Corporate Governance

Currently there are two binding incentive schemes for the Netia Group (the employee share option plans): 

1. The plan approved by Netia’s supervisory board in 2002, which expires on December 20, 2012 (the "Plan”); and

2. The plan for the years 2011-2020 adopted by Netia's supervisory board on February 25, 2011 (the "2011 Plan").

Both plans are aimed at encouraging, retaining and motivating participants and to align their interests directly with those of the shareholders. Schemes participants are granted options for the Company’s shares for new issue. The number of shares which can be issued for the purposes of the Plan may not exceed 18,373,785 (the total number of shares issued under the Plan through December 31, 2011 was 7,379,290). The number of shares which can be issued for the purposes of the  2011 Plan may not exceed 13,626,837 (no shares have been issued under the 2011 Plan so far).

The desctiption of both plans follows below.

PLAN

The execution of the Plan has been entrusted to Netia’s supervisory board. To the extent provided for in the Plan, the supervisory board, at its exclusive discretion, shall make decisions relating to, among other things, participation in the Plan, the allotment of options, and the terms & conditions of their being exercised. The Company’s management board may present the supervisory board with recommendations related to other employees’ participating in the Plan.

In 2007, to motivate members of the management board and senior manager to build Netia’s value, the supervisory board awarded a total of 38,000,000 stock options to members of Netia’s management board (in three tranches with the strike prices of PLN 5.50, PLN 7.00 and PLN 8.25, respectively). Furthermore, the supervisory board has consented to the granting of a total of 15,700,000 options to Netia’s senior managers (in two tranches and the strike prices for the particular tranches of options are: PLN 5.50 and PLN 7.00 respectively). In parallel, Netia’s supervisory board authorized the President of the management board to grant options to senior managers.

In 2008 the supervisory board awarded a total of 8,333,500 stock options to the management board with the strike price of PLN 3.50¹, authorizing in parallel the President of the management board to grant a total of 4,921,875 options with the same strike price to senior managers. In addition, the supervisory board awarded to a new management board member 5,000,000 options (in three tranches with the strike prices of PLN 5.50, PLN 7.00 and PLN 8.25, respectively).

In 2009 the supervisory board awarded 4,166,500 options to a new management board member (in four tranches with the strike prices of PLN 3.50¹, 5.50, PLN 7.00 and PLN 8.25, respectively).

As at December 31, 2011, 45,754,751 options were outstanding and the total number of vested options was 44,304,751. The vesting period for the options is up to three years from the date of grant. As at December 31 2011, the weighted average remaining contractual life of the outstanding options was 1 year. All the outstanding options are exercisable until December 20, 2012. Upon exercise of the options, Netia issues to each exercising participant the number of shares representing such participant’s gain resulting from the exercise of the options, being the difference between the exercise price of Netia’s shares and the strike price of the options. The participant is not required to pay the strike price, ranging from PLN 3.50 to PLN 8.25.

Netia recognizes the cost of share-based awards to employees (including share options) over the vesting period and the fair value of options is determined using a binomial pricing model. The cost of options recorded in the twelve-month period ended December 31, 2011 amounted to PLN 1.0 million. The Company estimates that the cost of the unvested options will amount to PLN 87 thousand in 2011.

The table below summarizes the data on the stock option that were in the program at December 31, 2011:

¹ Strike price is pegged to the market price of Netia shares at the date of entering the scheme, however it cannot be lower than PLN 3.50.
² Management Board have discretion to issue up to 0.6 million of PLN 3.50 options and 2.8 million of higher priced options to senior management.

2011 PLAN

On May 26, 2010, the annual shareholders meeting resolved to adopt a set of rules, to be administered by the Company’s supervisory board, for the issuing of up to 27,253,674 share options to the Management Board and employees of Netia with a latest possible exercise date of May 26, 2020. In addition, in order to satisfy the claims arising from the exercise of the options under the Plan, 2011 the shareholders meeting resolved to authorize the issuance of up to 13,626,837 series L shares.

