salary or changes in the price of the company’s stock. Executive officers are required to achieve the guideline within five years of becoming an executive officer, or, in the case of persons who were executive officers at the time the guidelines were adopted, within five years of the date of adoption of the guidelines. Currently, each executive officer is in compliance with the stock ownership guidelines.
For purposes of this policy, “ownership”"ownership" includes:
•shares of Alignour common stock directly held directly by the director or officer orheld in trust for the benefit of thesuch director or officermember of senior management or hisher or herhis family member living in the same household,
•shares of underlying Align restricted stock units held directly, whether or not yet vested, and
•50% of the gain on vested in-the-money stock options, andif any.
shares of underlying Align restricted stock units held directly by a director or officer, whether or not yet vested.
The term “ownership”"ownership" does not include unvested options to purchase our common stock or shares underlying unvested market stock units.
Role of Board.The Board has responsibilityis responsible for reviewing our overall performance rather than day-to-day operations. The Board’sBoard's primary responsibility is to oversee theour management of Align and, in so doing, serve the best interests of Alignus and itsour stockholders. The Board selects, evaluates and provides for the succession of executive officerssenior management and, subject to oversight by the Nominating and Governance Committee, the Board nominates for election at annual stockholder meetings individuals to serve as our directors of Align and elects individuals to fill any vacancies on the Board. ItThe Board reviews corporate objectives and strategies and evaluates and approves significant policies and proposed major commitments of corporate resources. ItThe Board participates in decisions that have a potential major economic impact on Align. Management keeps the directors informed of Company activityour activities through regular written reports and presentations at meetings of the Board and Committee meetings.its committees.
Board Leadership Structure; Executive Sessions. We currently separate theThe roles of chief executive officer (CEO)CEO and Chairman of the Board are separated in recognition of the differences between the two roles. The CEO is responsible for setting our strategic direction after consultation and input from the Board and for our day-to-day leadership and performance, of the Company, while the Chairman of the Board provides guidance to the CEO and, in consultation with the CEO and other members of our Board, sets the agenda for Board meetings and presides over meetings of the full Board. We believe that this separation of duties allows the CEO and Chairman to most efficiently use their time and to most effectively fulfill their respective responsibilities, which are critical to the future success of the Company.our success. While our bylawsBylaws and corporate governance guidelinesGuidelines do not require that our Chairman and CEO positions be separate, the Board believes that having separate positions and having an independent outside director serve as chairman is the appropriate leadership structure for Alignus at this time. Our Corporate Governance Guidelines provide that theour independent directors of the Board will meet in executive session at least twice a year. The Board held seven meetings in 2020 and the independent directors met in suchexecutive sessions eight times in 2015.five times.
Meetings
Board Effectiveness. To ensure that our Board and its committees are performing effectively and in the best interests of Align and its stockholders, our directors perform an annual assessment of the Board, its committees and each member.
Director Attendance. For the period of her or his or herservice on the Board serviceand each applicable committee in 2015,2020, each director attended at least 75 percent75% of the aggregate of the total number of meetings of the Board and the committees on which she or he or she serves.served.
Committees. During the year, the Board maintained an Audit Committee, a Compensation Committee, a Nominating and Governance Committee and a Technology Committee. Each committee has adopted a written charter that establishes practices and procedures for such committee in accordance with applicable corporate governance rules and regulations. These charters are available on the Investor Relations section of our website located at investor.aligntech.com.
Outside Advisors. The Board and each of its committees may retain outside advisors and consultants at its discretion and our expense.
|
| | | | |
Audit Committee | |
20152020 Meetings: 14
9
Members:
Greg J. Santora (Chair)
Anne M. Myong Andrea L. Saia
Warren S. Thaler
| Oversees and monitors our accounting and financial reporting processes, our financial statement audits, and our internal accounting and financial controls.controls |
Responsible for appointing, compensating, retaining, terminating and overseeing the work of our independent auditors.auditors |
Responsible for reviewing the auditorsauditors' proposed scope, approach and independence.independence |
Pre-approves audit and non-audit services.services |
Provides oversight and monitors our Internal Audit Department.Department |
Reviews, approves and monitors our Global Code of Business Conduct and Ethics.Speak Up Policy |
| Oversees and reviews our risk management policies.Anti-Bribery and Anti-Corruption Compliance Program |
| Oversees and reviews our cybersecurity, data privacy, and other information technology risks, controls and procedures |
| Establishes procedures for receiving, retaining and treating complaints regarding accounting, internal accounting controls or auditing matters.matters |
| None of the Audit Committee members are employees of Align, and our Board has determined that each member is independent within the meaning of the NASDAQ listing standards and the rules and regulations of the SEC.SEC |
| Our Board has determined that Mr. Santora isand Ms. Myong are each qualified as an “audit"audit committee financial expert”expert" within the meaning of the rules of the SEC and has confirmed that the other members of the Audit Committee are able to read and understand financial statements.statements |
|
| | | | |
Compensation Committee | |
20152020 Meetings: 8
Members:
George J. Morrow (Chair) Dr. David C. Nagel (1)
Anne M. Myong Andrea L. Saia Greg J. Santora
| Ensures that the Company’sour compensation programs successfully align the interest of employees, including executive officers,senior management, with those of the Company’s stockholders.our stockholders |
Reviews and administers all compensation arrangements for executive officers,senior management and reviews general compensation goals and guidelines for Align’sour employees and the criteria for which bonuses are to be determined.determined |
Retains, oversees, and assesses the independence of compensation consultants and advisors.advisors |
| Assists the Board in fulfilling its oversight responsibilities with respect to the management of risks arising from our compensation policies and programs.programs |
| May form and delegate authority to subcommittees when appropriate, although no such delegation is currently in effect.effect |
| None of the Compensation Committee members are employees of Align, and our Board has determined that each member is independent within the meaning of the NASDAQ listing standards.standards |
|
| | | | |
Nominating and Governance Committee |
20152020 Meetings: 2
4
Members:
Joseph Lacob(Chair)
Lacob (Chair) C. Raymond Larkin, Jr. George J. Morrow Susan E. Siegel Warren S. Thaler
| Identifies, evaluatesAt the request of the Board, conducts annual reviews and recommends nominees to the Board.makes recommendations concerning Board and senior management succession |
Evaluates the composition, organization and governance of the Board and its committees.committees and identifies, evaluates and recommends nominees to the Board |
Develops and recommends corporate governance principles applicable to Align |
Responsible for the assessment, analysis and implementation of matters involving environmental, sustainability and governance (ESG) initiatives, including those involving our Corporate Social Responsibility efforts described further starting page 59 of this proxy statement |
|
| | | | |
Technology Committee | |
20152020 Meetings: 1
Members:
Dr. David C. Nagel (Chair) (1)
Kevin J. Dallas Joseph Lacob Warren Thaler Thomas M. Prescott Andrea L. Saia Susan E. Siegel Warren S. Thaler(2)
| Reviews Align'sour technology and development activities. |
activities Oversees and advises the Board on matters of innovation and technology. |
technology |
(1) Dr. Nagel is not standing for reelection to the Board in 2016.
(2) Mr. Prescott was appointed to the Technology Committee in October 2015.
The NominatingCompensation Committee Interlocks and GovernanceInsider Participation
None of the members of our Compensation Committee appointed Ms. Saia to serve onis or has ever been a member of our senior management or an employee. None of the members of senior management currently serves, or in the past year has served, as a member of the Compensation Committee andor director (or other board committee performing equivalent functions or, in the Technologyabsence of any such committee, the entire board of directors) of any entity that has one or more members of senior management serving on our Compensation Committee effective immediately following the Annual Meeting, subject to her continuing membership on the Board of Directors.or our Board.
Process for
Identifying and Evaluating Director Nominees and Relevant Criteria.
The Nominating and Governance Committee considers candidates for board membership suggested by Board members, management and stockholders of Align.stockholders. The Nominating and Governance Committee has also retained from time to time aperiodically retains third-party executive search firmfirms to identify independent director candidates. In considering candidates for director nominee,nominees, the Nominating and Governance Committee generally assembles all information regarding a candidate’scandidate's background and qualifications. While Align does not have a formal diversity policy for board membership, the Board seeks directors who represent a mix of backgrounds and experiences that will enhance the quality of the Board’s deliberations and decisions. The Nominating and Governance Committee considers, among other factors, diversity with respect to perspectives, backgrounds, skills, experience, and community involvement in its evaluation of candidates for Board membership. Such diversity considerations are discussed by the Nominating and Governance Committee in connection with the general qualifications of each potential nominee. The Nominating and Governance Committee, in its discretion, may designate one or more of its members to interview any candidate. In addition, the Nominating and Governance Committee may seek input from Align’ssenior management or the Board, who may interview any candidate. The Nominating and Governance Committee recommends director nominees to the Board based on its assessment of overall suitability to serve on the Board in accordance with Align’sour policy regarding nominations and qualifications of directors.
While we do not have a formal diversity policy for Board membership, the Board seeks directors who represent a mix of backgrounds, skills, and experiences, including candidates of gender, racial, and ethnic diversity, that will enhance the quality of the Board's deliberations and decisions. Moreover, our directors have diverse business and professional backgrounds, including experience in finance and accounting, venture capital, medical device, consumer products, technology, brand management and international sales, marketing and operations. Such diversity considerations are discussed by the Nominating and Governance Committee in connection with the general qualifications of each potential nominee.
The following matrix is provided to illustrate the demographic diversity and tenure distribution of the nominees for director to serve on our Board. For more information on each director’s education, qualifications and background, please refer to the section entitled "Information Concerning the Nominees" previously discussed in this proxy statement.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Anne M. Myong | Kevin J. Dallas | Susan E. Siegel | Joseph M. Hogan | Andrea L. Saia | George J. Morrow | C. Raymond Larkin, Jr. | Warren S. Thaler | Greg J. Santora | Joseph Lacob |
Gender | | | | | | | | | | |
Male | | ● | | ● | | ● | ● | ● | ● | ● |
Female | ● | | ● | | ● | | | | | |
Race/Ethnicity | | | | | | | | | | |
African American or Black | | ● | | | | | | | | |
Asian or Pacific Islander | ● | | ● | | | | | | | |
Hispanic or Latino | | | ● | | | | | | | |
White or Caucasian | | | | ● | ● | ● | ● | ● | ● | ● |
Tenure | 0-8 years (50%) | 15+ years (50%) |
| | | | | | | | | | |
The Nominating and Governance Committee has specified the following minimum qualifications that it believes must be met by a nominee for appositiona position on the Board:
•the highest personal and professional ethics and integrity;
•proven achievement and competence in the nominee’snominee's field and the ability to exercise sound business judgment;
•skills and experience that are complementary to those of the existing Board;
•the ability to assist and support management and make significant contributions to Align’sour success; and
•an understanding of the fiduciary responsibilities that is required of a member of the Board and the commitment of time and energy necessary to diligently carry out those responsibilities.
Recent Board Refreshment. Since 2017, the Board has added three new directors, each of whom has brought valuable and diverse backgrounds and perspectives to the overall composition of the Board. We are committed to maintaining a well-balanced Board that blends a diversity of backgrounds with strategic expertise in fields including technology, cybersecurity, healthcare, life sciences, medical devices, e-commerce, consumer products and manufacturing that we deem necessary for the continued growth and expansion of our business into key domestic and international markets. As a public company in the highly regulated medical device industry our directors also bring a wealth of experience overseeing sales and marketing,
operational, finance and accounting, regulatory and compliance and corporate governance practices essential to our success. Our refreshment process reflects this balanced approach as the Board evolves for the future needs while providing essential continuity from the invaluable perspectives of our more tenured directors.
Stockholder Recommendation of Nominees.Under the terms of our Corporate Governance Guidelines, the Nominating and Governance Committee is required to considerconsiders recommendations for candidates to the Board from stockholders holding at least 1% of the total outstanding shares of Align common stock (stockholdersstock. Stockholders must have held such common stocktheir shares continuously for at least 12 months prior to the date of the submission of the recommendation).they submit their recommendation. The Nominating and Governance Committee will consider persons recommended by Align’sour stockholders in the same manner as a nomineenominees recommended by the Board, individual board members or management.
A stockholder may also nominate a person directly for election to the Board at an annual meeting of our stockholders provided their proposal meets the requirements set forth in our bylaws and the rules and regulations of the SEC related to stockholder proposals. The process for properly submitting a stockholder proposal, including a proposal to nominate a person for election to the Board at an annual meeting, is described abovebelow in the answer to the question "“Is there any information that I should know regarding future annual meetings?”"
Annual meeting attendance. Align encourages,We encourage, but doesdo not require, Board members to attend the annual stockholder meeting.meetings of stockholders. Last year, one directorthree directors attended our annual meeting of stockholders.
The Board’sBoard's Role in Risk Oversight. Management is responsible for the day-to-day management of the risks the Company faces,we face, while the Board, as a whole and through its committees, has responsibilityis responsible for the oversight of risk management.risks. In its risk managementoversight role, the Board has the responsibility to satisfy itselfmust be satisfied that the risk managementkey risks to our business and operations are identified and prioritized and that the processes implemented by management to respond to those risks are adequate and functioning as designed. As a critical part of this risk management oversight role, the Board encourages management to promote a culture that actively manages riskspromotes risk identification as part of Align’sour corporate strategy and day-to-day business operations. Furthermore, our Board encourages full and open communication between management and the Board. Our Chairman meets regularly with our CEO and other senior members of senior management to discuss strategy and the risks facing the Company.we face. Senior management, attends the quarterlyother employees as well as consultants and advisers routinely attend Board meetings and isare available to address any questions or concerns raised by the Board on risk management-related and other matters. The Board regularly receives presentations from senior management on strategic matters involving our operations to enable it to understand our risk identification, risk management and risk mitigation strategies. The Board also holds strategic planning sessions with senior management and other employees as well as consultants and advisers to discuss strategies, key challenges, and risks and opportunities for the Company.Align.
Our Board does not have a standing risk management committee, but rather administers thisits oversight functionresponsibilities directly through our Board as a whole, as well as through the various standing committees of our Board that address risks inherent in their respective areas of oversight. In particular, the Audit Committee assists the Board in fulfilling its oversight responsibilities with respect to risk management in areas of financial risk,and investment risks, internal controls, cybersecurity, data privacy, business continuity, crisis preparedness, and compliance with legal and regulatory requirements.requirements, including those related to our employee benefit plans. The Compensation Committee assists the Board in fulfilling its oversight responsibilities with respect to the management ofmanage risks arising from our
compensation policies and programs. The Nominating and Governance Committee assists the Board in fulfilling its oversight responsibilities with respect to the management ofmanage risks associated with Board organization, membership, and structure.structure as well as long-term and emergency Board and senior management succession planning. The Technology Committee assists the Board to manage strategic and competitive risks, including technical and market risks associated with product development and investment. When a committee receives a report, the chairmanchair of the committee discusses it with the full Board during the committee reports portion of the next Board meeting. Thismeeting which then enables the entire Board to coordinate the risk oversight role.function.
