the 2020 Plan and subject to outstanding awards under the 2020 Plan, the exercise price of options and/or SARs, annual limits, and other relevant provisions will be proportionately, equitably and appropriately adjusted by the Committee in its discretion. For instance, a two-for-one stock split would generally double the number of shares reserved under the 2020 Plan. Similarly, a two-for-one stock split would generally double the number of shares covered by each outstanding stock option and reduce the corresponding exercise price by one-half.
Termination of or Changes to the 2020 Plan
The Board of Directors may terminate, amend, or modify the 2020 Plan in any respect without shareholder approval, unless the particular amendment or modification requires shareholder approval under the Internal Revenue Code, under the rules and regulations under Section 16 of the Exchange Act, under the rules and regulations of the exchange on which the Company’s common stock is then listed, by any regulatory body having jurisdiction with respect thereto, or pursuant to any other applicable laws, rules, or regulations. No termination, amendment, or modification of the 2020 Plan, other than in connection with a change of control or capital adjustment pursuant to the 2020 Plan or as required by applicable law, may adversely affect any awards previously granted under the 2020 Plan without the participant’s written consent.
Duration
Unless terminated sooner by the Board of Directors as described above, the 2020 Plan will be of unlimited duration to facilitate administration of awards issued under the plan, but no award will be granted under the 2020 Plan after June 8, 2020.
Clawback
All awards granted under the 2020 Plan (whether vested or unvested) will be subject to repayment to (i.e., clawback by) the Company or a related entity as determined in good faith by the Committee or the Board in the event repayment is required by the terms of the Company’s recoupment, clawback or similar policy as may be in effect from time to time or by applicable federal or state law or regulation or applicable listing standard of any exchange on which the stock is then listed or reported, but in no event with a look-back period of more than one account, consolidating your accounts;three years, unless otherwise required by applicable federal or state law or regulation or applicable listing standard. Such recovery could in certain circumstances require repayment or forfeiture of awards or any shares or other cash or property received with respect to the awards, including any value received from a disposition of the shares acquired upon payment of the awards.
Certain Federal Income Tax Consequences
The following is a brief summary of the general U.S. federal income tax consequences of awards under the 2020 Plan. This summary is based on U.S. federal income tax laws and regulations in effect on the date of this Proxy Statement and is not a complete description of the U.S. federal income tax laws. In addition, this summary is not intended to be exhaustive, does not constitute legal advice or tax advice and does not describe municipal, state or foreign income tax consequences of awards, federal employment taxes or the tax consequences of any participant’s death.
Stock Options. A participant who exercises a non-qualified stock option will realize ordinary income in an amount measured by the excess of the fair market value of the shares on the date of exercise over the exercise price. The Company generally will be entitled to a corresponding deduction for federal income tax purposes.
A participant who exercises an incentive stock option will not be subject to taxation at the time of exercise, nor will the Company be entitled to a deduction for federal income tax purposes. The difference between the exercise price and the fair market value of shares on the date of exercise is a tax preference item for purposes of determining a participant’s alternative minimum tax. A disposition of the purchased shares after the expiration of the required holding period (i.e., the later of two years from the grant date or one year from the exercise date) will generate long-term capital gain in the year of disposition, and the Company will not be entitled to a deduction for federal income tax purposes. A disposition of the purchased shares prior to the expiration of the required holding period will result in a "disqualifying disposition" and will subject the participant to taxation at ordinary income rates in the year of disposition, and the Company generally will be entitled to a corresponding deduction.
Restricted Stock. A participant receiving restricted stock generally will recognize ordinary income in the amount of the fair market value of the restricted stock at the time the stock is no longer subject to forfeiture (i.e., has vested), less the consideration paid for the restricted stock (if any).
However, a participant may elect, under Section 83(b) of the Internal Revenue Code within 30 days of the grant of the restricted stock, to recognize taxable ordinary income on the grant date equal to the excess of the fair market value of the shares of restricted stock on the grant date (determined without regard to the restrictions) over the amount of the purchase price of the restricted stock (if any). Thereafter, if the shares are forfeited before they have vested, the participant will be entitled to a deduction, refund or loss, for tax purposes only, in an amount equal to any purchase price of the forfeited shares regardless of whether the participant made a Section 83(b) election. With respect to the sale of shares after the forfeiture period has expired, the holding period to determine whether any gain or loss is long-term or short-term begins when the forfeiture period expires, and the tax basis for such shares generally will be based on the fair market value of such shares on such date. However, if the participant makes an election under Section 83(b), the holding period will commence on the grant date, the tax basis will be equal to the fair market value of shares on such date (determined without regard to restrictions), and the Company generally will be entitled to a federal income tax deduction equal to the amount that is taxable as ordinary income to the participant in the year that such income is taxable. Dividends paid on restricted stock generally will be treated as compensation that is taxable as ordinary income to the participant and will be deductible by the Company. If, however, the participant makes a Section 83(b) election, the dividends will be taxable as ordinary income to the participant but will not be deductible by the Company.
Restricted Stock Units and Performance Units. A participant will not realize income in connection with the grant of a restricted stock unit or a performance unit or the credit of any related deemed dividends or dividend equivalents to his or her account. Upon settlement of a restricted stock unit or performance unit and delivery of shares of common stock and/or cash to the participant, the participant generally will be required to include as taxable ordinary income in the year of receipt, an amount equal to the amount of cash and the fair market value of any shares received. The Company will be entitled to a federal income tax deduction at the time and in the amount included in the participant’s income by reason of the receipt. For each case, soshare of common stock received in respect of a restricted stock unit or performance unit, the taxation of the post-settlement appreciation or depreciation is treated as either a short-term or long-term capital gain or loss, depending upon the length of time the participant held the shares of common stock.
Stock Appreciation Rights. A participant who exercises a SAR will realize ordinary income in an amount equal to the amount of cash and the fair market value of any shares received. The Company generally will be entitled to a corresponding deduction for federal income tax purposes. If the participant receives common stock upon exercise of a SAR, the taxation of the post-exercise appreciation or depreciation is treated as either a short-term or long-term capital gain or loss, depending upon the length of time the participant held the shares of common stock.
Performance Cash Awards. A participant will not recognize any taxable income at the time a performance cash award is granted. When the terms and conditions to which a performance cash award is subject have been satisfied and the award is paid, the participant will recognize as ordinary income the amount of cash he or she receives. The Company generally will be entitled to a federal income tax deduction equal to the amount of ordinary income the participant recognizes.
Section 409A. Section 409A of the Internal Revenue Code (“Section 409A”) imposes certain requirements on non-qualified deferred compensation arrangements, including requirements with respect to an individual’s election to defer compensation and the individual’s selection of the timing and form of distribution of the deferred compensation. Section 409A also generally provides that you holddistributions must be made on or following the occurrence of certain events (e.g., the individual’s separation from service, a number ofpredetermined date, or the individual’s death). Section 409A imposes restrictions on an individual’s ability to change his or her distribution timing or form after an election to defer compensation has been made or compensation has been deferred. For certain individuals who are "specified employees", Section 409A requires that such individual’s distribution commence no earlier than six months after the individual's separation from service.
Under current Internal Revenue Service guidance, certain awards under the 2020 Plan are excluded from non-qualified deferred compensation to which Section 409A applies. These excluded awards are stock options under which shares of the Company’s common stock in your account prior to the Reverse Stock Split that would entitle you to receive at least one share of commonare issued, stock in the Reverse Stock Split. Shares of the Company’s common stock held in registered form and shares of the common stock held in “street name” (that is, through a bank, broker or other nominee) for the same shareholder will be considered held in separate accounts and will not be aggregated when effecting the Reverse Stock Split.
Effects of the Reverse Stock Split
Effect on Common Stock
If the Board of Directors determines, following the receipt of shareholder approval, to implement the Reverse Stock Split, the principal result will be to decrease the number of outstanding shares of our common stock based on the 1-for-3 split ratio. Based on [•] shares of common stock outstanding as of March 11, 2019, the record date for the Annual Meeting, immediately following the Reverse Stock Split (and without giving any effect to the payment of cash in lieu of fractional shares), the Company will have approximately [•] shares of common stock outstanding.
The Reverse Stock Split will not change the terms of the Company’s common stock. The Company’s common stock will remain fully paid and non-assessable. After the Reverse Stock Split,appreciation rights under which shares of the Company’s common stock are issued, restricted stock, restricted stock units that are paid at or shortly after vesting and performance units that are paid at or shortly after vesting. Depending on their specific terms, other awards under the 2020 Plan may be treated as non-qualified deferred compensation to which Section 409A applies, and in such case it is generally the Company’s intent that such awards be designed to comply with the election timing, payment timing, and other requirements of Section 409A.
If an award is subject to and fails to satisfy the requirements of Section 409A, the recipient of that award will recognize ordinary income on the amounts deferred under the award, to the extent vested, which may be prior to when the compensation is actually or constructively received. Also, if an award that is subject to Section 409A fails to comply with the provisions of Section 409A, Section 409A imposes an additional twenty percent (20%) federal income tax on compensation recognized as ordinary income, as well as possible interest requirements with respect to such amounts, and will have certain withholding requirements.
The foregoing is only a summary of the same voting rightseffect of federal income taxation upon the Company and rightsupon participants, is not complete and does not discuss the federal employment taxes, tax consequences of any participant’s death or the income tax laws of any municipality, state, or foreign country in which a participant may reside. The foregoing is not legal advice or tax advice.
New Plan Benefits
As discussed more fully beginning on page 21, the 2020 compensation for non-employee directors includes an annual equity award in the amount of $80,000, with shares determined based on the closing price of the Company’s common stock on the grant date, rounded up in the case of a fractional share. Immediately following the Annual Meeting, the Company anticipates granting restricted stock to dividendseach non-employee director in the amount of $80,000, with the number of shares determined based on the closing price of the Company’s common stock on June 12, 2020. If shareholders approve the 2020 Plan at the Annual Meeting, the Company anticipates granting these shares of restricted stock under the 2020 Plan. If shareholders do not approve the 2020 Plan, the Company anticipates granting these shares of restricted stock under the 2018 Plan. The following table sets forth certain information regarding the anticipated grants of restricted stock to the non-employee directors.
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New Plan Benefits | | |
Name and Position | | Dollar Value ($) (1) |
All non-executive directors as a group (4 persons) (2) | | $320,000 |
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(1) | Amount reflects the aggregate value of restricted stock awards anticipated to be granted June 12, 2020 to all non-employee directors immediately following the Annual Meeting. The number of shares will be determined based on the closing price of the Company’s common stock on the grant date and, therefore, cannot be determined until the grant date. |
(2) | Ms. Mosley is not standing for re-election to the Board at the Annual Meeting and, therefore, will not receive an equity award on June 12, 2020. |
In addition to the anticipated grants of restricted stock to the non-employee directors discussed above, as noted above under “Compensation Discussion and distributions,Analysis” beginning on page 24, the Compensation Committee anticipates granting equity awards to the executive officers under a new Long-Term EIP after the Annual Meeting, but the exact size and terms of such awards have not yet been decided, and, therefore, those benefits to be awarded under the 2020 Plan are not currently determinable.
Participation and the types of awards granted under the 2020 Plan are subject to the discretion of the Compensation Committee, and no awards may be granted under the 2020 Plan unless shareholders approve the 2020 Plan at the Annual Meeting.Other than the anticipated grants discussed above of restricted stock to the non-employee directors and to the executive officers under a new Long-Term EIP, no determination has been made as to the awards, if any, that any individuals who would be eligible to participate in the plan will be identicalgranted in allthe future under the 2020 Plan.Therefore, any other respectsbenefits or amounts that will be received by any participant or groups of participants if the 2020 Plan is approved are not currently determinable.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth information as of December 31, 2019 with respect to the Company’s common stock now authorized. The Reverse Stock Split will affect all of the Company’s common shareholders uniformly and will not affect any shareholder’s percentage ownership interests or proportionate voting power, other than as a result of the treatment of fractional shares as described above. For example, a holder of 2.0% of the voting power of the outstanding shares of our common stock immediately prior to the Effective Time will generally continue to hold approximately 2.0% of the voting power of the outstanding shares of our common stock immediately after the Reverse Stock Split. The number of shareholders of record will not be affected by the Reverse Stock Split, except to the extent that there are shareholders of record who receive cash in lieu of fractional shares and, as a result, cease to hold at least one share following the Reverse Stock Split.
If implemented, the Reverse Stock Split may increase the number of shareholders owning “odd lots” of less than 100 shares of our common stock. Odd lot shares may be more difficult to sell, and brokerage commissions and other costs of transactions in odd lots generally are proportionately higher than the costs of transactions in “round lots” of even multiples of 100 shares. We believe, however, that these potential negative effects are outweighed by the benefits of the Reverse Stock Split.
The Company’s common stock is currently registered under Section 12 of the Exchange Act, and, accordingly, the Company is subject to the periodic reporting and other requirements of the Exchange Act. The Reverse Stock Split will not affect the registration of the common stockissued under the Exchange Act or the listing of the common stock on the NYSE under the symbol “DX.” After the Effective Time, the common stock will have a new Committee on Uniform Securities Identification Procedures (“CUSIP”) number,2018 Plan, which is a number used to identify the Company’s equity securities, and stock certificates with the older CUSIP number will need to be exchanged for stock certificates with the new CUSIP number. See “Issuance of New Book-Entry Shares; Exchange of Certificates.”
Effect on Preferred Stock
Pursuant to the Company’s Articles of Incorporation, the Company’s authorized capital stock includes 50,000,000 shares of preferred stock, 8,000,000 of which are designated as shares of the Company’s 8.50% Series A Cumulative Redeemable Preferred Stock (“Series A Preferred Stock”), par value $0.01 per share, and 7,000,000 of which are designated as shares of 7.625% Series B Cumulative Redeemable Preferred Stock (“Series B Preferred Stock”), par value of $0.01 per share. The proposed Split Articles Amendment will not impact the total authorized number of shares of preferred stock, Series A Preferred Stock, or Series B Preferred Stock or the par value of any of the preferred stock.
As of March 11, 2019, there were [•] and [•] shares of the Series A Preferred Stock and Series B Preferred Stock outstanding, respectively. The Reverse Stock Split will have no effect on the number of shares of Series A Preferred Stock or Series B Preferred Stock outstanding. Shares of both the Series A Preferred Stock and the Series B Preferred Stock are, in certain circumstances and pursuant to their terms, convertible into shares of the Company’s common stock. The conversion rate for both series of preferred stock will be adjusted on the date of the Effective Time to result in a reduction in the number of shares of common stock into which each share of Series A Preferred Stock and Series B Preferred Stock may be convertible that is based on the 1-for-3 split ratio.
Effect on Dividends
Under Virginia law, holders of the Company’s common stock are only entitled to receive such dividends payable on the common stock as the Board of Directors may declare out of funds legally available for such payments. The Board of Directors reviews the appropriateness of the dividend on our common stock each month. When declaring dividends, the Board of Directors considers the requirements for maintaining the Company’s REIT status and maintaining compliance with dividend requirements of the Series A Preferred Stock and Series B Preferred Stock. In addition, the Board of Directors considers, among other things, the Company's long-term outlook, the Company’s financial conditions and results of operations during recent financial periods, and trends in the investment and financing markets.
No Going Private Transaction
The Reverse Stock Split is not being proposed in response to any effort of which the Company is aware to accumulate shares of the Company’s common stock or obtain control of the Company, nor is it part of a plan by management to recommend a series of similar amendments to the Company’s Board of Directors and shareholders. The Board of Directors does not intend to use the Reverse Stock Split as a part of or as a first step in a “going private” transaction pursuant to Rule 13e-3 under the Exchange Act.
