Amendment No. 4 to Form 10

As filed with the Securities and Exchange Commission on June 18, 2015

Registration No. 001-36859

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 4 to

FORM 10

 

 

GENERAL FORM FOR REGISTRATION OF SECURITIES

Pursuant to Section 12(b) or (g) of the Securities Exchange Act of 1934

 

 

PayPal Holdings, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Delaware   47-2989869

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

2211 North First Street

San Jose, California

  95131
(Address of Principal Executive Offices)   (Zip Code)

(408) 967-1000

(Registrant’s telephone number, including area code)

 

 

Securities to be registered pursuant to Section 12(b) of the Act:

 

Title of each class

to be so registered

 

Name of each exchange on which

each class is to be registered

Common Stock  

The Nasdaq Global Select Market

Securities to be registered pursuant to Section 12(g) of the Act:

None

 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

 

 

 


PayPal Holdings, Inc.

INFORMATION REQUIRED IN REGISTRATION STATEMENT

CROSS-REFERENCE SHEET BETWEEN INFORMATION STATEMENT

AND ITEMS OF FORM 10

Certain information required to be included herein is incorporated by reference to specifically identified portions of the body of the information statement filed herewith as Exhibit 99.1. None of the information contained in the information statement shall be incorporated by reference herein or deemed to be a part hereof unless such information is specifically incorporated by reference.

 

Item 1. Business.

The information required by this item is contained under the sections of the information statement entitled “Information Statement Summary,” “Risk Factors,” “Business,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Certain Relationships and Related Party Transactions,” and “Where You Can Find More Information.” Those sections are incorporated herein by reference.

 

Item 1A. Risk Factors.

The information required by this item is contained under the section of the information statement entitled “Risk Factors.” That section is incorporated herein by reference.

 

Item 2. Financial Information.

The information required by this item is contained under the sections of the information statement entitled “Unaudited Pro Forma Condensed Combined Financial Statements,” “Selected Historical Combined Financial Data,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Those sections are incorporated herein by reference.

 

Item 3. Properties.

The information required by this item is contained under the section of the information statement entitled “Business.” That section is incorporated herein by reference.

 

Item 4. Security Ownership of Certain Beneficial Owners and Management.

The information required by this item is contained under the section of the information statement entitled “Security Ownership of Certain Beneficial Owners and Management.” That section is incorporated herein by reference.

 

Item 5. Directors and Executive Officers.

The information required by this item is contained under the sections of the information statement entitled “Directors” and “Management.” Those sections are incorporated herein by reference.

 

Item 6. Executive Compensation.

The information required by this item is contained under the sections of the information statement entitled “Compensation Discussion and Analysis” and “Executive Compensation.” Those sections are incorporated herein by reference.

 

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Item 7. Certain Relationships and Related Transactions.

The information required by this item is contained under the sections of the information statement entitled “Management” and “Certain Relationships and Related Party Transactions.” Those sections are incorporated herein by reference.

 

Item 8. Legal Proceedings.

The information required by this item is contained under the section of the information statement entitled “Business—Legal and Regulatory Proceedings.” That section is incorporated herein by reference.

 

Item 9. Market Price of, and Dividends on, the Registrant’s Common Equity and Related Stockholder Matters.

The information required by this item is contained under the sections of the information statement entitled “Dividend Policy,” “Capitalization,” “The Separation and Distribution,” and “Description of PayPal’s Capital Stock.” Those sections are incorporated herein by reference.

 

Item 10. Recent Sales of Unregistered Securities.

The information required by this item is contained under the sections of the information statement entitled “Description of Material Indebtedness” and “Description of PayPal’s Capital Stock—Sale of Unregistered Securities.” Those sections are incorporated herein by reference.

 

Item 11. Description of Registrant’s Securities to be Registered.

The information required by this item is contained under the sections of the information statement entitled “Dividend Policy,” “The Separation and Distribution,” and “Description of PayPal’s Capital Stock.” Those sections are incorporated herein by reference.

 

Item 12. Indemnification of Directors and Officers.

The information required by this item is contained under the section of the information statement entitled “Description of PayPal’s Capital Stock—Limitations on Liability, Indemnification of Officers and Directors and Insurance.” That section is incorporated herein by reference.

 

Item 13. Financial Statements and Supplementary Data.

The information required by this item is contained under the section of the information statement entitled “Index to Financial Statements” and the financial statements referenced therein. That section is incorporated herein by reference.

 

Item 14. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

 

Item 15. Financial Statements and Exhibits.

 

(a) Financial Statements

The information required by this item is contained under the section of the information statement entitled “Index to Financial Statements” and the financial statements referenced therein. That section is incorporated herein by reference.

 

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(b) Exhibits

The following documents are filed as exhibits hereto:

 

Exhibit
Number

  

Exhibit Description

  2.1    Form of Separation and Distribution Agreement by and between eBay Inc. and PayPal Holdings, Inc.†
  3.1    Form of Amended and Restated Certificate of Incorporation of PayPal Holdings, Inc.**
  3.2    Form of Amended and Restated Bylaws of PayPal Holdings, Inc.**
10.1    Form of Operating Agreement by and between eBay Inc. and PayPal Holdings, Inc.†
10.2    Form of Transition Services Agreement by and between eBay Inc. and PayPal Holdings, Inc.†
10.3    Form of Tax Matters Agreement by and between eBay Inc. and PayPal Holdings, Inc.†
10.4    Form of Employee Matters Agreement by and between eBay Inc. and PayPal Holdings, Inc.†
10.5    Form of Intellectual Property Matters Agreement between eBay Inc. and PayPal Holdings, Inc.†
10.6    Form of Colocation Services Agreement between eBay Inc. and PayPal Holdings, Inc.†
10.7    Form of Indemnity Agreement between PayPal Holdings, Inc. and individual directors and officers†
10.8    Form of PayPal Employee Incentive Plan†
10.9    Form of PayPal Holdings, Inc. 2015 Equity Incentive Award Plan†
10.10    Form of Global Restricted Stock Unit Award Agreement (and Performance-Based Restricted Stock Unit Agreement) under the PayPal Holdings, Inc. 2015 Equity Incentive Award Plan†
10.11    Form of Global Stock Option Agreement under the PayPal Holdings, Inc. 2015 Equity Incentive Award Plan†
10.12    Form of Director Annual Award Agreement under the PayPal Holdings, Inc. 2015 Equity Incentive Award Plan†
10.13    Form of Electing Director Quarterly Award Agreement under the PayPal Holdings, Inc. 2015 Equity Incentive Award Plan†
10.14    Form of PayPal Holdings, Inc. Employee Stock Purchase Plan†
10.15    Form of PayPal Holdings, Inc. Deferred Compensation Plan†
10.16    Offer Letter dated September 29, 2014 between eBay Inc. and Daniel Schulman†
10.17    Amendment dated December 31, 2014 to Offer Letter between eBay Inc. and Daniel Schulman†
10.18    Letter dated May 19, 2015 from eBay Inc. to William Ready†
10.19    Letter dated May 22, 2015 from eBay Inc. to James Barrese†
10.20    Letter dated December 31, 2014 from eBay Inc. to Patrick Dupuis†
10.21    Form of Braintree, Inc. Restricted Stock Unit Agreement between Braintree, Inc. and William J. Ready dated September 25, 2013†
10.22    PayPal Holdings, Inc. Change in Control Severance Plan for Key Employees, dated June 16, 2015**
10.23    PayPal Holdings, Inc. SVP and Above Standard Severance Plan, dated June 16, 2015**
21.1    List of subsidiaries†
99.1    Information Statement of PayPal Holdings, Inc., preliminary and subject to completion, dated June 18, 2015**

 

** Filed herewith.
Previously filed.

 

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SIGNATURES

Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized.

 

PayPal Holdings, Inc.
By:    

/s/ Daniel H. Schulman

Name: Daniel H. Schulman

Title:   President and CEO-Designee

Date: June 18, 2015

 

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EX-3.1

Exhibit 3.1

AMENDED AND RESTATED CERTIFICATE OF INCORPORATION

OF

PAYPAL HOLDINGS, INC.

PayPal Holdings, Inc., a corporation organized and existing under the laws of the State of Delaware, does hereby certify as follows:

A. The name of the corporation is PayPal Holdings, Inc. The date of the filing of its original certificate of incorporation with the Secretary of State was January 30, 2015.

B. This amended and restated certificate of incorporation amends, restates and integrates the certificate of incorporation of said corporation (the “original certificate of incorporation”) and has been duly adopted in accordance with the provisions of Sections 242 and 245 of the General Corporation Law of the State of Delaware (the “DGCL”) by the written consent of its sole stockholder in accordance with Section 228 of the DGCL.

C. The text of the original certificate of incorporation is hereby amended and restated to read herein as set forth in full.

ARTICLE I

The name of the corporation is PayPal Holdings, Inc. (the “corporation”).

ARTICLE II

The address of the registered office of the corporation in the State of Delaware is The Corporation Trust Company, 1209 Orange Street, City of Wilmington, County of New Castle. The name of its registered agent at that address is The Corporation Trust Company.

ARTICLE III

The purpose of the corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware.

ARTICLE IV

A. The total number of shares of all classes of stock which the corporation has the authority to issue is 4,100,000,000 shares, consisting of two classes: 4,000,000 shares of common stock, $0.0001 par value per share (the “Common Stock”), and 100,000,000 shares of preferred stock, 0.0001 par value per share (the “Preferred Stock”).

B. Except as may otherwise be provided in this certificate of incorporation, in a Certificate of Designation (as defined below) or as required by law, the holders of the outstanding shares of Common Stock shall have the right to vote on all questions to the exclusion of all other stockholders, each holder of record of Common Stock being entitled to one vote for each share of Common Stock standing in the name of the stockholder on the books of the corporation.


C. The Board of Directors is authorized, subject to any limitations prescribed by the law of the State of Delaware, to provide for the issuance of the shares of Preferred Stock in one or more series, for such consideration and for such corporate purposes as the Board of Directors (or a duly authorized committee thereof) may from time to time determine, and, by filing a certificate (referred to as a “Certificate of Designation”) pursuant to the applicable law of the State of Delaware, to establish from time to time the number of shares to be included in each such series, to fix the designation, powers, preferences and rights of the shares of each such series and any qualifications, limitations or restrictions thereof to the fullest extent now or hereafter permitted by this certificate of incorporation and the laws of the State of Delaware, including, without limitation, voting rights, dividend rights, liquidation rights, redemption rights and conversion rights, as shall be stated and expressed in a resolution or resolutions adopted by the Board of Directors (or such committee thereof) providing for the issuance of, or increase or decrease of the number of shares of, such series of Preferred Stock.