Cybersecurity. To more effectively address the cybersecurity threats posed today, we have a dedicated Chief Information Security Officer ("CISO") who is responsible for leading enterprise-wide information security strategy, policy, standards, process, and technology. Our information security program includes, among other things, vulnerability management, antivirus and malware protection, technology compliance and risk management, encryption, identity and access management, application security, and security monitoring and incident response. Our Audit Committee is responsible for reviewing cybersecurity risks and the cybersecurity program. In 2020, the CISO met with the Audit Committee twice to discuss our cyber risks and threats.
Data Privacy. We have various technical, administrative, and physical safeguards in place to help protect against unauthorized access to, use, or disclosure of the customer, consumer, and patient information and data we collect and store. We have a dedicated Data Privacy Officer ("DPO") who advises the business on privacy risks and assesses the effectiveness of privacy controls and compliance with various legislative and regulatory requirements. Our Audit Committee is responsible for reviewing data privacy risks, as well as steps taken by management to understand and mitigate such risks. The Audit Committee routinely receives updates from the DPO on data privacy risks we face and recommends actions to mitigate those risks.
Compliance and Ethics. We have a dedicated Global Compliance & Ethics Officer ("GCEO") who is responsible for implementing and maintaining an effective compliance and ethics program, including the Code, Speak Up Policy and other policies, trainings and communications related to key risk areas such as anti-bribery, anti-corruption, and ethical interactions with healthcare professionals. The GCEO is responsible for reviewing and assessing the effectiveness of our program against related laws and industry best practices. Our Audit Committee is responsible for reviewing compliance and ethics risks, as well as the steps management takes to understand and mitigate these risks.
The Compensation Committee’sCommittee's Role in Risk Oversight.In fulfilling its role in assistingto assist the Board in itsBoard's risk oversight responsibilities, the Compensation Committee believes thatevaluates the various elements of our compensation program mitigatesprograms to avoid encouraging and mitigating against and does not encourage excessive risk taking and instead encouragesby promoting behaviors that support sustainable value creation. The Compensation Committee annually assesses our compensation programs and has concludedbelieves that our compensation policies and practices do not create risks that are reasonably likely to have a material adverse effect on the Company.effect. To arrive at this conclusion, the Compensation Committee assessed our executive and broad-based compensation programs and determined thatassesses the following design features of our senior management and broad-based compensation programs' did not createprograms for undesired or unintentional riskrisks of a material nature and guardedthat they guard against excessive risk-taking:
•our compensation program isprograms are designed to provide a balanced mix of cash and equity, annual, and longer-term incentives in order to encourage strategies and actions that are in Align’sthe long-term best interests;interests of us and our stockholders;
•base salaries are consistent with an employee’semployees' responsibilities so that they are not motivated to take excessive risks to achieve a reasonable level of financial security;
•we annually assess performance under prior year compensation programs and make any adjustments deemed necessary or appropriate in order to mitigate opportunities or motives for excessive risk taking;
•based on the review of prior results, we annually review and establish performance goals under our annual cash incentive plan that we believe (A) are reasonable in light of past performance and market conditions, and (B) encourage success without encouraging excessive risk taking to achieve short-term results, and, therefore, do not encourage unnecessary or excessive risk-taking;
•the performance goals that determine payouts under our annual cash incentive plans are company-wide in order to encourage decision-making that is in the best long-term interests of Alignus and our stockholders as a whole;
•under our annual cash incentive plans, achievement of performance goals at levels below full target reduces only the payout related to that goal, not the other goals, and therefore does not result in an “all-or-nothing” approach;
each performance goal•the amount that senior management can receive under our annual cash incentive compensation plan hasis capped as a maximum cap on achievement;of their targets in order in part to avoid excessive risk taking;
•the Compensation Committee has discretion over annual cash incentive program payouts;
•for our executive officers,senior management, we use a portfolio of equity based incentivesequity-based awards that incentincentivize performance over a variety of time periods with respect to several balanced goals:
◦Restricted Stock Units ("RSUs") retain value even in a depressed market making it less likely that employees will take unreasonable risks to get, or keep, equity grant “ingrants "in the money”money"; and
performance-based◦Performance-based market stock units ("MSUs") measure relative stockholder return over a three-year performance cycle;cycle, thereby retaining value even if the price of our stock decreases in a market downturn; and
executive officers are◦senior management is subject to material share ownership guidelines.
Director Independence
In accordance with the NASDAQ listing standards, the Board undertook its annual review of the independence of its directors and considered whether any director had a material relationship with Alignus or itssenior management that could compromise hisher or herhis ability to exercise independent judgment in carrying out hisher or herhis responsibilities. As a result of this review, the Board affirmatively determined that Kevin J. Dallas, Joseph Lacob, C. Raymond Larkin, Jr., George J. Morrow, Dr. David C. Nagel,Anne M. Myong, Andrea L. Saia, Greg J. Santora, Susan E. Siegel and Warren S. Thaler are “independent"independent directors.”" Since Mr. Prescott was employed by Align as recently as 2015 and since Mr. Hogan is currently employed by Align, neither qualifies as our President and CEO, the Board determined that he is not independent.
Although Mr. Prescott's tenure on the Board will end once his current term expires at the Annual Meeting, the Board nonetheless considered his independence during 2020. Because his employment as our President and CEO ended in 2015 after more than a decade, the Board determined that he should not be considered independent.
Stockholder Communications with Board
Stockholders may communicate directly with theour non-management directors of Align by sending an email to Board@aligntech.com. Our General Counsel monitors theseThese communications and ensures thatare monitored to ensure appropriate summaries of all received messages are provided to the Board at its regularly scheduled meetings. In addition, the Chairman of the Nominating and Governance Committee has access to this email address and may monitor communications at his option. Where the nature of a communication warrants, our General CounselSenior Vice President, Chief Legal and Regulatory Officer may decide to obtain the more immediate attention of the appropriate committee of the Board or a non-management director, or Align’ssenior management or independent advisors. After reviewing stockholder messages, our Board will determine whether anyan appropriate response isif they deem a response necessary or warranted.
Director Compensation
Cash Compensation
In early 2014,Our director compensation program is designed both to attract and fairly compensate highly qualified, non-employee directors to represent and act in the best interests of our stockholders, employees, and the communities we serve. For the purpose of determining non-employee director compensation for 2020, the Compensation Committee requested an updated analysisengaged Compensia to evaluate the competitiveness of our non-employeeprogram. The Compensation Committee considered an overview of the corporate governance environment as well as recent trends and developments relating to director compensation. The Compensation Committee also specifically considered the amounts payable under and the various components of our director compensation policy from Compensia, Inc.,program, as well as the Committee's independentaggregate director compensation advisor. Compensia undertook a detailed reviewcost, in comparison to the boards of recent board compensation trends, includingdirectors of the formsame group of peer companies that the Compensation Committee used in determining senior management compensation. (For further details on our peer group, see the discussion of our "Peer Group" in the Compensation Discussion and amount of cash compensation and equity grants, chairperson retainers and stock ownership guidelines. Compensia also analyzedAnalysis section below). For 2020, the Board's compensation against our compensation peer group. The analysis showed that the Board compensation practices were, in aggregate, generally aligned with market norms and emerging best practices other thanand no changes were made to the provision of per meeting fees. After reviewing the data and analysis prepared by Compensia, theprogram.
Cash Compensation Committee approved, and the Board subsequently ratified, a revised
Our cash compensation program for non-employee director compensation policy. The revised policy, which became effective on July 1, 2014, eliminated per meeting fees which were replaced with the following:directors for fiscal 2020 was: (all amounts paid quarterly in advance)
| | | | | | | | |
Description | | Current Fee |
Annual Retainer for Board Membership (other than Chairman) | | $ | 50,000 | |
Annual Retainer for membership on the Compensation and/or Audit Committee (other than the Chairman) | | $ | 13,500 | |
Annual Retainer for Chair of the Compensation Committee and/or Audit Committee | | $ | 27,000 | |
Annual Retainer for membership on the Nominating and Governance Committee (other than Chairman) and/or Technology Committee | | $ | 5,000 | |
Annual Retainer for the Chair of Nominating and Governance Committee | | $ | 10,000 | |
Annual Retainer for the Chairman of the Board | | $ | 100,000 | |
|
| | | |
Description | Current Fee |
Annual Retainer for Board Membership (other than Chairman) | $ | 50,000 |
|
Annual Retainer for membership on the Compensation and/or Audit Committee | $ | 13,500 |
|
Annual Retainer for Chair of Compensation Committee and/or Audit Committee | $ | 27,000 |
|
Annual Retainer for membership on the Nominating and Governance Committee and/or Technology Committee | $ | 5,000 |
|
Annual Retainer for Chair of Nominating and Governance Committee and/or Technology Committee | $ | 10,000 |
|
Annual Retainer for Chairman of the Board | $ | 210,000 |
|
Equity Compensation. In 2015, we grantedApril 2020, our Compensation Committee approved an annual equity grant of RSUs to our then-current board members (other than Mr. Larkin) having a long term incentive value equivalent to $300,000. For Mr. Larkin's additional responsibilities as the Chairman and each continuing non-employee director,of our Board, the Compensation Committee approved an annual RSU grant of $400,000. The actual number of shares under the RSU awards was calculated using the closing price of our stock on the date of our 2020 annual meeting of stockholders, RSUs with a market value of approximately $450,000 and $325,000, respectively. Onstockholders. Accordingly, on May 13, 2015,20, 2020, each non-employee director was granted 5,500 RSUs.other than Mr. Larkin was granted an additional 2,5001,271 RSUs for his service as Chairmanand Mr. Larkin was granted 1,694 RSUs based on the closing per share price of the Board. These RSUsour stock on that date of $236.02. Each of these RSU awards vest 100% upon the earlier of (i) the one yearone-year anniversary of the grant date andor (ii) the date of the next annual meeting of stockholders following the grant date. Assuming the continued service of theeach non-employee director, each of these equity awards willare expected to vest 100% on May 13, 2016.19, 2021.
Total Compensation. The table below summarizes the compensation paid by to our non-employee directors for the year ended December 31, 2015. Mr. Hogan,2020. As our President and Chief Executive Officer, is not included in this table because he is an employee of Align and, as such, receives noCEO, Mr. Hogan's compensation for his service on the Board. The compensation received by Mr. Hogan is shown in the Summary Compensation Table on page 51.of this proxy statement.
| | | | | | | | | | | | | | | | | | | | |
Name | | Fees Earned or Paid in Cash ($) | | Stock Awards ($) (1) | | Total ($) |
Kevin J. Dallas | | 55,000 | | | 299,981 | | | 354,981 | |
Joseph Lacob | | 65,000 | | | 299,981 | | | 364,981 | |
C. Raymond Larkin, Jr. | | 100,000 | | | 399,818 | | | 499,818 | |
George J. Morrow | | 82,000 | | | 299,981 | | | 381,981 | |
Anne M. Myong | | 63,500 | | | 299,981 | | | 363,481 | |
Thomas M. Prescott | | 55,000 | | | 299,981 | | | 354,981 | |
Andrea L. Saia | | 82,000 | | | 299,981 | | | 381,981 | |
Greg J. Santora | | 90,500 | | | 299,981 | | | 390,481 | |
Susan E. Siegel | | 60,000 | | | 299,981 | | | 359,981 | |
Warren S. Thaler | | 73,500 | | | 299,981 | | | 373,481 | |
(1)The amounts reflect the aggregate grant date fair value computed in accordance with FASB ASC Topic 718 of awards of RSUs. There can be no assurance that the grant date fair value amounts will ever be realized. The RSUs are time based awards and are not subject to performance or market conditions. |
| | | | | | | | | |
Name | Fees earned or paid in cash ($) | | Stock awards ($)(1) | | | Total ($) |
Joseph Lacob | 65,000 |
| | 323,125 |
| | | 388,125 |
|
C. Raymond Larkin Jr. (2) | 210,000 |
| | 452,375 |
| | | 662,375 |
|
George Morrow | 77,000 |
| | 323,125 |
| | | 400,125 |
|
Dr. David Nagel | 73,500 |
| | 323,125 |
| | | 396,625 |
|
Thomas M. Prescott (3) | 30,416 |
| | __ |
| | | __ |
|
Andrea L. Saia | 63,500 |
| | 323,125 |
| | | 386,625 |
|
Greg Santora | 90,500 |
| | 323,125 |
| | | 413,625 |
|
Warren Thaler | 73,500 |
| | 323,125 |
| | | 396,625 |
|
| |
(1)
| The amounts shown in this column reflect the aggregate grant date fair value computed in accordance with FASB ASC Topic 718 of awards of RSUs. There can be no assurance that the grant date fair value amounts will ever be realized. The RSUs are time based awards and are not subject to performance or market conditions. |
| |
(2)
| Mr. Larkin is the Chairman of the Board. |
| |
(3)
| Mr. Prescott retired as our President and CEO in June 2015. As a result, until June 2015, he did not receive compensation for his service on the Board. The cash amounts shown here are for Mr. Prescott's membership on the Board and the Technology Committee commencing in June 2015 and October 2015, respectively. |
The aggregate number of stock awards outstanding at December 31,
20152020 for each non-employee director is as follows:
| | | | | | | | |
Name | | Stock Awards |
Kevin J. Dallas | | 1,271 | |
Joseph Lacob | | 1,271 | |
C. Raymond Larkin, Jr. | | 1,694 | |
George J. Morrow | | 1,271 | |
Anne M. Myong | | 1,271 | |
Thomas M. Prescott | | 1,271 | |
Andrea L. Saia | | 1,271 | |
Greg J. Santora | | 1,271 | |
Susan E. Siegel | | 1,271 | |
Warren S. Thaler | | 1,271 | |
|
| | | | | |
Name | Option Awards | | Stock Awards |
Mr. Lacob | 40,000 |
| | 5,500 |
|
Mr. Larkin | 60,000 |
| | 7,700 |
|
Mr. Morrow | 50,000 |
| | 5,500 |
|
Dr. Nagel | 60,000 |
| | 5,500 |
|
Mr. Prescott (1) | 13,125 |
| | 356,125 |
|
Ms. Saia | — |
| | 9,066 |
|
Mr. Santora | — |
| | 5,500 |
|
Mr. Thaler | — |
| | 5,500 |
|
(1) Mr. Prescott's equity awards were granted to him in during his tenure as our President and CEO.
