UPM annual report 2015

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IN BRIEF

STRATEGY

BUSINESSES

STAKEHOLDERS

GOVERNANCE

ACCOUNTS

37 Share-based payments Share-based rewards

38 Related party transactions

The Performance Share Plan consists of annually commencing three-year plans. The plan is targeted at Group Executive Team (GET) members and other selected members of the management and it con- sists of a three-year earning period. The earned shares are delivered after the earning period has ended. Under the plans, UPM shares are awarded based either on group-level performance or total shareholder return during a three-year earning period. Total shareholder return takes into account share price appreciation and paid dividends. The number of shares earned under Performance Share Plans as well as other key figures of the plans are presented in the table below.

market. In addition to Metsähallitus, individuals and companies, as well as municipalities and parishes, have filed claims relating to the Market Court decision. The capital amount of all of the claims totals EUR 196 million in the aggregate jointly and severally against UPM and two other companies; alternatively and individually against UPM, this represents EUR 34 million in the aggregate. It is expected that the amounts claimed will change as a result of new claims, which have not yet been served. In addition to the claims on capital amounts, the claimants are also requesting compensation relating to value added tax and interests. UPM considers all the claims unfounded in their entirety. No provision has been made in UPM’s accounts for any of these claims. In 2012 UPM commenced arbitration proceedings against Metsäliitto Cooperative and Metsä Board Corporation due to their breaches of UPM’s tag-along right under the shareholders’ agreement concerning Metsä Fibre Oy in connection with the sale of shares in Metsä Fibre to Itochu Corporation. UPM claimed jointly from Metsäliitto and Metsä Board a capital amount of EUR 58.5 million. Metsäliitto and Metsä Board had sold a 24.9% holding in Metsä Fibre to Itochu Corporation for EUR 472 million. In connection with the transaction with Itochu, Metsäliitto had exercised a call option to purchase UPM’s remaining 11% shareholding in Metsä Fibre for EUR 150 million. The arbitral tribunal rendered its final decision (arbitral award) in February 2014 and ordered Metsäliitto and Metsä Board to pay UPM the capital amount of EUR 58.5 million and penalty interest and compensate UPM for its legal fees. As a result, UPM recorded an income of EUR 67 million as a special item in Q1 2014. In May 2014 Metsäliitto and Metsä Board commenced litigation proceedings in the Helsinki District Court challenging the arbitral award and requesting the District Court to set aside the arbitral award or to declare it null and void. On 18 June 2015 the District Court dismissed the actions by Metsäliitto and Metsä Board. Metsäliitto and Metsä Board have appealed to the Helsinki Court of Appeal. On 27 March 2015 Helsinki District Court rendered decisions regarding UPM’s action for invalidation of a patent of Neste Oil Oyj (Neste) and Neste’s action for a declaratory judgment against UPM, in which Neste sought the court’s declaration that based on its patent Neste enjoys protection against the technology allegedly used by UPM at its biorefinery. The District Court dismissed both actions. The deci- sions have been appealed to the Helsinki Court of Appeal. Neste filed a separate action with the Finnish Market Court in which Neste requested the Market Court to prohibit UPM from continuing the alleged infringement of Neste’s patent at UPM’s biorefinery. The Mar- ket Court rejected Neste’s action on 3 December 2015. The decision is not final. In February 2015, the claims relating to the implementation of the social plan after the closure of the Docelles mill in 2014 were brought to Commercial Court of Epinal, France. The claimants, the co-operative (SCOP) established by former employees of the Docelles mill as well as certain former employees of the mill, seek the forced sale of the assets of the Docelles mill to the SCOP for 2 euros and damages in the amount of approximately EUR 55 million for the alleged lost sales. Commercial Court dismissed all of the claimants’ claims in its judgment on 29 September 2015. The judgment was appealed by the claimants to Court of Appeal of Nancy, which dismissed all of the claimants’ claims in its judgment on 27 January 2016. The judgement is not final. Other shareholdings In Finland, UPM is participating in a project to construct a new nuclear power plant unit Olkiluoto 3 (OL3) through its shareholdings in Poh- jolan Voima Oy. Pohjolan Voima Oy is a majority shareholder of Teollisuuden Voima Oyj (TVO), holding 58.5% of its shares. UPM’s indirect share of OL3 is approximately 31%. Originally the commer- cial electricity production of the OL3 plant unit was scheduled to start in April 2009. The completion of the project, however, has been de- layed. In September 2014 TVO announced that it had received addi- tional information about the schedule for the OL3 project from the AREVA-Siemens-Consortium (Supplier), which is constructing OL3 as a fixed-price turnkey project. According to this information, the start of regular electricity production of the plant unit would take place in late 2018. According to TVO, the proposed schedule is currently undergo- ing detailed scrutiny.