D. Except as otherwise expressly provided in any Certificate of Designation designating any series of Preferred Stock pursuant to the foregoing provisions of this Article IV, any new series of Preferred Stock may be designated, fixed and determined as provided herein by the Board of Directors without approval of the holders of Common Stock or the holders of Preferred Stock, or any series thereof, and any such new series may have powers, preferences and rights, senior to, junior to or pari passu with the rights of the Common Stock, the Preferred Stock, or any future class or series of Preferred Stock or Common Stock. Each series of Preferred Stock shall be distinctly designated. The authority of the Board of Directors with respect to each series of Preferred Stock shall include, but not be limited to, determination of the following:

 

  (i) the designation of the series, which may be by distinguishing number, letter or title;

 

  (ii) the number of shares of the series, which number the Board of Directors may thereafter (except where otherwise provided in the Certificate of Designation) increase or decrease (but not below the number of shares thereof then outstanding);

 

  (iii) the amounts payable on, and the preferences, if any, of shares of the series in respect of dividends, and whether such dividends, if any, shall be cumulative or noncumulative;

 

  (iv) dates at which dividends, if any, shall be payable;

 

  (v) the redemption rights and price or prices, if any, for shares of the series;

 

  (vi) the terms and amount of any sinking fund provided for the purchase or redemption of shares of the series;

 

  (vii) the amounts payable on, and the preferences, if any, of shares of the series in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the corporation;

 

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  (viii) whether the shares of the series shall be convertible into or exchangeable for shares of any other class or series, or any other security, of the corporation or any other corporation, and, if so, the specification of such other class or series or such other security, the conversion or exchange price or prices or rate or rates, any adjustments thereof, the date or dates at which such shares shall be convertible or exchangeable and all other terms and conditions upon which such conversion or exchange may be made;

 

  (ix) restrictions on the issuance of shares of the same series or of any other class or series; and

 

  (x) the voting rights, if any, of the holders of shares of the series.

ARTICLE V

In furtherance and not in limitation of the powers conferred by the laws of the State of Delaware, the Board of Directors of the corporation shall have the power to adopt, amend or repeal by-laws of the corporation (the “Bylaws”), in whole or in part.

ARTICLE VI

A. Election of directors need not be by written ballot unless the Bylaws of the corporation shall so provide.

B. Subject to the rights of the holders of any series of Preferred Stock to elect directors under specified circumstances, the number of directors shall be fixed from time to time exclusively pursuant to a resolution adopted by a majority of the total number of directors that the corporation would have if there were no vacancies.

C. Each nominee for director, other than those who may be elected by the holders of Preferred Stock under specified circumstances, shall stand for election as a director at the next annual meeting of stockholders and shall, if elected, hold office until the next annual meeting of stockholders and until their respective successors are duly elected and qualified, subject to their earlier death, resignation, retirement or removal from service as a director.

D. Advance notice of stockholder nominations for the election of directors and of any stockholder proposals to be considered at an annual stockholder meeting shall be given in the manner provided in the Bylaws. Nominations of any person for election to the Board of Directors at an annual meeting or at a special meeting (but only if the election of directors is a matter specified in the notice of meeting given by or at the direction of the person calling such special meeting) may be made at such meeting only (i) by or at the direction of the Board of Directors, including by any committee or persons appointed by the Board of Directors, (ii) by a stockholder who (1) was a stockholder of record (and, with respect to any beneficial owner, if different, on whose behalf such nomination is proposed to be made, only if such beneficial owner was the beneficial owner of shares of the corporation) both at the time of giving the notice provided for in the Bylaws and at the time of the meeting, (2) is entitled to vote at the meeting, and (3) has complied with the procedures set forth in the Bylaws as to such nomination or (iii) by a stockholder or group of stockholders as provided in Clause E of this Article VI. The foregoing Clauses (ii) and (iii) shall be the exclusive means for a stockholder to make any nomination of a person or persons for election to the Board of Directors at an annual meeting or special meeting (other than, if permitted by Article VII, pursuant to a Special Meeting Request).

 

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E. Subject to the terms and conditions of this Clause E and the applicable provisions of the Bylaws, the corporation shall include in its proxy statement for an annual meeting of the stockholders of the corporation the name, together with the Required Information (defined below), of any person nominated for election (the “Stockholder Nominee”) to the Board of Directors by one or more stockholders that satisfy, the requirements of this Clause E (such person or group, the “Eligible Stockholder”), and that expressly elects at the time of providing the notice required by this Clause E to have its nominee included in the corporation’s proxy materials pursuant to this Clause E. Such notice shall consist of all of the information required in a stockholder’s notice required by the Bylaws with respect to any director nomination, in proper form, along with a copy of the Eligible Stockholder’s Schedule 14N (the “Schedule 14N”) that has been or will be filed with the Securities and Exchange Commission (the “Commission”) in accordance with Rule 14a-18 under the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder (as so amended and inclusive of such rules and regulations, the “Exchange Act”), and any additional information as required to be delivered to the corporation by this Clause E (all such information collectively referred to as the “Notice”), and such Notice shall be delivered to the corporation in accordance with the procedures and at the times set forth in this Clause E. This Clause E shall be the exclusive means by which the corporation may be required (subject to the terms and conditions of this Clause E and the applicable provisions of the Bylaws) to include in its proxy statement for any meeting of the stockholders of the corporation any person nominated for election to the Board of Directors by a stockholder. Without limiting the foregoing:

(i) The Notice, to be timely, must be delivered to or mailed and received at the principal executive offices of the corporation within the time periods applicable to stockholder notices of nominations delivered pursuant to the Bylaws and further be updated and supplemented, if necessary, in accordance with the Bylaws. In addition, for the Notice to be timely, an Eligible Stockholder must file or cause to be filed its Schedule 14N with the Commission no later than the thirtieth (30th) day following the final date specified in the Bylaws for delivery of the Notice. In no event shall any adjournment or postponement of an annual meeting, the date of which has been announced by the corporation, commence a new time period for the giving of a Notice. For the avoidance of doubt, the requirement to update and supplement a Notice and to file a Schedule 14N with the Commission shall not allow an Eligible Stockholder to change or add any proposed Stockholder Nominee.

(ii) Subject to the provisions of this Clause E(ii), the maximum number of Stockholder Nominees (including Stockholder Nominees that were submitted by an Eligible Stockholder for inclusion in proxy materials of the corporation pursuant to this Clause E but either are subsequently withdrawn, or that the Board of Directors itself determines to nominate for election) appearing in the corporation’s proxy materials with respect to any annual meeting of stockholders shall not exceed 20% of the number of directors in office as of the last day on which the Notice may be delivered, or if such amount is not a whole number, the closest whole number below 20% of such number of directors (the “Permitted Number”); provided, that the Permitted Number shall be

 

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reduced by (1) the number of such director candidates for which the corporation shall have received one or more valid stockholder notices nominating director candidates pursuant to Clause D(ii) of this Article VI, (2) the number of directors or director candidates that the corporation has agreed to include in its proxy materials as a nominee pursuant to an agreement, arrangement or other understanding with a stockholder or group of stockholders and (3) the number of directors in office and whom the Board of Directors is renominating for election for whom access to the corporation’s proxy materials was previously provided pursuant to this Clause E (other than any such director who has served as a director continuously for at least twenty-four (24) months), but only to the extent that the Permitted Number after such reduction with respect to this clause (3) equals or exceeds one (1); provided, further, that if one or more vacancies for any reason occurs on the Board of Directors at any time before the date of the annual meeting and the Board of Directors resolves to reduce the size of the Board of Directors in connection therewith, the Permitted Number shall be calculated based on the number of directors in office as so reduced. If the number of Stockholder Nominees submitted by Eligible Stockholders pursuant to this Clause E exceeds the Permitted Number, each Eligible Stockholder will select one Stockholder Nominee for inclusion in the corporation’s proxy materials until the Permitted Number is reached, going in order of the amount (largest to smallest) of shares of Common Stock each Eligible Stockholder disclosed as owned in its Notice. If the Permitted Number is not reached after each Eligible Stockholder has selected one Stockholder Nominee, this selection process will continue as many times as necessary, following the same order each time, until the Permitted Number is reached.

(iii) An Eligible Stockholder is one or more stockholders of record who own and have owned, or are acting on behalf of one or more beneficial owners who own and have owned (in each case as defined below), continuously for at least thirty-six (36) months as of both the date that the Notice is received by the corporation pursuant to this Clause E, and as of the record date for determining stockholders eligible to vote at the annual meeting, Common Stock of the corporation representing at least three percent (3%) of the corporation’s issued and outstanding Common Stock (the “Required Shares”), and who continue to own the Required Shares at all times between the date such Notice is received by the corporation and the date of the applicable meeting of stockholders, provided that the aggregate number of stockholders, and, if and to the extent that a stockholder is acting on behalf of one or more beneficial owners, of such beneficial owners, whose stock ownership is counted for the purpose of satisfying the foregoing ownership requirement shall not exceed fifteen (15). Two or more funds that are (1) under common management and investment control or (2) under common management and funded primarily by a single employer (such funds together under each of (1) or (2) comprising a “Qualifying Fund”) shall be treated as one stockholder for the purpose of determining the aggregate number of stockholders in this Clause E, provided that each fund comprising a Qualifying Fund otherwise meets the requirements set forth in this Clause E. No stockholder or beneficial holder may be a member of more than one group constituting an Eligible Stockholder under this Clause E. A record holder acting on behalf of a beneficial owner will be counted as a stockholder only with respect to the shares owned by beneficial owners on whose behalf such record holder has been directed in writing to act, and, with respect to the shares covered by such directions, will be deemed to be the same stockholder as the beneficial owner for purposes of determining the number of stockholders whose holdings may be considered as part of an Eligible Stockholder’s holdings.