The basic terms of the 2011 Plan adopted by Netia’s supervisory board are as follows:

• The stock options shall be granted in the form of annual grants provided that in each calendar year the supervisory board may grant up to 3,893,382 stock options and the number of stock options granted in each calendar year to members of the Company’s management board may not exceed 1,946,691 stock options.


• The stock options may be exercised by the 2011 Plan participants within certain open periods, set by the supervisory board, falling between the vesting date of the stock options (which cannot be shorter than three years from the date of the stock option grant) and the expiry date of the stock options (which cannot be longer than the term of the 2011 Plan, i.e. by 26 May 2020). The supervisory board determines the vesting dates, the expiry dates and the strike price of each stock option grant.


• The supervisory board determined the following open periods in which participants may exercise their stock options: (i) the two-week period starting from the first day on which the Company’s shares are traded following the publication of the Company’s periodic reports; (ii) two-week period preceding the expiry date of the relevant stock option grant; and (iii) the period in which a tender offer for the sale or swap of the Company’s shares aimed at surpassing the threshold of holding more than 33% of all the voting securities in the Company is ongoing.


• The 2011 Plan participants are entitled to exercise their stock options on the condition that they continue their engagement with the Netia Group until the vesting date of the stock options (subject to change of control events and the termination of their engagement by the Netia Group without material cause) and the fulfillment of the business criteria set by the supervisory board for each year of the 2011 Plan. The proportion of the stock options exercised versus the number of stock options granted shall be equal to the lower of: 100% or the actual performance of the objectives set out as part of the performance criteria approved by the supervisory board and applicable in the financial year in which the stock options were granted. 


• A participant exercising the stock options shall receive, free of charge, for each exercised stock option a number of series 1 warrants equal to the difference between the average market price of the Company’s shares as of the date of exercising the stock option and the strike price of the stock option divided afterwards by the average market price of the Company’s shares as of the date of exercising the stock option, subject to the limitation that one stock option authorizes its holder to receive up to one half of a series 1 warrant.


• One series 1 warrant authorizes its holder to subscribe for one series L share in the Company at its nominal value. The total number of series L shares of the Company which may be issued under the 2011 Plan is 13,626,837.


• The 2011 Plan shall be of a non-cash nature, whereby in order to pay the nominal value of the shares subscribed for pursuant to the 2011 Plan, the relevant company from the Netia Group in which the participant is employed shall grant to the participant on the date of the exercise of the stock options remuneration in a net amount equal to the nominal value of the Shares subscribed for by the given participant.


• The supervisory board of the Company may authorize the management board to establish the terms and determine the stock option grants to employees of the Netia Group.
  

Detailed terms of the 2011 Plan and vesting conditions for granted options are attached in the annexes below.

Simultaneously with the adoption of the 2011 Plan, on February 25, 2011 the supervisory board of the Company awarded 2011 stock option grants to the management board members, totaling 1,725,000 options, on the terms set forth below: Mr. Mirosław Godlewski, President of the management board, was granted 575,000 stock options, and Messrs. Jonathan Eastick, Grzegorz Esz, Piotr Nesterowicz and Tom Ruhan were granted 287,500 stock options each. The strike price for the options granted to the management board equals PLN 5.23 and the earliest vesting date is February 25, 2014. The final exercise date for all granted stock options shall be May 26, 2020.

Moreover, on February 25, 2011 the supervisory board authorized the management board of the Company to grant to 65 employees of the Netia Group the stock options for the year 2011 in the total amount of 2,186,382. As at September 30, 2011 the management board granted, on the basis of the above authorization, 1,828,000 options to key employees.

As at December 31, 2011, the weighted average remaining contractual life of the outstanding options was 8.5 years. The outstanding options are exercisable until May 26, 2020. Upon exercise of the options, Netia will issue to each exercising participant the number of shares representing such participant’s gain resulting from the exercise of the options, being the difference between the market price of the Company’s shares as of the date of exercise of the options and strike price of the options. The participant will not be required to pay the strike price ranging from PLN 5.23 to PLN 5.64. The fair value of these granted options was PLN 6.5m as at the grant date.

The cost of options recorded in the twelve-month period ended December 31, 2011 amounted to PLN 0,9m.