Potential Anti-Takeover Effect
If the Reverse Stock Split is effected, the Share Reduction described in Proposal Four will also be implemented, and the Company’s Articles of Incorporation will be amended to reduce the number of the Company’s authorized shares of common stock from 200,000,000 to 90,000,000. This reduction in authorized shares of common stock will be proportionately smaller than the 1-for-3 split ratio, meaning that, after the Reverse Stock Split, the Company could, without further shareholder approval, issue proportionately more common stock with a greater dilutive effect on existing shareholders than prior to the Reverse Stock Split.
Although the Board of Directors’ purpose for seeking approval of the Reverse Stock Split and the Share Reduction in Proposal Four is not intended to discourage or prevent takeover attempts, the Company notes that authorized but unissued shares of common stock, if issued, could be used by incumbent directors to make takeover attempts more difficult and thereby discourage an attempt to acquire control of the Company, even though its shareholders might deem such an acquisition desirable. For example, the shares could be privately placed with purchasers who might support the Board of Directors in opposing a hostile takeover bid. Any issuance of new shares could also be used to dilute the stock ownership and voting power of a third party seeking to remove directors, replace incumbent directors, accomplish certain business transactions or alter or amend provisions of the Company’s Articles of Incorporation. To the extent that it would impede any such attempts, the issuance of additional shares of common stock following effectiveness of the Reverse Stock Split could potentially serve to perpetuate the existing management.
Reduction in Stated Capital
Pursuant to the Reverse Stock Split, the par value of the Company’s common stock will remain $0.01 per share. As a result of the Reverse Stock Split, at the Effective Time, the stated capital on the Company’s balance sheet attributable to our common stock will be reduced in proportion to the size of the Reverse Stock Split, subject to a minor adjustment in respect of the treatment of fractional shares, and the additional paid-in capital account will be credited with the amount by which the stated capital is reduced. Our shareholders’ equity, in the aggregate, will remain unchanged.
Effect on Equity Compensation
As of March 11, 2019, the Company’s only outstandingcompensation plan under which equity compensation is restricted stock awardedsecurities are currently authorized for issuance.
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Equity Compensation Plan Information | | | | | | |
Plan Category (1) | | Number of Securities to Be Issued upon Exercise of Outstanding Options, Warrants and Rights | | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights | | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (2) |
Equity Compensation Plans Approved by Shareholders | | | | | | |
2018 Stock and Incentive Plan | | — | | — | | 919,688 |
Equity Compensation Plans Not Approved by Shareholders (3) | | — | | — | | — |
Total | | — | | — | | 919,688 |
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(1) This table does not include the 2,300,000 shares to be reserved for issuance under the Company’s 2009 and 2018 Plans. If2020 Plan if shareholders approve the Reverse Stock Split occurs,2020 Plan at the all outstanding restrictedAnnual Meeting.
(2) Reflects shares of the Company’s common stock will
automaticallyavailable to be adjusted by the 1-for-3 split ratio, without any other changes. In addition,granted under the terms of the 2018 Plan in the Compensation Committee will implement certain conforming changes to the 2018 Plan to proportionately reduce the remaining authorized numberform of shares of Company common stock available foroptions, stock appreciation rights, restricted stock awards, under the plan to reflect the 1-for-3 split ratio,restricted stock unit and make corresponding changes to the annual limits on and the aggregate number and kind of securities for which awards thereafter may be made, and make proportionate, equitable and appropriate changes to other relevant provisions of the plan.
Issuance of New Book-Entry Shares; Exchange of Certificates
performance unit awards. If the shareholders approve the Split Articles Amendment and the Board of Directors determines to effect the Reverse Stock Split, the Company will communicate to shareholders and the public, prior to the Effective Time of the Reverse Stock Split, additional details regarding the Reverse Stock Split, including information regarding the issuance of new book-entry shares, information regarding the exchange of old stock certificates representing pre-Reverse Stock Split shares for new stock certificates representing post-Reverse Stock Split shares and information regarding payment for fractional shares by our registrar and transfer agent, Computershare.
Shareholders should not destroy any share certificate(s) and should not submit any share certificate(s) until requested to do so.
Interest of Certain Persons in Matters to be Acted Upon
No officer or director has any substantial interest, direct or indirect, by security holdings or otherwise, in the Reverse Stock Split that is not shared by all of our other shareholders.
No Appraisal Rights
Under Virginia law, the Articles of Incorporation and the Company’s Bylaws, shareholders have no rights to exercise dissenters’ rights of appraisal with respect to the Split Articles Amendment.
Material U.S. Federal Income Tax Consequences of the Reverse Stock Split
The following summary describes certain material U.S. federal income tax consequences of the Reverse Stock Split to holders of our common stock. Unless otherwise specifically indicated herein, this summary addresses the U.S. federal income tax consequences only to a U.S. holder. For purposes of the discussion below, a “U.S. holder” is a person that for U.S. federal income tax purposes is a beneficial owner of our common stock that is (i) a citizen or individual resident of the United States; (ii) a corporation (including an entity treated as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the United States, any state thereof or the District of Columbia; (iii) an estate whose income is subject to U.S. federal income taxation regardless of its source; or (iv) any trust if (a) a U.S. court is able to exercise primary supervision over the administration of such trust and one or more U.S. persons have the authority to control all substantial decisions of the trust or (b) it has a valid election in place to be treated as a U.S. person.
This summary does not address all of the tax consequences that may be relevant to any particular shareholder, including tax considerations that arise from rules of general application to all taxpayers or to certain classes of taxpayers or that are generally assumed to be known by shareholders. This summary also does not address the tax consequences to (i) persons that may be subject to special treatment under U.S. federal income tax law, such as banks, insurance companies, thrift institutions, regulated investment companies, real estate investment trusts, tax-exempt organizations, U.S. expatriates, persons subject to the alternative minimum tax, traders in securities that elect to mark to market and dealers in securities or currencies, (ii) persons that hold our common stock as part of a position in a “straddle” or as part of a “hedging,” “conversion” or other integrated investment transaction for
U.S. federal income tax purposes or (iii) persons that do not hold our common stock as “capital assets” (generally, property held for investment).
This summary is based on the provisions of the Internal Revenue Code, U.S. Treasury Regulations thereunder, administrative rulings and judicial authority related thereto, each as in effect as of the date hereof. Subsequent developments in U.S. federal income tax law, including changes in law or differing interpretations, which may or may not be applied retroactively, could have a material effect on the U.S. federal income tax consequences of the Reverse Stock Split as described herein. In addition, we have not sought, and will not seek, an opinion of counsel or a ruling from the Internal Revenue Service (“IRS”) regarding the U.S. federal income tax consequences of the Reverse Stock Split and there can be no assurance the IRS will not challenge the statements and conclusions set forth below or that a court would not sustain any such challenge.
In view of the foregoing and because the following discussion is intended as a general summary only, each holder of our common stock should consult such shareholder’s own tax advisor regarding the tax consequences, including the applicable U.S. federal, state, local and foreign tax consequences, and any tax reporting requirements associated with the Reverse Stock Split in light of such shareholder’s own tax situation.
If a partnership (or other entity or arrangement classified as a partnership for U.S. federal income tax purposes) is the beneficial owner of our common stock, the U.S. federal income tax treatment of a partner in the partnership generally will depend on the status of the partner and the activities and tax treatment of the partnership. Partnerships that hold our common stock, and partners in such partnerships, should consult their own tax advisors regarding the U.S. federal income tax consequences of the Reverse Stock Split.
U.S. Holders. The Reverse Stock Split is intended to be treated as a tax-free recapitalization for U.S. federal income tax purposes. Therefore, except as described below with respect to cash in lieu of fractional shares, no gain or loss generally should be recognized by U.S. holders in the Reverse Stock Split. Accordingly, the aggregate tax basis in the common stock received pursuant to the Reverse Stock Split generally should equal the aggregate tax basis in the common stock surrendered (excluding the portion of the tax basis that is allocable to any fractional share), and the holding period for the common stock received generally should include the holding period for the common stock surrendered. Any cash payments to a U.S. holder in lieu of fractional shares are intended to resolve our inability to evenly divide a U.S. holder’s shares of common stock due to the reverse split ratio selected by the Board of Directors. Such cash payments are not intended to represent separately bargained-for consideration. Accordingly, a U.S. holder who receives cash in lieu of a fractional share of our common stock pursuant to the Reverse Stock Split generally will recognize capital gain or loss in an amount equal to the difference between the amount of cash received and the U.S. holder’s tax basis in the shares of our common stock surrendered allocated to such fractional share of our common stock. Such capital gain or loss should be long-term capital gain or loss if the U.S. holder’s holding period for our common stock surrendered exceeded one year at the time of the Reverse Stock Split. Capital losses are generally only deductible against capital gains, except for a small amount that, for individuals, can offset ordinary income.
U.S. Information Reporting and Backup Withholding Tax. Information returns generally will be required to be filed with the IRS with respect to the receipt of cash in lieu of a fractional share of our common stock pursuant to the Reverse Stock Split in the case of certain U.S. holders. In addition, certain U.S. holders may be subject to a backup withholding tax on the payment of such cash. A U.S. holder may be subject to backup withholding if the holder does not provide a correct taxpayer identification number in the manner required or otherwise fails to comply with applicable backup withholding tax rules. Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules may be refunded or allowed as a credit against the U.S. holder’s federal income tax liability, if any, provided such holder timely furnishes the required information to the IRS.
Non-U.S. Holders. The discussion in this section is addressed to “non-U.S. holders.” A non-U.S. holder generally includes a beneficial owner of our common stock who is neither a U.S. holder nor an entity treated as a partnership for U.S. federal income tax purposes.
Generally, non-U.S. holders should not recognize any gain or loss upon completion of the Reverse Stock Split. A non-U.S. holder who receives cash in lieu of a fractional share of our common stock pursuant to the Reverse Stock Split generally should not recognize gain or loss, provided that (a) such gain or loss is not effectively connected with the conduct of a trade or business in the United States by such non-U.S. holder (or, if certain income tax treaties apply, is not attributable to a non-U.S. holder’s permanent establishment in the United States), (b) with respect to non-U.S. holders who are individuals, such non-U.S. holders are present in the United States for less than 183 days in the taxable year of the Reverse Stock Split and other conditions are met, (c) the U.S. federal income tax classification of our Company does not implicate the Foreign Investment in Real Property Tax Act of 1980 (“FIRPTA”) rules during a specified testing period and (d) such non-U.S. holders comply with certain certification requirements.
A non-U.S. holder generally will not incur tax under FIRPTA with respect to cash received in lieu of a fractional share of our common stock pursuant to the Reverse Stock Split as long as we are a “domestically-controlled REIT.” A domestically controlled REIT is a REIT in which, at all times during a specified testing period, less than 50% in value of its shares are held directly or indirectly by non-U.S. holders. We cannot assure you that that test will be met. However, a non-U.S. holder that owned, actually or constructively, 10% or less of our stock at all times during a specified testing period will not incur tax under FIRPTA with respect to cash received in lieu of a fractional share of our common stock pursuant to the Reverse Stock Split if the stock is “regularly traded” on an established securities market. To the extent that our stock is regularly traded on an established securities market, a non-U.S. holder will not incur tax under FIRPTA unless it owns more than 10% of our stock.
Non-U.S. holders should consult with their tax advisor regarding the U.S. federal, state, local and foreign income and other tax consequences of the Reverse Stock Split.
U.S. Information Reporting and Backup Withholding Tax. In general, backup withholding and information reporting should not apply to payment of cash in lieu of a fractional share of our common stock to a non-U.S. holder pursuant to the Reverse Stock Split if the non-U.S. holder certifies under penalties of perjury that it is a non-U.S. holder and the applicable withholding agent does not have actual knowledge to the contrary. Backup withholding may apply to a non-U.S. holder that is unable to make the required certification. Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules may be refunded or allowed as a credit against the non-U.S. holder’s U.S. federal income tax liability, if any, provided that certain required information is timely furnished to the IRS. In certain circumstances the amount of cash paid to a non-U.S. holder in lieu of a fractional share of our common stock, the name and address of the beneficial owner and the amount, if any, of tax withheld may be reported to the IRS.
The implementation of this Proposal Three is expressly conditioned on the approval by shareholders of Proposal Four regarding the reduction of the Company’s authorized common shares. Accordingly, even if this Proposal Three is approved by shareholders2020 Plan at the Annual Meeting, itno additional awards will be granted under the 2018 Plan.
(3) The Company does not be implemented unless Proposal Four is alsohave any equity compensation plans that have not been approved by shareholders at the Annual Meeting. If shareholders do not approve both this Proposal Three and Proposal Four, neither the Reverse Stock Split nor the Share Reduction will be implemented.shareholders.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR APPROVAL OF THE AMENDMENT TO THE COMPANY'S ARTICLES OF INCORPORATION TO EFFECTDYNEX CAPITAL, INC. 2020 STOCK AND INCENTIVE PLAN.
RELATED PERSON TRANSACTIONS
We recognize that maintaining the independence in fact and appearance for our directors and officers is critical. Therefore, we have certain policies and procedures in place to critically evaluate each transaction that could impact the independence of directors and officers. Our Code of Business Conduct and Ethics provides that the Company’s personnel, including directors and officers, are expected to avoid any situation in which their personal interests conflict, or have the appearance of conflicting, with those of the Company. Our Corporate Governance Guidelines also provide that the Company will generally refrain from entering into contracts with Board members and their immediate family members or providing support directly or indirectly to organizations with which a Board member may be affiliated. In the event that we deem it appropriate to enter transactions with a Board member or a member of his or her immediate family, the terms of the transaction must be made in the ordinary course of business and on substantially the same terms as those prevailing at the time of a comparable transaction with a non-related person. The Board will also evaluate each of these transactions when the independence of the director is determined.
Our Board has adopted certain written policies and procedures, included within our Code of Business Conduct and Ethics, for the review, approval and ratification of related person transactions, which we refer to here as our Related Person Policy. Among other things, our Related Person Policy provides that, other than compensation matters which are approved or ratified by our Compensation Committee, a related person transaction is prohibited unless it is approved or ratified by the Audit Committee. A REVERSE STOCK SPLIT OF THE COMPANY’S COMMON STOCK AT“related person transaction” is any transaction, arrangement or relationship (or any series of transactions, arrangements or relationships) in which we were, are or will be a participant, in which the amount involved exceeds $120,000, and in which any related person had, has or will have a direct or indirect material interest. A RATIO OF 1-FOR-3.“related person,” as defined in our Related Person Policy, means any person who is an executive officer, director or nominee for director of the Company, any person who is the owner of more than 5% of any class of the Company’s outstanding equity securities, any immediate family member of any of the foregoing persons, which means any child, stepchild, parent, stepparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, sister-in-law or any person (other than a tenant or employee) sharing the household of the executive officer, director, nominee or more than 5% owner, and any entity which is owned or controlled by any of the foregoing persons or in which one of the foregoing persons has a substantial ownership interest or control of such entity.
Under the Related Person Policy, proposed related person transactions must be reported to the Chairperson of the Audit Committee. The Chairperson will assess, with the assistance of counsel, if appropriate, whether the proposed transaction would be a related person transaction and, if so, the proposed related person transaction shall be submitted to the Audit Committee for consideration. In determining whether to approve or ratify the proposed related person transaction, the Audit Committee will consider, among other things, whether the related person transaction is in, or is not inconsistent with, the best interests of the Company and its shareholders, and, where applicable, whether the terms of such transaction are comparable to those that could be obtained in arms-length dealings with an unrelated third party. The Audit Committee notifies the related person of its determination.