 

 

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(iv) No later than the final date specified in this Clause E for delivery of the Notice, an Eligible Stockholder must provide the following information in writing to the Secretary of the corporation: (1) one or more written statements from the record holders of the shares (and from each intermediary through which the shares are or have been held during the requisite thirty-six (36)-month holding period) verifying that, as of a date within seven calendar days prior to the date the Notice is received by the corporation, the Eligible Stockholder owns, and has owned continuously for the preceding thirty-six (36) months, the Required Shares, and the Eligible Stockholder’s agreement to provide, within five (5) business days after the record date for the annual meeting, written statements from the record holder and intermediaries verifying the Eligible Stockholder’s continuous ownership of the Required Shares through the record date; (2) the information required to be set forth in the Notice, together with the written consent of each Stockholder Nominee to being named in the proxy statement as a nominee and to serving as a director if elected; (3) a representation that the Eligible Stockholder (including each member of any group of stockholders that together is an Eligible Stockholder) (a) acquired the Required Shares in the ordinary course of business and not with the intent to change or influence control of the corporation, and does not presently have such intent, (b) presently intends to maintain qualifying ownership of the Required Shares through the date of the annual meeting, (c) has not nominated and will not nominate for election to the Board of Directors at the annual meeting any person other than its Stockholder Nominee(s) being nominated pursuant to this Clause E, (d) has not engaged and will not engage in, and has not and will not be a “participant” in another person’s, “solicitation” within the meaning of Rule 14a-1(l) under the Exchange Act in support of the election of any individual as a director at the annual meeting other than its Stockholder Nominee(s) or a nominee of the Board of Directors, (e) will not distribute to any stockholder any form of proxy for the annual meeting other than the form distributed by the corporation and (f) will provide facts, statements and other information in all communications with the corporation and its stockholders that are or will be true and correct in all material respects and do not and will not omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading and other comply with all applicable laws, rules and regulations in connection with any actions taken pursuant to this Clause E; (4) in the case of a nomination by a group of stockholders that together is such an Eligible Stockholder, the designation by all group members of one group member that is authorized to act on behalf of all members of the nominating stockholder group with respect to the nomination and matters related thereto, including withdrawal of the nomination; and (5) an undertaking that the Eligible Stockholder agrees to (a) assume all liability stemming from any legal or regulatory violation arising out of the Eligible Stockholder’s communications with the stockholders of the corporation or out of the information that the Eligible Stockholder provided to the corporation, (b) indemnify and hold harmless the corporation and each of its directors, officers and employees individually against any liability, loss or damages in connection with any threatened or pending action, suit or proceeding, whether legal, administrative or investigative, against the corporation or any of its directors, officers or employees arising

 

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out of any violation of law, regulation or contract (including any provisions of this certificate of incorporation or the corporation’s Bylaws) in connection with any nomination submitted by the Eligible Stockholder pursuant to this Clause E, and (c) file with the Commission under Regulation 14A of the Exchange Act any solicitation or other communication with the corporation’s stockholders relating to the meeting at which the Stockholder Nominee will be nominated.

(v) The Eligible Stockholder may provide to the Secretary, at the time the Notice is timely delivered to the corporation pursuant to this Clause E, a written statement for inclusion in the corporation’s proxy statement for the annual meeting, not to exceed 500 words, in support of the Stockholder Nominee’s candidacy (the “Statement”). Notwithstanding anything to the contrary contained in this Clause E, the corporation may omit from its proxy materials any information or Statement that it, in good faith, believes is materially false or misleading, omits to state any material fact, or would violate any applicable law or regulation. Nothing in this certificate of incorporation shall limit the corporation’s ability to solicit against and include in the proxy statement its own statement relating to any Stockholder Nominee.

(vi) At the request of the corporation, each Stockholder Nominee must (1) provide an executed agreement, in a form deemed satisfactory by the Board of Directors or its designee, that (a) the Stockholder Nominee has read and agrees, if elected, to serve as a member of the Board of Directors, to adhere to the corporation’s Corporate Governance Guidelines and Code of Conduct and any other corporation policies and guidelines applicable to directors, and (b) that the Stockholder Nominee is not and will not become a party to any compensatory, payment or other financial agreement, arrangement or understanding with any person or entity in connection with his or her nomination, service or action as a director of the corporation, or any agreement, arrangement or understanding with any person or entity as to how the Stockholder Nominee would vote or act on any issue or question as a director, in each case that has not been fully disclosed to the corporation; (2) submit completed and signed questionnaires required of the corporation’s directors (forms of which shall be made available by the Secretary following written request); and (3) provide such additional information as necessary to permit the Board of Directors to determine if such Stockholder Nominee is independent under the listing standards of each principal U.S. exchange upon which the Common Stock is listed, any applicable rules of the Commission and any publicly disclosed standards used by the Board of Directors in determining and disclosing the independence of the corporation’s directors. If any information or communications provided by or on behalf of the Eligible Stockholder or the Stockholder Nominee to the corporation or its stockholders ceases to be true and correct in all material respects or omits a material fact necessary to make the statements made, in light of the circumstances under which they were made, not misleading, each Eligible Stockholder or Stockholder Nominee, as the case may be, shall promptly notify the Secretary of any defect in such previously provided information and of the information that is required to correct any such defect.

 

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(vii) Any Stockholder Nominee who is included in the corporation’s proxy materials for a particular annual meeting of stockholders but either (1) withdraws from or becomes ineligible or unavailable for election at the annual meeting (other than by reason of such Stockholder Nominee’s death, disability or other health reason) or (2) does not receive at least 10% of the votes cast in favor of the election of such Stockholder Nominee (as calculated pursuant to the applicable provisions of the Bylaws), will be ineligible to be a Stockholder Nominee pursuant to this Clause E for the next two (2) annual meetings of stockholders of the corporation. Any Stockholder Nominee who is included in the corporation’s proxy statement for a particular annual meeting of stockholders, but subsequently is determined not to satisfy the eligibility requirements of this Clause E or any other provision of this certificate of incorporation or the corporation’s Bylaws, Corporate Governance Guidelines or other applicable regulation any time before the annual meeting of Stockholders, will not be eligible for election at the relevant annual meeting of stockholders and may not be substituted by the Eligible Stockholder that nominated such Stockholder Nominee.

(viii) Notwithstanding anything to the contrary, the corporation shall not be required to include, pursuant to this Clause E, any Stockholder Nominee in its proxy materials for any annual meeting of stockholders or, if the proxy statement already has been filed, to allow the nomination of a Stockholder Nominee, notwithstanding that proxies in respect of such vote may have been received by the Corporation: (1) if the Stockholder Nominee or the Eligible Stockholder (or any member of any group of stockholders that together is such Eligible Stockholder) who has nominated such Stockholder Nominee has engaged in or is currently engaged in, or has been or is a “participant” in another person’s, “solicitation” within the meaning of Rule 14a-1(l) under the Exchange Act in support of the election of any individual as a director at the annual meeting other than its Stockholder Nominee(s) or a nominee of the Board of Directors; (2) who is not independent under the listing standards of each principal U.S. exchange upon which the Common Stock is listed, any applicable rules of the Commission and any publicly disclosed standards used by the Board of Directors in determining and disclosing independence of the corporation’s directors, in each case as determined in good faith by the Board of Directors; (3) whose election as a member of the Board of Directors would cause the corporation to be in violation of this certificate of incorporation, the Bylaws, the rules and listing standards of the principal U.S. exchanges upon which the Common Stock is listed, or any applicable state or federal law, rule or regulation; (4) who is an officer or director of a competitor, as defined in Section 8 of the Clayton Antitrust Act of 1914, as amended; (5) who is a named subject of a pending criminal proceeding (excluding traffic violations and other minor offenses) or has been convicted in such a criminal proceeding within the past ten (10) years; (6) if such Stockholder Nominee or the applicable Eligible Stockholder (or any individual member of a group of Eligible Stockholders) shall have provided information to the corporation in connection with such nomination that was untrue in any material respect or omitted to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading, as determined by the Board of Directors or any duly authorized committee thereof; or (7) the Eligible Stockholder (or any member of a group of Eligible Stockholders) or applicable Stockholder Nominee otherwise breaches or fails to comply with its obligations pursuant to this certificate of incorporation, including without limitation this Clause E, or the Bylaws.

 

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(ix) Any Stockholder Nominee who is included in the corporation’s proxy materials for an annual meeting pursuant to this Clause E shall tender an irrevocable resignation in advance of the annual meeting. Such resignation shall become effective upon a determination in good faith by the Board of Directors or any duly authorized committee thereof that any of the provisions of Clause E(viii) shall be applicable.

(x) For purposes of this Clause E:

(1) “Required Information” that the corporation will include in its proxy statement is (a) the information concerning the Stockholder Nominee and the Eligible Stockholder that is required to be disclosed in the corporation’s proxy statement by the regulations promulgated under the Exchange Act; and (b) if the Eligible Stockholder so elects, a Statement.

(2) An Eligible Stockholder shall be deemed to “own” only those outstanding shares of Common Stock as to which the stockholder possesses both (a) the full voting and investment rights pertaining to the shares and (b) the full economic interest in (including the opportunity for profit and risk of loss on) such shares; provided, that the number of shares calculated in accordance with the immediately foregoing Clauses (a) and (b) shall not include any shares (x) sold by such stockholder or any of its affiliates in any transaction that has not been settled or closed, including short sales, (y) borrowed by such stockholder or any of its affiliates for any purposes or purchased by such stockholder or any of its affiliates pursuant to an agreement to resell or (z) subject to any option, warrant, forward contract, swap, contract of sale, other derivative or similar agreement entered into by such stockholder or any of its affiliates, whether any such instrument or agreement is to be settled with shares or with cash based on the notional amount or value of shares of outstanding Common Stock, in any such case which instrument or agreement has, or is intended to have, the purpose or effect of (I) reducing in any manner, to any extent or at any time in the future, such stockholder’s or its affiliates’ full right to vote or direct the voting of any such shares, and/or (II) hedging, offsetting or altering to any degree gain or loss arising from the full economic ownership of such shares by such stockholder or affiliate. A stockholder shall “own” shares held in the name of a nominee or other intermediary so long as the stockholder retains the right to instruct how the shares are voted with respect to the election of directors and possesses the full economic interest in the shares. A stockholder’s ownership of shares shall be deemed to continue during any period in which the stockholder has delegated any voting power by means of a proxy, power of attorney or other instrument or arrangement which is revocable at any time by the stockholder. The terms “owned,” “owning” and other variations of the word “own” shall have correlative meanings. Whether outstanding shares of Common Stock are “owned” for these purposes shall be determined by the Board of Directors.