The Board of Directors and the Group Executive Team There have not been any material transactions between UPM and its members of the Board of Directors or the Group Executive Team (key management personnel) or persons closely associated with these mem- bers or organisations in which these individuals have control or signifi- cant influence. There are no loans granted to any members of the Board of Directors or the Group Executive Team at 31 December 2015 and 2014. Shares held by members of the Board of Directors and members of the Group Executive Team are disclosed in pages 65 and 69. Remuneration to members of the Board of Directors and the Group Executive Team are disclosed in Note 7. Associated companies and joint ventures The Group’s recovered paper purchases in 2015 from associated companies and joint ventures were close to 620,000 tonnes (620,000 tonnes). In Finland, the Group organises its producer’s responsibility of recovered paper collection through Paperinkeräys Oy, in which the Group has 33.1% interest. Austria Papier Recycling GmbH purchases recovered paper in Austria, in which the Group has a 33.3% equity interest. L.C.I s.r.l. is an Italian recovered paper purchasing company in which the Group has a 50.0% interest. ASD Altpapier Sortierung Dachau GmbH is a German recovered paper sorting company in which the Group has a 50.0% interest. The purchases from those four companies represented approximately 81% (80%) of total recovered paper purchase amount from associated companies and joint ventures. Recovered paper purchases are based on market prices. The balances with the Group's associated companies and joint ventures are presented in Note 21. Pension Funds In Finland, Group has a pension foundation, Kymin Eläkesäätiö, which is a separate legal entity. Pensions for about 10% of the Group’s Finnish employees are arranged through the foundation. In 2015 the contributions paid by UPM to the Foundation amounted to EUR 10 million (7 million). The Foundation manages and invests the contributions paid to the plan. The fair value of the Foundation’s assets at 31 December 2015 was EUR 357 million (351 million), of which 49% was in the form of equity instruments, 40% in the form of debt instruments and 11% invested in property and money market. In the UK, the single UPM Pension Scheme operates under a Trust which is independent from the Company. The Trust consists of various Defined Benefit sections, all of which are closed to future accrual and one common Defined Contribution section which is open to all UPM employees in the UK. The Group made contributions of EUR 28 million (6 million) to the Defined Benefit sections of the Scheme in 2015. The next UK actuarial valuation will be in April 2016. The fair value of the UK Defined Benefit fund assets at 31 December 2015 was EUR 409 million (363 million), of which 62% was invested in equity instruments, 28% in debt instruments and 10% in property and money market. Subsidiaries and joint operations The Group’s principal subsidiaries and joint operations are disclosed in Note 36.

The Group’s long-term incentives consist of the Performance Share Plan (PSP) for senior executives and the Deferred Bonus Plan (DBP) for other key employees. In both PSP and DBP, earning of shares is subject to achievement of predetermined earning criteria. PSP and DBP share deliveries are executed by using already existing shares and the plans, therefore, have no dilutive effect.

Performance share plans No. of participants (31 Dec. 2015)

PSP 2012-2014

PSP 2013-2015

PSP 2014-2016

PSP 2015-2017

Actual achievement

22.3%

90.4%

–

Max no. of shares to be delivered 1) : to the President and CEO

48,837 103,695 85,855 238,387

197,976 397,760 402,280 998,016

125,000 370,000 347,500 842,500

125,000 370,000 345,000 840,000

to other members of GET to other key individuals

Total max no. of shares to be delivered

Share delivery (year)

2015

2016

2017

2018

Operating cash flow (60%) and EPS (40%)

Total shareholder return (100%)

Earning criteria (weighting)

1) For PSP 2012–2014 and PSP 2013–2015 the gross amount of the actual no. of shares earned.

The Deferred Bonus Plan is targeted at other selected key employees of the Group and it consists of annually commencing plans. Each plan consists of a one-year earning period and a two-year restriction peri- od. UPM shares are awarded based on achievement of group and/or

business area EBITDA targets. Prior to share delivery, the share re- wards earned are adjusted with dividends and other capital distribu- tion, if any, paid to all shareholders during the restriction period. Key figures related to the Deferred Bonus Plans are presented in the table below.

Deferred bonus plans No. of participants (at grant) No. of participants (31 Dec. 2015)

DBP 2012

DBP 2013

DBP 2014

DBP 2015

580 489

560 505

395 380

350 348

Max no. of shares to be delivered (at grant)

1,800,000

1,640,000

950,000 312,637

800,000 302,869

Estimated no. of shares to be delivered as at 31 Dec. 2015 1)

616,584

255,451

Share delivery (year)

2015

2016

2017

2018

Group/Business Area EBITDA

Earning criteria

Financial STI targets

1) For DBP 2012 the gross amount of the actual no. of shares earned.

The indicated actuals and estimates of the share rewards under the Performance Share Plan and the Deferred Bonus Plan represent the gross amount of the rewards of which the applicable taxes will be

deducted before the shares are delivered to the participants. The amount of estimated payroll tax accruals at 31 December 2015 recognised as liabilities were EUR 14.7 million (9.9 million).

39 Commitments and contingencies Contingent liabilities

The Group is a defendant or plaintiff in a number of legal proceedings incidental to its operations. These lawsuits primarily involve claims arising from commercial law issues. Group companies In 2011, Metsähallitus (a Finnish state enterprise which administers state-owned land) filed a claim for damages against UPM and two other Finnish forest companies. The claim relates to the Finnish Market Court decision of 3 December 2009 whereby the defendants were deemed to have breached competition rules in the Finnish roundwood

contents

accounts

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128

UPM Annual Report 2015

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