Mr. Benedetti, the Company’s Executive Vice President, Chief Financial Officer and Chief Operating Officer, has since 2002 been the sole shareholder of a company that is the parent corporation to a wholly-owned subsidiary, DCI Commercial, Inc. (“DCI”), formerly known as Dynex Commercial, Inc. The Company and DCI were defendants in litigation filed by Basic Capital Management, Inc., American Realty Trust, Inc. and Transcontinental Realty Investors, Inc. (together, the “DCI Plaintiffs”) in 1999 regarding the activities of DCI while it was an operating subsidiary of an affiliate of the Company (the “DCI Litigation”). The DCI Litigation concluded in 2004 and after various appeals by the DCI Plaintiffs, no judgment was entered against the Company. Final judgment in the principal amount of $46.5 million, including damages of $25.6 million and attorneys’ fees and post-judgment interest of $20.9 million, was entered in the litigation against DCI (the “DCI Judgment”) in 2015. The Company has been funding defense costs for DCI since 1999 and formally entered into a Litigation Cost Sharing Agreement with DCI (the “Cost Sharing Agreement”) in 2000 whereby the Company agreed to advance DCI's portion of the costs of defending DCI in various lawsuits including the DCI Litigation. The total amount due to the Company under the Cost Sharing Agreement and the amounts advanced prior to the Cost Sharing Agreement relating to the DCI Litigation including interest was $13.3 million as of December 31, 2019. DCI costs advanced by the Company are loans and bear simple interest at the rate of Prime plus 8.0% per annum subject to a maximum of 12% under Virginia law.
In May 2018, the receiver for one of the DCI Plaintiffs (the “Receiver”) in the DCI Litigation filed a separate claim (the "Receiver Litigation") against the Company seeking payment of $11.3 million in connection with the DCI Judgment, alleging that the Company breached the Cost Sharing Agreement. The case is pending in the U.S. District Court, Northern District of Texas (the “Northern District Court”). On November 21, 2019, the Northern District Court granted in part and denied in part summary judgment on the Receiver’s claim and the Company’s claim for offset and recoupment. The Northern District Court found that the Company breached the Cost Sharing Agreement and therefore must pay damages to the Receiver. The Northern District Court simultaneously granted the Company’s motion for summary judgment finding that DCI also breached the Cost Sharing Agreement and that the Company can recover amounts due to it from DCI under the Cost Sharing Agreement. The Northern District Court ordered the parties to submit evidence supporting their damages claimed by January 10, 2020. The Receiver subsequently filed a claim for damages with the Northern District Court of $12.6 million, while the Company filed claims for damages ranging from $13.3 million to $30.6 million, including interest. The Receiver filed objections (the "Objections") with the Northern District Court to, among other things, the Company recovering amounts incurred prior to entry into the Cost Sharing Agreement and amounts incurred under the Cost Sharing Agreement after January 31, 2006, including interest, which is the date that DCI’s corporate existence ceased under Virginia law. The Company subsequently objected to $0.3 million of the Receiver’s claim related to attorneys' fees incurred by the Receiver which the Company asserts is not collectible under Virginia law. The Company has further disputed the Receiver's Objections as not supportable under Virginia law, and has further refined its damages claim to $13.3 million based on simple interest and $17.8 million based on a combination of simple and compound interest, which the Company believes is supportable under Virginia law. Both claim amounts include $1.7 million plus accrued interest for the advancement of attorneys' fees to DCI in 1999 and 2000 in connection with the DCI Litigation prior to the effective date of the Cost Sharing Agreement.
For further discussion of these matters, please see Part I, Item 3 of the Company’s Annual Report on Form 10-K filed with the SEC on February 25, 2020. Neither DCI nor Mr. Benedetti expects to derive any monetary benefit under the Cost Sharing Agreement other than the advancement of the litigation costs. Neither DCI nor its parent company has made any payments to the Company. The Audit Committee approved the Cost Sharing Agreement in accordance with the Company’s Related Person Policy.
PROPOSAL FOUR
APPROVAL OF AN AMENDMENT TO THE COMPANY’S ARTICLES OF INCORPORATION TO REDUCE THE NUMBER OF SHARES OF COMMON STOCK AUTHORIZED FROM 200,000,000 TO 90,000,000
The Company is also asking shareholders to approve an amendment to the Company’s Articles of Incorporation to reduce the number of shares of the Company’s common stock authorized from 200,000,000 shares to 90,000,000 (the “Share Reduction”) by implementing an amendment to the Company’s Articles of Incorporation, the full text of which is attached as Appendix B to this proxy statement (the “Share Reduction Articles Amendment”).
The Board of Directors recommends that shareholders approve the Share Reduction in this Proposal Four. On February 26, 2019, the Board of Directors approved the Share Reduction Articles Amendment subject to approval by the Company’s shareholders, and further subject to shareholder approval of the Split Articles Amendment, which is presented in Proposal Three of this proxy statement, and actual implementation of the Reverse Stock Split. In other words, if approved by shareholders, implementation of the proposed Share Reduction under this Proposal Four is contingent on shareholder approval of the Split Articles Amendment inProposal Three in this proxy statement and actual implementation of the Reverse Stock Split.
The Board has determined that together the Split Articles Amendment and the Share Reduction Articles Amendment are in the best interests of the Company and its shareholders. Because the amendments are designed to work together, the implementation of the Share Reduction in Proposal Four is contingent upon shareholder approval of the Split Articles Amendment in Proposal Three and actual implementation of the Reverse Stock Split. Accordingly, unless Proposal Three is approved and the Reverse Stock Split actually implemented, the Share Reduction in this Proposal Four will not be implemented regardless of the outcome of the vote thereon.
As a matter of Virginia law, implementation of the Reverse Stock Split does not require a change in the total number of shares of the Company’s common stock authorized under its Articles of Incorporation. In determining to recommend a change to the total number of shares of the Company’s common stock authorized under its Articles of Incorporation in connection with the Reverse Stock Split, the Board of Directors considered the number of shares that would be available for issuance if the Company did not reduce its total authorized shares of common stock from the current limit as compared to the number that would be available following a reduction that is proportionate to the 1-for-3 split ratio for the Reverse Stock Split. The Board of Directors also considered the potential for future stock issuances to raise capital, satisfy obligations under the Company’s outstanding convertible securities, effect acquisitions and other transactions, and/or provide equity incentives to employees. The Board of Directorsbelieves that the reduction contemplated by the Share Reduction Articles Amendment is appropriate because it will maintain an adequate number of common shares that the Company is authorized to issue as compared to the total number currently outstanding. As of March 11, 2019, there were [•] shares of the Company’s common stock outstanding.
Pursuant to the Company’s Articles of Incorporation, the Company’s authorized capital stock includes 50,000,000 shares of preferred stock, 8,000,000 of which are designated as shares of Series A Preferred Stock and 7,000,000 of which are designated as shares of Series B Preferred Stock. The proposed Share Reduction Articles Amendment will not impact the total authorized number of shares of preferred stock, Series A Preferred Stock, or Series B Preferred Stock or the par value of any of the preferred stock.
Following the Reverse Stock Split described in Proposal Three and the reduction in the number of authorized shares of common stock described in this Proposal Four, the ratio of authorized common stock to issued and outstanding common stock will be higher than prior to the Reverse Stock Split. This means that the Company will have authority, without further shareholder approval, to issue a greater number of shares of common stock, or proportionately more common stock, with a greater dilutive effect on existing stockholders than prior to the Reverse Stock Split. Further, such increased proportion of unissued authorized shares may be construed to have an anti-takeover effect, as described above under Proposal Three under the heading “Potential for Anti-Takeover
Effect,” or, if additional shares of common stock are issued, may have the effect of diluting the earnings per share and book value per share, as well as the stock ownership and voting rights of the currently outstanding shares of the Company’s common stock.
The implementation of this Proposal Four is expressly conditioned on the approval by shareholders of Proposal Three and implementation of the Reverse Stock Split. Accordingly, even if this Proposal Four is approved by shareholders at the Annual Meeting, it will not be implemented unless Proposal Three is also approved by shareholders at the Annual Meeting and the Company implements the Reverse Stock Split. If shareholders do not approve both this Proposal Four and Proposal Three, neither the Reverse Stock Split nor the Share Reduction will be implemented.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR APPROVAL OF THE AMENDMENT TO THE COMPANY’S ARTICLES OF INCORPORATION TO REDUCE THE NUMBER OF SHARES OF COMMON STOCK AUTHORIZED FROM 200,000,000 TO 90,000,000.
RELATED PERSON TRANSACTIONS
We recognize that maintaining the independence in fact and appearance for our directors and officers is critical. Therefore, we have certain policies and procedures in place to critically evaluate each transaction that could impact the independence of directors and officers. Our Code of Business Conduct and Ethics provides that the Company’s personnel, including directors and officers, are expected to avoid any situation in which their personal interests conflict, or have the appearance of conflicting, with those of the Company. Our Corporate Governance Guidelines also provide that the Company will generally refrain from entering into contracts with Board members and their immediate family members or providing support directly or indirectly to organizations with which a Board member may be affiliated. In the event that we deem it appropriate to enter transactions with a Board member or a member of his or her immediate family, the terms of the transaction must be made in the ordinary course of business and on substantially the same terms as those prevailing at the time of a comparable transaction with a non-related person. The Board will also evaluate each of these transactions when the independence of the director is determined.
Our Board has adopted certain written policies and procedures, included within our Code of Business Conduct and Ethics, for the review, approval and ratification of related person transactions, which we refer to here as our Related Person Policy. Among other things, our Related Person Policy provides that, other than compensation matters which are approved or ratified by our Compensation Committee, a related person transaction is prohibited unless it is approved or ratified by the Audit Committee. A “related person transaction” is any transaction, arrangement or relationship (or any series of transactions, arrangements or relationships) in which we were, are or will be a participant, in which the amount involved exceeds $120,000, and in which any related person had, has or will have a direct or indirect material interest. Any related person transaction must be reported to the Chairperson of the Audit Committee. A “related person,” as defined in our Related Person Policy, means any person who is an executive officer, director or nominee for director of the Company, any person who is the owner of more than 5% of any class of the Company’s outstanding equity securities, any immediate family member of any of the foregoing persons, which means any child, stepchild, parent, stepparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, sister-in-law or any person (other than a tenant or employee) sharing the household of the executive officer, director, nominee or more than 5% owner, and any entity which is owned or controlled by any of the foregoing persons or in which one of the foregoing persons has a substantial ownership interest or control of such entity.
Under the Related Person Policy, proposed related person transactions are reported to the Chairperson of the Audit Committee. The Chairperson will assess, with the assistance of counsel, if appropriate, whether the proposed transaction would be a related person transaction and, if so, the proposed related person transaction shall be submitted to the Audit Committee for consideration. In determining whether to approve or ratify the proposed related person transaction, the Audit Committee will consider, among other things, whether the related person transaction is in, or is not inconsistent with, the best interests of the Company and its shareholders, and, where applicable, whether the terms of such transaction are comparable to those that could be obtained in arms-length dealings with an unrelated third party. The Audit Committee notifies the related person of its determination.
Mr. Benedetti, the Company’s Executive Vice President, Chief Financial Officer and Chief Operating Officer, has since 2002 been the sole shareholder of a company that was the parent corporation to a wholly-owned subsidiary, DCI Commercial, Inc. (“DCI”), formerly known as Dynex Commercial, Inc. As previously disclosed, the Company and DCI were defendants in litigation filed by Basic Capital Management, Inc., American Realty Trust, Inc. and Transcontinental Realty Investors, Inc. (together, the “DCI Plaintiffs”) in 1999 regarding the activities of DCI while it was an operating subsidiary of an affiliate of the Company. This litigation concluded in 2004 and after various appeals by the DCI Plaintiffs, no judgment was entered against the Company. Final judgment in the principal amount of $46.5 million, including damages of $25.6 million and attorneys’ fees and post-judgment interest of $20.9 million, was entered in the litigation against DCI (the “DCI Judgment”) in 2015.
On April 26, 2017, the DCI Plaintiffs filed a suit, case no. DC-17-04848 (the “Suit”), in the 191st District Court of Dallas County, Texas, naming the Company and DCI as co-defendants. The Company removed the case to the United States District
Court for the Northern District of Texas (the “U.S. District Court, Northern District of Texas”). The Suit represents the DCI Plaintiffs’ attempt to collect the DCI Judgment from the Company and alleges that the Company and DCI conspired to fraudulently transfer DCI assets to the Company and to commit related acts to defraud the DCI Plaintiffs with respect to recovery on the DCI Judgment. The Suit also alleges that the Company and DCI are a single business enterprise. On May 7, 2018, the Suit was dismissed, and the DCI Plaintiffs filed an amended complaint on June 4, 2018, adding former corporate affiliates of the Company and Mr. Benedetti as defendants. On January 25, 2019, the U.S. District Court, Northern District of Texas, dismissed the amended complaint, finding that the DCI Plaintiffs’ allegations as they related to the single enterprise claims were conclusory without alleging particular supporting facts to state a claim, and in the case of the former corporate affiliates and Mr. Benedetti, for lack of personal jurisdiction. The U.S. District Court, Northern District of Texas, also found that the DCI Plaintiffs’ allegations as they relate to fraudulent transfers did not sufficiently allege facts to enable the U.S. District Court, Northern District of Texas, to draw reasonable inference that the Company or DCI acted with constructive or actual fraudulent intent. The U.S. District Court, Northern District of Texas gave the DCI Plaintiffs leave to file an amended complaint, which the DCI Plaintiffs filed on March 8, 2019. The Company believes that the Suit against it is baseless and without merit and intends to defend itself vigorously in this action.
In December 2000, the Company and DCI entered into a Litigation Cost Sharing Agreement whereby the Company agreed to advance DCI’s portion of the costs of defending certain litigation against it. The Litigation Cost Sharing Agreement currently remains in effect. Litigation costs advanced by the Company on behalf of DCI are loans and carry simple interest at the rate of Prime plus 8% per annum. At December 31, 2018, the total amount due to the Company under the Litigation Cost Sharing Agreement, including interest, was $11.4 million.
One of the DCI Plaintiffs also filed a claim against the Company for $11.3 million on May 24, 2018 in the 68th District Court of Dallas County, Texas (the “68th District Court”) seeking payment allegedly pursuant to the provisions of the Litigation Cost Sharing Agreement. On June 20, 2018, the Company removed the matter to the U.S. District Court, Northern District of Texas, and on June 21, 2018, the Company filed a motion to transfer the lawsuit to the U.S. District Court for the Eastern District of Virginia. The Company has filed a declaratory judgment action in the Eastern District of Virginia seeking a declaration that the Company is not obligated under the Litigation Cost Sharing Agreement to pay any portion of the DCI Judgment. On January 30, 2019, the U.S. District Court, Northern District of Texas, remanded the case back to the 68th District Court. The Company has moved to dismiss the case from the 68th District Court for lack of subject matter jurisdiction. The declaratory judgment action in the U.S. District Court in the Eastern District of Virginia is still pending as of March 11, 2019.
Neither DCI nor Mr. Benedetti expects to derive any monetary benefit under the Litigation Cost Sharing Agreement other than the advancement of the litigation costs. Neither DCI nor its parent company has made any payments to the Company. The Audit Committee approved the Litigation Cost Sharing Agreement in accordance with the Company’s Related Person Policy.
Separately, in 2014, third parties were awarded a judgment against certain of the DCI Plaintiffs in a matter not involving the Company or DCI. Those parties (the “Garnishment Plaintiffs”) are currently pursuing a garnishment action against the DCI Judgment (the “Garnishment Action”). The Garnishment Plaintiffs requested from the Company and DCI via post-judgment discovery certain information related to DCI while it was an operating subsidiary of an affiliate of the Company and certain other information related to the activities of DCI. In November 2018, to resolve all disputes in connection with certain orders and motions made in connection with the Garnishment Action, the Garnishment Plaintiffs, the Company, DCI and Mr. Benedetti entered into an Agreement Resolving Certain Post-Judgment Discovery Issues (the “Discovery Agreement”), pursuant to which the Company, DCI and Mr. Benedetti agreed that one or more of them would pay the Garnishment Plaintiffs the total sum of $300,000. In November 2018, the Company paid the full sum of $300,000 under the Discovery Agreement. The Garnishment Action is ongoing.