F. Subject to the rights of the holders of any series of Preferred Stock then outstanding, newly created directorships resulting from any increase in the authorized number of directors or any vacancies in the Board of Directors resulting from death, resignation, removal or

 

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other cause may be filled (a) by a majority of the directors, although less than a quorum, (b) by a sole remaining director or (c) in accordance with the proviso in Article VII, Section E(2), and directors so chosen shall hold office for a term expiring at the next annual meeting of stockholders at which the term of office of the class to which they have been elected expires, and until their respective successors are elected, except in the case of the death, resignation, or removal of any director. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director.

ARTICLE VII

A. Any action required or permitted to be taken by the stockholders of the corporation must be effected at a duly called annual or special meeting of stockholders of the corporation and may not be effected by any consent in writing by such stockholders.

B. Subject to the terms of any class or series of Preferred Stock and except as required by law, special meetings of the stockholders of the corporation may be called only by: (i) the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized directors (whether or not there exist any vacancies in previously authorized directorships at the time any such resolution is presented to the Board for adoption); (ii) the Chairman of the Board; (iii) the Chief Executive Officer; and shall be held at such place, if any, and on such date, and at such time as they shall fix; or (iv) in accordance with the following sentence, subject to the provisions of this Article VII and the other applicable provisions of this certificate of incorporation, a special meeting of the stockholders shall be called by the Secretary of the corporation upon the written request (a “Stockholder Requested Special Meeting”) of one or more stockholders of record of the corporation that together have continuously held, for their own account or on behalf of others, beneficial ownership of at least a twenty percent (20%) “net long position” of the outstanding common stock of the corporation (the “Requisite Percent”) for at least thirty (30) days as of the Delivery Date.

For purposes of determining the Requisite Percent, “net long position” shall be determined with respect to each requesting holder in accordance with the definition thereof set forth in Rule 14e-4 under the Exchange Act; provided, that (x) for purposes of such definition, (1) “the date that a tender offer is first publicly announced or otherwise made known by the bidder to the holders of the security to be acquired” shall be the date of the relevant Special Meeting Request (as defined below), (2) the “highest tender offer price or stated amount of the consideration offered for the subject security” shall refer to the closing sales price of the Common Stock on the NASDAQ Global Select Market (or such other securities exchange designated by the Board of Directors if the Common Stock is not listed for trading on the NASDAQ Global Select Market) on such date (or, if such date is not a trading day, the next succeeding trading day), (3) the “person whose securities are the subject of the offer” shall refer to the corporation, and (4) a “subject security” shall refer to the outstanding common stock of the corporation; and (y) the “net long position” of such holder shall be reduced by the number of shares of Common Stock as to which the Board of Directors determines that such holder does not, or will not, have the right to vote or direct the vote at the special meeting or as to which the Board of Directors determines that such holder has entered into any derivative or other agreement, arrangement or understanding that hedges or transfers, in whole or in part, directly or indirectly, any of the economic consequences of ownership of such shares.

 

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Whether the requesting holders have complied with the requirements of this Article VII and related provisions of this certificate of incorporation shall be determined in good faith by the Board of Directors, which determination shall be conclusive and binding on the corporation and its stockholders.

C. In order for a Stockholder Requested Special Meeting to be called, one or more requests for a special meeting (each, a “Special Meeting Request,” and collectively, the “Special Meeting Requests”) must be signed by the Requisite Percent of stockholders submitting such request and by each of the beneficial owners, if any, on whose behalf the Special Meeting Request is being made and must be delivered to the Secretary of the corporation. The Special Meeting Request(s) shall be delivered to the Secretary of the corporation at the principal executive offices of the corporation by overnight express courier or registered mail, return receipt requested. Each Special Meeting Request shall (i) set forth a statement of the specific purpose(s) of the meeting and the matters proposed to be acted on at it, (ii) bear the date of signature of each such stockholder signing the Special Meeting Request, (iii) set forth (1) the name and address, as they appear in the corporation’s books, of each stockholder signing such request and the beneficial owners, if any, on whose behalf such request is made, and (2) the class, if applicable, and the number of shares of Common Stock that are owned of record and beneficially (within the meaning of Rule 13d-3 under the Exchange Act) by each such stockholder and the beneficial owners, if any, on whose behalf such request is made, (iv) include documentary evidence that the stockholders requesting the special meeting own the Requisite Percent as of the Delivery Date (as defined below); provided, that if the stockholders are not the beneficial owners of the shares constituting all or part of the Requisite Percent, then to be valid, the Special Meeting Request must also include documentary evidence (or, if not simultaneously provided with the Special Meeting Request, such documentary evidence must be delivered to the Secretary of the corporation within ten (10) days after the Delivery Date) that the beneficial owners on whose behalf the Special Meeting Request is made beneficially own such shares as of the Delivery Date, (v) an agreement by each of the stockholders requesting the special meeting and each beneficial owner, if any, on whose behalf the Special Meeting Request is being made to notify the corporation promptly in the event of any decrease in the “net long position” held by such stockholder or beneficial owner following the delivery of such Special Meeting Request and prior to the special meeting and an acknowledgement that any such decrease shall be deemed to be a revocation of such Special Meeting Request by such stockholder or beneficial owner to the extent of such reduction, and (vi) contain all of the information required by the Bylaws to be disclosed pursuant to the Bylaws, provided that all references to “Proposing Person” and to “Nominating Person” in the Bylaws shall, for purposes of Clause C of this Article VII, mean (1) the stockholders of record making the Special Meeting Request, (2) any beneficial owner or beneficial owners, if different, on whose behalf the Special Meeting Request is being made, and (3) any affiliate or associate (each within the meaning of Rule 12b-2 under the Exchange Act for purposes of these Bylaws) of such stockholder or beneficial owner. Each stockholder making a Special Meeting Request and each beneficial owner, if any, on whose behalf the Special Meeting Request is being made is required to update the notice delivered pursuant to this Article VII in accordance with the applicable provisions of the Bylaws. Any requesting stockholder may revoke his, her or its Special Meeting Request at any time prior to the special meeting by written revocation delivered to the Secretary of the corporation at the principal executive offices of the corporation. If at any time after sixty (60) days following the earliest dated Special Meeting Request, the unrevoked (whether by specific written revocation by the stockholder or pursuant to

 

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Clause C(v) of this Article VII) valid Special Meeting Requests represent in the aggregate less than the Requisite Percent, then the requesting stockholder(s) or beneficial owner(s) shall be deemed to have withdrawn such request (in connection with which the Board of Directors may cancel the meeting).

In determining whether a special meeting of stockholders has been requested by stockholders holding in the aggregate at least the Requisite Percent, multiple Special Meeting Requests delivered to the Secretary of the corporation will be considered together only if each Special Meeting Request identifies substantially the same purpose or purposes of the special meeting and substantially the same matters proposed to be acted on at the special meeting (in each case as determined in good faith by the Board of Directors), and such Special Meeting Requests have been delivered to the Secretary of the corporation within sixty (60) days of the earliest dated Special Meeting Request.

D. Except as provided in the next sentence, a special meeting requested by stockholders shall be held at such date, time and place within or without the State of Delaware as may be fixed by the Board of Directors; provided, however, that the date of any such special meeting shall be not more than ninety (90) days after the date on which valid Special Meeting Request(s) constituting the Requisite Percent are delivered to the Secretary of the corporation (such date of delivery being the “Delivery Date”). Notwithstanding the foregoing, the Secretary of the corporation shall not be required to call a special meeting of stockholders if (i) the Board of Directors calls an annual meeting of stockholders, or a special meeting of stockholders at which a Similar Item (as defined below) is to be presented pursuant to the notice of such meeting, in either case to be held not later than sixty (60) days after the Delivery Date; (ii) the Delivery Date is during the period commencing ninety (90) days prior to the first anniversary of the date of the immediately preceding annual meeting and ending on the earlier of (1) the date of the next annual meeting and (2) thirty (30) days after the first anniversary of the date of the immediately preceding annual meeting; or (iii) the Special Meeting Request(s) (1) contain an identical or substantially similar item (as determined in good faith by the Board of Directors, a “Similar Item”) to an item that was presented at any meeting of stockholders held not more than one hundred and twenty (120) days before the Delivery Date (and for purposes of this Clause (iii), the election of directors shall be deemed a Similar Item with respect to all items of business involving the election or removal of directors); (2) relate to an item of business that is not a proper subject for action by the stockholders under applicable law and Article VII; (3) were made in a manner that involved a violation of Regulation 14A under the Exchange Act or other applicable law; or (4) do not comply with the provisions of this Article VII.

E. Business transacted at any Stockholder Requested Special Meeting (1) shall be limited to the purpose(s) stated in the Special Meeting Request for such special meeting; provided, that the Board of Directors shall have the authority in its discretion to submit additional matters to the stockholders and to cause other business to be transacted pursuant to the corporation’s notice of meeting, and (2) shall not include the election, removal or replacement of directors unless a single person or entity, or “group” of persons or entities who have filed as a “group” as defined under Section 13(d) of the Exchange Act with respect to their ownership of the then-outstanding shares of capital stock of the corporation entitled to vote generally in the election of directors, has a “net long position” of greater than 50% of such shares as of the Delivery Date; provided, that following such time that a single person or entity, or “group” of

 

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persons or entities who have filed as a “group” as defined under Section 13(d) of the Exchange Act with respect to such ownership, has a net “net long position” at of greater than 50% of such shares as of the Delivery Date, then, subject to the rights of the holders of any series of Preferred Stock with respect to such series of Preferred Stock, any director, or the entire Board of Directors, may be removed from office at any time with or without cause, and replaced, by the affirmative vote of the holders of a majority of the voting power of all of the then-outstanding shares of capital stock of the corporation entitled to vote generally in the election of directors, voting together as a single class. If none of the stockholders who submitted a Special Meeting Request appears at or sends a duly authorized representative to the Stockholder Requested Special Meeting to present the matters to be presented for consideration that were specified in the Special Meeting Request, the corporation need not present such matters for a vote at such meeting.

ARTICLE VIII

A. The corporation shall not be governed by or subject to Section 203 of the DGCL.

B. Notwithstanding the foregoing, the corporation shall not engage in any business combination (as defined below), at any point in time at which the Common Stock is registered under Section 12(b) or 12(g) of the Exchange Act, with any interested stockholder (as defined below) for a period of three (3) years following the time that such stockholder became an interested stockholder, unless:

(i) prior to such time, the Board of Directors approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder, or

(ii) upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock (as defined below) of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the voting stock outstanding (but not the outstanding voting stock owned by the interested stockholder) those shares owned by (i) persons who are directors and also officers or (ii) employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer, or

(iii) at or subsequent to such time, the business combination is approved by the Board of Directors and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least two thirds (2/3) of the outstanding voting stock of the corporation which is not owned by the interested stockholder.

