A lawsuit filed Thursday in federal court in New York City claims that Applied Materials Inc. has not complied with Securities and Exchange Commission (SEC) rules governing executive and director compensation. The rules were reportedly initiated in 2006 following the Enron, WorldCom, and Tyco options-related scandals.
In particular, the filing accuses Applied Materials of failing to disclose the model and the assumptions used to calculate the fair value of equity-based awards given to certain officers and directors. With those metrics, it would have been possible for analysts and shareholders to verify the disclosed fair values using a pricing calculator. Instead, shareholders, allegedly reliant on such information in order to make an informed vote, are left in the dark.
Per its website, Applied Materials self-describes as “the leader in materials engineering solutions used to produce virtually every new chip and advanced display in the world.” The complaint says that since at least 2008, “Applied Materials has represented in its proxy statements that the assumptions used to calculate its most highly-compensated executives’ equity-based compensation are available in the corresponding annual report on Form 10-K provided with the proxy statement. But that has never been true.”
According to the lawsuit, Applied Materials did not even share the model used to calculate company principals’ equity-based awards. Instead its 2008 to 2018 filings said that such valuations were arrived at by simply using the price of the stock on the date of grant, which is unequivocally false, the complaint says.
From 2019 onwards, Applied Materials has disclosed that it uses a Monte Carlo model but reportedly still withheld the underlying assumptions it used. The complaint claims that these omissions are “all the more glaring” because the company provided, in its Form 10-Ks, both the model and underlying assumptions used to calculate employee stock purchase plans.
The complaint states two claims for relief under the Securities Exchange Act of 1934. It requests that Applied Materials be ordered to disclose the assumptions used to determine compensation offered to certain officers in fiscal 2019, 2020, and 2021 and deduct any understated compensation. The complaint also seeks damages flowing from the purportedly unlawful 2022 proxy statement and an award of the plaintiff’s litigation fees and costs.
The shareholder is represented by Barrack, Rodos & Bacine.