Neither DCI nor Mr. Benedetti expects to derive any monetary benefit under the Discovery Agreement other than the Company’s payment to the Garnishment Plaintiffs. The entire Board of Directors approved the Discovery Agreement.
PROPOSAL FIVE
RATIFICATION OF THE SELECTION
OF THE COMPANY’S AUDITORS
The Audit Committee has selected the firm of BDO USA, LLP (“BDO”) as independent certified public accountants to audit the consolidated financial statements of the Company for the fiscal year ending December 31, 2019.2020. BDO has audited the financial statements of the Company since 2005, including for the fiscal year ended December 31, 2018.2019.
The Audit Committee is directly responsible for the appointment, compensation, retention and oversight of the work of BDO as the Company’s independent auditor. The Audit Committee is aware that a long-tenured auditor may be believed by some to pose an independence risk. To address these concerns, the Audit Committee:
•reviews and limits all non-audit services and engagements provided by BDO, specifically with regard to the impact on the firm’s independence;
•conducts a quarterlyan annual assessment of BDO’s service quality, and its working relationship with our management;
•conducts periodic private meetings separately with each of BDO and our management;
•approves the selection of BDO’s new lead engagement partner with each rotation;
•at least annually obtains and reviews a report form BDO describing all relationships between the independent auditor and the Company; and
•periodically considers whether there should be regular rotation of the independent auditor.
Based on the above, the members of the Audit Committee and the Board of Directors believe that continued retention of BDO to serve as the Company’s independent auditor is in the best interests of the Company and its shareholders.
Although ratification is not required, the Board is submitting the selection of BDO to our shareholders for ratification because we value our shareholders’ views on the Company’s independent certified public accountants, and as a matter of good governance practice. In the event that shareholders do not ratify the selection of BDO, the Audit Committee will consider making a change in auditors for the Company for the fiscal year ending December 31, 2020.2021.
Representatives of BDO are expected to be present at the Annual Meeting, will have an opportunity to make a statement, if they desire to do so, and are expected to be available to respond to appropriate questions from shareholders.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR RATIFICATION OF THE SELECTION OF BDO USA, LLP AS INDEPENDENT PUBLIC ACCOUNTANTS FOR THE FISCAL YEAR ENDING DECEMBER 31, 2019.2020.
AUDIT INFORMATION
Independent Registered Public Accounting Firm Fees
The following information is furnished with respect to fees billed for professional services rendered to the Company by BDO for the audit of the Company’s annual financial statements for the fiscal years ended December 31, 20182019 and 2017,2018, respectively, and fees billed for other services rendered by BDO during those periods. Information related to audit fees for 20182019 includes amounts billed through December 31, 20182019 and additional amounts estimated to be billed for the 20182019 period for audit services rendered.
| | | | | | | | | | | |
| For Fiscal Year Ended December 31, | | |
| 2019 | | 2018 |
Audit Fees (1) | $ | 527,130 | | | $ | 497,216 | |
Audit-Related Fees | — | | | — | |
Tax Fees | — | | | — | |
All Other Fees | — | | | — | |
Total | $ | 527,130 | | | $ | 497,216 | |
|
| | | | | | | |
| For Fiscal Year Ended December 31, |
| 2018 | | 2017 |
Audit Fees (1) | $ | 468,391 |
| | $ | 345,318 |
|
Audit-Related Fees | — |
| | — |
|
Tax Fees | — |
| | — |
|
All Other Fees | — |
| | — |
|
Total | $ | 468,391 |
| | $ | 345,318 |
|
(1)Audit Fees include: (i) the audit of the Company’s consolidated financial statements included in its Annual Report on Form 10-K and services attendant to, or required by, statute or regulation; (ii) reviews of the interim consolidated financial statements included in the Company’s quarterly reports on Form 10-Q and (iii) comfort letters, consents and other services related to SEC and other regulatory filings. | |
(1) | Audit Fees include: (i) the audit of the Company’s consolidated financial statements included in its Annual Report on Form 10-K and services attendant to, or required by, statute or regulation; (ii) reviews of the interim consolidated financial statements included in the Company’s quarterly reports on Form 10-Q and (iii) comfort letters, consents and other services related to SEC and other regulatory filings. |
Pre-Approval Policies and Procedures
In accordance with the Audit Committee Charter, all audit (including audit-related) and non-audit services performed by BDO, as described above, were pre-approved by the Audit Committee, which concluded that the provision of such services by the Company’s independent registered public accounting firm was compatible with the maintenance of that firm’s independence in the conduct of its auditing functions. The charter authorizes the Audit Committee to delegate to one or more of its members pre-approval authority with respect to permitted services. The decisions of any Audit Committee member to whom pre-approval authority is delegated must be presented to the full Audit Committee at its next scheduled meeting.
Audit Committee Report
The following Audit Committee Report shall not be deemed to be soliciting material or to be incorporated by reference by any general statement incorporating by reference this proxy statement into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent the Company specifically incorporates this Report therein and shall not otherwise be deemed filed under such Acts.
The Audit Committee, among other responsibilities, engages the independent public accountants, reviews with the independent public accountants the plans and results of any audits, reviews other professional services provided by the independent public accountants, reviews the independence of the independent public accountants, considers the range of audit and non-audit fees and reviews the adequacy of internal accounting controls. The Audit Committee is comprised of three directors, each of whom is independent for audit committee purposes, as defined by the regulations of the SEC and the NYSE listing standards.
The Audit Committee has reviewed and discussed with management and the independent accountants the Company’s audited financial statements and the results of their examination and evaluation of the Company’s internal controls for fiscal year 2018.
2019. The Audit Committee also discussed with management and the independent accountants the quality and adequacy of the Company’s internal controls and the internal audit functions, organization, responsibilities, budget and staffing. The Audit Committee reviewed with both the independent accountants and the internal auditors their audit plans, audit scope and identification of audit risks.In addition, the Audit Committee has discussed with the independent accountants the matters required to be discussed under auditing standardsby the applicable requirements of the Public Company Accounting Oversight Board including Auditing Standard No. 1301, Communications with Audit Committees.and the SEC.
The Audit Committee has received from the independent accountants written disclosures and a letter regarding BDO’s communications with the Audit Committee concerning independence, as required by the applicable requirements of the Public Company Accounting Oversight Board. These disclosures have been reviewed by the Audit Committee, and the Audit Committee has discussed with the independent accountants the independent accountants’ independence.
Based on these reviews and discussions, the Audit Committee recommended to the Board that the audited financial statements be included in the Company’s Annual Report on Form 10-K for fiscal year 20182019 for filing with the SEC.
Audit Committee
Barry A. Igdaloff, Chairperson
Valerie A. Mosley
Robert A. Salcetti
David H. Stevens
SHAREHOLDER PROPOSALS
If any shareholder desires to present a proposal to be acted upon at the 20202021 Annual Meeting of Shareholders (including a nomination for director), written notice of such proposal must be received, in proper form, by the Secretary of the Company no later than December [29], 2019January 28, 2021 and no earlier than September [30], 2019.October 30, 2020. The proxy solicited by the Board of Directors for the 20202021 Annual Meeting will confer discretionary authority to vote on any shareholder proposal presented at the meeting if the Company has not received notice of such proposal within this time period, in writing delivered to the Company’s Secretary. If any shareholder intends to present a proposal to be considered for inclusion in the Company’s proxy materials in connection with the 20202021 Annual Meeting, the proposal must comply with Exchange Act Rule 14a-8 and must be received by the Company’s Secretary, at the Company’s principal office address set forth on the first page of this Proxy Statement, on or before November [29], 2019.December 29, 2020.
ANNUAL REPORT ON FORM 10-K
A copy of the Company’s Annual Report on Form 10-K for fiscal year 20182019 and a list of all its exhibits will be supplied without charge to any shareholder upon written request sent to the Company’s principal executive offices: Dynex Capital, Inc., Attention: Investor Relations, 4991 Lake Brook Drive, Suite 100, Glen Allen, Virginia 23060. Exhibits to the Form 10-K are available for a reasonable fee. You may also view the Company’s Annual Report on Form 10-K and its exhibits online at the SEC web page at www.sec.gov or via the Company’s web page at www.dynexcapital.com under “Investor Center - SEC Filings.”
By Order of the Board of Directors
Stephen J. Benedetti
Executive Vice President, Chief Financial Officer,
Chief Operating Officer and Secretary
March [28], 2019April 28, 2020
Appendix A
Text of Split Articles Amendment
Article III
DYNEX CAPITAL, INC.
2020 STOCK AND INCENTIVE PLAN
ARTICLE I
Establishment, Purpose and Duration
1.1 Establishment of the Plan.
(a) Dynex Capital, Inc., a Virginia corporation (the “Company”), hereby establishes the Dynex Capital, Inc. 2020 Stock and Incentive Plan (the “Plan”). Unless otherwise defined herein, all capitalized terms shall have the meanings set forth in Section 2.1. The Plan permits the grant of Incentive Stock Options, Nonqualified Stock Options, Restricted Stock, Restricted Stock Units, Stock Appreciation Rights, Performance Units and Performance Cash Awards to Key Employees of the Company or its Subsidiaries and the grant of Nonqualified Stock Options, Restricted Stock, Restricted Stock Units, Stock Appreciation Rights, Performance Units and Performance Cash Awards to Non-Employee Directors of the Company or its Subsidiaries or to Consultants or Advisors to the Company or its Subsidiaries.
(b) The Plan was adopted by the Board of Directors of the Company on April 27, 2020 and became effective on June 9, 2020 (the “Effective Date”) upon approval of the Plan by the Company’s shareholders. Upon the Company’s shareholders approval of the Plan, no additional awards shall be made under the Company’s 2018 Stock and Incentive Plan, as amended and restated effective June 20, 2019, or any other prior equity plan (the “Prior Plans”) although outstanding awards under the Prior Plans shall remain outstanding in accordance with their terms.
1.2 Purpose of the Plan. The purpose of the Plan is to promote the success of the Company and its subsidiaries by providing incentives to Key Employees, Non-Employee Directors, Consultants and Advisors that will promote the identification of their personal interests with the long-term financial success of the Company and with growth in shareholder value, consistent with the Company’s risk management practices. The Plan is designed to provide flexibility to the Company, including its subsidiaries, in its ability to attract, retain the services of, and motivate Key Employees, Non-Employee Directors, Consultants and Advisors upon whose judgment, experience, interest, and special effort the successful conduct of the Company’s Articlesoperations is largely dependent.
1.3 Duration of Incorporationthe Plan. The terms of this Plan shall become effective onthe Effective Date, as described in Section 1.1(b). No Award may be granted under the Plan after June 8, 2030. Awards outstanding on such date shall remain valid in accordance with their terms. The Board shall have the right to terminate the Plan at any time pursuant to Article XVI.
ARTICLE II
Definitions
2.1 Definitions. The following terms shall have the meanings set forth below:
(a)“Advisor” means a natural person who provides bona fide advisory services to the Company or its Subsidiaries, provided the services are not in connection with a capital-raising transaction and the person does not directly or indirectly promote or maintain a market for the Company’s securities.
(b)“Affiliate” has the meaning ascribed to such term in Rule 12b-2 under the Exchange Act.
(c)“Agreement” means a written agreement or other instrument or document, which may be in electronic format, implementing the grant of an Award and setting forth the specific terms of an Award, and which is amendedsigned or acknowledged (including a signature or acknowledgment in electronic format) by insertingan authorized officer of the Company and theParticipant. The Company’s Chief Executive Officer, Chief Financial Officer, Chairman of the Committee, Chairman of the Board, and such other directors or officers of the Company as shall be designated by the Committee are hereby authorized to execute or acknowledge Agreements on behalf of the Company (including a signature or acknowledgment in electronic format) and to cause Agreements to be delivered to each Participant (including delivery in electronic format).
(d)“Award” means a grant under this Plan of an Incentive Stock Option, Nonqualified Stock Option, Restricted Stock, Restricted Stock Unit, Stock Appreciation Right, Performance Unit and/or Performance Cash Award.
(e)“Award Date” means the date on which an Award is made (also referred to as “granted”) by the Committee under this Plan.
(f)“Beneficiary” means the person designated by a Participant pursuant to Section 17.11.
(g)“Board” means the Board of Directors of the Company, unless otherwise indicated.
(h)“Cause” has the meaning set forth in any employment agreement, or, if none, in any severance or change of control agreement, then in effect between the Participant and the Company or a subsidiary, if applicable, and, if the Participant has no such agreement or if such agreement does not define the term, “Cause” means (i) the Participant’s failure to comply with a lawful directive of the Board of Directors of the Company or a subsidiary or of any supervisory personnel, (ii) any criminal act by the Participant, (iii) any act of dishonesty or misconduct by the Participant that has an adverse effect on the property, operations, business or reputation of the Company or a subsidiary, or (iv) the material breach by the Participant of any written policies of the Company or a subsidiary or the terms of any confidentiality, non-competition, non-solicitation or other agreement that the Participant has with the Company or a subsidiary.
(i)“Change of Control” shall be deemed to have occurred if the conditions set forth in any one of the following as new third, fourth, and fifth paragraphs undershall have been satisfied at any time after the caption “Common Stock” in such Article:Effective Date:
As(i) the acquisition by any person, including a group (within the meaning of [__:__] [a][p].m.Section 13(d)(3) or 14(d)(2) of the Exchange Act), Richmond, Virginia time, on [_____], 20[__] (the “Effective Time”of beneficial ownership of thirty-five percent (35%), every three or more of either (A) the then outstanding shares of Company Stock (the “Outstanding Company Common Stock”) or (B) the Corporation’s Common Stock issued andcombined voting power of the then outstanding immediately priorvoting securities of the Company entitled to vote generally in the election of directors (the “Outstanding Company Voting Securities”); or
(ii) the composition of the Company’s Board shall change such that the individuals who, as of the Effective Date, constitute the Board (the “Incumbent Directors”) no longer comprise at least a majority of the members of the Board; provided, however, that any individual becoming a director subsequent to the Effective Time and held by each holder, shall automatically be combined into one validly issued, fully paid and non-assessable share of Common Stock, par value of $.01 each, without any further actionDate whose election, or nomination for election by the Corporation orCompany’s shareholders, was approved by a vote of at least a majority of the holder thereof, subject to the treatment of fractional share interests as described in the next paragraph (the “Reverse Stock Split”).
No fractional sharesIncumbent Directors shall be issued in connection with the Reverse Stock Split. A holderconsidered as though such individual were an Incumbent Director, but excluding, for this purpose, any such individual whose initial assumption of Common Stock who would otherwise be entitled to receive a fractional interest in a share of Common Stockoffice occurs as a result of the Reverse Stock Split shall,an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a person other than the Board; or
(iii) consummation of a reorganization, merger, share exchange or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a “Business Combination”), in each case, unless, following such fractional interest, beBusiness Combination:
(A)the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, at least eighty percent (80%) of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to receive cash (without interest)vote generally in the election of directors, as the case may be, of the corporation resulting from the Corporation in lieusuch Business Combination (including, without limitation, a corporation which as a result of such fractional interest an amount equal totransaction owns the product of (i) the closing price per shareCompany or all or substantially all of the Company’s assets either directly or through one or more subsidiaries or affiliates) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as reportedthe case may be; and
(B)at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were Incumbent Directors at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or
(iv) approval by the shareholders of the Company of a complete liquidation or dissolution of the Company, except pursuant to a Business Combination that complies with clause (A) or (B) of Section 2.1(i)(iii).