PROPOSAL TWO
RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS
The Audit Committee of our Board has selected PricewaterhouseCoopers LLP ("PwC"), independent registered public accountants, (“PwC”), to audit the financial statements of Align for the year ending December 31, 2016.2021. In making its recommendation to appoint PwC, as Align’s independent registered public accountants, the Audit Committee has considered whether the provision of the non-audit services rendered by PwC is compatible with maintaining the firm’sfirm's independence.
Representatives of PwC are expected to be present at the Annual Meeting with the opportunity to make a statement if they desire to do so and are expected to be available to respond to appropriate questions.
Although stockholder ratification of the selection of PwC as our independent registered public accountants is not required by our Bylaws or any other applicable law, the Audit Committee is submitting the selection of PwC to the stockholders for ratification as a matter of good corporate practice. If the stockholders fail to ratify the selection, the Audit Committee and the Board will reconsider whether or not to retain that firm.PwC. Even if the selection is ratified, our Audit Committee, at its discretion, may direct the appointment of a different firm to act as our independent registered public accountants at any time during the year if it determines that such a change would be in our best interests and in the best interests of our stockholders. In addition to the selection of the firm the Audit Committee and its chairperson were directly involved in the selection of PwC’s new lead engagement partner.
Ratification of the selection of PwC requires that the holders of a majority of the shares present in person or represented by proxy and entitled to vote at the Annual Meeting vote “For”"FOR" this Proposal 2. An “Abstention”"ABSTAIN" vote will have the same effect as an “Against”"AGAINST" vote in this Proposal 2. Discretionary votes by brokers, banks and related agents on this routine proposal will be counted towards the quorum requirement and will affect the outcome of the vote.
OUR BOARD RECOMMENDS THAT YOU VOTE “FOR”"FOR" THE RATIFICATION OF THE SELECTION OF PRICEWATERHOUSECOOPERS LLP AS ALIGN’SOUR INDEPENDENT
REGISTERED PUBLIC ACCOUNTANTS FOR THE YEAR ENDING DECEMBER 31, 20162021
Fees to PricewaterhouseCoopers LLP for 20152020 and 20142019
The following table presents fees for professional services rendered by PwC for the audit of Align’sour annual financial statements for 20152020 and 20142019 and fees billed for audit-related services and tax services rendered by PwC for fiscal 20152020 and 2014:2019:
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| 2020 | | 2019 |
Audit fees (1) | $ | 5,365,206 | | | $ | 4,251,382 | |
Audit-related fees (2) | — | | | — | |
Tax fees (3) | 976,064 | | | 1,901,185 | |
All other fees (4) | 10,255 | | | 8,330 | |
Total fees | $ | 6,351,525 | | | $ | 6,160,897 | |
(1)Audit fees — These are fees for professional services performed for the annual audit of our financial statements and review of financial statements included in our quarterly filings, and services that are normally provided in connection with statutory and regulatory filings or engagements, and attest services, except those not required by statute or regulation. This category also includes advice on accounting matters that arose during, or as a result of, the audit or the review of interim financial statements.
(2)Audit-related fees — These are fees related to assurance and related services.
(3)Tax fees — These are fees for professional services performed with respect to tax compliance, tax advice and tax planning.
(4)All other fees — These consist of all other fees billed to us for professional services performed and not reported under "Audit fees," "Audit-related fees" and "Tax fees."
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| 2015 | | 2014 |
Audit fees (1) | $ | 2,407,019 |
| | $ | 2,298,528 |
|
Audit-related fees (2) | 275,557 |
| | 147,443 |
|
Tax fees (3) | 1,091,285 |
| | 778,159 |
|
All other fees (4) | 10,650 |
| | 6,150 |
|
Total fees: | $ | 3,784,511 |
| | $ | 3,230,280 |
|
| |
(1)
| Audit fees — These are fees for professional services performed by PwC for the annual audit of Align’s financial statements and review of financial statements included in Align’s quarterly filings, and services that are normally provided in connection with statutory and regulatory filings or engagements, and attest services, except those not required by statute or regulation.
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| |
(2)
| Audit-related fees — These are fees for technical advisory consultations performed by PwC that are reasonably related to the performance of the audit or review of Align’s financial statements and are not reported under “Audit fees”, including fees for due diligence services and pre-implementation assessment of controls relating to enterprise resource planning ("ERP") software system.
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| |
(3)
| Tax fees — These are fees for professional services performed by PwC with respect to tax compliance, tax advice and tax planning.
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(4)
| All other fees — These consist of all other fees billed to us for professional services performed by PwC and not reported under "Audit fees," "Audit-related fees" and "Tax fees."
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Audit Committee’sCommittee's Policy of Pre-Approval of Audit and Permissible Non-Audit Services
The Audit Committee’sCommittee's policy is to pre-approve all audit and permissible non-audit services provided by the independent registered public accountants subject to limited discretionary authority granted to our Chief Financial Officer. These services may include audit services, audit-related services, tax services and other services. Pre-approval is detailed as to the particular service or category of services and is generally subject to a specific budget. The independent registered public accountants and management are required to periodically report to the Audit Committee regarding the extent of services provided by the independent registered public accountants in accordance with this pre-approval and the fees for the services performed to date. All PwC services in 20152020 and 20142019 were pre-approved by the Audit Committee.
REPORT OF THE AUDIT COMMITTEE OF THE BOARD
The following is the report of the Audit Committee of the Board of Directors with respect to Align’sAlign's audited financial statements for the year ended December 31, 2015,2020, which include the consolidated balance sheets of Align as of December 31, 20152020 and 2014,2019, and the related consolidated statements of operations, stockholders’stockholders' equity and cash flows for each of the three years ended December 31, 2015,2020, 2019 and 2018 and the notes thereto.
The Audit Committee of the Board of Directors of Align is comprised entirely of independent directors who meet the independence requirements of the Listing Rules of the NASDAQ Stock Market and the SEC. In accordance with the written charter adopted by the Board of Directors of Align, the purpose of the Audit Committee is to assist the Board of Directors in its oversight and monitoring of:of among other things:
•the integrity of Align’sAlign's financial statements;
Align’s•Align's compliance with legal and regulatory requirements;
•the independent registered public accountant’saccountant's qualifications, independence and performance;
•the adequacy of Align’sAlign's internal accounting and financial controls; and
Align’s•Align's internal audit department.
The full text of the Audit Committee’sCommittee's charter is available on the Investor Relations section of Align’sAlign's website (www.aligntech.com)(www.aligntech.com). The Audit Committee regularly reviews its charter to ensure that it is meeting all relevant audit committee policy requirements of the SEC and the NASDAQ listing standards.
In carrying out its responsibilities, the Audit Committee, among other things, is responsible for:
•providing guidance with respect to Align’sAlign's relationship with the independent auditors, including having responsibility for their appointment, compensation and retention;
involved in•providing guidance with respect to the selection of the audit firm'sfirm’s lead engagement partner;
•reviewing the results and audit scope;
•approving audit and non-audit services;
•reviewing and discussing with management the quarterly and annual financial reports;
•overseeing and reviewing Align’sAlign's enterprise risk, management policies;privacy and data security; and
•overseeing management’smanagement's implementation and maintenance of effective systems of internal controls.
Before selecting PricewaterhouseCoopers LLP as Align’s independent auditors, the
The Audit Committee carefully considered PricewaterhouseCoopers LLP’srecognizes the importance of maintaining the independence of Align's independent accountants. Each year, the Committee evaluates the qualifications, asperformance and independence of Align's independent accountants and determines whether to re-engage the current independent accountants. This included a review of the qualifications of the engagement team, the quality control procedures the firm has established, as well as its reputation for integrity and competence in the fields of accounting and auditing. The Audit Committee’s review also included matters to be considered under the SEC’s rules regarding auditor independence, including the nature and extent of non-audit services, to ensure that the accountants’ independence will not be impaired. In addition,Based on this evaluation, the Audit Committee has received the written disclosures and the letter required from theretained PwC as Align's independent accountants for 2021.
The Audit Committee has reviewed and discussed the audited financial statements for the year ended December 31, 2020 with Align’s management and PwC. The Audit Committee has also discussed with PwC the matters required to be discussed by Auditing Standard No. 1301, "Communications with Audit Committees" issued by the Public Company Accounting Oversight Board ("PCAOB").
The Audit Committee also has received and reviewed the written disclosures and the letter from PwC required by applicable requirements of the PCAOB regarding the independent accountant’sPwC's communications with the audit committeeAudit Committee concerning independence, and has discussed with PwC its independence. The Audit Committee of our Board of Directors has determinedconcluded that the provision of services by PricewaterhouseCoopers LLPPwC of non-audit related services is compatible with maintaining the independence of PricewaterhouseCoopers LLPPwC as our independent accountants.
In performing its responsibilities, the Audit Committee has reviewed and discussed with management and the independent auditors the audited consolidated financial statements in Align's Annual Report on Form 10-K for the year ended December 31, 2015. The Audit Committee has also discussed with the independent accountants the matters required to be discussed by Statement on Auditing Standards No. 61 as amended (AICPA, Professional Standards, Vol. 1, AU section 380), as adopted by the Public Company Accounting Oversight Board in Rule 3200T.
Based upon this review and discussionsthe Audit Committee's discussion with management and the independent accountants and the Audit Committee’sCommittee's review of the representations of management and the report of the independent accountants to the Audit Committee, the Audit Committee recommended that the Board of Directors include Align’sAlign's audited consolidated financial statements in Align’sAlign's Annual Report on Form 10-K for the year ended December 31, 20152020 for filing with the SEC.
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Respectfully submitted by: |
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AUDIT COMMITTEE | |
Greg J. Santora, Chair |
Andrea L. Saia |
Anne M. Myong | Warren S. Thaler |
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PROPOSAL THREE
ADVISORY VOTEAPPROVAL OF THE AMENDMENT TO APPROVETHE
AMENDED AND RESTATED BYLAWS TO DESIGNATE THE COMPENSATIONEXCLUSIVE FORUM FOR THE ADJUDICATION OF OUR NAMED EXECUTIVE OFFICERSCERTAIN LEGAL MATTERS
Our Board has unanimously declared advisable, adopted and recommends that stockholders approve, an amendment to our Amended and Restated Bylaws (the "Amendment") designating the exclusive forums in which certain claims against us may be brought. The Amendment provides (i) the federal district courts of the United States shall serve as the exclusive jurisdiction for any litigation arising under the Securities Act of 1933, as amended (the "Securities Act"), unless we consent to an alternative forum, and (ii) the Court of Chancery in the state of Delaware (or, if and only if the Court of Chancery of the State of Delaware does not have jurisdiction, another State court in Delaware or, if and only if all such State courts do not have jurisdiction, the federal district court for the District of Delaware) will be the exclusive forum for certain actions involving Align unless we consent to an alternative forum. Specifically, the Court of Chancery would be the exclusive forum for (a) derivative actions or proceedings brought on behalf of Align; (b) any action or proceeding asserting a claim of breach of a fiduciary duty owed by, or other wrongdoing by, any director, officer, stockholder, employee or agent of Align to Align or our stockholders; (c) any action or proceeding asserting a claim arising pursuant to, or seeking to enforce any right, obligation or remedy under, any provision of the Delaware General Corporation Law ("DGCL"), our Certificate of Incorporation or Bylaws (as each may be amended from time to time) (the "Incorporation Documents") (d) any action or proceeding as to which the DGCL confers jurisdiction on the Court of Chancery of the State of Delaware; (e) any action to interpret, apply, enforce or determine the validity of the Incorporation Documents; or (f) any action or proceeding asserting a claim governed by the internal affairs doctrine.The Amendment also clarifies that the provision does not affect suits brought to enforce a duty or liability created by the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or any other claim for which the federal courts have exclusive jurisdiction. The description of the Amendment is qualified in its entirety by the full text of the amendment attached to this Proxy Statement as Appendix A.
As more fully described in this Proposal Three, we believe that the Amendment will reduce the risk that we could become subject to duplicative litigation in multiple forums, as well as the risk that the outcome of cases in multiple forums could be inconsistent, even though each forum purports to follow Delaware law or federal securities law. Any of these outcomes could expose us to increased expenses or losses.
Reasons for the Proposal
By designating the forums in which certain claims can be brought, we intend to promote the efficient resolution of such claims and avoid duplicative lawsuits being brought in multiple jurisdictions. Since 2018, we have been subject to seven purported stockholder derivative actions in the state and district courts of California and in the district court in New York. While the New York action was eventually transferred to the California district court, these actions demonstrate that we have experienced the litigation of similar or identical claims in multiple jurisdictions, as well as the substantial cost and management distraction related to their defense. In addition, while we have always been a Delaware corporation, we recently moved our headquarters from California to Arizona. In light of the fact that we are no longer headquartered in California, the Board believes that it is prudent to adopt the Amendment to protect us and our stockholders from the potential for future harm from costs associated with the tendency of the plaintiffs' bar to file claims in multiple jurisdictions and in jurisdictions or venues the plaintiffs' bar may deem more convenient or view as more favorable for them rather than consistent and predictable for us and our stockholders overall.
Further, the ability for plaintiffs to litigate claims governed by Delaware law in state courts outside the State of Delaware may mean that claims are brought in jurisdictions which do not apply Delaware law in the same manner as the Court of Chancery of the State of Delaware. Even if such jurisdictions sought to apply Delaware law in a manner consistent with the courts of the State of Delaware, the outcomes of those cases and cases brought in other forums could be inconsistent with each other and with the manner in which the Delaware courts would decide such cases. In addition, the Board considered the fact that the Delaware courts are widely regarded as the leading courts for the determination of corporate law disputes in terms of precedent, experience and focus. The specialized Delaware Court of Chancery's considerable expertise has led to the development of a substantial and influential body of case law interpreting the DGCL. We expect this will provide us and our stockholders with more consistency and predictability regarding the outcome of corporate disputes, which can minimize the time, cost and uncertainty of litigation for all parties.
Further, the Board believes that designating the federal district courts of the United States as the exclusive forum for claims brought under the Securities Act promotes many of the same benefits to us and our stockholders as discussed above.
