This excerpt taken from the TEF 20-F filed Apr 12, 2006.
Telefónica acknowledges the importance of retaining and incentivising the following ten members of O2s management (the Key Managers):
Telefónica agrees that, with effect from the date on which the Offer becomes or is declared unconditional in all respects (the Unconditional Date) each of the Key Managers
(other than Rudolf Gröger) will have an initial fixed term contract of two years and that the terms of Rudolf Grögers service contract will be amended so that with effect from the Unconditional Date he will have an initial fixed term
contract of four years.
Telefónica further agrees that O2 will make available a pool of up to £17 million (allocated on a basis to be agreed) to fund retention payments to the Key Managers. The eligibility
of the Key Managers to participate in these payments will be conditional on their waiving their right to any compensation in respect of share scheme rights which did not fully vest on the change of control of O2, to which they would otherwise be
entitled under their service contracts if their employment was terminated in the twelve months following the Unconditional Date. Payments will be conditional on the Key Managers (i) not having given notice to resign their employment; and (ii) not
having been dismissed summarily (i.e. without notice or any payment in lieu of notice) in accordance with their service contract, in both cases prior to the second anniversary of the Unconditional Date and, subject thereto, will be made on that
In view of the fact that certain options under O2s UK, Irish and International SAYE schemes will become exercisable following the Unconditional Date over less than the full number of O2
shares otherwise available on the maturity of their savings contracts, Telefónica agrees that, subject to the provisions contained in paragraph 3.1 below, O2 will pay compensation to SAYE optionholders of an amount, not exceeding £21.9
million, equal to the additional profit which the employees would have received had they continued to make savings under the SAYE schemes to the bonus date of their savings contracts (when they would have acquired
the full number of shares under option). This compensation payment will be subject to UK income tax and employees and employers NICs (and equivalent tax and social security contributions outside the UK).
UK SAYE options granted on 20 December 2002 under a three-year savings contract (Maturing Options) will reach their bonus date on 13 February 2006. This will enable holders of
Maturing Options to exercise using the terminal bonus payable under their savings contract, and is therefore beneficial to them. The final exercise date for such options is the expiry of any period during which Telefónica is bound or entitled
to acquire shares in O2 under the compulsory acquisition procedures in sections 428 to 430F of the Companies Act 1985 (Compulsory Acquisition). In the light of this, Telefónica agrees that it will not issue notices implementing
Compulsory Acquisition at a date earlier than 23 January 2006 (unless such delay would result in Telefónica being unable to implement Compulsory Acquisition at all).
Existing Share Options and Awards
O2 confirms that the Annex to this schedule contains accurate and complete details, on a fully diluted basis, of all options over and awards in respect of O2 shares granted as at 11 November 2005
to employees and directors under all employee share schemes operated by O2 or relating to O2 shares (the Employee Share Schemes). The 8,902,650,037 O2 Shares referred to in the Annex to this schedule as the Total diluted equity
base constitutes the existing issued share capital of O2 together with 134,829,724 net O2 Shares being the only O2 Shares capable of being issued under the Employee Share Schemes or otherwise pursuant to any obligation of O2. This assumes that
the Unconditional Date occurs prior to January 31st 2006. In the event that the Unconditional Date occurs after January 31st 2006, certain options under O2s UK, Irish and International SAYE schemes described in Section 2.1 above might become
exercisable and therefore the number of net O2 Shares capable of being issued under the Employee Share Schemes referred to above would increase (in an amount not exceeding 16,073,796 O2 Shares) and there would be a corresponding decrease in the
£21.9m compensation payable to SAYE scheme participants referred to in section 2.1 above.
Subject to Telefónicas rights under the Code to close the Offer, the Offer will extend to all O2 shares acquired on the exercise or vesting of all options and awards granted to
employees and directors under the Employee Share Schemes.
O2 confirms that it will not, following the date of the announcement of the Offer, grant any options or awards over O2 shares pursuant to the Employee Share Schemes or otherwise, without the
consent in writing of Telefónica.