For purposes of this definition, a Change of Control occurs on the New York Stockdate on which an event described in (i), (ii), (iii) or (iv) occurs, provided that if a Change of Control occurs on account of a series of transactions or events, the Change of Control occurs on the date of the last of such transactions or events.
For purposes of this definition only, the term “person” means any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act), other than any employee benefit plan (or related trust) sponsored or maintained by the Company or any otheraffiliated company, and “beneficial ownership” has the meaning given the term in Rule 13d-3 under the Exchange Act.
(j) “Code” means the Internal Revenue Code of 1986, as amended from time to time, and any regulations promulgated thereunder.
(k) “Committee” means the committee of the Board appointed by the Company to administer the Plan pursuant to Article III, which shall be the Compensation Committee of the Board of Directors of the Company, unless a subcommittee is required as provided below or unless the Board of Directors of the Company determines otherwise. All members of the Committee shall be “independent directors” under applicable listing standards of any national securities exchange or system on which the Common Stock is then listed traded or quoted)reported. For actions which require that all of the members of the Committee constitute “nonemployee directors” as defined in Rule 16b3, or any similar or successor rule, the Committee may consist of a subcommittee of at least two members of the Compensation Committee meeting such qualifications. In the event the Board of Directors of the Company exercises the authority of the Committee in connection with the Plan or an Award as contemplated by Section 3.1(a), the term “Committee” shall refer to the Board of Directors of the Company in connection with the Plan or with regard to that Award.
(l)“Company” means Dynex Capital, Inc. or any successor thereto.
(m)“Consultant” means a natural person who provides bona fide consulting services to the Company or its Subsidiaries, provided the services are not in connection with a capital-raising transaction and the person does not directly or indirectly promote or maintain a market for the Company’s securities.
(n)“Disability” or “Disabled” means, with respect to an Incentive Stock Option, a Disability within the meaning of Code Section 22(e)(3). As to all other Awards, the Committee shall determine whether a Disability exists and such determination shall be conclusive.
(o)“Exchange Act” means the Securities Exchange Act of 1934, as amended from time to time.
(p)“Fair Market Value” of a Share means (i) the per Share price at the close of business on the dayapplicable principal U.S. market on the relevant date if it is a trading date, or, if not, on the most recent date on which the Stock was traded prior to such date, as reported by the national securities exchange or system for the applicable principal U.S. market, or (ii) if, in the opinion of the Effective TimeCommittee, this method is inapplicable or inappropriate for any reason, the fair market value as determined pursuant to a reasonable method adopted by the Committee in good faith for such purpose.
(q)“Good Reason” has the meaning set forth in any employment agreement, or, if none, in any severance or change of control agreement, then in effect between the Participant and the Company or a subsidiary, if applicable, and, if the Participant has no such agreement or if such agreement does not define the term, “Good Reason” means (i) a material diminution in the Participant’s authority, duties or responsibilities; (ii) a material diminution in the fractionParticipant’s base compensation; or (iii) a relocation of the primary location at which the Participant must perform services to a location that is more than fifty (50) miles away. The Participant is required to provide notice to the Company of the existence of a condition described in this Section 2.1(q) within a ninety (90) day period of the initial existence of the condition, upon the notice of which the Company shall have thirty (30) days to remedy the condition. If the condition is remedied within thirty (30) days, then “Good Reason” does not exist. If the condition is not remedied within thirty (30) days, then the Participant must resign within ninety (90) daysof the expiration of the remedy period for “Good Reason” to exist.
(r)“Incentive Stock Option” or “ISO” means an option to purchase Stock, granted under Article VI, which is designated as an incentive stock option and is intended to meet the requirements of, and qualify for favorable federal income tax treatment under, Code Section 422.
(s)“Key Employee” means an officer or other key employee of the Company or its Subsidiaries, who, in the opinion of the Committee, can contribute significantly to the growth and profitability of, or perform services of major importance to, the Company and its Subsidiaries.
(t)“Non-Employee Director” means an individual who is a member of the board of directors of the Company or any Subsidiary thereof who is not an employee of the Company or any Subsidiary thereof.
(u)“Nonqualified Stock Option” means an option to purchase Stock, granted under Article VI, which is not intended to be an Incentive Stock Option and is so designated.
(v)“Option” means an Incentive Stock Option or a Nonqualified Stock Option.
(w)“Participant” means a Key Employee, Non-Employee Director, Consultant or Advisor who has been granted an Award under the Plan and whose Award remains outstanding.
(x)“Performance-Based Compensation Award” means any Award for which exercise, full enjoyment or receipt thereof by the Participant is contingent on satisfaction or achievement of the Performance Goal(s) applicable thereto. The terms and conditions of each Performance-Based Compensation Award, including the Performance Goal(s) and Performance Period, shall be set forth in an Agreement or in a subplan of the Plan that is incorporated by reference into an Agreement.
(y)“Performance Cash Award” means an Award of cash granted to a Participant pursuant to Article XI.
(z)“Performance Goal” means one or more performance measures or goals set by the Committee in its discretion for each grant of a Performance-Based Compensation Award. The extent to which such performance measures or goals are met will determine the amount or value of the Performance-Based Compensation Award that a Participant is entitled to exercise, receive or retain. For purposes of the Plan, a Performance Goal may be particular to a Participant, and may include, but is not limited to, one or more of the following performance criteria, either individually, alternatively or in any combination, subset or component, applied to the performance of the Company as a whole or to the performance of a Subsidiary, division, strategic business unit, line of business or business segment, measured either quarterly, annually or cumulatively over a period of years or partial years, in each case as specified by the Committee in the Award: (i) stock value or increases therein, (ii) total shareholder return, relative total shareholder return or comparative total shareholder return, (iii) total shareholder equity, (iv) operating revenue, (v) commodity revenue, (vi) book value or book value growth, book value per share or per common share or growth in book value per share or per common share, (vii) tangible book value or tangible book value growth, tangible book value per share or growth in tangible book value per share, (viii) dividends, (ix) dividends paid, (x) earnings per share or earnings per share growth (before or after one or more of taxes, interest, depreciation and/or amortization), (xi) diluted and basic earnings per share or diluted earnings per share growth (before or after one or more of taxes, interest, depreciation and/or amortization), including fully diluted earnings per share after extraordinary events, (xii) net earnings, (xiii) earnings and/or earnings growth (before or after one or more of taxes, interest, depreciation and/or amortization), operating earnings and/or operating earnings growth, (xiv) profits or profit growth (net profit, gross profit, operating profit, net operating profit, economic profit, profit margins or other corporate profit measures), (xv) cash flow, operating cash flow and/or free cash flow (either before or after dividends), (xvi) cash from operations, (xvii) operating or other expenses or growth thereof, (xviii) operating efficiency, (xix) return on equity, (xx) return on tangible equity or return on tangible common equity, (xxi) return on assets, portfolio assets, net assets, capital or investments (including return on total capital or return on invested capital), (xxii) return on operating revenue, (xxiii) sales or revenues or growth thereof, (xxiv) portfolio growth, (xxv) servicing volume, (xxvi) production volume, (xxvii) improvement in or attainment of working capital levels, (xxviii) improvement in or attainment of expense levels, (xxix) assets under management or growth thereof, (xxx) cost control measures, (xxxi) regulatory compliance, (xxxii) gross, operating or other margins, (xxxiii) efficiency ratio (as generally recognized and used for financial reporting and analysis), (xxxiv) operating ratio, (xxxv) income or net income (either before or after taxes), (xxxvi) operating income, net operating income, or core net operating income, (xxxvii) interest income, (xxxviii) net interest income, (xxxix) net interest margin, (xl) non-interest income, (xli) non-interest expense, (xlii) delinquency ratios, (xliii) credit loss levels, (xliv) credit quality, net charge-offs and/or non-performing assets, (xlv) provision expense, (xlvi) productivity, (xlvii) satisfactory internal or external audits, (xlviii) improvement of financial ratings, (xlix) achievement of balance sheet or income statement objectives, (l) quality measures, (li) peer ranking or peer performance based on a public index, (lii) peer ranking or peer performance based on a Committee-determined group of peers, (liii) number or dollar amount of securities sold, (liv) debt reduction, (lv) gain on sale of investments, (lvi) achievement of risk management objectives, (lvii) achievement of strategic performance objectives or other strategic objectives, (lviii) achievement of merger or acquisition objectives, (lix) implementation, management or completion of critical projects or processes, (lx) market capitalization, (lxi) total enterprise value (market capitalization plus debt), (lxii) economic value added, (lxiii) total economic return, (lxiv) general and administrative expense (either including or excluding litigation costs), (lxv) debt leverage (debt to capital), (lxvi) market share or (lxvii) any component or components of the foregoing (including, without limitation, determination thereof, in the Committee’s sole discretion, with or without the effect of discontinued operations and dispositions of business units or segments, nonrecurring items, material extraordinary items that are both unusual and infrequent, non-budgeted items, special charges, accruals for acquisitions, reorganization and restructuring programs and/or changes in tax law, accounting principles or other such laws or provisions affecting the Company’s reported results). Performance Goals may include a threshold level of performance below which no payment or vesting may occur, levels of performance at which specified payments or specified vesting will occur, and a maximum level of performance above which no additional payment or vesting will occur. Performance Goals may be absolute in their terms or measured against or in relationship to a pre-established target, the Company’s budget or budgeted results, previous period results, a market index, a designated comparison group of other companies comparably, similarly or otherwise situated, or any combination thereof. The Committee shall determine the Performance Period during which a Performance Goal must be met, and attainment of Performance Goals shall be subject to certification by the Committee. In the Committee’s sole discretion, to the extent such discretion is expressly reserved in the Award Agreement, the Committee may adjust the compensation
or economic benefit due upon attainment of Performance Goals and adjust the Performance Goals themselves.
(aa)“Performance Period” means the time period during which a Performance Goal must be met in connection with a Performance-Based Compensation Award. Such time period shall be set by the Committee, provided, however, that, except as permitted under Section 4.6, the Performance Period shall not be less than one year, subject to applicable provisions regarding accelerated vesting events.
(ab)“Performance Unit” means an Award, designated as a Performance Unit, granted to a Participant pursuant to Article X, valued by reference to the Fair Market Value of Stock or valued as a fixed dollar amount, and subject to achievement or satisfaction of one shareor more Performance Goals. Performance Units are payable in cash, Stock or a combination thereof. Even to the extent a Performance Unit is denoted by reference to Shares of Stock and is payable in Stock, the receipt of a Performance Unit Award does not constitute receipt of the underlying Shares.
(ac)“Period of Restriction” means the period during which Shares of Restricted Stock are subject to a substantial risk of forfeiture and/or subject to limitations on transfer, pursuant to Article VII, or the period during which Restricted Stock Units are subject to vesting requirements, pursuant to Article VIII. The relevant restriction may lapse based on a period of time or after meeting performance criteria specified by the Committee, or both. The Period of Restriction shall be set by the Committee, provided, however, that, except as permitted in Section 4.6, the Period of Restriction shall not be less than one year, subject to applicable provisions regarding accelerated vesting events.
(ad)“Restricted Stock” means an Award of Stock granted to a Participant pursuant to Article VII, which is subject to a substantial risk of forfeiture and/or subject to limitations on transferability until the designated conditions for the lapse of such restrictions are satisfied.
(ae)“Restricted Stock Unit” or “RSU” means an Award designated as the right to receive shares of Stock or the cash equivalent thereof granted to a Participant pursuant to Article VIII, and subject to vesting requirements. Restricted Stock Units are payable in cash, Stock or a combination thereof. Even to the extent a Restricted Stock Unit is denoted by reference to Shares of Stock and is payable in Stock, the receipt of a Restricted Stock Unit Award does not constitute receipt of the underlying Shares.
(af)“Rule 16b-3” means Rule 16b-3 promulgated under the Exchange Act, including any corresponding subsequent rule or any amendments enacted after the Effective Date.
(ag)“Stock” or “Shares” means the common stock of the Company.
(ah)“Stock Appreciation Right” or “SAR” means an Award, designated as a stock appreciation right, granted to a Participant pursuant to Article IX, and payable in cash, Stock or a combination thereof.
(ai)“10% Shareholder” means a person who owns, directly or indirectly, stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or any parent or subsidiary of the Company. Indirect ownership of stock shall be determined in accordance with Code Section 424(d).
(aj)For purposes of Incentive Stock Options, “Subsidiary” shall mean a corporation at least fifty percent (50%) of thetotal combined voting power of all classes of stock of which is owned by such holder.
Each certificatethe Company, either directly or through one or more of its Subsidiaries. For purposes of all Awards other than Incentive Stock Options, “Subsidiary” shall mean any entity that immediately priorwould be considered a single employer with the Company within the meaning of Code Section 414(b) or Code Section 414(c), except to the Effective Time, represented sharesextent a different definition is required under Code Section 409A.
ARTICLE III
Administration
3.1 The Committee.
(a) The Plan shall be administered by the Committee which shall have all powers necessary or desirable for such administration. To the extent required by Rule 16b-3, all Awards shall be made by members of the Common Stock (the “Old Certificates”) shall thereafter representCommittee who are “non-employee directors” as that term is defined in Rule 16b-3, or by the numberBoard. In the event the Board determines that a member of sharesthe Committee (or any applicable subcommittee) was not an “independent director” under applicable listing standards of Common Stock intoany national securities exchange or system on which the shares of Common Stock representedis then listed or reported and/or was not a “nonemployee director” as defined in Rule 16b3, as applicable, on the Award Date, such determination shall not invalidate the Award and the Award shall remain valid in accordance with its terms. Any authority granted to the Committee may also be exercised by the Old Certificatesfull Board.
(b) The express grant in this Plan of any specific power to the Committee shall have been combined,not be construed as limiting any power or authority of the Committee. In addition to any other powers and, subject to the elimination of fractional share interests as provided above.
Appendix B
Text of Share Reduction Articles Amendment
Article IIIprovisions of the Company’s ArticlesPlan, the Committee shall have the following specific powers: (i) to determine the terms and conditions upon which the Awards may be made and exercised; (ii) to determine all terms and provisions of Incorporation is amended by replacingeach Agreement, which need not be identical; (iii) to construe and interpret the first paragraphAgreements and the Plan, including the ability to resolve any ambiguities and define any terms; (iv) to establish, amend or waive rules or regulations for the Plan’s administration; (v) to accelerate the exercisability of any Award or the termination of any Period of Restriction or other restrictions imposed under the caption “Common Stock”Plan to the extent permitted by Code Section 409A; and (vi) to make all other determinations and take all other actions necessary or advisable for the administration of the Plan. The interpretation and construction of any provisions of the Plan or an Agreement by the Committee shall be final and conclusive. In the event of a conflict or inconsistency between the Plan and any Agreement, the Plan shall govern, and the Agreement shall be interpreted to minimize or eliminate any such conflict or inconsistency.
(c) The Committee may consult with counsel, who may be counsel to the Company, and shall not incur any liability for any action taken in good faith in reliance upon the advice of counsel.
(d) The Committee, in its discretion, may delegate to the Company’s Chief Executive Officer and Chief Financial Officer, acting jointly, all or part of the Committee’s authority and duties with respect to Awards to individuals who are not subject to the reporting and other provisions of Section 16 of the Exchange Act. The Committee may revoke or amend the terms of a delegation at any time but such Articleaction shall not invalidate any prior actions of the Committee’s delegee or delegees that were consistent with the following:terms of the Plan.
3.2 Selection of Participants. The number of shares of Common Stock that the CorporationCommittee shall have the authority to issuegrant Awards under the Plan, from time to time, to such Key Employees, Non-Employee Directors, Consultants and Advisors as may be selected by the Committee. Each Award shall be 90,000,000evidenced by an Agreement.
3.3 Decisions Binding. All determinations and decisions made by the Board or the Committee pursuant to the provisions of the Plan shall be final, conclusive and binding.