C. The restrictions contained in this Article VIII shall not apply if:

(i) the corporation, by action of its stockholders, adopts an amendment to this certificate of incorporation expressly deleting or deciding not to be bound by this Article VIII; provided that, in addition to any other vote required by law, such amendment to the certificate of incorporation must be approved by the affirmative vote of

 

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a majority of the shares entitled to vote. An amendment adopted pursuant to this paragraph shall not be effective until 12 months after the adoption of such amendment and shall not apply to any business combination between the corporation and any person who became an interested stockholder on or prior to such adoption;

(ii) a stockholder becomes an interested stockholder inadvertently and (1) as soon as practicable divests itself of ownership of sufficient shares so that the stockholder ceases to be an interested stockholder; and (2) would not, at any time within the 3-year period immediately prior to a business combination between the corporation and such stockholder, have been an interested stockholder but for the inadvertent acquisition of ownership; or

(iii) the business combination is proposed prior to the consummation or abandonment of and subsequent to the earlier of the public announcement or the notice required hereunder of a proposed transaction which (1) constitutes one of the transactions described in the second sentence of this paragraph; (2) is with or by a person who either was not an interested stockholder during the previous three years or who became an interested stockholder with the approval of the Board of Directors; and (3) is approved or not opposed by a majority of the members of the Board of Directors then in office (but not less than one) who were directors prior to any person becoming an interested stockholder during the previous three years or were recommended for election or elected to succeed such directors by a majority of such directors. The proposed transactions referred to in the preceding sentence are limited to (x) a merger or consolidation of the corporation (except for a merger in respect of which, pursuant to Section 251(f) of the DGCL, no vote of the stockholders of the corporation is required); (y) a sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions), whether as part of a dissolution or otherwise, of assets of the corporation or of any direct or indirect majority-owned subsidiary of the corporation (other than to any direct or indirect wholly-owned subsidiary or to the corporation) having an aggregate market value equal to 50% or more of either that aggregate market value of all of the assets of the corporation determined on a consolidated basis or the aggregate market value of all the outstanding stock of the corporation; or (z) a proposed tender or exchange offer for 50% or more of the outstanding voting stock of the corporation. The corporation shall give not less than twenty (20) days’ notice to all interested stockholders prior to the consummation of any of the transactions described in Clause (x) or (y) of the second sentence of this paragraph.

D. For purposes of this Article VIII, references to:

(i) “affiliate” means a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, another person.

(ii) “associate,” when used to indicate a relationship with any person, means: (i) any corporation, partnership, unincorporated association or other entity of which such person is a director, officer or partner or is, directly or indirectly, the owner of 20% or more of any class of voting stock; (ii) any trust or other estate in which such person has at least a 20% beneficial interest or as to which such person serves as trustee or in a similar fiduciary capacity; and (iii) any relative or spouse of such person, or any relative of such spouse, who has the same residence as such person.

 

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(iii) “business combination,” when used in reference to the corporation and any interested stockholder of the corporation, means:

(1) any merger or consolidation of the corporation or any direct or indirect majority-owned subsidiary of the corporation (a) with the interested stockholder, or (b) with any other corporation, partnership, unincorporated association or other entity if the merger or consolidation is caused by the interested stockholder and as a result of such merger or consolidation, Clause B of this Article VIII is not applicable to the surviving entity;

(2) any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions), except proportionately as a stockholder of the corporation, to or with the interested stockholder, whether as part of a dissolution or otherwise, of assets of the corporation or of any direct or indirect majority-owned subsidiary of the corporation which assets have an aggregate market value equal to 10% or more of either the aggregate market value of all the assets of the corporation determined on a consolidated basis or the aggregate market value of all the outstanding stock of the corporation;

(3) any transaction which results in the issuance or transfer by the corporation or by any direct or indirect majority-owned subsidiary of the corporation of any stock of the corporation or of such subsidiary to the interested stockholder, except: (a) pursuant to the exercise, exchange or conversion of securities exercisable for, exchangeable for or convertible into stock of the corporation or any such subsidiary which securities were outstanding prior to the time that the interested stockholder became such; (b) pursuant to a merger under Section 251(g) of the DGCL; (c) pursuant to a dividend or distribution paid or made, or the exercise, exchange or conversion of securities exercisable for, exchangeable for or convertible into stock of the corporation or any such subsidiary which security is distributed, pro rata to all holders of a class or series of stock of the corporation subsequent to the time the interested stockholder became such; (d) pursuant to an exchange offer by the corporation to purchase stock made on the same terms to all holders of said stock; or (e) any issuance or transfer of stock by the corporation; provided, however, that in no case under items (c)-(e) of this subsection (3) shall there be an increase in the interested stockholder’s proportionate share of the stock of any class or series of the corporation or of the voting stock of the corporation (except as a result of immaterial changes due to fractional share adjustments);

(4) any transaction involving the corporation or any direct or indirect majority-owned subsidiary of the corporation which has the effect, directly or indirectly, of increasing the proportionate share of the stock of any class or series, or securities convertible into the stock of any class or series, of the corporation or

 

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of any such subsidiary which is owned by the interested stockholder, except as a result of immaterial changes due to fractional share adjustments or as a result of any purchase or redemption of any shares of stock not caused, directly or indirectly, by the interested stockholder; or

(5) any receipt by the interested stockholder of the benefit, directly or indirectly (except proportionately as a stockholder of the corporation), of any loans, advances, guarantees, pledges, or other financial benefits (other than those expressly permitted in subsections (1)-(4) above) provided by or through the corporation or any direct or indirect majority-owned subsidiary.

(iv) “control,” including the terms “controlling,” “controlled by” and “under common control with,” means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting stock, by contract, or otherwise. A person who is the owner of 20% or more of the outstanding voting stock of any corporation, partnership, unincorporated association or other entity shall be presumed to have control of such entity, in the absence of proof by a preponderance of the evidence to the contrary. Notwithstanding the foregoing, a presumption of control shall not apply where such person holds voting stock, in good faith and not for the purpose of circumventing this Article VII, as an agent, bank, broker, nominee, custodian or trustee for one or more owners who do not individually or as a group have control of such entity.

(v) “interested stockholder” means any person (other than the corporation or any direct or indirect majority-owned subsidiary of the corporation) that (1) is the owner of 20% or more of the outstanding voting stock of the corporation, or (2) is an affiliate or associate of the corporation and was the owner of 20% or more of the outstanding voting stock of the corporation at any time within the three year period immediately prior to the date on which it is sought to be determined whether such person is an interested stockholder, and the affiliates and associates of such person; provided, that the term “interested stockholder” shall not include any person whose ownership of shares in excess of the 20% limitation set forth herein is the result of any action taken solely by the corporation; provided, that any such person shall be an interested stockholder if thereafter such person acquires additional shares of voting stock of the corporation, except as a result of further corporate action not caused, directly or indirectly, by such person. For the purpose of determining whether a person is an interested stockholder, the voting stock of the corporation deemed to be outstanding shall include stock deemed to be owned by the person through application of the definition of “owner” below, but shall not include any other unissued stock of the corporation which may be issuable pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, warrants or options, or otherwise.

(vi) “owner,” including the terms “own” and “owned,” when used with respect to any stock, means a person that individually or with or through any of its affiliates or associates:

(1) beneficially owns such stock, directly or indirectly; or

 

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(2) has (a) the right to acquire such stock (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement or understanding, or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise; provided, that a person shall not be deemed the owner of stock tendered pursuant to a tender or exchange offer made by such person or any of such person’s affiliates or associates until such tendered stock is accepted for purchase or exchange; or (b) the right to vote such stock pursuant to any agreement, arrangement or understanding; provided, however, that a person shall not be deemed the owner of any stock because of such person’s right to vote such stock if the agreement, arrangement or understanding to vote such stock arises solely from a revocable proxy or consent given in response to a proxy or consent solicitation made to ten (10) or more persons; or

(3) has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting (except voting pursuant to a revocable proxy or consent as described in item (b) of subsection (2) above), or disposing of such stock with any other person that beneficially owns, or whose affiliates or associates beneficially own, directly or indirectly, such stock.

(vii) “person” means any individual, corporation, partnership, unincorporated association or other entity.

(viii) “stock” means, with respect to any corporation, capital stock and, with respect to any other entity, any equity interest.

(ix) “voting stock” means stock of any class or series entitled to vote generally in the election of directors. Every reference to a percentage of voting stock shall refer to such percentage of the votes of such voting stock.

ARTICLE IX

A. To the fullest extent permitted by law, no director of the corporation shall be personally liable either to the corporation or to any of its stockholders for monetary damages for breach of fiduciary duty as a director. Without limiting the effect of the preceding sentence, if the Delaware General Corporation Law is hereafter amended to authorize the further elimination or limitation of the liability of a director, then the liability of a director of the corporation shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law, as so amended.

B. To the fullest extent permitted by applicable law, this corporation is also authorized to provide indemnification of (and advancement of expenses to) agents (and any other persons to which Delaware law permits this corporation to provide indemnification) through bylaw provisions, agreements with such agents or other persons, vote of stockholders or disinterested directors or otherwise, in excess of the indemnification and advancement otherwise permitted by Section 145 of the Delaware General Corporation Law, subject only to limits created by applicable Delaware law (statutory or non-statutory), with respect to actions for breach of duty to the corporation, its stockholders, and others.

 

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C. No amendment, modification or repeal of this Article IX, nor the adoption of any provision of this certificate of incorporation inconsistent with this Article IX, shall eliminate, reduce or otherwise adversely affect any right or protection of a director of the corporation hereunder in respect of any act or omission occurring prior to or at the time of such amendment, modification or repeal or adoption of such inconsistent provision.