O2 confirms that no O2 shares will be capable of being issued or awarded under the Employee Share Schemes or otherwise after the implementation by Telefónica of Compulsory
Employees and directors whose options under O2s Executive Share Option Schemes become exercisable on the Unconditional Date (or are already exercisable at that date), will not be required
to finance the exercise of such options. Instead, arrangements will be put in place (cashless exercise) by which the exercise price will be deducted from the consideration due on the acquisition of their O2 shares, and paid to O2 (which will also
arrange the deduction of any employees National Insurance Contributions (and equivalent social security contributions outside the UK) (NICs) and income tax liabilities due on the exercise of any non-tax favoured options, and will
remit such employees NICs and income tax to HM Revenue & Customs or the equivalent outside the UK), and pay the balance to the employee, in cash or loan notes as appropriate.
Vesting levels under those Employee Share Schemes which are performance-related (that is, O2s Performance Share Plan and Deferred Equity Incentive Plan) and require the exercise of
discretion in relation to the Offer will be as determined by the Remuneration Committee of O2. Telefónica is content with an arrangement under which:
Awards made in 2003 and 2004 would vest in full, and the O2 shares under those awards be released immediately; and
Awards made in 2005 would vest in full (and O2 be released from any further obligation in respect of the awards), but the Offer proceeds for those O2 shares under award would be released on the
first anniversary of the Unconditional Date subject to the participant (i) not having given notice to resign their employment, and (ii) not having been dismissed for cause in accordance with their service contract, in both cases prior to such first
The Chairman of O2 has a conditional share award over 292,397 O2 shares which would normally vest in July 2007 provided he built up a personal holding of 350,877 O2 shares by 29 July 2005. The
Chairman built up his personal holding by 29 July 2005. The O2 Remuneration Committee has determined that the full number of O2 shares under the award should vest on the Unconditional Date, and his personal shareholding should be
Cash bonus scheme
Telefónica agrees that O2 will honour the cash bonus payments which will become payable under the 2005/06 cash bonus scheme. In light of the fact that Telefónica may, from the date
on which the Offer becomes or is declared unconditional in all respects (the Unconditional Date), set different commercial objectives for O2 to those that have been assumed for the 2005/06 bonus scheme, Telefónica agrees that the
Remuneration Committee of O2 will determine the minimum level of bonus for 2005/06 by reference to performance to the end of December 2005 (which would include updated forecasts to 31 March 2006). This will be paid at the usual time.
Where an employees employment is terminated by O2 or Telefónica other than for cause in the 12 months following the Unconditional Date (whether before or after 31 March 2006),
without prejudice to other elements of compensation under the employees termination package, O2 will have the discretion to pay to the employee a pro-rata bonus determined by reference to the full year bonus paid or payable in respect of the
financial year ending 31 March 2006.
At the request of the O2 board, the trustees of the UK Defined Benefit Pension Scheme have met with the companys Consulting Actuary and obtained the latest available information as to the
valuation of the scheme assets as at 30 September 2005. Based on the latest available information, the trustees concluded that the amount required to fund the accrued benefits of members within the scheme is in deficit to the amount of £81
million as at this date. Telefónica agrees that O2 may make a payment to the pension scheme not exceeding £81 million prior to the Unconditional Date.
Provision in O2 financial statement
On or prior to the Unconditional Date, all payments agreed to be made by O2 under the terms of this schedule (including all employers NICs (or equivalent social security contributions
outside the UK) which O2 is required to pay in respect of O2 shares acquired under or payments received in respect of the Employee Share Schemes) will, so far as permissible under applicable accounting standards, be fully provided for in the
financial statements of O2 for the financial period of O2 ending 31 December 2005.
Other employee issues
Telefónica considers of primary importance the retention and integration of O2 executives and employees into the Telefónica Group, as well as their motivation to achieving
outstanding performance and business results. To that end, Telefonica is committed to develop a long term incentive programme for the future.