3.4 Rule l6b-3 Requirements. Notwithstanding any provision of the Plan to the contrary, the Board or the Committee may impose such conditions on any Award, and amend the Plan in any such respects, as may be required to satisfy the requirements of Rule 16b-3.
3.5 Indemnification of Committee. In addition to such other rights of indemnification as they may have as directors or as members of the Committee, the members of the Committee shall be indemnified by the Company against reasonable expenses, including attorneys’ fees, actually and reasonably incurred in connection with the defense of any action, suit or proceeding, or in connection with any appeal therein, to which they or any of them may be a party by reason of any action taken or failure to act under or in connection with the Plan or any Award granted or made hereunder, and against all amounts reasonably paid by them in settlement thereof or paid by them in satisfaction of a judgment in any such action, suit or proceeding, if such members acted in good faith and in a manner which they believed to be in, and not opposed to, the best interests of the Company and its Subsidiaries.
ARTICLE IV
Stock Subject to the Plan
4.1 Number of Shares.
(a) Subject to adjustment as provided in Article XIII, the maximum aggregate number of Shares that may be issued pursuant to Awards made under thePlan shall not exceed 2,300,000. No shares subject to awards made under Prior Plans shall be available for use under the Plan. Except as provided in Section 4.2, the issuance of Shares in connection with the exercise of, or as other payment for, Awards under the Plan shall reduce the number of Shares available for future Awards under the Plan.
(b) Subject to adjustment as provided in Article XIII, no more than an aggregate of 2,300,000 Shares may be issued pursuant to the exercise of Incentive Stock Options granted under the Plan (including shares issued pursuant to the exercise of Incentive Stock Options that are the subject of disqualifying dispositions within the meaning of Code Sections 421 and 422).
4.2 Lapsed Awards or Forfeited Shares. If any Award granted under this Plan terminates, expires, or lapses for any reason other than by virtue of exercise or settlement of the Award, or if Shares issued pursuant to Awards are forfeited, any Stock subject to such Award again shall be available for the grant of an Award under the Plan.
4.3 Use of Shares as Payment of Exercise Price or Taxes. Shares withheld by the Company, delivered by the Participant, or otherwise used to pay the Option Price pursuant to the exercise of an Option or the SAR Exercise Price pursuant to the exercise of a SAR shall not be available for future Awards under the Plan. Shares withheld by the Company, delivered by the Participant, or otherwise used to satisfy payment of withholding taxes associated with an Award shall not be available for future Awards under the Plan. To the extent Shares are delivered or withheld pursuant to the exercise of an Option or a SAR, the number of underlying Shares as to which the exercise related shall be counted against the number of Shares available for future Awards under the Plan, as opposed to counting only those Shares issued upon exercise.
4.4 Per-Participant Annual Limit. The maximum number of Shares with respect to which Awards may be granted in any calendar year to any Participant during such calendar year shall be 400,000 in the aggregate and the maximum dollar amount of cash Awards granted in any calendar year to any Participant shall be $5,000,000 in the aggregate.
4.5 No Fractional Shares. No fractional Shares shall be issued or delivered pursuant to the Plan or any Award thereunder. The Committee shall determine whether cash, other Awards, or other property shall be issued or paid in lieu of such fractional Shares or whether such fractional Shares or any rights thereto shall be forfeited or otherwise eliminated.
4.6 Minimum Vesting and Performance Period. An Award granted under the Plan shall not vest earlier than the first anniversary of the Award Date and, if applicable, shall not have a Performance Period of less than one year, provided, however, that this minimum vesting restriction and, if applicable, minimum Performance Period shall not apply to (a) substituted Awards granted pursuant to Article XV; (b) shares of CommonStock delivered in lieu of fully-vested cash obligations; (c) Awards to Non-Employee Directors that vest on the earlier of the first anniversary of the Award Date and the next annual meeting of shareholders which is at least fifty (50) weeks after the immediately preceding year’s annual meeting of shareholders; and (d) any additional Awards granted under the Plan up to a maximum of five percent (5%) of the maximum aggregate number of Shares authorized for delivery under the Plan pursuant to Section 4.1 (subject to adjustment as provided in Article XIII). This Section 4.6 shall not restrict the right of the Committee or the Board to provide for accelerated payment, vesting or exercisability of an Award, including in the event of death, Disability, termination of employment (including retirement) or a Change of Control, in the terms of the Agreement or otherwise.
ARTICLE V
Eligibility
Persons eligible to participate in the Plan include (i) allemployees of the Company and its Subsidiaries (including any entity that becomes a Subsidiary after the Effective Date) who, in the opinion of the Committee, are Key Employees, (ii) all Non-Employee Directors, and (iii) all individuals providing bona fide consulting or advisory services to the Company or its Subsidiaries (including any entity that becomes a Subsidiary after the Effective Date) who, in the opinion of the Committee, are Consultants or Advisors. The grant of an Award shall not obligate the Company to pay a Key Employee, Non-Employee Director, Consultant or Advisor any particular amount of remuneration, to continue the employment of a Key Employee or the service of a Non-Employee Director, Consultant or Advisor after the grant, or to make further grants to a Key Employee, Non-Employee Director, Consultant or Advisor at any time thereafter.
ARTICLE VI
Stock Options
6.1 Grants of Options. Subject to the terms and provisions of the Plan, Options may be granted to such Key Employees, Non-Employee Directors, Consultants or Advisors at any time and from time to time as shall be determined by the Committee. The Committee shall have complete discretion in determining the number of Shares subject to Options granted to each Participant, provided, however, that only Nonqualified Stock Options may be granted to Non-Employee Directors, Consultants and Advisors.
6.2 Option Agreement. Each Option grant shall be evidenced by an Agreement that shall specify the type of Option granted, the Option Price (as hereinafter defined), the duration of the Option, the number of Shares to which the Option pertains, any conditions imposed upon the exercisability of the Option, and such other provisions as the Committee shall determine, provided, however, that, except as permitted in Section 4.6, if the exercisability of an Option is subject solely to time-based conditions, the length of such period of time shall not be less than one year, subject to applicable provisions regarding accelerated vesting events. The Agreement shall specify whether the Option is intended to be an Incentive Stock Option or Nonqualified Stock Option, provided, however, that if an Option is intended to be an Incentive Stock Option but fails to be such for any reason, it shall continue in full force and effect as a Nonqualified Stock Option. No Option may be exercised after the expiration of its term or, except as set forth in the Agreement, after the termination of the Participant’s employment or service. The Committee shall set forth in the Agreement when, and under what circumstances, an Option may be exercised after termination of the Participant’s employment or period of service, provided that no Incentive Stock Option may be exercised after (a) three months from the Participant’s termination of employment with the Company for reasons other than Disability or death, or (b) one year from the Participant’s termination of employment on account of Disability or death. The Committee may, in its sole discretion, amend a previously granted Incentive Stock Option to provide for more liberal exercise provisions, provided, however, that if the Incentive Stock Option as amended no longer meets the requirements of Code Section 422, and, as a result the Option no longer qualifies for favorable federal income tax treatment under Code Section 422, the amendment shall not become effective without the written consent of the Participant.
6.3 Option Price. The exercise price per share of Stock covered by an Option (“Option Price”) shall be determined by the Committee subject to the limitations described in this Section 6.3 and the Plan. The Option Price shall not be less than 100% of the Fair Market Value of such Stock on the Award Date. In addition, an ISO granted to a Key Employee who, at the time of grant, is a 10% Shareholder, shall have an Option Price which is at least equal to 110% of the Fair Market Value of the Stock on the Award Date.
6.4 Duration of Options. Each Option shall expire at such time as the Committee shall determine at the time of grant, provided, however, that no Option shall be exercisable later than the tenth (10th) anniversary date of its Award Date. In addition, an ISO granted to a Key Employee who, at the time of grant, is a 10% Shareholder, shall not be exercisable later than the fifth (5th) anniversary date of its Award Date.
6.5 Exercisability.
(a) Options granted under the Plan shall be exercisable at such times and be subject to such restrictions and conditions as the Committee shall determine, which need not be the same for all Participants.
(b) An Incentive Stock Option, by its terms, shall be exercisable in any calendar year only to the extent that the aggregate Fair Market Value (determined at the Award Date) of the Stock with respect to which Incentive Stock Options are exercisable by the parParticipant for the first time during the calendar year does not exceed $100,000 (the “Limitation Amount”). Incentive Stock Options granted under the Plan and all other plans of the Company and any Subsidiary shall be aggregated for purposes of determining whether the Limitation Amount has been exceeded. The Committee may impose such conditions as it deems appropriate on an Incentive Stock Option to ensure that the foregoing requirement is met. If Incentive Stock Options that first become exercisable in a calendar year exceed the Limitation Amount, the excess Options will be treated as Nonqualified Stock Options to the extent permitted by law.
6.6 Method of Exercise. Options shall be exercised by the delivery of a written notice to the Company in the form (which may be electronic) prescribed by the Committee (or its delegee) setting forth the number of Shares with respect to which the Option is to be exercised, accompanied by full payment for the Shares and payment of (or an arrangement satisfactory to the Company for the Participant to pay) any tax withholding required in connection with the Option exercise. To the extent approved by the Committee from time to time, the Option Price shall be payable to the Company in full either (a) in cash, (b) by delivery of Shares of Stock that the Participant has previously acquired and owned valued at Fair Market Value at the time of exercise, (c) by delivery of a properly executed exercise notice together with irrevocable instructions to a broker to deliver promptly to the Company, from the sale proceeds with respect to the sale of Stock, the amount necessary to pay the Option Price and, if necessary, applicable withholding taxes, (d) by the Company withholding Shares otherwise issuable upon the exercise valued at Fair Market Value at the time of exercise, or (e) by a combination of the foregoing. As soon as practicable, after receipt of written notice and payment of the Option Price and completion of payment of (or an arrangement satisfactory to the Company for the Participant to pay) any tax withholding required in connection with the Option exercise, the Company shall, in the Committee’s discretion, either deliver to the Participant stock certificates in an appropriate amount based upon the number of Options exercised, issued in the Participant’s name, or deliver the appropriate number of Shares in book-entry or electronic form.
6.7 Restrictions on Stock Transferability. The Committee shall impose such restrictions on any Shares acquired pursuant to the exercise of an Option under the Plan as it may deem advisable, including, without limitation, restrictions under the applicable federal securities law, under the requirements of any national securities exchange or system on which the Stock is then listed or reported, and under any blue sky or state securities laws applicable to such Shares. The Committee may specify in an Agreement that Stock delivered on exercise of an Option is Restricted Stock or Stock subject to a buyback right by the Company in the amount of, or based on, the Option Price therefor in the event the Participant does not complete a specified service period after exercise.
6.8 Nontransferability of Options.
(a)In general, no Option granted under the Plan may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, otherwise than upon the death of the Participant in accordance with Section 17.11. Further, Options granted to a Participant under the Plan shall be exercisable during his lifetime only by such Participant or his guardian or legal representative.
(b) Notwithstanding the provisions of Section 6.8(a) and subject to federal and state securities laws, including Rule 16b-3, the Committee may grant or amend Nonqualified Stock Options that permit a Participant to transfer the Options to his spouse, lineal ascendants and/or lineal descendants, to a trust for the benefit of such persons, to a partnership, limited liability company, or other entity the only partners, members, or interest-holders of which are such persons, or pursuant to a domestic relations order, provided that the Nonqualified Stock Option may not again be transferred other than to the Participant originally receiving the Option or to an individual, trust, partnership, limited liability company or other entity to which such Participant could have transferred the Option pursuant to this Section 6.8(b). Consideration may not be paid for the transfer of Options. The transferee of an Option shall be subject to all conditions applicable to the Option prior to its transfer. The Agreement granting the Option shall set forth the transfer conditions and restrictions. The Committee may impose on any transferable Option and on Stock issued upon the exercise of an Option such limitations and conditions as the Committee deems appropriate. Any such transfer supersedes any Beneficiary designation made under Section 17.11 with respect to the transferred Nonqualified Stock Options.
6.9 Disqualifying Disposition of Shares Issued on Exercise of an ISO. If a Participant makes a “disposition” (within the meaning of Code Section 424(c)) of Shares issued upon exercise of an ISO within two (2) years from the Award Date or within one (1) year from the date the Shares are transferred to the Participant, the Participant shall, within ten (10) days of disposition, notify the Committee (or its delegee) in order that any income realized as a result of such disposition can be properly reported by the Company on IRS forms W-2 or 1099.
6.10 Shareholder Rights. A Participant holding Options shall have no right to vote the underlying Shares, no right to receive dividends on the underlying Shares, and no other rights as a shareholder until after the exercise of the Options and the issuance of the underlying Shares. In no event shall any Option granted under the Plan include any right to dividend equivalents with respect to such Option or the underlying Shares.
ARTICLE VII
Restricted Stock
7.1 Grant of Restricted Stock. Subject to the terms and provisions of the Plan, the Committee, at any time and from time to time, may grant shares of Restricted Stock under the Plan to such Key Employees, Non-Employee Directors, Consultants or Advisors and in such amounts as it shall determine. Participants receiving Restricted Stock Awards are not required to pay the Company therefor (except for applicable tax withholding) other than the rendering of services. If determined by the Committee, custody of Shares of Restricted Stock may be retained by the Company until the termination of the Period of Restriction pertaining thereto.
7.2 Restricted Stock Agreement. Each Restricted Stock Award shall be evidenced by an Agreement that shall specify the Period of Restriction, the number of Restricted Stock Shares granted, and, if applicable, any Performance Period and Performance Goal(s), and such other provisions as the Committee shall determine.
7.3 Transferability. Except as provided in this Article VII and subject to the limitation in the next sentence, the Shares of Restricted Stock granted hereunder may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated until the termination of the applicable Period of Restriction or upon earlier satisfaction of other conditions as specified by the Committee in its sole discretion and set forth in the Agreement. All rights with respect to the Restricted Stock granted to a Participant under the Plan shall be exercisable during his lifetime only by such Participant or his guardian or legal representative, provided that the Committee may permit, its sole discretion, transfers of Shares of Restricted Stock during the lifetime of the Participant pursuant to a domestic relations order. Consideration may not be paid for the transfer of Shares of Restricted Stock.
7.4 Other Restrictions. The Committee shall impose such other restrictions on any Shares of Restricted Stock granted pursuant to the Plan as it may deem advisable including, without limitation, restrictions under applicable federal or state securities laws, and may legend the certificates representing Restricted Stock to give appropriate notice of such restrictions or otherwise denote the Restricted Stock as restricted, if issued in book-entry or electronic form.
7.5 Certificate Legend. In addition to any other legends placed on certificates, or to which Shares of Restricted Stock issued in book-entry or electronic form are made subject, pursuant to Section 7.4, any Award of Restricted Stock issued in book-entry or electronic form shall be subject to the following legend, and any certificates representing shares of Restricted Stock granted pursuant to the Plan shall bear the following legend:
The sale or other transfer of the shares of stock represented by this certificate, whether voluntary, involuntary, or by operation of law, is subject to certain restrictions on transfer set forth in the Dynex Capital, Inc. 2020 Stock and Incentive Plan, in the rules and administrative procedures adopted pursuant to such Plan, and in a restricted stock agreement dated <<date of grant>>. A copy of the Plan, such rules and procedures, and such restricted stock agreement may be obtained from the Head of Human Resources of Dynex Capital, Inc.
7.6 Removal of Restrictions. Except as otherwise provided in this Article VII, the Agreement, or applicable law or regulation, Shares of Restricted Stock covered by each Restricted Stock Award made under the Plan shall become freely transferable by the Participant after the last day of the Period of Restriction, and, where applicable, after a determination of the satisfaction or achievement of any applicable Performance Goal(s). Once the Shares are released from the restrictions, the Participant shall be entitled to have the legend required by Section 7.5 removed from his Stock certificate or similar notation removed from such Shares if issued in book-entry or electronic form.