ARTICLE X

Unless the corporation consents in writing to the selection of an alternative forum, the sole and exclusive forum for (a) any derivative action or proceeding brought on behalf of the corporation, (b) any action asserting a claim of breach of a fiduciary duty owed by any director or officer or other employee of the corporation to the corporation or the corporation’s stockholders, (c) any action asserting a claim against the corporation or any director or officer or other employee of the corporation arising pursuant to any provision of the DGCL or this certificate of incorporation or the Bylaws (as either may be amended from time to time), or (d) any action asserting a claim against the corporation or any director or officer or other employee of the corporation governed by the internal affairs doctrine shall be a state court located within the State of Delaware (or, if no state court located within the State of Delaware has jurisdiction, the federal district court for the District of Delaware). Any person or entity purchasing or otherwise acquiring any interests in shares of capital stock of the corporation shall be deemed to have notice of and to have consented to the provisions of this Article X.

ARTICLE XI

In furtherance and not in limitation of the powers conferred by the laws of the State of Delaware as they presently exist or may hereafter be amended, the corporation may from time to time alter, amend, repeal or adopt, in whole or in part, any provisions of this certificate of incorporation.

IN WITNESS WHEREOF, this Amended and Restated Certificate of Incorporation of PayPal Holdings, Inc. has been signed and attested as of this          day of             , 2015.

 

Daniel H. Schulman
President and Chief Executive Officer

 

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EX-3.2

Exhibit 3.2

AMENDED AND RESTATED BYLAWS

OF

PAYPAL HOLDINGS, INC.

(a Delaware corporation)

PayPal Holdings, Inc. (the “Corporation”), pursuant to the provisions of Section 109 of the Delaware General Corporation Law, hereby adopts these Amended and Restated Bylaws, which restate, amend and supersede the bylaws of the Corporation, as previously amended and restated, in their entirety as described below:

ARTICLE I

STOCKHOLDERS

Section 1.1 Place of Meetings. Meetings of the stockholders of the Corporation may be held at such place, either within or without the State of Delaware, as may be designated from time to time by the Board of Directors. The Board of Directors may, in its sole discretion, determine that the meeting shall not be held at any place, but may instead be held solely by means of remote communication as provided under the Delaware General Corporation Law.

Section 1.2 Annual Meetings. If required by applicable law, an annual meeting of stockholders shall be held for the election of directors at such date and time, as the Board of Directors shall each year fix. Any other proper business may be transacted at the annual meeting.

Section 1.3 Special Meetings. Special meetings of the stockholders may be called and business at such special meetings may be transacted only in accordance with the provisions of Article VII of the Certificate of Incorporation (defined below).

Section 1.4 Notice of Meetings. Notice of all meetings of stockholders shall be given that shall state the place, if any, date and time of the meeting, the means of remote communications, if any, by which stockholders and proxy holders may be deemed to be present in person and vote at such meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called. Unless otherwise required by applicable law or the Certificate of Incorporation of the Corporation as currently in effect (the “Certificate of Incorporation”), such notice shall be given not less than ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder entitled to vote at such meeting.

Section 1.5 Manner of Giving Notice; Affidavit of Notice.

(a) Notice of any meeting of stockholders, if mailed, is given when deposited in the United States mail, postage prepaid, directed to the stockholder at his, her or its address as it appears on the records of the Corporation.


(b) Except as otherwise prohibited by the Delaware General Corporation Law and without limiting the foregoing, any notice to stockholders given by the Corporation under any provision of the Delaware General Corporation Law, the Certificate of Incorporation or these Bylaws shall be effective if given by a form of electronic transmission consented to (and not properly revoked by written notice to the Corporation) by the stockholder to whom the notice is given, to the extent such consent is required by the Delaware General Corporation Law. Any such consent shall be revocable by the stockholder by written notice to the Corporation. Any such consent shall be deemed revoked if (i) the Corporation is unable to deliver by electronic transmission two (2) consecutive notices given by the Corporation in accordance with such consent and (ii) such inability becomes known to the Secretary or an Assistant Secretary of the Corporation or to the transfer agent of the Corporation, or other person responsible for the giving of notice; provided, however, that the inadvertent failure to treat such inability as a revocation shall not invalidate any meeting or other action. Any such notice shall be deemed given (i) if by facsimile telecommunication, when directed to a number at which the stockholder has consented to receive notice; (ii) if by electronic mail, when directed to an electronic mail address at which the stockholder has consented to receive notice; (iii) if by a posting on an electronic network together with separate notice to the stockholder of such specific posting, upon the later of (A) such posting and (B) the giving of such separate notice; and (iv) if by any other form of electronic transmission, when directed to the stockholder.

(c) For the purposes of these Bylaws, an “electronic transmission” means any form of communication, not directly involving the physical transmission of paper, that creates a record that may be retained, retrieved and reviewed by a recipient thereof, and that may be directly reproduced in paper form by such a recipient through an automated process.

(d) Except as otherwise prohibited under the Delaware General Corporation Law and without limiting the manner by which notice otherwise may be given to stockholders, any notice to stockholders given by the Corporation under any provision of the Delaware General Corporation Law, the Certificate of Incorporation or these Bylaws may be given by a single written notice to stockholders who share an address if consented to by the stockholders at that address to whom such notice is given. Such consent shall have been deemed to have been given if a stockholder fails to object in writing to the Corporation within sixty (60) days of having been given written notice by the Corporation of its intention to send the single notice in accordance with this Section 1.5(d). Any such consent shall be revocable by the stockholders by written notice to the Corporation.

(e) An affidavit of the Secretary or an Assistant Secretary of the Corporation or of the transfer agent or other agent of the Corporation that the notice has been given shall, in the absence of fraud, be prima facie evidence of the facts stated therein.

Section 1.6 Adjournments. Any meeting of stockholders may adjourn from time to time to reconvene at the same or another place, if any, or by means of remote communications, if any, by which stockholders and proxy holders may be deemed to be present in person and vote at such meeting, and notice need not be given of any such adjourned meeting if the place, if any, time and date thereof, and the means of remote communications, if any, by which stockholders and proxy holders may be deemed to be present in person and vote at such adjourned meeting are announced at the meeting at which the adjournment is taken; provided,

 

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however, that if the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, then a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. At the adjourned meeting the Corporation may transact any business that might have been transacted at the original meeting.

Section 1.7 Quorum. At each meeting of stockholders, the holders of a majority of the shares of stock entitled to vote at the meeting, present in person or represented by proxy, shall constitute a quorum for the transaction of business, except if otherwise required by applicable law. Where a separate vote by a class or classes or series is required, a majority of the shares of such class or classes or series then outstanding and entitled to vote present in person or by proxy shall constitute a quorum entitled to take action with respect to that vote on that matter. If a quorum shall fail to attend any meeting, the chairman of the meeting or the holders of a majority of the shares entitled to vote who are present, in person or by proxy, at the meeting may adjourn the meeting. Shares of the Corporation’s stock belonging to the Corporation (or to another corporation, if a majority of the shares entitled to vote in the election of directors of such other corporation are held, directly or indirectly, by the Corporation), shall neither be entitled to vote nor be counted for quorum purposes; provided, however, that the foregoing shall not limit the right of the Corporation or any other corporation to vote any shares of the Corporation’s stock held by it in a fiduciary capacity.

Section 1.8 Conduct of Business. Meetings of stockholders shall be presided over by such person as the Board of Directors may designate as chairman of the meeting, or, in the absence of such a person, the Chairman of the Board, or, in the absence of such person, the President of the Corporation, or, in the absence of such person, such person as may be chosen by the holders of a majority of the shares entitled to vote who are present, in person or by proxy, at the meeting. The Secretary of the Corporation shall act as secretary of the meeting, but in his or her absence the chairman of the meeting may appoint any person to act as secretary of the meeting. The Board of Directors shall be entitled to make such rules or regulations for the conduct of meetings of stockholders as it shall deem necessary, appropriate or convenient. Subject to such rules and regulations of the Board of Directors, if any, the chairman of the meeting shall have the right and authority to prescribe such rules, regulations and procedures and to do all such acts as, in the judgment of such chairman, are necessary, appropriate or convenient for the proper conduct of the meeting, including, without limitation, adjourning the meeting if the chairman determines in his or her sole discretion that an adjournment is advisable, establishing an agenda or order of business for the meeting, rules and procedures for maintaining order at the meeting and the safety of those present, limitations on participation in the meeting to stockholders of record of the Corporation, their duly authorized and constituted proxies and such other persons as the chairman shall permit, restrictions on entry to the meeting after the time fixed for the commencement thereof, limitations on the time allotted to questions or comments by participants and regulation of the opening and closing of the polls for balloting and matters which are to be voted on by ballot.

Section 1.9 Voting; Proxies. Unless otherwise provided by law or the Certificate of Incorporation, each stockholder shall be entitled to one (1) vote for each share of stock held by such stockholder of record according to the records of the Corporation. The stockholders entitled to vote at any meeting of stockholders shall be determined in accordance

 

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with the provisions of Section 1.10 of these Bylaws, subject to Section 217 (relating to voting rights of fiduciaries, pledgors and joint owners of stock) and Section 218 (relating to voting trusts and other voting agreements) of the Delaware General Corporation Law. Each stockholder entitled to vote at a meeting of stockholders may authorize another person or persons to act for such stockholder by proxy. Such a proxy may be prepared, transmitted and delivered in any manner permitted by applicable law. Unless otherwise provided in the Certificate of Incorporation or a Certificate of Designation relating to a series of Preferred Stock, directors shall be elected as provided in Section 2.2 of these Bylaws. Unless otherwise provided by applicable law, the rules or regulations of any stock exchange applicable to the Corporation, the Certificate of Incorporation or these Bylaws, every matter other than the election of directors shall be decided by the affirmative vote of the holders of a majority in voting power of the shares of stock entitled to vote thereon that are present in person or represented by proxy at the meeting.

Section 1.10 Fixing Date for Determination of Stockholders of Record. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which (i) in the case of determination of stockholders entitled to vote at any meeting of stockholders or adjournment thereof, shall, unless otherwise required by law, not be less than ten (10) nor more than sixty (60) days before the date of such meeting, and (ii) in the case of any other action, shall not be more than sixty (60) days prior to any such other action. If no record date is fixed by the Board of Directors, then the record date shall be as provided by applicable law. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting.