In reaching its conclusion to recommend that stockholders approve the Amendment, the Board considered that the exclusive forum provisions contemplated by the Amendment may in some instances impose additional litigation costs on plaintiffs in pursuing certain claims, particularly if a plaintiff does not reside in or near the State of Delaware. The Board also weighed the possibility that an exclusive forum provision may limit a plaintiff's ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which such plaintiffs may claim limits their ability to enforce certain rights. The Board believes that the benefits of the Amendment to us and our stockholders far outweigh these potential drawbacks.
Further, some plaintiffs might prefer to litigate claims under the Securities Act in a state court because it may be more convenient or viewed as being more favorable to them, or for other reasons. Again, the Board believes that the substantial benefits to us and our stockholders as a whole from designating the federal district courts of the United States as the exclusive forum for litigation arising under the Securities Act outweigh these concerns.
While the Delaware Supreme Court ruled in March 2020 that federal forum selection provisions requiring claims under the Securities Act be brought in federal court are "facially valid" under the DGCL, there is uncertainty as to whether courts in other jurisdictions will enforce provisions such as those contemplated in the Amendment, including whether a court would enforce the provision requiring claims arising under the Securities Act to be brought in the federal district courts of the United States. If the exclusive forum provision contemplated by the Amendment is found to be unenforceable in a particular action, we may incur additional costs associated with resolving such an annual advisory voteaction or the validity of the exclusive forum provision on appeal. Conversely, the provision contemplated by the Amendment might impose additional litigation costs on stockholders who assert that the provision is not enforceable or is invalid. The Delaware courts or federal district courts of the United States may also reach different judgments or results than would other courts, including courts where a stockholder considering an action may be located or would otherwise choose to approvebring the compensationaction, and such judgments may be more or less favorable to us than to our stockholders.
Vote Required
Approval of the Amendment requires that the holders of at least 66-2/3% of the outstanding shares of our named executive officers allows our stockholders to provide us with their direct input on our compensation philosophy, policies and practices as disclosed in the proxy statement every year, and is consistent with our policy of seeking input from, and engaging in discussions with, our stockholders on these matters. Accordingly, this year, we are again requesting you approve, on an advisory basis, the compensation of our named executive officers disclosed in "Compensation Discussion and Analysis," the Summary Compensation table and the related compensation tables, notes, and narrative in this proxy statement.
As we discuss below under the caption “Executive Compensation—Compensation Discussion and Analysis,” our executive compensation program is designed to link the actions of our executive officers to business outcomes that drive value for our stockholders. We believe that the most effective way to achieve this goal is to compensate our executive officers for the achievement of specific annual financial goals, certain annual and longer-term key strategic objectives, and the realization of increased stockholder value. We believe the compensation program for our executive officers has been highly effective in achieving these objectives. Align, on a year-over-year basis, grew revenues 11% and delivered operating margins of 22.3%, despite the negative impact of foreign exchange and our Additional Aligner policy adopted during the year. Strong Invisalign case volume growth of 22.0% year over year offset much of these headwinds and enabled us to achieve revenue growth and operating margins above our original forecast. We encourage you to carefully review the “Compensation Discussion and Analysis” beginning on page 37 of this proxy statement and the compensation tables that follow for additional details on Align’s executive compensation, including Align’s compensation philosophy and objectives, as well as the processes our Compensation Committee used to determine the structure and amounts of the compensation of our named executive officers in fiscal 2015.
The following highlights key aspects of executive compensation with respect to our named executive officers in fiscal 2015:
Approximately 80% - 85% of their target total direct compensation opportunity is variable and tied to achievement of internal performance targets or Align'svoting stock price performance;
Since Align’s achievement of internal financial performance targets was slightly above target in 2015 compared to below target in 2014, each named executive officer received a greater cash incentive award compared to fiscal 2014;
Granted long-term equity awards, including performance-based market stock units, which are earned based on a comparison of Align’s stock price performance to the NASDAQ Composite index over a three-year performance period;
All of our post-employment cash compensation arrangements in the event of a change in control of Align are "double trigger" arrangements that require both a change in control plus a qualifying termination of employment before any cash payments are made.
Previously, our former CEO had a "single trigger" pursuant to which 100% of his equity would vest immediately upon a change of control of Align. With the hiring of Mr. Hogan, however, we eliminated this 100% vesting for the CEO, and Mr. Hogan's employment agreement contains a single trigger provision equivalent to the protection given to our other NEOs whereby the vesting of equity awards is accelerated only by one year immediately upon a change of control.
Executive officers are not entitled to any tax gross-up treatment on any severance or change-of-control benefits;
Align’s compensation programs are reviewed regularly by the Compensation Committee, which has determined the Company’s compensation programs do not create inappropriate or excessive risk that is likely to have a material adverse effect on the Company; and
Align continued to demonstrate its prudent use of equity while balancing stockholder concerns with the motivation of our executive officers to achieve the Company’s business goals and create long-term stockholder value. In 2015, Align’s overall equity award adjusted burn rate (which counts each RSU and earned MSU award as 2.5 shares) was 3.5%.
We are asking you to indicate your support for the compensation of our named executive officers as described in this proxy statement. 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 you to vote, on an advisory basis, “For” the following resolution at the Annual Meeting:Meeting vote "FOR" this Proposal Three. An abstention vote or a broker non-vote will have the same effect as an "Against" vote in this Proposal Three.
“RESOLVED, that the compensation paid to Align Technology, Inc.’s named executive officers, as disclosed pursuant to the SEC’s compensation disclosure rules, including the Compensation Discussion and Analysis, compensation tables and narrative discussion set forth on pages 37 to 49 of this Proxy Statement, is hereby approved.”
This is an advisory vote, which means that this proposal is not binding on us; however, our Board and Compensation Committee values the opinions expressed by our stockholders and will carefully consider the outcome of the vote when making future compensation decisions for our executive officers. You may vote for, against or abstain from voting on this matter.
OUR BOARD UNANIMOUSLY RECOMMENDS THAT YOU VOTE “FOR”"FOR" THE APPROVAL OF THE COMPENSATIONAMENDMENT TO OUR AMENDED AND RESTATED BYLAWS TO DESIGNATE THE EXCLUSIVE FORUM FOR THE ADJUDICATION OF OUR NAMED EXECUTIVE OFFICERS AS DISCLOSED IN THIS PROXY STATEMENT.CERTAIN LEGAL MATTERS
PROPOSAL FOUR
AMENDMENT OF ARTICLE V OF OUR AMENDED AND RESTATED CERTIFICATE OF INCORPORATION TO ELIMINATE THE “FOR CAUSE” REQUIREMENT FOR STOCKHOLDER REMOVAL OF A DIRECTOR
A Delaware court recently confirmed that a provision in a Delaware company’s organizational documents that provides that a director may only be removed “for cause” by the stockholders is not valid if the company has a nonclassified board of directors. As a result of this ruling, our Board reconsidered one of the provisions of Article V of our Amended and Restated Certificate of Incorporation relating to the removal of a director by the stockholders and determined that it is necessary to amend such provision to conform with the Delaware court’s ruling. Our Board has approved, and recommends that our stockholders approve, an amendment to Article V of our Amended and Restated Certificate of Incorporation to eliminate the “for cause” requirement prescribed by Article V for stockholder removal of a director. Article V currently provides that stockholders may remove a director only “for cause” and requires that the removal be approved by the affirmative vote of holders of at least 66 2/3% of our outstanding voting stock entitled to vote at the Annual Meeting.
Provisions of Article V Regarding Stockholder Removal of a Director
The final paragraph of Article V imposes two requirements that must be satisfied for stockholders to remove a director:
the director may be removed only by the affirmative vote of the holders of at least 66 2/3% of our outstanding voting stock entitled to vote at the Annual Meeting; and
the director may be removed only “for cause.”
Text of Article V as Proposed to be Amended by this Proposal Four
If stockholders approve this Proposal Four, but not Proposal Five (which proposes to eliminate the supermajority vote requirement for stockholder removal of a director), the final paragraph of Article V will be amended to read in its entirety as follows:
“Vacancies occurring on the Board of Directors for any reason may be filled by vote of a majority of the remaining members of the Board of Directors, even if less than a quorum, at any meeting of the Board of Directors. A person so elected by the Board of Directors to fill a vacancy shall hold office for the remainder of the full term of the director for which the vacancy was created or occurred and until such director's successor shall have been duly elected and qualified. A director or the entire Board of Directors may be removed from office at any time by the affirmative vote of 66 2/3% of the outstanding shares of voting stock of the Corporation entitled to vote at an election of directors.”
Effect of this Article V Amendment
If stockholders approve this Proposal Four, Article V will be amended to eliminate the “for cause” requirement currently applicable to any stockholder action to remove a director. Upon the effectiveness of this Article V amendment, a director will be subject to removal by stockholders:
by the affirmative vote of the holders of at least 66 2/3% of our outstanding voting stock entitled to vote at the Annual Meeting; and
such removal may be with or without cause, in accordance with the provisions of the Delaware General Corporate Law.
Text of Article V as Proposed to be Amended by this Proposal Four and Proposal Five
If stockholders approve this Proposal Four and Proposal Five, the final paragraph of Article V will be amended by both Article V amendments to read in its entirety as follows:
“Vacancies occurring on the Board of Directors for any reason may be filled by vote of a majority of the remaining members of the Board of Directors, even if less than a quorum, at any meeting of the Board of Directors. A person so elected by the Board of Directors to fill a vacancy shall hold office for the remainder of the full term of the director for which the vacancy was created or occurred and until such director's successor shall have been duly elected and qualified. A director or the entire Board of Directors may be removed from office at any time by the affirmative vote of a majority of the outstanding shares of voting stock of the Corporation entitled to vote at an election of directors.”
Effect of both Article V Amendments under Proposal Four and Proposal Five
If stockholders approve this Proposal Four, Article V will be amended to eliminate the “for cause” requirement and, if stockholders also approve Proposal Five, the final paragraph of Article V will be further amended to eliminate the supermajority vote requirement currently applicable to any stockholder action to remove a director. Upon the effectiveness of both of these amendments, a director will be subject to removal by stockholders:
by the affirmative vote of the holders of a majority of our outstanding voting stock entitled to vote at the Annual Meeting; and
such removal may be with or without cause, in accordance with the provisions of the Delaware General Corporation Law.
Article V if this Proposal Four is not Approved but Proposal Five is Approved
If this Proposal Four is not approved by the stockholders, the current “for cause” requirement described above will remain in place and will continue to require that directors may be removed by stockholders only “for cause,” as described above. However, because Proposal Five is not subject to the approval of this Proposal Four, if Proposal Five is approved by the stockholders, stockholder removal of a director will no longer require that the removal be by the vote of the holders of 66 2/3% of the voting power of our outstanding shares of voting stock, as provided in our current Amended and Restated Certificate of Incorporation, and will instead only require the vote of the holders of a majority of the voting power of our outstanding shares of voting stock.
Vote Required to Approve this Proposal Four
Approval of the amendment of Article V of our Amended and Restated Certificate of Incorporation to eliminate the “for cause” requirement for stockholder removal of a director requires that the holders of at least 66-2/3% of our outstanding voting stock entitled to vote at the Annual Meeting vote “FOR” this Proposal Four. An abstention vote will have the same effect as an “Against” vote in this Proposal Four.
Stockholder approval of this Proposal Four is not conditioned on stockholder approval of Proposal Five.
OUR BOARD RECOMMENDS THAT YOU VOTE “FOR” THE APPROVAL OF THE AMENDMENT OF ARTICLE V OF OUR AMENDED AND RESTATED CERTIFICATE OF INCORPRATION TO ELIMINATE THE “FOR CAUSE” REQUIREMENT FOR STOCKHOLDER REMOVAL OF A DIRECTOR
PROPOSAL FIVE
AMENDMENT TO OUR AMENDED AND RESTATED CERTIFICATE OF INCORPORATION TO ELIMINATE THE SUPER MAJORITY VOTE REQUIREMENT FOR STOCKHOLDER REMOVAL OF A DIRECTOR
Our Board has approved, and recommends that our stockholders approve, an amendment to Article V of our Amended and Restated Certificate of Incorporation to eliminate the supermajority stockholder vote requirement for stockholder removal of a director. Article V currently requires the affirmative vote of holders of at least 66 2/3% of our outstanding voting stock entitled to vote at the Annual Meeting to remove a director, and provides that stockholders may remove a director only “for cause.”
Provisions of Article V Regarding Stockholder Removal of a Director
Article V imposes two requirements that must be satisfied for stockholders to remove a director:
the director may be removed only by the affirmative vote of the holders of at least 66 2/3% of our outstanding voting stock entitled to vote at the Annual Meeting; and
the director may be removed only “for cause.”
Text of Article V as Proposed to be Amended by this Proposal Five and Proposal Four
If stockholders approve this Proposal Five and Proposal Four, the final paragraph of Article V will be amended to read in its entirety as follows:
“Vacancies occurring on the Board of Directors for any reason may be filled by vote of a majority of the remaining members of the Board of Directors, even if less than a quorum, at any meeting of the Board of Directors. A person so elected by the Board of Directors to fill a vacancy shall hold office for the remainder of the full term of the director for which the vacancy was created or occurred and until such director's successor shall have been duly elected and qualified. A director or the entire Board of Directors may be removed from office at any time by the affirmative vote of a majority of the outstanding shares of voting stock of the Corporation entitled to vote at an election of directors.”
Effect of Article V Amendments under this Proposal Five and Proposal Four
If stockholders approve this Proposal Five and Proposal Four, the final paragraph of Article V will be amended to eliminate the supermajority vote requirement and will be further amended to eliminate the “for cause” requirement currently applicable to any stockholder action to remove a director. Upon the effectiveness of both of these amendments, a director will be subject to removal by stockholders:
if the number of votes cast in favor of the director’s removal exceed the number of votes cast against the director’s removal; and
such removal may be with or without cause, in accordance with the provisions of the Delaware General Corporation Law.
Article V if this Proposal Five is not Approved but Proposal Four is Approved
If this Proposal Five is not approved by the stockholders, the current supermajority vote requirement described above will remain in place and removal of a director by the stockholders will continue to require the vote of the holders of 66 2/3% of the voting power of our outstanding shares of voting stock entitled to vote at the Annual Meeting, as provided in our current Amended and Restated Certificate of Incorporation. In addition, if this Proposal Five is not approved and Proposal Four is approved, the “for cause” requirement applicable to stockholder removal of a director, as described above, will be eliminated.
Vote Required to Approve this Proposal Five
Approval of the amendment of Article V of our Amended and Restated Certificate of Incorporation to eliminate the supermajority stockholder vote requirement for stockholder removal of a director requires that the holders of at least 66-2/3% of our outstanding voting stock entitled to vote at the Annual Meeting vote “FOR” this Proposal Five. An abstention vote will have the same effect as an “Against” vote in this Proposal Five.