7.7 Voting Rights. During the Period of Restriction, Participants holding Shares of Restricted Stock granted hereunder may exercise full voting rights with respect to those Shares.
7.8 Dividends and Other Distributions. During the Period of Restriction, unless otherwise provided in the applicable Agreement and except with respect to Restricted Stock subject to one or more Performance Goals, recipients of Shares of Restricted Stock shall be entitled to receive all dividends and other distributions paid with respect to those Shares. With respect to Restricted Stock subject to one or more Performance Goals, during the Period of Restriction, dividends on such shares may be accumulated but not paid to the recipient unless and until the applicable Performance Goal(s) have been met (subject to any delay in payment required by Code Section 409A, if applicable). If any such dividends or distributions are paid in Shares, such Shares shall be subject to the same restrictions on transferability as the Shares of Restricted Stock with respect to which they were paid.
ARTICLE VIII
Restricted Stock Units
8.1Grant of Restricted Stock Units. Subject to the terms and provisions of the Plan, the Committee, at any time and from time to time, may grant Restricted Stock Units under the Plan (with one Unit representing one Share) to such Key Employees, Non-Employee Directors, Consultants or Advisors and in such amounts as it shall determine. Participants receiving Restricted Stock Unit Awards are not required to pay the Company therefor (except for applicable tax withholding) other than the rendering of services. The Committee is expressly authorized to grant Restricted Stock Units that are deferred compensation covered by Code Section 409A, as well as Restricted Stock Units that are not deferred compensation covered by Code Section 409A.
8.2Restricted Stock Unit Agreement. Each Restricted Stock Unit Award shall be evidenced by an Agreement that shall specify the Period of Restriction, the number of Restricted Stock Units granted, and if applicable, any Performance Period and Performance Goal(s), and such other provisions as the Committee shall determine. Restricted Stock Units granted under this Article VIII that are subject to Performance Goal(s) may be referred to as “Performance Stock Units.”
A participant holding Restricted Stock Units shall have no rights to deemed dividends or other distributions with respect to such Restricted Stock Units unless the Committee provides otherwise in the Agreement. The Committee may provide in the Agreement for deemed dividends or distributions with respect to Restricted Stock Units, provided that any such deemed dividends or distributions with respect to Restricted Stock Units subject to Performance Goal(s) may be accumulated but not paid unless and until the Period of Restriction applicable to the Restricted Stock Units has ended and the applicable Performance Goal(s) have been met (subject to any delay in payment required by Code Section 409A, if applicable). A Participant holding Restricted Stock Units shall have no right to vote the Shares represented by such Restricted Stock Units unless and until the underlying Shares are issued to the Participant.
8.3Payment after Lapse of Restrictions. Subject to the provisions of the Agreement, upon the lapse of restrictions with respect to a Restricted Stock Unit, the Participant is entitled to receive, without any payment to the Company (other than required tax withholding), the number of Shares equal to the number of Restricted Stock Units with respect to which the restrictions lapse or the cash equivalent thereof based on the Fair Market Value per Share on the date the restrictions lapse.
The Agreement may provide for settlement of the RSUs at the time of the lapse of restrictions or, in accordance with Code Section 409A, if applicable, on an elective or non-elective basis, for settlement of the RSUs at a later date, adjusted (if so provided in the Agreement) from the date of the lapse of restrictions based on an interest, dividend equivalent, earnings, or other basis (including deemed investment of the RSUs in Shares) set out in the Agreement (the “adjusted RSU Value”).
Settlement of the RSUs or adjusted RSU Value to the Participant shall be made in Shares, in cash or a combination thereof as determined by the Committee, either at the time of the Award or thereafter, and as provided in the Agreement. To the extent settlement of the adjusted RSU Value to the Participant is made in Shares, such Shares shall be valued at the Fair Market Value on the date of settlement in the event of an elective or nonelective delayed settlement. The Committee may specify in a Restricted Stock Unit Agreement that the Shares which are delivered upon settlement may be Restricted Stock pursuant to Article VII and subject to such further restrictions and vesting as provided in the Restricted Stock Unit Agreement.
8.4Nontransferability of Restricted Stock Units. No Restricted Stock Unit granted under the Plan, and no right to receive payment in connection therewith, may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than upon the death of the Participant in accordance with Section 17.11 or, if permitted by the Committee in its sole discretion, pursuant to a domestic relations order. Further, all rights with respect to Restricted Stock Units granted to a Participant under the Plan shall be exercisable during his lifetime only by such Participant or his guardian or legal representative except to the extent such Restricted Stock Units have been disposed of pursuant to a domestic relations order. Consideration may not be paid for the transfer of Restricted Stock Units.
ARTICLE IX
Stock Appreciation Rights
9.1 Grant of Stock Appreciation Rights. Subject to the terms and provisions of the Plan, the Committee, at any time and from time to time, may grant Stock Appreciation Rights under the Plan to such Key Employees, Non-Employee Directors, Consultants or Advisors and in such amounts as it shall determine.
9.2 SAR Agreement. Each SAR grant shall be evidenced by an Agreement that shall specify its terms and conditions, which terms and conditions shall be determined by the Committee, subject to the limitations set forth in this Section 9.2 and in Section 9.3. The per Share exercise price of a SAR (the “SAR Exercise Price”) shall not be less than 100% of the Fair Market Value of a Share on the Award Date.
9.3 Exercisability of SARs. SARs may be exercised upon whatever terms and conditions the Committee, in its sole discretion, imposes upon such SARs, subject to the limitations set forth in Section 9.2 and this Section 9.3. Except as permitted in Section 4.6, if the exercisability of a SAR is subject solely to time-based conditions, the length of such period of time shall not be less than one year, subject to applicable provisions regarding accelerated vesting events
9.4 Other Conditions Applicable to SARs. In no event shall the term of any SAR granted under the Plan exceed ten (10) years from the Award Date. A SAR may be exercised only when the Fair Market Value of a Share exceeds the SAR Exercise Price. A SAR shall be exercised by delivery to the Committee (or its delegee) of a written notice of exercise in the form (which may be electronic) prescribed by the Committee (or its delegee).
9.5 Payment after Exercise of SARs. Subject to the provisions of the Agreement, upon the exercise of a SAR, the Participant is entitled to receive, without any payment to the Company therefor (except for required tax withholding), an amount (the “SAR Value”) equal to the product of multiplying (i) the number of Shares with respect to which the SAR is exercised by (ii) an amount equal to the excess of (A) the Fair Market Value per Share on the date of exercise of the SAR over (B) the SAR Exercise Price.
Payment of the SAR Value to the Participant shall be made at the time of exercise in Shares, in cash or in a combination thereof as determined by the Committee. To the extent payment of the SAR Value to the Participant is made in Shares, such Shares shall be valued at the Fair Market Value on the date of exercise. The Committee may specify in a SAR Agreement that the Shares which are delivered upon payment of the SAR Value may be Restricted Stock pursuant to Article VII and subject to such further restrictions and vesting as provided in the SAR Agreement.
9.6 Nontransferability of SARs. No SAR granted under the Plan, and no right to receive payment in connection therewith, may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than upon the death of the Participant in accordance with Section 17.11 or, if permitted by the Committee in its sole discretion, pursuant to a domestic relations order. Further, all SARs, and rights in connection therewith, granted to a Participant under the Plan shall be exercisable during his lifetime only by such Participant or his guardian or legal representative except to the extent such SARs have been disposed of pursuant to a domestic relations order. Consideration may not be paid for the transfer of SARs.
9.7 Shareholder Rights. A Participant holding SARs shall have no right to vote the underlying Shares, no right to receive dividends on the underlying Shares, and no other rights as a shareholder until after the exercise of the SARs and the issuance of the underlying Shares. In no event shall any SAR granted under the Plan include any right to dividend equivalents with respect to such SAR or the underlying Shares.
ARTICLE X
Performance Units
10.1Grant of Performance Units. Subject to the terms and provisions of the Plan, the Committee, at any time and from time to time, may grant Performance Units under the Plan to such Key Employees, Non-Employee Directors, Consultants or Advisors and in such amounts as it shall determine. Participants receiving such Awards are not required to pay the Company therefor (except for applicable tax withholding) other than the rendering of services. The Committee is expressly authorized to grant Performance Units that are deferred compensation covered by Code Section 409A, as well as Performance Units that are not deferred compensation covered by Code Section 409A.
10.2Performance Unit Agreement. Each Performance Unit is intended to be a Performance-Based Compensation Award, and the terms and conditions of each such Award, including the Performance Goal(s) and Performance Period, shall be set forth in an Agreement or in a subplan of the Plan that is incorporated by reference into an Agreement. The Committee shall set the Performance Goal(s) in its discretion for each Participant who is granted a Performance Unit.
The Committee may provide in the Agreement for payment of dividend equivalents with respect to each Performance Unit, provided that any such dividend equivalents may be accumulated but not paid unless and until the applicable Performance Goal(s) have been met (subject to any delay in payment required by Code Section 409A, if applicable). A Participant holding Performance Units shall have no right to vote the Shares represented by such Performance Units unless and until the underlying Shares are issued to the Participant.
10.3Settlement of Performance Units. After a Performance Period has ended, the holder of a Performance Unit shall be entitled to receive the value thereof based on the degree to which the Performance Goal(s) and other conditions established by the Committee and set forth in the Agreement (or in a subplan of the Plan that is incorporated by reference into an Agreement) have been satisfied. Payment of the amount to which a Participant shall be entitled upon the settlement of a Performance Unit shall be made in cash, Stock or a combination thereof as determined by the Committee.
10.4Nontransferability of Performance Units. No Performance Unit granted under the Plan, and no right to receive payment in connection therewith, may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than upon the death of the Participant in accordance with Section 17.11 or, if permitted by the Committee in its sole discretion, pursuant to a domestic relations order. All rights with respect to Performance Units granted to a Participant under the Plan shall be exercisable during his lifetime only by such Participant or his guardian or legal representative except to the extent such Performance Units have been disposed of pursuant to a domestic relations order. Consideration may not be paid for the transfer of Performance Units.
ARTICLE XI
Performance Cash Awards
A Performance Cash Award may be granted upon the attainment during a Performance Period of one or more Performance Goals. Subject to the terms and conditions of the Plan, Performance Cash Awards may be granted to such Key Employees, Non-Employee Directors, Consultants or Advisors at any time and from time to time as shall be determined by the Committee. The terms and conditions of any Performance Cash Award, including the Performance Goal(s) and Performance Period, shall be determined by the Committee in its discretion and shall be set forth in an Agreement or in a subplan of the Plan that is incorporated by reference into an Agreement. The Committee is expressly authorized to grant Performance Cash Awards that are deferred compensation covered by Code Section 409A, as well as Performance Cash Awards that are not deferred compensation covered by Code Section 409A.
ARTICLE XII
Termination of Employment or Service
12.1 Termination Due to Retirement. Unless otherwise provided in the Agreement, in the event that a Participant terminates his employment or service with the Company or one of its Subsidiaries due to retirement (as defined in such applicable rules or policy of the Company in effect at the time or as otherwise defined in the Agreement), then, provided no Cause exists to terminate such Participant’s employment or service and provided further either (i) upon such retirement the Participant will be subject to a non-competition covenant pursuant to an existing agreement with the Company or a subsidiary or (ii) the Participant executes and delivers to the Company, no later than the date of such retirement, a non-competition agreement in a form acceptable to the Company, (a) all Options or Stock Appreciation Rights held by the Participant that are not already vested or exercisable shall be automatically vested and exercisable, (b) any remaining Period of Restriction applicable to the unvested portion of each Award of Restricted Stock or Restricted Stock Units held by the Participant that is solely based on a period of time shall automatically lapse, and (c) the achievement or satisfaction of any Performance Goal(s) applicable to the unvested portion of an Award held by the Participant during any Performance Period shall be adjusted through the date of termination as determined by the Committee and the Committee shall provide for such vesting, if any, as it deems appropriate.
12.2 Termination Due to Death or Disability. Unless otherwise provided in the Agreement, in the event a Participant’s employment or service is terminated because of death or Disability, (a) all Options or Stock Appreciation Rights held by the Participant that are not already vested or exercisable shall be automatically vested and exercisable, (b) any remaining Period of Restriction applicable to the unvested portion of each Award of Restricted Stock or Restricted Stock Units held by the Participant that is solely based on a period of time shall automatically lapse, and (c) the achievement or satisfaction of any Performance Goal(s) applicable to the unvested portion of an Award held by the Participant during any Performance Period shall be adjusted through the date of termination as determined by the Committee and the Committee shall provide for such vesting, if any, as it deems appropriate.
12.3 Involuntary Termination Not for Cause. Unless otherwise provided in the Agreement, in the event the Company or one of its Subsidiaries terminates the employment or service of a Participant not for Cause, then provided the termination does not occur in connection with a Change of Control and provided further either (i) upon such termination the Participant will be subject to a non-competition covenant pursuant to an existing agreement with the Company or a subsidiary or (ii) the Participant executes and delivers to the Company, no later than the date of such termination, a non-competition agreement in a form acceptable to the Company, (a) all Options or Stock Appreciation Rights held by the Participant that are not already vested or exercisable shall be automatically vested and exercisable, (b) any remaining Period of Restriction applicable to the unvested portion of each Award of Restricted Stock or Restricted Stock Units held by the Participant that is solely based on a period of time shall automatically lapse, and (c) the achievement or satisfaction of any Performance Goal(s) applicable to the unvested portion of an Award held by the Participant during any Performance Period shall be adjusted through the date of termination as determined by the Committee and the Committee shall provide for such vesting, if any, as it deems appropriate.
12.4 Termination for Good Reason. Unless otherwise provided in the Agreement, in the event that a Participant terminates his employment or service with the Company or one of its Subsidiaries for Good Reason, then provided the termination does not occur in connection with a Change of Control and provided further either (i) upon such termination the Participant will be subject to a non-competition covenant pursuant to an existing agreement with the Company or a subsidiary or (ii) the Participant executes and delivers to the Company, no later than the date of such termination, a non-competition agreement in a form acceptable to the Company, the Committee may, in its sole discretion, waive the automatic forfeiture of any or all of the unvested portion of each Award held by the Participant and provide for such vesting as it deems appropriate.
12.5 Termination for Cause. Unless otherwise provided in the Agreement, in the event a Participant’s employment or service is terminated for Cause, the unvested portion and the vested portion not yet paid or exercised of each Award held by the Participant shall be automatically forfeited to the Company and no further exercise of an Option or a SAR shall be allowed.
12.6 Termination for Other Reasons. Unless otherwise provided in the Agreement, upon a voluntary or involuntary separation from employment or service of a Participant where none of Sections 12.1, 12.2, 12.3, 12.4 or 12.5 applies, the unvested portion of each Award held by the Participant shall be automatically forfeited to the Company.
Article XIII
Change in Capital Structure
13.1 Effect of Change in Capital Structure. In the event of a stock dividend, stock split or combination of shares, spin-off, recapitalization or merger in which the Company is the surviving corporation, or other change in the Company’s capital stock (including, but not limited to, the creation or issuance to shareholders generally of rights, options or warrants for the purchase of common stock or preferred stock of the Company), the number and kind of Shares or securities of the Company to be issued under the Plan (under outstanding Awards and Awards to be granted in the future), the Option Price of Options and/or SAR Exercise Price of SARs, the annual limits on and the aggregate number and kind of Shares for which Awards thereafter may be made, and other relevant provisions shall be proportionately, equitably and appropriately adjusted by the Committee, whose determination shall be binding on all persons. If the adjustment would produce fractional shares with respect to any Award, the Committee may adjust appropriately the number of shares covered by the Award so as to eliminate the fractional shares. Where an Award being adjusted is an ISO or is subject to or falls under an exemption from Code Section 409A, the adjustment of any Option and/or SAR shall also be effected so as to comply with Code Section 424(a) and not to constitute a modification within the meaning of Code Section 424(h) or Code Section 409A, as applicable.