Section 1.11 List of Stockholders Entitled to Vote. A complete list of stockholders entitled to vote at any meeting of stockholders, arranged in alphabetical order and showing the address of each stockholder and the number of shares registered in the name of each stockholder, shall be open to the examination of any stockholder, for any purpose germane to the meeting, for a period of at least ten (10) days prior to the meeting, (i) on a reasonably accessible electronic network, provided that the information required to gain access to such list is provided with the notice of the meeting, or (ii) during ordinary business hours, at the principal place of business of the Corporation. In the event that the Corporation determines to make the list available on an electronic network, the Corporation may take reasonable steps to ensure that such information is available only to the stockholders of the Corporation. If the meeting is to be held at a place, then the list shall be produced and kept at the time and place of the meeting during the whole time thereof and may be inspected by any stockholder who is present. If the meeting is to be held solely by means of remote communication, then the list shall also be open to the examination of any stockholder during the whole time of the meeting on a reasonably accessible electronic network, and the information required to access such list shall be provided with the notice of the meeting. Except as otherwise provided by law, such list shall be the only evidence as to who are the stockholders entitled to examine the list of stockholders required by this Section 1.11 or to vote in person or by proxy at any meeting of the stockholders. The Corporation shall not be required to include electronic mail addresses or other electronic contact information on such list.

 

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Section 1.12 Inspectors of Elections.

(a) Applicability. Unless otherwise provided in the Corporation’s Certificate of Incorporation or required by the Delaware General Corporation Law, the following provisions of this Section 1.12 shall apply only if and when the Corporation has a class of voting stock that is:

(i) listed on a national securities exchange;

(ii) authorized for quotation on an interdealer quotation system of a registered national securities association; or

(iii) held of record by more than 2,000 stockholders; in all other cases, observance of the provisions of this Section 1.12 shall be optional, and at the discretion of the Corporation.

(b) Appointment. The Corporation shall, in advance of any meeting of stockholders, appoint one or more inspectors of election to act at the meeting and make a written report thereof. The Corporation may designate one or more persons as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate is able to act at a meeting of stockholders, the person presiding at the meeting shall appoint one or more inspectors to act at the meeting.

(c) Inspector’s Oath. Each inspector of election, before entering upon the discharge of his or her duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his or her ability.

(d) Duties of Inspectors. At a meeting of stockholders, the inspectors of election shall:

(i) ascertain the number of shares outstanding and the voting power of each share;

(ii) determine the shares represented at a meeting and the validity of proxies and ballots;

(iii) count all votes and ballots;

(iv) determine and retain for a reasonable period of time a record of the disposition of any challenges made to any determination by the inspectors; and

(v) certify their determination of the number of shares represented at the meeting, and their count of all votes and ballots. The inspectors may appoint or retain other persons or entities to assist the inspectors in the performance of the duties of the inspectors.

 

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(e) Opening and Closing of Polls. The date and time of the opening and the closing of the polls for each matter upon which the stockholders will vote at a meeting shall be announced by the inspectors at the meeting. No ballot, proxies or votes, nor any revocations thereof or changes thereto, shall be accepted by the inspectors after the closing of the polls unless the Court of Chancery upon application by a stockholder shall determine otherwise.

(f) Determinations. In determining the validity and counting of proxies and ballots, the inspectors shall be limited to an examination of the proxies, any envelopes submitted with those proxies, any information provided in connection with proxies in accordance with Section 211(e) or Section 212(c)(2) of the Delaware General Corporation Law, or any information provided pursuant to Section 211(a)(2)(B)(i) or (iii) of the Delaware General Corporation Law, ballots and the regular books and records of the Corporation, except that the inspectors may consider other reliable information for the limited purpose of reconciling proxies and ballots submitted by or on behalf of banks, brokers, their nominees or similar persons which represent more votes than the holder of a proxy is authorized by the record owner to cast or more votes than the stockholder holds of record. If the inspectors consider other reliable information for the limited purpose permitted herein, the inspectors at the time they make their certification of their determinations pursuant to this Section 1.12 shall specify the precise information considered by them, including the person or persons from whom they obtained the information, when the information was obtained, the means by which the information was obtained and the basis for the inspectors’ belief that such information is accurate and reliable.

Section 1.13 Notice of Stockholder Business to Be Brought Before an Annual or Special Meeting.

(a) Business Properly Brought Before an Annual or Special Meeting. At an annual meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be (i) brought before the meeting by the Corporation and specified in the notice of meeting given by or at the direction of the Board of Directors, (ii) brought before the meeting by or at the direction of the Board of Directors, or (iii) otherwise properly brought before the meeting by a stockholder who (A) was a stockholder of record (and, with respect to any beneficial owner, if different, on whose behalf such business is proposed, only if such beneficial owner was the beneficial owner of shares of the Corporation) both at the time of giving the notice provided for in this Section 1.13 and at the time of the meeting, (B) is entitled to vote at the meeting, and (C) has complied with this Section 1.13 as to such business. Except for proposals properly made in accordance with Rule 14a-8 under the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder (as so amended and inclusive of such rules and regulations, the “Exchange Act”), and included in the notice of meeting given by or at the direction of the Board of Directors, the foregoing clause (iii) shall be the exclusive means for a stockholder to propose business to be brought before an annual meeting of the stockholders. Stockholders shall not be permitted to propose business to be brought before a special meeting of the stockholders (other than pursuant to a request for a special meeting in accordance with the requirements set forth in Article VII of the Certificate of Incorporation (a “Special Meeting Request”)), and the only matters that may be brought before a special meeting are the matters specified in the Corporation’s notice of meeting. Stockholders seeking to nominate persons for election to the Board, if permitted by Article VII of the Certificate of Incorporation, must comply with Section 1.14 of these Bylaws, and this Section 1.13 shall not be applicable to nominations except as expressly provided in Section 1.14 of these Bylaws.

 

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(b) Requirement of Timely Notice of Stockholder Business. Without qualification, for business to be properly brought before an annual meeting by a stockholder, the stockholder must (i) provide Timely Notice (as defined below) thereof in writing and in proper form to the Secretary of the Corporation and (ii) provide any updates or supplements to such notice at the times and in the forms required by this Section 1.13. To be timely, a stockholder’s notice with respect to an annual meeting of stockholders (other than a notice submitted in order to include a Stockholder Nominee (as defined below) in the Corporation’s proxy materials, as defined and described in Clause E of Article VI of the Certificate of Incorporation) must be delivered by overnight express courier or registered mail, return receipt requested, and received at, the principal executive offices of the Corporation not less than ninety (90) days nor more than one hundred twenty (120) days prior to the one year anniversary of the preceding year’s annual meeting; provided, however, that if the date of the annual meeting is more than thirty (30) days before or more than sixty (60) days after such anniversary date, notice by the stockholder to be timely must be so delivered, or mailed and received, not earlier than the one hundred twentieth (120th) day prior to such annual meeting and not later than the ninetieth (90th) day prior to such annual meeting or, if later, the tenth (10th) day following the day on which public disclosure of the date of such annual meeting was first made (such notice within such time periods, “Timely Notice”). In no event shall any adjournment or postponement of an annual meeting or the announcement thereof commence a new time period for the giving of Timely Notice as described above.

(c) Requirements for Proper Form of Stockholder Notice of Proposed Business. To be in proper form for purposes of this Section 1.13, a stockholder’s notice to the Secretary shall set forth:

(i) Stockholder Information. As to each Proposing Person (as defined below), (A) the name and address of such Proposing Person (including, if applicable, the name and address that appear on the Corporation’s books and records), (B) the class or series and number of shares of the Corporation that are, directly or indirectly, owned of record or beneficially owned (within the meaning of Rule 13d-3 under the Exchange Act) by such Proposing Person, except that such Proposing Person shall in all events be deemed to beneficially own any shares of any class or series of the Corporation as to which such Proposing Person has a right to acquire beneficial ownership at any time in the future and (C) a representation whether such Proposing Person intends or is part of a group that intends (x) to deliver a proxy statement and/or form of proxy to holders of at least the percentage of the Corporation’s outstanding stock required to approve or adopt the proposal or (y) otherwise to solicit proxies from stockholders in support of such proposal;

(ii) Information Regarding Disclosable Interests. As to each Proposing Person, (A) any derivative, swap or other transaction or series of transactions engaged in, directly or indirectly, by such Proposing Person, the purpose or effect of which is to give such Proposing Person economic risk similar

 

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to ownership of shares of any class or series of the Corporation, including due to the fact that the value of such derivative, swap or other transactions are determined by reference to the price, value or volatility of any shares of any class or series of the Corporation, or which derivative, swap or other transactions provide, directly or indirectly, the opportunity to profit from any increase in the price or value of shares of any class or series of the Corporation (“Synthetic Equity Interests”), which such Synthetic Equity Interests shall be disclosed without regard to whether (x) such derivative, swap or other transactions convey any voting rights in such shares to such Proposing Person, (y) the derivative, swap or other transactions are required to be, or are capable of being, settled through delivery of such shares or (z) such Proposing Person may have entered into other transactions that hedge or mitigate the economic effect of such derivative, swap or other transactions, (B) any proxy (other than a revocable proxy or consent given in response to a solicitation made pursuant to, and in accordance with, Section 14(a) of the Exchange Act by way of a solicitation statement filed on Schedule 14A), agreement, arrangement, understanding or relationship pursuant to which such Proposing Person has or shares a right to vote any shares of any class or series of the Corporation, (C) any agreement, arrangement, understanding or relationship, including any repurchase or similar so-called “stock borrowing” agreement or arrangement, engaged in, directly or indirectly, by such Proposing Person, the purpose or effect of which is to mitigate loss to, reduce the economic risk (of ownership or otherwise) of shares of any class or series of the Corporation by, manage the risk of share price changes for, or increase or decrease the voting power of, such Proposing Person with respect to the shares of any class or series of the Corporation, or which provides, directly or indirectly, the opportunity to profit from any decrease in the price or value of the shares of any class or series of the Corporation (“Short Interests”), (D) any rights to dividends on the shares of any class or series of the Corporation owned beneficially by such Proposing Person that are separated or separable from the underlying shares of the Corporation, (E) any performance related fees (other than an asset based fee) that such Proposing Person is entitled to based on any increase or decrease in the price or value of shares of any class or series of the Corporation, or any Synthetic Equity Interests or Short Interests, if any, and (F) any other information relating to such Proposing Person that would be required to be disclosed in a proxy statement or other filing required to be made in connection with solicitations of proxies or consents by such Proposing Person in support of the business proposed to be brought before the meeting pursuant to Section 14(a) of the Exchange Act (the disclosures to be made pursuant to the foregoing clauses (A) through (F) are referred to as “Disclosable Interests”); provided, however, that Disclosable Interests shall not include any such disclosures with respect to the ordinary course business activities of any broker, dealer, commercial bank, trust company or other nominee who is a Proposing Person solely as a result of being the stockholder directed to prepare and submit the notice required by these Bylaws on behalf of a beneficial owner; and

 

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(iii) Description of Proposed Business. As to each item of business the stockholder proposes to bring before the annual or special meeting, (A) a reasonably brief description of the business desired to be brought before the annual or special meeting, the reasons for conducting such business at the annual or special meeting and any material interest in such business of each Proposing Person, (B) the text of the proposal or business (including the text of any resolutions proposed for consideration), and (C) a reasonably detailed description of all agreements, arrangements and understandings (x) between or among any of the Proposing Persons or (y) between or among any Proposing Person and any other person or entity (including their names) in connection with the proposal of such business by such stockholder.