OUR BOARD RECOMMENDS THAT YOU VOTE “FOR” THE APPROVAL OF THE AMENDMENT OF ARTICLE V OF OUR AMENDED AND RESTATED CERTIFICATE OF INCORPRATION TO ELIMINATE SUPERMAJORITY VOTE REQUIREMENT FOR STOCKHOLDER REMOVAL OF A DIRECTOR
PROPOSAL SIX
APPROVAL OF AN AMENDMENT AND RESTATEMENT OF THE
THE ALIGN TECHNOLOGY, INC. 2005 INCENTIVE2010 EMPLOYEE STOCK PURCHASE PLAN
Our 2005 Incentive Plan, as amended and restated (the “Incentive Plan”), which was most recently amended and restated and approved by
The stockholders at our 2013 Annual Meeting of Stockholders, allows Alignare being asked to grant stock options, restricted stock, restricted stock units, performance shares, performance units, stock appreciation rights and other stock-based and cash incentives to employees and consultants of Align and its affiliates and to members of our Board. On March 16, 2016, our Board approvedapprove an amendment and restatement of the Incentiveour 2010 Employee Stock Purchase Plan (the “Amendment”"ESPP"), subject. The amendment and restatement of the ESPP is being submitted for the approval of our stockholders in order to stockholder approval. The Amendment provides:
An increase by 4,500,000 shares in the number of shares authorizedof our common stock available for issuance under the Incentive Plan,ESPP by 2,000,000 shares, from 25,668,8952,400,000 shares to 30,168,8954,400,000 shares. As of March 31, 2021, 253,444 shares of the original 2,400,000 share pool remain available for issuance under the ESPP. If the amendment and restatement of the ESPP is approved by our stockholders, the additional 2,000,000 shares would increase the total number of shares remaining available for future issuance under the ESPP to approximately 2,253,444 shares.
An additional restriction
The amendment and restatement of the ESPP was approved by the Board on the grants that non-employee directors may receive in any fiscal year, such that no non-employee directors mayMarch 24, 2021, and will not be granted in any fiscal year of Align, awards exceeding the lesser of (i) awards covering 100,000 shares or (ii) awards with a grant date fair value of greater than $1,000,000.
Restrictions on the vesting of awards under the Incentive Plan, such that no portion of an award will vest earlier than the 1-year anniversary of the grant date although up to 5% of the shares reserved in the 2015 Plan may be granted without this minimum vesting requirement.
Flexibility for the administrator to subject awards to forfeiture or recoupment provisions,effective unless and requires (i) awards be subject to recoupment under a company clawback policy and (ii) a participant to reimburse us for any payment in settlement of an award where the participant has engaged in or failed to prevent certain misconduct.
The Incentive Plan has not been materially amended with respect to any other terms or provisions. To the extentuntil it is approved by our stockholders. If our stockholders do not approve this Proposal Six, the Incentive Planamendment and restatement of the ESPP, the amendment and restatement will not take effect, but we may continue as ifto grant rights to purchase shares under the ESPP in accordance with the current terms and conditions of the ESPP. The Board has determined that it is in the best interests of us and our stockholders that the amendment and restatement of the ESPP be approved and is asking our stockholders for their approval of the amendment and restatement of the ESPP.
Summary of the Amendment did not apply and Restatement of the ESPP
The following is a summary of the principal features of the ESPP, as amended and restated, and its operation. The summary is qualified in its entirety by reference to the ESPP, as amended and restated, as set forth in Appendix B.
General. The ESPP was notoriginally adopted by the Board.Board in March 2010 and approved by our stockholders on May 20, 2010. The amended and restated ESPP was approved by the Board on March 24, 2021 and will not be effective unless and until approved by our stockholders. The purpose of the ESPP is to provide a means by which our employees and those of our designated subsidiaries may be given an opportunity to purchase our common stock.
The Incentive Plan is designed to allow Align to deduct in full
Shares Available for federal income tax purposes the compensation recognized by its executive officers in connection with certain awards grantedIssuance. If our stockholders approve this proposal, a total of 4,400,000 shares will be reserved for issuance under the Incentive Plan.ESPP. We expect that the number of shares reserved for issuance under the ESPP will last for approximately 11 years.
Components. The ESPP includes two components. One component of the ESPP (the "423 Component") is intended to qualify as an "employee stock purchase plan" under Code Section 162(m) (“Section 162(m)”)423 of the Internal Revenue Code of 1986, as amended (the “Code”"Code"), generally denies a corporate tax deduction for annual compensation exceeding $1 million paid to. The second component of the chief executive officer and other “covered employees,” as determined under Section 162(m) and applicable guidance. However, certain types of compensation, including performance-based compensation, are generally excluded from this deductibility limit. To enable compensation in connection with stock options, stock appreciation rights and certain restricted stock awards, restricted stock units, performance shares, performance units, and other stock and cash incentives awarded under the Incentive PlanESPP is not intended to qualify as “performance-based” within the meaning ofan "employee stock purchase plan" under Code Section 162(m), the Incentive Plan limits the sizes of such awards as further described below. By approving the Amendment, stockholders will be approving, among other things, eligibility requirements for participation in the Incentive Plan, performance measures upon which specific performance goals applicable to certain awards would be based, which are the same as those currently used in the Incentive Plan, limits on the number of shares or compensation that could be made to participants, and other material terms of the Incentive Plan and awards423 (the "Non-423 Component"). The options granted under the Incentive Plan. NotwithstandingNon-423 Component are granted pursuant to rules, procedures or sub-plans adopted by the foregoing, Align retains the abilityBoard designed to grant equity awards under the Incentive Plan that do not qualify as “performance-based” compensation within the meaning of Section 162(m).
Reasons Why You Should Vote to Approve the Amendment
Long-Term Stock Ownership is a Key Component of our Compensation Objective. Our overall compensation objective is to compensate our executives andachieve tax, securities laws or other employees in a manner that attracts and retains the caliber of individuals needed to manage and staff our business in a competitive industry. Our employees are our most valuable asset, and we strive to provide them with compensation packages that are not only competitive but also that reward personal performance, help meet our retention needs and incentivize them to manage our business as owners, thereby aligning their interests with those of our stockholders.
To achieve these objectives we historically have provided a significant portion of our key employees’ total compensation in the form of equity awards through our equity incentive programs, the value of which depends on our stock performance. Our goal is for equity awards to continue to represent a significant portion of our employees’ total compensation. We believe this approach helps to encourage long-term focus and commitment from oureligible employees and provides Align with an important retention tool for key employees, as awards generally are subject to vesting over an extended period of time subject to continued service with us. In addition, we believe we must continue to use equity awards to help attract, retain and motivate employees and other service providers to continue to grow our business and ultimately increase stockholder value as we compete for a limited pool of talented people and face challenges in hiring and retaining such talent.
Reserving Shares Available for Granting Equity Awards is Important for Meeting our Future Compensation Needs. A significant portion of the compensation for our senior officers is in the form of equity compensation. In addition, approximately
801 of our regular, full-time employees hold outstanding equity awards as of March 1, 2016. If the Amendment is approved, we expect that the share reserve increase will allow us to continue to grant stock-based compensation at levels we deem appropriate for at least the next 3 years, and that we will not have to restructure our existing compensation programs for reasons that are not directly related to the achievement of our business objectives. To remain competitive without stock-based compensation arrangements, it likely will be necessary to replace components of compensation previously awarded in equity with cash. We do not believe increasing cash compensation to make up for any shortfall in equity compensation would be practical or advisable, because we believe that a combination of equity awards and cash compensation provide a more effective compensation strategy than cash alone for attracting, retaining and motivating our employees long-term and aligning employees’ and stockholders’ interests. In addition, any significant increase in cash compensation in lieu of equity awards could substantially increase our operating expenses and reduce our cash flow from operations, which could adversely affect our business results and could adversely affect our business strategy, including using cash flow for research and development of innovative new products, and improvements in the quality and performance of existing products.
We Manage Our Equity Incentive Program Carefully. We manage our long-term stockholder dilution by limiting the number of equity awards granted for each of our fiscal years and granting what we believe to be the appropriate number of equity awards needed to attract, reward and retain employees.
Overhang
Administration. . As of March 1, 2016, Align had outstanding under the Incentive Plan stock options covering 467,880 shares and 2,542,151 unvested restricted stock units (including market-performance based restricted stock units assuming maximum levels of achievement). Accordingly, the approximately 3,010,031 shares subject to currently outstanding awards (commonly referred to as the “overhang”) represent approximately 3.8% of our outstanding shares of common stock. Subject to approval by our stockholders, the overhang resulting from the number of shares requested under the AmendmentThe ESPP will be approximately 12.5% (which includes currently outstanding stock awards, plus shares available grant under our current available pool and the proposed pool).
Under the heading “Equity Compensation Plan Information” on page 36 as required by Securities and Exchange Commission rules, we provide information about shares of our common stock that may be issued under our equity compensation plans as of December, 31, 2015. To facilitate the approval of this Amendment, set forth below is certain additional information. As of March 1, 2016:
80,167,047 shares of our common stock were outstanding.
The market value of one share of our common stock was $67.86.
The number of shares remaining available for future grants, under the Incentive Plan was 3,484,132.
The weighted average exercise price of all outstanding stock options was $15.37.
The weighted average remaining contractual term for all outstanding stock options was 1.94 years.
467,880 Options outstanding.
2,542,151 RSU and MSU (assuming maximum levels of achievement) outstanding.
Historical Burn Rate. We look at the rate at which we grant awards under our equity incentive programs (also known as our “burn rate”) by measuring the number of shares subject to equity awards granted in a fiscal year divided by the weighted average equivalent of shares of common stock outstanding for that fiscal year. Our 3-year average adjusted burn-rate for the Incentive Plan is 4.0% (adjusted so that each full-value award is counted as two and one half shares of stock) is below the burn rate benchmark published by Institutional Shareholder Services Inc. (“ISS”), a leading proxy advisory service, for companies in our industry.
Anticipated Forfeitures. We currently forecast granting awards covering approximately 6,500,000 shares over the next 3 year period (calculated using a fungible ratio of 1.9 in accordance with the terms of the Plan), which is equal to 8.1% of our common shares outstanding as of March 1, 2016. We also anticipate cancellation of options and forfeitures of restricted stock unit awards of approximately 850,000 shares over this period (calculated using a fungible ratio of 1.9), based on our historic rates. If our expectation for cancellations is accurate, our net grants (grants less cancellations) over the next 3 year period would be approximately 5,650,000 shares (calculated using a fungible ratio of 1.9), or approximately 7% of our common stock outstanding as of March 1, 2016. The proposed share reserve under the Amendment would increase the number of available shares under the Incentive Plan from 3,484,132 to 7,984,132. If the Amendment is approved our stockholders, we expect that this increase to the share reserve would meet our equity compensation needs for approximately the next 3 years.
We Strive to use Compensation and Governance Best Practices. The new 1-year minimum vesting and forfeiture provisions above will add to the already existing compensation and governance best practices we use in the Incentive Plan and will work to strengthen the connection between equity awards and long-term performance that enhances stockholder value.
Summary of the Incentive Plan
The following is a summary of the material features of the Incentive Plan (as it is proposed to be amended by the Amendment) and its operation. This summary is qualified in its entirety by reference to the Incentive Plan itself. A copy of the Amendment is attached to this Proxy Statement as Appendix B.
Purpose. The purposes of the Incentive Plan are to attract and retain the best available personnel for positions of substantial responsibility, to provide incentives to individuals who perform services to Align and to promote the success of Align’s business.
Administration. The Incentive Plan is administered by the Board or a committee designated byof the Board (in either case, the “Plan Administrator”"Administrator"). To make grantsThe Administrator has full and exclusive discretionary authority to certain officersconstrue, interpret and key employees of Align intended to be an exempt transaction under Rule 16b-3 of the Securities Exchange Act of 1934, as amended (“Rule 16b-3”), the members of the committee must qualify as “non-employee directors” under Rule 16b-3. In the case of awards intended to qualify for the performance-based compensation exemption under Section 162(m), administration must be by a committee consisting of two or more “outside directors” within the meaning of Section 162(m).
Subject toapply the terms of the Incentive Plan,ESPP, to designate separate offerings under the Plan Administrator has the sole discretion to select the employees, consultants, and directors who will receive awards,ESPP, to determine eligibility, to adjudicate all disputed claims filed under the number of shares covered by each award,ESPP and to determineestablish such procedures it deems necessary for the terms and conditions of awards, to modify or amend each award (subject to the restrictionsadministration of the Incentive Plan), includingESPP. Subject to accelerate vesting or waive forfeiture restrictions, and to interpret the provisions of the Incentive PlanESPP, every finding, decision, and outstanding awards.
determination made by the Administrator will, to the full extent permitted by law, be final and binding upon all parties.
Eligibility
Eligibility. . The Incentive PlanUnless the Administrator provides that nonstatutory stock options, restricted stock, restricted stock units (“RSUs”), performance shares, performance units, and stock appreciation rights (“SARs”) may be granted to employees (including officers) and consultants of Align and its affiliates and to membersotherwise (consistent with the terms of the Board. Incentive stock options may be granted onlyESPP and, where applicable, Code Section 423), our employees and those of our designated subsidiaries whose customary employment is at least 20 hours per week and more than 5 months in a calendar year are eligible to employees of Align or its parent or subsidiaries. The Plan Administrator will determine which eligible personsparticipate in the ESPP; except that for the 423 Component, no employee will be granted awards. In addition, the Plan Administrator may grant other incentives payable in cash or sharesan option under the Incentive PlanESPP (i) to the extent that, immediately after the grant, such employee would own 5% or more of the total combined voting power of all classes of our capital stock or the capital stock of any Align parent or subsidiary, or (ii) to the extent that her or his rights to purchase stock under all of our employee stock purchase plans accrues at a rate which exceeds $25,000 worth of stock (determined at the fair market value of the shares at the time such option is granted) for each calendar year in which such rights are outstanding at any time, as determined byin accordance with Code Section 423 and the Plan Administrator toregulations thereunder. For purposes of the Non-423 Component, any employee (or group of employees) may be excluded from participation in the best interestsESPP or an offering under the ESPP if the Administrator determines, in its sole discretion,
that participation of Align and subject tosuch employee is not advisable or practicable for any terms and conditions the Plan Administrator deems advisable.reason. As of March 1, 2016,31, 2021, approximately 8012,300 employees and 10 consultants of Align or its affiliates and 8 members of our Board were eligible to participate in the Incentive Plan.ESPP.