13.2 Authority. Notwithstanding any provision of the Plan to the contrary, the Committee may take the foregoing actions without the consent of any Participant, and the Committee’s determination shall be conclusive and binding on all persons for all purposes.
13.3 Manner of Adjustment. Adjustments made by the Committee pursuant to this Article XIII to outstanding Awards shall be made as appropriate to maintain favorable tax and/or accounting treatment.
ARTICLE XIV
Change of Control
In the event of a Change of Control of the Company, the Committee, as constituted before such Change of Control, in its sole discretion and without the consent of the Participant, may, as to any outstanding Award, either at the time the Award is made or any time thereafter, take any one or more of the following actions: (i) provide for acceleration of the vesting, delivery and exercisability of, and the lapse of time-based and/or performance-based vesting restrictions with respect to, any such Award so that such Award may be exercised or realized in full on or before a date initially fixed by the Committee; (ii) provide for the purchase, settlement or cancellation of any such Award by the Company, for an amount of cash equal to the amount which could have been obtained upon the exercise of such Award or realization of such Participant’s rights had such Award been currently exercisable or payable; (iii) provide for the replacement of any such Stock-settled Award with a cash-settled Award; (iv) make such adjustment to any such Award then outstanding as the Committee deems appropriate to reflect such Change of Control and to retain the economic value of $.01 each.the Award; or (v) cause any such Award then outstanding to be assumed, or new rights substituted therefor, by the acquiring or surviving corporation in such Change of Control. Where an Award is subject to or falls under an exemption from Code Section 409A, this Article XIV will be applied in a manner so as to comply with Code Section 409A or to maintain the exemption from Code Section 409A, as applicable.
ARTICLE XV
Amendment, Modification, and Substitution of Awards
15.1 Amendment, Modification and Substitution. Subject to the terms and provisions and within the limitations of the Plan, the Committee may amend or modify the terms of any outstanding Award or accelerate the vesting thereof. In addition, the Committee may cancel or accept the surrender of outstanding Awards (to the extent not yet exercised) granted under the Plan or outstanding awards granted under any other equity compensation plan of the Company and authorize the granting of new Awards pursuant to the Plan in substitution therefor so long as the new or substituted awards do not specify a lower exercise price than the cancelled or surrendered Awards or awards, and otherwise the new Awards may be of a different type than the cancelled or surrendered Awards or awards, may specify a longer term than the cancelled or surrendered Awards or awards, may provide for more rapid vesting and exercisability than the cancelled or surrendered Awards or awards, and may contain any other provisions that are authorized by the Plan. The Committee shall continue to have the authority to amend or modify the terms of any outstanding Award after June 8, 2030, provided that no amendment or modification will extend the original term of the Award beyond that set forth in the applicable Award Agreement. Notwithstanding the foregoing, however, but subject to Article XIII and Article XIV, no amendment or modification of an Award, shall, without the consent of the Participant, adversely affect the rights or obligations of the Participant. Notwithstanding any provision of the Plan to the contrary, the Committee shall not amend, modify, or substitute an Award in a manner that violates Code Section 409A, or causes an Award that previously qualified for an exemption from Section 409A to become subject to Code Section 409A, and the Committee shall not amend, modify, or substitute an Award that satisfies the requirements of Rule 16b-3 in a manner that causes any exemption pursuant to Rule 16b-3 to become no longer available.
15.2 Option and SAR Repricing. Notwithstanding any provision of the Plan to the contrary, neither the Committee nor the Board shall have the right or authority, without obtaining shareholder approval, to amend or modify the Option Price of any outstanding Option or the SAR Exercise Price of any outstanding SAR, or to cancel an outstanding Option or SAR, at a time when the Option Price or SAR Exercise Price, as applicable, is greater than the Fair Market Value of a Share in exchange for cash, another Award, or other securities, except in connection with a corporate transaction involving the Company in accordance with Article XIII or Article XIV.
ARTICLE XVI
Termination, Amendment and Modification of the Plan
16.1Termination, Amendment and Modification. At any time and from time to time, the Board may terminate, amend, or modify the Plan. Such amendment or modification may be without shareholder approval except to the extent that such approval is required by the Code, pursuant to the rules under Section 16 of the Exchange Act, by any national securities exchange or system on which the Stock is then listed or reported, by any regulatory body having jurisdiction with respect thereto or under any other applicable laws, rules or regulations.
16.2Awards Previously Granted. No termination, amendment or modification of the Plan other than pursuant to Article XIII or Article XIV shall in any manner adversely affect any Award theretofore granted under the Plan, without the written consent of the Participant.
ARTICLE XVII
General
17.1 Applicable Withholding Taxes. Each Participant shall agree, as a condition of receiving an Award, to pay to the Company, or make arrangements satisfactory to the Company regarding the payment of, all applicable federal, state and local taxes (including the Participant’s FICA obligation) required by law to be withheld with respect to any grant, exercise, or payment made under or as a result of the Plan. The Company shall withhold only the minimum amount necessary to satisfy applicable statutory withholding requirements, provided that the Committee may permit a Participant to elect to have an additional amount (up to the maximum allowed by law) withheld subject to the requirements under Code Section 409A. Until the applicable withholding taxes have been paid or arrangements satisfactory to the Company have been made, no stock certificates (or, in the case of Restricted Stock, no stock certificates free of a restrictive legend) shall be issued to the Participant and no issuance in book-entry or electronic form (or, in the case of Restricted Stock, no issuance in book-entry or electronic form free of a restrictive legend or notation) shall be made for the Participant. As an alternative to making a cash payment to the Company to satisfy applicable withholding tax obligations, the Committee may permit Participants to elect or the Committee may require Participants to satisfy the withholding requirement, in whole or in part, by having the Company withhold Shares of Stock having a Fair Market Value equal to the amount required to be withheld, or by delivering to the Company Shares of Stock that the Participant has previously acquired and owned having a Fair Market Value equal to the amount required to be withheld. The value of any Shares so withheld or delivered shall be based on the Fair Market Value of the Shares on the date that the amount of tax to be withheld is to be determined. All elections by Participants shall be irrevocable and be made in writing and in such manner as determined by the Committee (or its delegee) in advance of the day that the transaction becomes taxable.
17.2 Requirements of Law. The granting of Awards and the issuance of Shares of Stock under this Plan shall be subject to all applicable laws, rules, and regulations, and to such approvals by any governmental agencies or self regulatory organizations as may be required.
17.3 Effect of Plan. The establishment of the Plan shall not confer upon any Key Employee, Non-Employee Director, Consultant or Advisor any legal or equitable right against the Company, a Subsidiary or the Committee, except as expressly provided in the Plan. The Plan does not constitute an inducement or consideration for the employment or service of any Key Employee, Non-Employee Director, Consultant or Advisor, nor is it a contract between the Company or any of its Subsidiaries and any Key Employee, Non-Employee Director, Consultant or Advisor. Participation in the Plan shall not give any Key Employee, Non-Employee Director, Consultant or Advisor any right to be engaged or retained in the service of the Company or any of its Subsidiaries. No Key Employee, Non-Employee Director, Consultant or Advisor shall have rights as a shareholder of the Company prior to the date Shares are issued to him pursuant to the Plan.
17.4 Creditors. The interests of any Participant under the Plan or any Agreement are not subject to the claims of creditors and may not, in any way, be assigned, alienated or encumbered.
17.5 Successors. All obligations of the Company under the Plan, with respect to Awards granted hereunder, shall be binding on any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation or otherwise, of all or substantially all of the business and/or assets of the Company.
17.6Securities Law Restrictions. The Committee may require each Participant purchasing or acquiring Shares pursuant to an Option or other Award to represent to and agree with the Company in writing that such Participant is acquiring the Shares for investment and not with a view to the distribution thereof. All Shares delivered under the Plan shall be subject to such stock-transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations, and other requirements of the Securities and Exchange Commission, any national securities exchange or system on which the Stock is then listed or reported, and any applicable federal or state securities laws, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions or otherwise denote the Shares as being subject to such restrictions, if issued in book-entry or electronic form. No Shares shall be issued hereunder unless the Company shall have determined that such issuance is in compliance with, or pursuant to an exemption from, all applicable federal and state securities laws.
17.7 Governing Law. The Plan, and all Agreements hereunder, shall be construed and administered in accordance with and governed by the laws of the Commonwealth of Virginia and the intention of the Company is that ISOs granted under the Plan qualify as such under Code Section 422. The Plan and Awards are subject to all present and future applicable provisions of the Code. If any provision of the Plan or an Award conflicts with any such Code provision, the Committee shall cause the Plan to be amended, and shall modify the Award, so as to comply, or if for any reason amendments cannot be made, that provision of the Plan or the Award shall be void and of no effect.
17.8 Severability. In the event any provision of the Plan shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included.
17.9 Unfunded Status of Plan. The Plan is intended to constitute an “unfunded” plan for incentive and deferred compensation. With respect to any payments as to which a Participant has a fixed and vested interest but which are not yet made to a Participant by the Company, nothing contained herein shall give any such Participant any rights that are greater than those of a general unsecured creditor of the Company.
17.10 Share Certificates and Book Entry. To the extent that the Plan provides for issuance of stock certificates to represent shares of Stock, the issuance may be effected on a non-certificated basis to the extent permitted by applicable law and the applicable rules of any national securities exchange or system on which the Stock is then listed or reported. Notwithstanding any provision of the Plan to the contrary, in its discretion the Committee may satisfy any obligation to deliver Shares represented by stock certificates by delivering Shares in book-entry or electronic form. If the Company issues any Shares in book-entry or electronic form that are subject to terms, conditions and restrictions on transfer, a notation shall be made in the records of the transfer agent with respect to any such Shares describing all applicable terms, conditions and restrictions on transfer. In the case of Restricted Stock granted under the Plan, such notation shall be substantially in the form of the legend contained in Section 7.5.
17.11 Beneficiary Designations. A Participant may designate a Beneficiary to receive any Options or SARs that may be exercised after his death or to receive any other Award that may be paid after his death, as provided for in the Agreement. Such designation and any change or revocation of such designation shall be made in writing in the form and manner prescribed by the Committee (or its delegee). In the event that the designated Beneficiary dies prior to the Participant, or in the event that no Beneficiary has been designated, any Awards that may be exercised or paid following the Participant’s death shall be transferred or paid in accordance with the Participant’s will or the laws of descent and distribution. If the Participant and his Beneficiary shall die in circumstances that cause the Committee (or its delegee), in its discretion, to be uncertain which shall have been the first to die, the Participant shall be deemed to have survived the Beneficiary.
17.12 Electronic Transmissions and Records. Subject to limitations under applicable law, the Committee (and its delegee) is authorized in its discretion to issue Awards and/or to deliver and accept notices, elections, consents, designations and/or other forms or communications to or from Participants by electronic or similar means, including, without limitation, transmissions through email or specialized software, recorded messages on electronic telephone systems, and other permissible methods, on such basis and for such purposes as it determines from time to time, and all such communications will be deemed to be “written” for purposes of the Plan.
17.13 Clawback. All Awards granted under the Plan (whether vested or unvested) shall be subject to repayment to (i.e., clawback by) the Company or a related entity as determined in good faith by the Committee or the Board in the event repayment is required by the terms of the Company’s recoupment, clawback or similar policy as may be in effect from time to time or by applicable federal or state law or regulation or applicable listing standard of any national securities exchange or system on which the Stock is then listed or reported, but in no event with a look-back period of more than three (3) years, unless in the opinion of counsel satisfactory to the Participant required by applicable federal or state law or regulation or applicable listing standard. Such recovery could in certain circumstances require repayment or forfeiture of Awards or any Shares or other cash or property received with respect to the Awards (including any value received from a disposition of the Shares acquired upon payment of the Awards). Any recovery in connection with an Award subject to the requirements of Code Section 409A shall be implemented in a manner which complies with Code Section 409A.
ARTICLE XVIII
Omnibus Code Section 409A Provision
18.1 Intent of Awards. It is intended that Awards that are granted under the Plan shall be exempt from treatment as “deferred compensation” subject to Code Section 409A unless otherwise specified by the Committee. Towards that end, all Awards under the Plan are intended to contain such terms as will qualify the Awards for an exemption from Code Section 409A unless otherwise specified by the Committee. The terms of the Plan and all Awards granted hereunder shall be construed consistent with the foregoing intent. Notwithstanding any provision of the Plan to the contrary, the Committee may amend any outstanding Award without the Participant’s consent if, as determined by the Committee, in its sole discretion, such amendment is required either to (a) confirm exemption under Code Section 409A, (b) comply with Code Section 409A or (c) prevent the Participant from being subject to any tax or penalty under Code Section 409A. Notwithstanding the foregoing, however, neither the Company nor any of its Affiliates nor the Committee shall be liable to the Participant or any other person or entity if an Award that is subject to Code Section 409A or the Participant or any other person or entity is otherwise subject to any additional tax, interest or penalty under Code Section 409A. Each Participant is solely responsible for the payment of any tax liability (including any taxes, penalties and interest that may arise under Code Section 409A) that may result from an Award.
18.2 409A Awards. The Committee may grant an Award under the Plan that is subject to Code Section 409A and is intended to comply with Code Section 409A (a “409A Award”). The terms of such 409A Award, including any authority by the Company and the rights of the Participant with respect to such 409A Award, will be subject to such rules and limitations and shall be interpreted in a manner as to comply with Code Section 409A.
18.3 Time of Payment. The time and form of payment of a 409A Award, including application of a six-month delay for specified employees in certain circumstances, shall be as set forth in the applicable Agreement. A 409A Award may only be paid in connection with a separation from service, a fixed time, death, Disability, a Change of Control or an unforeseeable emergency within the meaning of Code Section 409A. The time of distribution of the 409A Award must be fixed by reference to the specified payment event. Notwithstanding the foregoing, if the time of distribution of the 409A Award is not set forth in the applicable Agreement, then the time of distribution of the 409A Award shall be within two and one-half (2½) months of the end of the later of the calendar year or the fiscal year of the Company or Affiliate that employs the Participant in which the 409A Award becomes vested and no longer subject to a substantial risk of forfeiture within the meaning of Code Section 409A. For purposes of Code Section 409A, each installment payment will be treated as the entitlement to a single payment.
18.4 Acceleration or Deferral. The Company shall have no authority to accelerate or delay or change the form of any distributions relating to 409A Awards except as permitted under Code Section 409A.
18.5 Distribution Requirements. Any distribution of a 409A Award triggered by a Participant’s termination of employment shall be made only at the time that the Participant has had a separation from service within the meaning of Code Section 409A and, if required under Code Section 409A, subject to a six-month delay for specified employees. A separation from service shall occur where it is reasonably anticipated that no further services will be performed after that date or that the level of bona fide services the Participant will perform after that date (whether as an employee or independent contractor of the Company or an Affiliate) will permanently decrease to less than twenty percent (20%) of the average level of bona fide services performed over the immediately preceding thirty-six (36) month period. Continued services solely as a director of the Company or an Affiliate shall not prevent a separation from service from occurring by an employee as permitted by Code Section 409A.
18.6 Scope and Application of this Provision. For purposes of this Article XVIII, references to a term or event (including any authority or right of the Company or a Participant) being “permitted” under Code Section 409A means that the term or event will not cause the Participant to be deemed to be in constructive receipt of compensation relating to the 409A Award prior to the distribution of cash, Shares or other property or to be liable for payment of interest or a tax penalty under Code Section 409A.
Approved by the Board of Directors on April 27, 2020 and by the shareholders on June 9, 2020.