Shares Available underSubject to the Incentive Plan. We are asking stockholders to approve an increase of 4,500,000 shareslimits set forth in the previous paragraph, the maximum aggregate number of shares reservedavailable that any participant may purchase under the Incentive Plan. If stockholders approve the Amendment, a maximum aggregate of 30,168,895 sharespurchase period will be available for issuance under2,500 shares and the Incentive Plan. If the Amendment is not approved by stockholders, approximately 25,668,895 shares will be available for issuance.
Any shares subject to options or SARs will be counted as one share for purposes of determining the availablemaximum number of shares for issuancethat may be purchased during each purchase period by all participants under the Incentive Plan. Any shares subjectESPP will be 400,000 shares.
Offerings
The ESPP is implemented by offerings of rights to restricted stock, RSUs or performance shares or unitseligible employees. Each offering will be in such form and will contain such terms and conditions as the Administrator deems appropriate, which, for the 423 Component, will comply with Code Section 423(b) and all employees granted rights under an offering will have the same rights and privileges. The provisions of separate offerings need not be identical. The ESPP generally has a series of consecutive, overlapping 24 month offering periods, with each offering period consisting of 4 six-month purchase periods commencing generally on February 1 and August 1 of each year. The Non-423 Component will be implemented by a series of six-month offering periods with a per sharenew offering period commencing generally on February 1 and August 1 of each year. The first day of any offering is referred to as the "offering date."
An eligible employee may become a participant in the ESPP by delivering an enrollment agreement to our stock administration office (or its designee), on or unitbefore a date determined by the Administrator prior to the offering date or by following an electronic or other enrollment procedure determined by the Administrator. An enrollment agreement will authorize participant contributions, generally in the form of payroll deductions unless otherwise determined by the Administrator, which may not be less than 1% or exceed 15% of a participant's compensation (as defined in the ESPP) during the offering. Generally during an offering, a participant may change the rate of her or his participation level, except that a participant may only make one change to her or his participation level during each purchase priceperiod. Additionally, any increase in the rate of a participant's participation level will apply only to future purchase periods under the ESPP.
On the offering date, each participant is granted a right to purchase shares. An offering includes purchase periods of approximately six months in duration. The right expires at the end of the offering, or potentially earlier in connection with an employee's termination (described below), but is exercised on generally the last day on which our common stock is actively traded during the purchase period (the "purchase date"). If the fair market value of our common stock on any purchase date is lower than the fair market value of a share on the date of grant that were granted prior to May 16, 2013, will be counted as 1.5 shares for purposes of determining the available number of shares for issuance under the Incentive Plan. To the extent a share that was subject to an award that counted as 1.5 shares against the shares reserved under the Incentive Plan is recycled back into the Incentive Plan (as described below), the Incentive Plan will be credited with 1.5 shares. Any shares subject to restricted stock, RSUs or performance shares or units with a per share or unit purchase price lower than the fair market value of a share on the date of grant that were granted on or after May 16, 2013, will be counted as 1.9 shares for purposes of determining the available number of shares for issuance under the Incentive Plan. To the extent a share that was subject to an award that counted as 1.9 shares against the shares reserved under the Incentive Plan is recycled back into the Incentive Plan (as described below), the Incentive Plan will be credited with 1.9 shares. Shares may be authorized, but unissued, or reacquired shares of our common stock. As of March 1, 2016, the closing price of our common stock on NASDAQ was $67.86 per share.
If an award expires or becomes unexercisable without having been exercisedthe offering date, then all participants in full or, with respect to RSUs, performance shares or units, is terminated due to failure to vest, the unpurchased shares (or for awards other than options or SARs, the unissued shares) which were subject theretooffering period automatically will become available for future grant or sale under the Incentive Plan (unless the Incentive Plan has terminated). Upon thebe withdrawn from such offering period immediately after exercise of a SAR settledtheir option on such purchase date and automatically re-enrolled in shares, the gross number of shares covered byimmediately following offering period on the portion offirst day thereof.
Purchase Price. Unless and until the award so exercised will cease to be available underAdministrator determines otherwise, the Incentive Plan. Shares that have actually been issued under the Incentive Plan under any award will not be returned to the Incentive Plan and will not become available for future distribution under the Incentive Plan, except if shares issued pursuant to restricted stock, RSUs, performance shares or performance units are repurchased by Align or are forfeited to Align due to failure to vest, such shares will become available for future grant under the Incentive Plan. Shares used to pay the exercise or purchase price of an award and/or to satisfyfor shares is the tax withholding obligations related to an award will not become available for future grant or sale under the Incentive Plan. To the extent an award under the Incentive Plan is paid out in cash rather than shares, such cash payment will not result in reducing the number of shares available for issuance under the Incentive Plan.
Prohibition on Repricing and Exchange Programs. The Incentive Plan prohibits any program providing participants the opportunity to transfer outstanding awards to a financial institution or other person or entity selected by the Administrator, exchange awards for awards of the same type, awards of a different type, and/or cash, or have the exercise price of awards repriced (i.e., increased or reduced).
Options. The exercise price of options granted under the Incentive Plan is determined by the Plan Administrator and must not be less than 100%lesser of: (a) 85% of the fair market value of Align’sour common stock on the offering date, of grant (except as permitted under Section 424(a) of the Code). Options granted under the Incentive Plan expire as determined by the Plan Administrator, but in no event later than seven (7) years from date of grant. However, incentive stock options granted to stockholders owning more than 10% of the voting stock of Align must have an exercise price per share no less than 110%or (b) 85% of the fair market value of a share on the date of grant and the term of such option must be no more than 5 years from the date of grant. The fair market value of Align’s common stock generally is determined by reference to the price of Align’sour common stock on the determinationpurchase date.
Options become exercisable at such times and under such conditions as are determined by
Payment of Purchase Price; Contributions. On each purchase date, each participant's accumulated payroll deductions (or other contributions) will be applied to the Plan Administrator and as are set forth inpurchase of whole shares of our common stock, up to the individual option agreements. An option is exercised by giving notice to Align specifying themaximum number of full shares to be purchasedpermitted under the ESPP and tendering payment ofa given purchase period. Currently, a participant may make contributions under the purchase price together with any applicable tax withholdings. The method of payment ofESPP only by payroll deductions, unless the exercise price for the shares purchased upon exercise of an option will be determined by the Plan Administrator. Each option grant is evidenced by an agreement that specifies the exercise price, the term of the option, the forms of consideration for exercise, and such other terms and conditions as the Plan Administrator, in its sole discretion, will determine.
Stock Appreciation Rights. A SAR gives a participant the rightpermits participants to receive the appreciation in the fair market value of Align common stock between the date of grant of the SAR and the date of its exercise. The Plan Administrator, subject to the provisions of the Incentive Plan, will have complete discretion to determine the terms and conditions of SARs granted under the Incentive Plan. However, no SAR may have (i) a term of more than 7 years from the date of grant or (ii) an exercise price below 100% of the fair market value of Align’s common stock on the grant date (except as permitted under Section 424(a) of the Code).
Upon exercise of a SAR, the holder of the SAR will be entitled to receive payment from us in an amount determined by multiplying (i) the difference between the fair market value of a share on the date of exercise over the exercise price by (ii) the number of shares with respect to which the SAR is exercised. At the discretion of the Plan Administrator, such payment may be incontribute amounts through cash, shares or a combination of both. Each SAR grant will be evidenced by an agreement that specifies the exercise price, the term of the SAR, the conditions of exercise, and such other terms and conditions as the Plan Administrator will determine.
Termination of Employment. The Incentive Plan gives the Plan Administrator the authority to vary the terms of the individual option and SAR agreements, including exercisability of the award following termination of service with Align. In the absence of a period specified in the option or SAR agreement, generally if a participant ceases to be an employee, director or consultant for any reason other than disability, death or misconduct, then the participant will have the right to exercise his or her outstanding award for 3 months (or 12 months if termination is due to death or disability) after the date of termination, but only to the extent the option or SAR is vested on the date of termination. In no event will an option or SAR be exercisable beyond its term.
Restricted Stock. Awards of restricted stock are rights to acquire or purchase shares, which vest in accordance with the terms and conditions established by the Plan Administrator in its sole discretion. Shares of restricted stock may not be transferred by the participant until vested. Unless otherwise provided by the Plan Administrator, a participant will forfeit any shares of restricted stock as to which the restrictions have not lapsed prior to the participant’s termination of service. Participants holding shares of restricted stock will have the right to vote the shares and to receive any dividendscheck or other distributions paid on such shares; however, if dividends or other distributions are paid in the form of shares, such shares will be subject to the same restrictions as the original award. The Plan Administrator may, in its sole discretion, reduce or waive any restrictions and may accelerate the time at which any restrictions will lapse or be removed. Each restricted stock award will be evidenced by an agreement that specifies the period of restriction, the number of shares granted, and such other terms and conditions as the Plan Administrator will determine.
Restricted Stock Units. The Plan Administrator may grant RSUs under the Incentive Plan, which represent a right to receive shares at a future date asspecified means set forth in the participant’s award agreement. Each RSUenrollment agreement prior to each purchase date.
Withdrawal. Generally, a participant may withdraw from an offering by delivering a withdrawal notice to our stock administration office (or its designee) in such form as we provide or following an electronic or other procedure determined by the Administrator. The participant will receive her or his accumulated contributions from the offering promptly after the effective date of her or his withdrawal. Once a participant withdraws from a particular offering, the participant must re-enroll in the ESPP in order to participate in future offerings under the ESPP.
Termination of Employment. Rights granted under the Incentive Plan will be evidenced by an agreement that specifies the number of shares subject to the award and such other terms and conditions as the Plan Administrator will determine. RSUs will result in a payment to a participant only if the performance goals or other vesting criteria the Plan Administrator may establish are achieved or the awards otherwise vest. Earned RSUs will be paid, in the sole discretion of the Plan Administrator, in the form of cash, shares, or a combination of both. The Plan Administrator may establish vesting criteria in its discretion, which may be based on company-wide, divisional, business unit or individual goals, applicable federal or state securities laws, or any other basis, and which may include the performance goals listed below. The extent to which the vesting criteria are met will determine the number of RSUs to be paid out to the participant.
After the grantESPP terminate immediately upon cessation of a restricted stock unit award, the Plan Administrator, in its sole discretion, may reduceparticipant's employment with us and any of our designated subsidiaries for any reason. Once a participant's employment is terminated, we will distribute to such terminated employee all her or waive any vesting criteria that must be met to receive a payout and may accelerate the time at which any restrictions will lapse or be removed. A participant will forfeit any unearned RSUs as of the date set forth in the award agreement.
Performance Units and Performance Shares. Performance units and performance shares also may be grantedhis accumulated contributions under the Incentive Plan. Each award of performance shares or units granted under the Incentive Plan will be evidenced by an agreement that specifies the performance period and other terms and conditions of the award as the Plan Administrator will determine. Performance units and performance shares will result in a payment to a participant only if the performance goals or other vesting criteria the Plan Administrator may establish are achieved or the awards otherwise vest. Earned performance units and performance shares will be paid, in the sole discretion of the Plan Administrator, in the form of cash, shares, or a combination of both. The Plan Administrator may establish performance objectives in its discretion, which may be based on company-wide, divisional, business unit or individual goals, applicable federal or state securities laws, or any other basis, and which may include the performance goals listed below. The extent to which the vesting criteria are met will determine the number and/or the value of performance units and performance shares to be paid out to the participant.
After the grant of a performance unit or performance share, the Plan Administrator, in its sole discretion, may reduce or waive any performance objectives or other vesting provisions for such performance units or shares and accelerate the time at which any restrictions will lapse or be removed. Performance units will have an initial value established by the Plan Administrator on or before the date of grant. Performance shares will have an initial value equal to the fair market value of a share on the grant date. A participant will forfeit any performance shares or units that are unearned or unvested as of the date set forth in the award agreement.
Other Cash or Stock Awards. In addition to the awards described above, the Plan Administrator may grant other incentives payable in cash or shares under the Incentive Plan as it determines to be in the best interests of Align and subject to such other terms and conditions as it deems appropriate, including awards intended to qualify as “performance based compensation” under Section 162(m).offering generally without interest.
Performance Goals
. Awards
Adjustments upon Changes in Capitalization, Dissolution or Liquidation, or Change of restricted stock, RSUs, performance shares, performance units and other incentives under the Incentive Plan may be made subject to the attainment of performance goals relating to one or more business criteria within the meaning of Section 162(m) and may provide for a targeted level or levels of achievement including: cash flow; cash position; earnings before interest and taxes; earnings before interest, taxes, depreciation and amortization; earnings per share; economic profit; economic value added; equity or stockholder’s equity; market share; net income; net profit; net sales; operating earnings; operating income; profit before tax; ratio of debt to debt plus equity; ratio of operating earnings to capital spending; return on net assets; revenue; sales growth; share price; or total return to stockholders. The performance goals may differ from participant to participant and from award to award, may be used to measure the performance of Align as a whole, or (except with respect to stockholder return metrics) a business unit or other segment of Align, or one or more product lines or specific markets and may be measured on a growth basis or relative basis to a peer group or index. The performance goals will be calculated in accordance with Align’s financial statements, generally accepted accounting principles, or under a methodology established by the Plan Administrator prior to or at the time of issuance of an award, which is consistently applied with respect to a performance goal in the relevant performance period.
To the extent necessary to comply with the performance-based compensation provisions of Section 162(m), with respect to any award granted subject to performance goals, within the first 25% of the performance period, but in no event more than 90 days following the commencement of any performance period (or such other time as may be required or permitted by Section 162(m)), the Plan Administrator will, in writing: (i) designate one or more participants to whom an award will be made, (ii) select the performance goals applicable to the performance period, (iii) establish the performance goals, and amounts of such awards, as applicable, which may be earned for such performance period, and (iv) specify the relationship between the performance goals and the amounts of such awards, as applicable, to be earned by each participant for such performance period. Following the completion of each performance period, the Plan Administrator will certify in writing whether the applicable performance goals have been achieved for such performance period. In determining the amounts earned by a participant, the Plan Administrator may reduce or eliminate (but not increase) the amount payable at a given level of performance to take into account additional factors that the Plan Administrator may deem relevant to the assessment of individual or corporate performance for the performance period. The Plan Administrator also may determine what actual award, if any, will be paid in the event of a participant’s termination of employment (whether as a result of death or disability or otherwise, and whether prior to or following a change in control of Align) prior to the completion of a performance period or upon a change in control of Align. A participant will be eligible to receive payment pursuant to an award intended to qualify as “performance-based compensation” under Section 162(m) for a performance period only if the performance goals for such period are achieved.Control
Individual Award Limitations. The Incentive Plan contains annual individual grant limits intended to satisfy Section 162(m). Specifically, the maximum number of shares or cash (as applicable) which could be issued to any one individual in any fiscal year (i) pursuant to options or SARs is 1,000,000 shares, (ii) pursuant to restricted stock awards intended to qualify as performance-based compensation under Section 162(m) is 500,000 shares, (iii) pursuant to RSUs intended to qualify as performance-based
compensation under Section 162(m) is 500,000 shares, and (iv) pursuant to performance shares intended to qualify as performance-based compensation under Section 162(m) is 500,000 shares, and the maximum dollar value which could be awarded to any one individual in any fiscal year pursuant to the grant of performance units intended to qualify as performance-based compensation under Section 162(m) is $5,000,000. In addition, in connection with his or her initial service with Align, an individual may be granted additional awards of up to a maximum of (i) 1,000,000 shares covering options or SARs, (ii) 500,000 shares covering restricted stock awards intended to qualify as performance-based compensation under Section 162(m), (iii) 500,000 shares covering RSUs intended to qualify as performance-based compensation under Section 162(m), and (iv) 500,000 shares covering performance shares intended to qualify as performance-based compensation under Section 162(m). Other types of incentives payable in cash under the Incentive Plan that the Plan Administrator may determine to grant have a maximum dollar value of $5,000,000 per fiscal year for any participant. No non-employee director may be granted in any fiscal year awards exceeding the lesser of (i) awards covering 100,000 shares or (ii) awards with a grant date fair value of greater than $1,000,000 (other than any awards granted to such director while he or she was a consultant or employee of Align or its affiliates).
Non-Transferability of Awards. Awards granted under the Incentive Plan generally are not transferable, other than by will or by the laws of descent or distribution, and all rights with respect to an award granted to a participant generally will be available during a participant’s lifetime only to the participant.
Misconduct.Changes in Capitalization. If a participant terminates service with Align as a result of his or her misconduct (as defined in the Incentive Plan) or the participant engages in misconduct while holding an outstanding award, then all awards granted under the Incentive Plan that the participant holds will terminate immediately and the participant will have no further rights with respect to those awards.
Minimum Vesting Requirements for Awards. In general, awards will vest in full no earlier than the 1-year anniversary of the grant date. The Incentive Plan provides certain limited exceptions to this limitation.
Adjustments. In the event ofthat any dividend or other distribution (whether in the form of cash, shares,common stock, other securities, or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation,
split-up, spin-off, combination, repurchase, or exchange of sharescommon stock or other securities of Align,our securities, or other change in theour corporate structure affecting Align’sthe common stock the Plan Administrator,such that an adjustment is appropriate in order to prevent diminutiondilution or enlargement of the benefits or potential benefits intended to be made available under the Incentive Plan,ESPP, then the Administrator will adjust the number and class of shares of our common stock thatwhich may be delivered under the Incentive Plan, and/orESPP, the number, classpurchase price per share and pricethe number of shares of our common stock subject tocovered by each outstanding award,option under the ESPP which has not yet been exercised, the maximum number of shares a participant can purchase during a purchase period and the award grant limitations (including the maximum number of shares issuablethat can be purchased during a purchase period by all participants under the Incentive Plan and the individual award limitations described above).ESPP.
Dissolution or LiquidationLiquidation. . In the event of Align’s proposed dissolution or liquidation, the Planoffering period will be shortened by setting a new purchase date and will terminate immediately prior to the completion of the dissolution or liquidation, unless provided otherwise by the Administrator. The new purchase date will be prior to the dissolution or liquidation. If the Administrator shortens any offering periods then in progress, the Administrator will notify each participant as soon as practicablein writing or electronically, at least ten business days prior to the effectivenew purchase date, of such proposed transaction. An award will terminate immediately prior to consummation of such proposed actionthat the purchase date has been changed to the extentnew purchase date and that the awardright will be exercised automatically on the new purchase date, unless the participant has not been previously exercised.already withdrawn from the offering.
Merger or Change inof Control. In the event of oura merger or changeChange in controlControl (as defined in the Incentive Plan)ESPP), each outstanding award will be treated asthen the Plan Administrator determines, including, without limitation, that each award be assumedsurviving corporation or substituted for by the successor corporation (or aits parent or subsidiary ofmay assume outstanding rights under the successor corporation). If the successor corporation does not assumeESPP or substitute forsimilar rights. If no surviving corporation assumes outstanding rights or substitutes similar rights, the award, options and SARsAdministrator will become fully vested and exercisable, all restrictions on restricted stock, RSUs and performance shares and units will lapse, andshorten the offering with respect to awards with performance-based vesting, all performance goals or other vesting criteria generallywhich such right relates by setting a new purchase date on which such offering will end. The new purchase date will be deemed achieved at 100% of target levels and all other terms and conditions met. In such event,prior to the Plantransaction. If the Administrator shortens any offering periods then in progress, the Administrator will notify participants holding options and/each participant in writing or SARselectronically prior to the date of the merger or Change in Control, that the award is fully vested and exercisable for a period of time aspurchase date has been changed to the Plan Administrator may determinenew purchase date and that the awardright will terminate upon expiration of such period. With respect to awards granted to non-employee directors that are assumed or substituted for, ifbe exercised automatically on the new purchase date, of or following such assumption or substitution such director is terminated in his or her capacity as a director other than upon his or her voluntary resignation, then he or she will fully vest in and haveunless the right to exercise options and/or SARs as to all ofparticipant has already withdrawn from the shares subject to such awards, all restrictions on restricted stock, RSUs and performance shares and units will lapse, and with respect to awards with performance-based vesting, all performance goals or other vesting criteria will be deemed achieved at 100% of target levels and all other terms and conditions met. The Plan Administrator will not be required to treat all awards similarly in the transaction.offering.
Forfeiture Events. All awards granted under the Incentive Plan will be subject to reduction, cancellation, forfeiture, or recoupment rights in favor of Align under our clawback policy. In addition, the Plan Administrator may provide in an award agreement that the participant’s rights, payments, and benefits with respect to such award shall be subject to reduction, cancellation, forfeiture, or recoupment upon the occurrence of specified events.
Amendment and Termination of the Incentive PlanESPP. . The Plan Administrator will have the authority tomay, at any time and for any reason, amend, suspend or terminate the Incentive Plan atESPP or any time, except stockholder approvalpart of the ESPP. If the ESPP is terminated, the Administrator may elect to terminate all outstanding offering periods either immediately or upon completion of the purchase of shares on the next purchase date (which may be sooner than originally scheduled, if determined by the Administrator), or may elect to permit offering periods to expire in accordance with their terms (and subject to any adjustments described above). If an offering period is terminated prior to expiration, all amounts credited to a participant's account that were not used to purchase shares will be required for any amendmentreturned to the Incentiveparticipant (without interest) as soon as administratively practicable. Without stockholder consent and without limiting the foregoing, the Administrator is entitled to change the offering periods, designate separate offerings, limit the frequency and/or number of changes in the amount withheld during an offering period, establish the exchange ratio applicable to amounts withheld in a currency other than U.S. dollars, permit payroll withholding in excess of the amount designated by a participant in order to adjust for delays or mistakes in our processing of properly completed withholding elections, establish reasonable waiting and adjustment periods and/or accounting and crediting procedures to ensure that amounts applied toward the purchase of shares for each participant correspond with contribution amounts, and establish such other limitations or procedures as the Administrator determines in its sole discretion advisable which are consistent with the ESPP. If the Administrator determines that the ongoing operation of the ESPP may result in unfavorable financial accounting consequences, the Administrator may modify, amend or terminate the ESPP to reduce or eliminate such accounting consequence.
Participation in Plan Benefits
Participation in the ESPP is voluntary and is dependent on each eligible employee's election to participate and her or his determination as to the extent required by any applicable laws. Any amendment, suspensionlevel of payroll deductions or termination will not, without the written consent of the
participant, impair any rights of any participant under any award previously granted. If stockholders approve the Amendment, the Incentive Plan will terminate on the 10-year anniversary of Align’s 2016 Annual Meeting of Stockholders, unless the Plan Administrator terminates it earlier pursuant to the terms of the Incentive Plan.
Number of Awards Granted to Employees, Consultants and Directors
Subject to the annual numerical limitsother contributions. Accordingly, future purchases under the Incentive Plan, the number of awards (if any) that an employee, consultant, or director may receive under the Incentive Plan isESPP are not determinable. Non-employee directors are not eligible to participate in the discretionESPP. As of March 31, 2021, the Plan Administrator and therefore cannot be determined in advance. Our executive officers and non-employee members of the Board have an interest in this proposal because they are eligible to receive awards under the Incentive Plan. The following table sets forth: (a) the total number of shares subject to RSUs (including market-performance based restricted stock units assuming maximum levels of achievement), and (b) the weighted average per unitclosing price of RSUs granted during the last fiscal year. No other types of awards, including options, were granted under the Incentive Plan during the last fiscal year.our common stock was $541.53 per share.
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Name of Individual or Group | Number of Shares Subject to RSUs (#) | | Weighted Average per Unit Value of RSUs ($) |
| | | |
Joseph M. Hogan | 222,000 | | 64.55 |
Thomas M. Prescott | 98,000 | | 56.78 |
David L. White | 23,000 | | 56.78 |
Raphael S. Pascaud | 24,000 | | 56.78 |
Zelko Relic | 24,000 | | 56.78 |
Roger E. George | 21,400 | | 56.78 |
All executive officers, as a group | 381,320 | | 61.30 |
All directors who are not executive officers, as a group | 138,700 | | 57.36 |
All employees who are not executive officers, as a group | 559,962 | | 57.16 |
Summary ofCertain U.S. Federal Income Tax Information
The following paragraphs are intended as a summary423 Component of the U.S. federal income tax consequencesESPP, and the right of participants to U.S. taxpayers and Align of equity awards grantedmake purchases thereunder, is intended to qualify under the Incentive Plan as of the date of this filing. The summary is based on existing U.S. laws and regulations, and there can be no assurance that those laws and regulations will not change in the future. The summary does not purport to be complete and does not discuss the tax consequences upon a participant’s death, or the provisions of Sections 421 and 423 of the tax lawsCode. Under these provisions, no income will be taxable to a participant until the shares purchased under the ESPP are sold or otherwise disposed of. Upon sale or other disposition of any municipality, state or foreign country in whichthe shares, the participant may reside. As a result,generally will be subject to tax consequences for any particular participant may vary based on his or her individual circumstances.
Nonstatutory Stock Options. No taxable income is recognizedin an amount that depends upon the grantholding period. If the shares are sold or otherwise disposed of a nonstatutory stock option with a per share exercisemore than two years from the first day of the applicable offering and one year from the applicable date of purchase, the participant will recognize ordinary income measured as the lesser of (a) the excess of the fair market value of the shares at the time of such sale or disposition over the purchase price, at least equal toor (b) the excess of the fair market value of a share of the underlying stock on the offering date that the right was granted over the purchase price for the right. Any additional gain will be treated as long-term capital gain. If the shares are sold or otherwise disposed of grant. Upon exercise,before the expiration of these holding periods, the participant will recognize ordinary income in an amount equal togenerally measured as the excess of the fair market value (on the exercise date) of the shares purchased over the exercise price of the option. Any additional gain or loss recognized upon any later disposition of the shares would be capital gain or loss.
Incentive Stock Options. No taxable income is recognized when an incentive stock option is granted or exercised (except for purposes of the alternative minimum tax, in which case, the spread upon exercise will be an alternative minimum tax adjustment item). If the participant exercises the option and then later sells or otherwise disposes of the shares more than 2 years after the grant date and more than 1 year after the exercise date, the difference between the sale price and the exercise price will be taxed as long-term capital gain or loss. If the participant exercises the option and then later sells or otherwise disposes of the shares before the end of the 2 or 1 year holding periods described above, he or she generally will recognize ordinary income at the time of the sale equal to the fair market value of the shares on the exercise date minus the exercise price ofshares are purchased
over the option and any additional gain or loss will be capital gain or loss.
Stock Appreciation Rights. No taxable income is recognized upon the grant of a stock appreciation right with a per share exercise price equal to the fair market value of a share of the underlying stock on the date of grant. Upon exercise, the participant will recognize ordinary income in an amount equal to the amount of cash and the fair market value of any shares received.purchase price. Any additional gain or loss recognized upon any lateron such sale or disposition of the shares wouldwill be long-term or short-term capital gain or loss.
Restricted Stock, Restricted Stock Units, Performance Units and Performance Shares. A participant generally will not recognize taxable income at the time an award of restricted stock, restricted stock units, performance shares or performance units are granted. Instead, he or she will recognize ordinary income in the first taxable year in whichloss, depending on how long the shares underlying the award vests (that is, becomes either (i) transferable or (ii) no longer subject to a substantial risk of forfeiture). However, the recipient of a restricted stock award may elect to recognize income at the time he or she receives the award in an amount equal to the fair market value of the shares underlying the award (less any amount paid for the shares) onhave been held from the date the awardof purchase. The Company generally is granted.
Cash Payments. A participant will recognize ordinary income upon receipt of a cash payment pursuant to any award in an amount equal to the cash received.
Tax Effects for Align. Align generally will benot entitled to a tax deduction in connection with an award under the Incentive Plan in an amount equalfor amounts taxed as ordinary income or capital gain to a participant except to the extent of ordinary income recognized by participants upon a participant and at the time the participant recognizes such income (for example, the exercisesale or disposition of a nonstatutory stock option). Special rules limit the deductibility of compensation paid to Align’s Chief Executive Officer and to each of its three (3) most highly compensated executive officers other than the Chief Financial Officer. Under Section 162(m), the annual compensation paid to any of these specified executives will be deductible onlyshares prior to the extent that it does not exceed $1,000,000. However, Align can preserve the deductibility of certain compensation in excess of $1,000,000 if the conditions of Section 162(m) are met. These conditions include stockholder approvalexpiration of the Incentive Plan, setting limits on the number of awards that any individual may receive and for awards other than certain stock options, establishing performance criteria that must be met before the award actually will vest or be paid. The Incentive Plan has been designed to permit the Plan Administrator to grant awards that qualify as performance-based for purposes of satisfying the conditions of Section 162(m), thereby permitting Align to continue to receive a federal income tax deduction in connection with such awards.holding periods described above.
Section 409A
. Section 409A of the Code (“Section 409A”) sets forth requirements with respect to how an individual may elect to defer compensation and select the timing and form of distribution of the deferred compensation. Section 409A also generally provides that distributions must be made on or following the occurrence of certain events (e.g., the individual’s separation from service, a predetermined 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 the compensation has been deferred.
Awards granted under the Incentive Plan with a deferral feature will be subject to the requirements of Section 409A. If an award is subject to and fails to satisfy the requirements of Section 409A, the recipient may 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 Section 409A’s provisions, Section 409A imposes an additional 20% federal income tax on compensation recognized as ordinary income, as well as interest on such deferred compensation. In addition, certain states such as California have adopted similar provisions.
THE FOREGOING IS ONLY A SUMMARY OF THE EFFECTSEFFECT OF U.S. FEDERAL INCOME TAXATION LAWS UPON THE PARTICIPANTPARTICIPANTS AND ALIGN WITH RESPECT TO AWARDS GRANTEDUS UNDER THE INCENTIVE PLAN ANDESPP. IT DOES NOT PURPORT TO BE COMPLETE AND REFERENCE SHOULD BE MADE TO THE APPLICABLE PROVISIONS OF THE CODE. IN ADDITION, THIS SUMMARY DOES NOT DISCUSS THE IMPACT OF EMPLOYMENT OR OTHER TAX REQUIREMENTS, THE TAX CONSEQUENCES OF A PARTICIPANT’SPARTICIPANT'S DEATH OR THE PROVISIONS OF THE INCOME TAX LAWS OF ANY MUNICIPALITY, STATE OR FOREIGN COUNTRYNON-U.S. JURISDICTION IN WHICH THE EMPLOYEE OR CONSULTANTPARTICIPANT MAY RESIDE.
Vote Required andRequired; Recommendation of Board Recommendationof Directors
The
The affirmative vote of a majority of the holdersvoting power of the then-outstanding shares of our common stock present in person or represented by proxy at the meeting and entitled to vote at the 2016 Annual Meeting of Stockholders is required to approve the Amendment to the Align Technology, Inc. 2005 Incentive Plan, as amendedamendment and restated. Unless marked to the contrary, proxies received will be voted “FOR” approvalrestatement of the Amendment and its material terms.ESPP. An abstention vote will have the same effect as an "Against" vote in this Proposal Four.
The Board believes it is in the best interests of Align that stockholders approve the Amendment, which will (i) increase the number of shares that are available for awards under the Incentive Plan, (ii) make awards subject to minimum vesting requirements subject to certain limited exceptions and (iii) make awards subject to reduction, cancellation, forfeiture, or recoupment under certain circumstances.
OUR BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THIS PROPOSAL FOUR AND RECOMMENDS THAT STOCKHOLDERS VOTE “FOR”"FOR" THE APPROVAL OF THE AMENDMENT TO THE ALIGN TECHNOLOGY, INC. 2005 INCENTIVEAND RESTATEMENT OF OUR 2010 EMPLOYEE STOCK PURCHASE PLAN (AS AMENDED AND RESTATED).
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information as of December 31, 20152020 about our common stock that may be issued upon the exercise of options and rights granted to employees, consultants or members of our Board of Directors under all existing equity compensation plans, including the 1997 Equity Incentive Plan, the Employee Stock Purchase Plan, the 2001 Stock2005 Incentive Plan and the 2005 Incentive2010 Employee Stock Purchase Plan, each as amended, and certain individual arrangements.
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Plan Category | Number of securities to be issued upon exercise of outstanding options, RSUs and MSUs (a) | | Weighted average exercise price of outstanding options | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column a) | |
Equity compensation plans approved by security holders | 859,149 | | (1) | $ | — | | | 4,950,369 | | (2)(3) |
Equity compensation plans not approved by security holders | | | | | | |
Total | 859,149 | | | $ | — | | | 4,950,369 | |
(1) Includes 631,905 restricted stock units, including 227,244 market-performance based restricted stock units at target, which have an exercise price of zero.
(2) Includes 325,665 shares available for issuance under our ESPP. We are unable to ascertain with specificity the number of securities to be issued upon exercise of outstanding rights or the weighted average exercise price of outstanding rights under the ESPP.
(3) Our 2005 Incentive Plan, as amended, provides for the granting of incentive stock options, non-statutory stock options, restricted stock units, market stock units, stock appreciation rights, performance units and performance shares to employees, non-employee directors, and consultants. Shares granted on or after May 16, 2013 as an award of restricted stock, restricted stock unit, market stock units, performance share or performance unit ("full value awards") are counted against the authorized share reserve as one and nine-tenths (1 9/10) shares for every one share subject to the award, and any shares canceled that were counted as one and nine-tenths (1 9/10) against the plan reserve will be returned at the same ratio. Full value awards granted prior to May 16, 2013 were counted against the authorized share reserve as one and one half (1 1/2) share for every one share subject to the award, and any shares canceled that were counted as one and one half against the plan reserve will be returned at this same ratio. As of December 31, 2020, we have a total of 27,783,379 shares authorized and reserved, of which 5,313,294 shares are available for issuance which excludes 688,590 of potentially issuable MSUs if performance targets are achieved at maximum payout.
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Plan Category | | Number of securities to be issued upon exercise of outstanding options, RSUs and MSUs (1) | | Weighted average exercise price of outstanding options (2) | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column)(1) (2) (3) |
Equity compensation plans approved by security holders | | 3,185,509 | | $15.14 | | 6,550,307 |
Equity compensation plans not approved by security holders | | — | | — | | — |
Total | | 3,185,509 | | $15.14 | | 6,550,307 |
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(1)
| Includes 2,078,136 restricted stock units, and 611,150 market-performance based restricted stock units at target, which have an exercise price of zero. |
| |
(2)
| Includes 1,133,749 shares available for issuance under our ESPP. We are unable to ascertain with specificity the number of securities to be issued upon exercise of outstanding rights or the weighted average exercise price of outstanding rights under the ESPP. |
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(3)
| Our 2005 Incentive Plan, as amended, provides for the granting of incentive stock options, non-statutory stock options, restricted stock units, market stock units, stock appreciation rights, performance units and performance shares to employees, non-employee directors, and consultants. Shares granted on or after May 16, 2013 as an award of restricted stock, restricted stock unit, market stock units, performance share or performance unit ("full value awards") are counted against the authorized share reserve as one and nine-tenths (1 9/10) shares for every one (1) share subject to the award, and any shares canceled that were counted as one and nine-tenths against the plan reserve will be returned at the same ratio. Full value awards granted prior to May 16, 2013 were counted against the authorized share reserve as one and one half (1 1/2) share for every one (1) share subject to the award, and any shares canceled that were counted as one and one half against the plan reserve will be returned at this same ratio. As of December 31, 2015, we have a total of 23,283,379 shares authorized and reserved, of which 4,869,639 shares are available for issuance which excludes 546,933 of potentially issuable MSUs if performance targets are achieved at maximum payout.
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PROPOSAL FIVE
ADVISORY VOTE TO APPROVE THE COMPENSATION OF OUR NAMED EXECUTIVE OFFICERS
The Board believes that an annual advisory vote to approve the compensation of our named executive officers allows our stockholders to provide us with their direct input on our compensation philosophy, policies and practices as disclosed in the proxy statement every year, and is consistent with our policy of seeking input from, and engaging in discussions with, our stockholders on these matters. Accordingly, this year, we are again requesting that you approve, on an advisory basis, the compensation of our named executive officers disclosed in the "Compensation Discussion and Analysis," the Summary Compensation table and the related compensation tables, notes and narrative in this proxy statement. Our compensation program is designed to motivate and reward exceptional performance in a straight-forward and effective way, while also recognizing the success of our business. We delivered a remarkable second half of 2020 in the midst of an unprecedented global pandemic, achieving numerous financial and operating milestones in the process, including six-month record net revenues of $1.6 billion, representing 24.8% year-over-year growth, with clear aligner net revenues up 24.7% and systems and services net revenues up 25.3% year-over-year. We believe the compensation paid to our NEOs for 2020 appropriately reflects and rewards their contributions to that performance and is aligned with the long-term interests of our stockholders.
We encourage stockholders to read the Compensation Discussion and Analysis, beginning on page 27 of this proxy statement, which describes the details of our executive compensation program and the decisions made by the Compensation Committee in 2020.
Shareholders are being asked to approve the following resolution at the Annual Meeting:
"RESOLVED, that the compensation paid to the named executive officers, as disclosed in this proxy statement pursuant to the SEC's executive compensation disclosure rules, which disclosure includes the Compensation Discussion and Analysis, the compensation tables, and the narrative disclosures that accompany the compensation tables, is hereby approved."
As an advisory vote, this proposal is not binding on Align, the Board, or the Compensation Committee. However, the Compensation Committee and the Board value the opinions expressed by stockholders in their votes on this proposal and will consider the outcome of the vote when making future compensation decisions regarding named executive officers. It is expected that the next say-on-pay vote will occur at the 2022 annual meeting of stockholders.
You may vote "FOR", "AGAINST," or "ABSTAIN" from voting on this matter.
OUR BOARD RECOMMENDS THAT YOU VOTE "FOR" THE APPROVAL OF THE COMPENSATION OF OUR NAMED EXECUTIVE OFFICERS AS DISCLOSED IN THIS PROXY STATEMENT.
EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
This section explains how we compensate our named executive officers (NEOs).(each, a "NEO" and collectively, the "NEOs,") although much of the discussion also applies to all our senior management whose titles are senior vice president and above. Our NEOs for fiscal 2015year 2020 include our CEO, CFO and three other most highly compensated members of senior management. They are:
•Joseph M. Hogan, our President and Chief Executive OfficerCEO
David L. White,•John F. Morici, our Chief Financial Officer
Raphael S. Pascaud, our Chief Marketing Portfolio & Business Development Officer
Zelko Relic, ourCFO and Senior Vice President, Research & DevelopmentGlobal Finance
Roger E. George,•Simon Beard, our Senior Vice President Corporate and Legal AffairsManaging Director, Americas
•Julie Tay, our Senior Vice President and General CounselManaging Director, Asia Pacific
In accordance with the SEC’s executive compensation disclosure rules, we have also included discussion and disclosure of compensation for Thomas M. Prescott,•Raj Pudipeddi, our formerSenior Vice President and Chief ExecutiveProduct, Innovation & Marketing Officer who retired in June 2015.
Executive Summary
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2020 Executive Compensation | | The 2020 executive compensation program was designed to build upon our outstanding 2019 business and financial performance. |
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| Our executive compensation program emphasizes performance-based pay: |
| 92% of our CEO's total-target annual compensation was subject to annual performance goals or tied to the value of our common stock. |
| 84% of our other NEO's total-target annual compensation, on average, was subject to annual performance goals or tied to the value of our common stock. |
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| Based on strong performance following significant second quarter COVID-19 pandemic-related sales and business disruptions, we rebounded to achieve a weighted average of 361.5% of our revised financial targets resulting in our NEOs receiving annual incentive payments (bonuses) of 120% of their second half of 2020 target award opportunities. |
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Strong Compensation Pay Practices | | Core governance principles and practices are employed to align the compensation of senior management with stockholder interests. |
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| There were no changes to our Long-Term Incentive compensation program in 2020. |
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| After a mid-year reassessment, we made responsible adjustments to our existing Annual Cash Incentive Plan to focus management efforts on a strong second half of 2020 recovery by resetting performance metrics and reducing the maximum potential bonus opportunity by 50%. |
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| We continue to carefully manage equity burn rates with our overall equity-based burn rate for 2020 at 0.5% and our adjusted gross burn rate at 1.2%. |
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Strong Company Performance | | Our stock price increased 91.5% in 2020 as we outperformed both the NASDAQ Composite and S&P 500 Index. Our three-year total stockholder return ("TSR") of 140.5% far exceeds the NASDAQ Composite Index three-year TSR of 86.7% and the S&P 500 Index three-year "TSR" of 40.5%. |
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| Second half 2020 net revenues were a record $1.569 billion, a 24.8% increase over the same six month period in 2019. |
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| We shipped a record 1.1 million Invisalign cases in the second half of 2020, an increase of 33.2% compared to the same period in 2019. |
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| Second half 2020 operating income was $390.3 million, up 40.2% compared to the same period in 2019, and 24.9% of second half 2020 net revenues. |
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| Our cash and cash equivalents as of December 31, 2020 was $960.8 million which was primarily driven by strong cash flow from operations of $662.2 million. |
CEO Transition.
2020 Business Highlights
Mr. Hogan,
2020 was dominated by the COVID-19 pandemic and its unprecedented disruptions to our CEO, joined Align in June 2015 after the retirement of our then CEO, Thomas M. Prescott. Our board of directors conducted an extensive search for candidates to find a new CEO. The board believed that Mr. Hogan was the ideal choice as CEO due to his extensive experience in leading the strategicbusiness and operational aspects of large and complex, international organizations in the healthcare and technology industries. In designing Mr. Hogan’ compensation package, the Compensation Committee engaged its independent compensation consultant, Compensia, to examine peer CEO compensation,employees as well as pay packages for recently hired CEOs,the businesses and lives of our customers, their patients and our suppliers. In response, we reevaluated priorities, adapted to create a compensation offer that focusednew ways of doing business and developed new strategies and plans quickly and revised them frequently as conditions evolved. Throughout, our senior management remained steadfast to our objectives, focusing on aligning Mr. Hogan’s performance directly with stockholder interests. The offer also needed to be attractive when compared to other compensation opportunities available to Mr. Hogan. Following a reviewthe health and analysissafety of such data, the Compensation Committee recommended,our employees, our customers and the Board approved, the following compensation package:their patients, operational execution and continued progress toward our four principal pillars of growth: (i) International expansion; (ii) GP adoption; (iii) Patient demand & conversion; and (iv) Orthodontic utilization.
Annual base salary of $950,000;
A one-time signing bonus of $1,500,000;
A target annual cash incentive opportunity of 150% of annual base salary; and
An equity award of 111,000 RSUs and 111,000 MSUs.
More details of Mr. Hogan’s pay package can be found on page 51.
In connection with Mr. Prescott’s retirement, we entered into a Transition Agreement with him pursuant to which he received the following benefits: (i) seven months’ salary continuation through December 31, 2015 for an aggregate amount of $393,750; (ii) eligibility to receive a prorated annual bonus (5/12th) for 2015 as determined by the Board and based upon the recommendation of the Board’s Compensation Committee in accordance with Align’s standard practices; and (iii) a one-time bonus of $25,000 intended to assist with post-termination medical care costs (in lieu of any reimbursement of COBRA premiums).