(iv) Definition of Proposing Person. For purposes of this Section 1.14, the term “Proposing Person” shall mean (i) the stockholder providing the notice of business proposed to be brought before an annual or special meeting, (ii) the beneficial owner or beneficial owners, if different, on whose behalf the notice of the business proposed to be brought before the annual or special meeting is made, and (iii) any affiliate or associate of such stockholder or beneficial owner.

(d) Update and Supplement of Stockholder Notice of Proposed Business. A stockholder providing notice of business proposed to be brought before an annual or special meeting shall further update and supplement such notice, if necessary, so that the information provided or required to be provided in such notice pursuant to this Section 1.13 or in any Special Meeting Request shall be true and correct as of the record date for the meeting and as of the date that is ten (10) business days prior to the meeting or any adjournment or postponement thereof, and such update and supplement shall be delivered to, or mailed and received by, the Secretary at the principal executive offices of the Corporation not later than five (5) business days after the record date for the meeting (in the case of the update and supplement required to be made as of the record date), and not later than eight (8) business days prior to the date of the meeting, or in the case of any adjournment or postponement thereof, eight (8) business days prior to the date of such adjournment or postponement. For the avoidance of doubt, the obligation to update and supplement as set forth in this Section 1.14(d) or any other Section of these Bylaws shall not be deemed to extend any applicable deadlines under these Bylaws, cure deficiencies in any notice of business or permit a change in the proposal, business or resolution proposed to be brought before a meeting of the stockholders.

(e) Business Not Properly Brought Before a Meeting. Notwithstanding anything in these Bylaws to the contrary, no business shall be conducted at an annual or special meeting except in accordance with this Section 1.13. The presiding officer of the meeting shall, if the facts warrant, determine that the business was not properly brought before the meeting in accordance with this Section 1.13, and if he or she should so determine, he or she shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted.

(f) Exchange Act Compliance. This Section 1.13 is expressly intended to apply to any business proposed to be brought before an annual or special meeting of stockholders other than any proposal made pursuant to Rule 14a-8 under the Exchange Act. In addition to the requirements of this Section 1.13 with respect to any business proposed to be brought before an annual or special meeting, each Proposing Person shall comply with all applicable requirements

 

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of the Exchange Act with respect to any such business. Nothing in this Section 1.13 shall be deemed to affect the rights of stockholders to request inclusion of proposals in the Corporation’s proxy statement pursuant to Rule 14a-8 under the Exchange Act.

(g) Definition of Public Disclosure. For purposes of these Bylaws, “public disclosure” shall mean disclosure in a press release reported by a national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Sections 13, 14 or 15(d) of the Exchange Act.

Section 1.14 Nominations.

(a) Who May Make Nominations. Nominations of any person for election to the Board of Directors at an annual meeting or at a special meeting (but only if the election of directors is a matter specified in the notice of meeting given by or at the direction of the person calling such special meeting) may be made at such meeting only in accordance with the provisions of Clauses D and E of Article VI of the Certificate of Incorporation and any requirements imposed by this Section 1.14 as to such nomination. Clauses D and E of Article VI of the Certificate of Incorporation, together with any additional requirements imposed by this Section 1.14, shall be the exclusive means for a stockholder to make any nomination of a person or persons for election to the Board of Directors at an annual meeting or special meeting (other than, if permitted by Article VII of the Certificate of Incorporation, pursuant to a Special Meeting Request). Any person nominated for election to the Board of Directors pursuant to Clause E of Article VI of the Certificate of Incorporation shall be referred to herein as a “Stockholder Nominee.”

(b) Requirement of Timely Notice of Stockholder Nominations. Without qualification, for a stockholder to make any nomination of a person or persons for election to the Board of Directors at an annual meeting, the stockholder must (i) provide Timely Notice (as defined in Section 1.13 of these Bylaws) thereof in writing and in proper form to the Secretary of the Corporation and (ii) provide any updates or supplements to such notice at the times and in the forms required by this Section 1.14. Without qualification, if the election of directors is a matter specified in the notice of meeting given by or at the direction of the person calling such special meeting, then for a stockholder to make any nomination of a person or persons for election to the Board of Directors at a special meeting, the stockholder must (i) provide timely notice thereof in writing and in proper form to the Secretary of the Corporation at the principal executive offices of the Corporation, and (ii) provide any updates or supplements to such notice at the times and in the forms required by this Section 1.14. To be timely, a stockholder’s notice (other than a notice submitted in order to include a Stockholder Nominee (as defined above) in the Corporation’s proxy materials, as defined and described in Clause E of Article VI of the Certificate of Incorporation) for nominations to be made at a special meeting (other than, if permitted by Article VII of the Certificate of Incorporation, pursuant to a Special Meeting Request) must be delivered to, or mailed and received at, the principal executive offices of the Corporation not earlier than the one hundred twentieth (120th) day prior to such special meeting and not later than the ninetieth (90th) day prior to such special meeting or, if later, the tenth (10th) day following the day on which public disclosure (as defined in Section 1.13 of these Bylaws) of the date of such special meeting was first made. In no event shall any adjournment or postponement of an annual meeting or special meeting or the announcement thereof commence a new time period for the giving of a stockholder’s notice as described above.

 

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(c) Requirements for Proper Form of Notice of Stockholder Nominations. To be in proper form for purposes of this Section 1.14, a stockholder’s notice to the Secretary shall set forth:

(i) Stockholder Information. As to each Nominating Person (as defined below), (A) the name and address of such Nominating Person (including, if applicable, the name and address that appear on the Corporation’s books and records), (B) the class or series and number of shares of the Corporation that are, directly or indirectly, owned of record or beneficially owned (within the meaning of Rule 13d-3 under the Exchange Act) by such Nominating Person, except that such Nominating Person shall in all events be deemed to beneficially own any shares of any class or series of the Corporation as to which such Nominating Person has a right to acquire beneficial ownership at any time in the future and (C) a representation whether such Nominating Person intends or is part of a group that intends to deliver a proxy statement and/or form of proxy to holders of at least the percentage of the Corporation’s outstanding stock reasonably believed by the Nominating Person to be sufficient to elect the nominee or nominees proposed to be nominated by the Nominating Person;

(ii) Information Regarding Disclosable Interests. As to each Nominating Person, any Disclosable Interests (as defined in Section 1.13(c)(ii), except that for purposes of this Section 1.14 the term “Nominating Person” shall be substituted for the term “Proposing Person” in all places it appears in Section 1.13(c)(ii)), and the disclosure in clause (F) of Section 1.13(c)(ii) shall be made with respect to the election of directors at the meeting;

(iii) Information Regarding Proposed Nominees. As to each person whom a Nominating Person proposes to nominate for election as a director, (A) all information with respect to such proposed nominee that would be required to be set forth in a stockholder’s notice pursuant to this Section 1.14 if such proposed nominee were a Nominating Person, (B) all information relating to such proposed nominee that is required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of directors in a contested election pursuant to Section 14(a) under the Exchange Act (including such proposed nominee’s written consent to being named in the proxy statement as a nominee and to serving as a director if elected), (C) a description of all direct and indirect compensation and other material monetary agreements, arrangements and understandings during the past three years, and any other material relationships, between or among any Nominating Person, on the one hand, and each proposed nominee, his or her respective affiliates and associates, on the other hand, including, without limitation, all information that would be required to be disclosed pursuant to Item 404 under Regulation S-K if such Nominating Person were the “registrant” for purposes of such rule and the proposed nominee were a director or executive officer of such registrant, and

 

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(D) a statement as to whether the proposed nominee, if elected, intends to tender, promptly following such person’s election or re-election, an irrevocable resignation effective upon the occurrence of both (1) such person’s failure to receive the required vote for re-election at the next meeting at which such person would face re-election and (2) acceptance of such resignation in accordance with Section 2.2 of these Bylaws and the Corporation’s Governance Guidelines for the Board of Directors; and

(iv) Other Information to Be Furnished by Proposed Nominees. The Corporation may require any proposed nominee to furnish such other information (A) as may reasonably be required by the Corporation to determine the eligibility of such proposed nominee to serve as an independent director of the Corporation in accordance with the Corporation’s Governance Guidelines or (B) that could be material to a reasonable stockholder’s understanding of the independence or lack of independence of such proposed nominee.

(v) Definition of Nominating Person. For purposes of this Section 1.13, the term “Nominating Person” shall mean (i) the stockholder providing the notice of the nomination proposed to be made at the meeting, (ii) the beneficial owner or beneficial owners, if different, on whose behalf the notice of the nomination proposed to be made at the meeting is made, and (iii) any affiliate or associate of such stockholder or beneficial owner.

(d) Update and Supplement of Stockholder Notice of Nominations. A stockholder providing notice of any nomination proposed to be made at a meeting shall further update and supplement such notice, if necessary, so that the information provided or required to be provided in such notice pursuant to this Section 1.14 or, if permitted by Article VII of the Certificate of Incorporation, in any Special Meeting Request, shall be true and correct as of the record date for the meeting and as of the date that is ten (10) business days prior to the meeting or any adjournment or postponement thereof, and such update and supplement shall be delivered to, or mailed and received by, the Secretary at the principal executive offices of the Corporation not later than five (5) business days after the record date for the meeting (in the case of the update and supplement required to be made as of the record date), and not later than eight (8) business days prior to the date of the meeting, or in the case of any adjournment or postponement thereof, eight (8) business days prior to the date of such adjournment or postponement. For the avoidance of doubt, the obligation to update and supplement as set forth in this Section 1.13(d) or any other Section of these Bylaws shall not be deemed to extend any applicable deadlines under these Bylaws, cure deficiencies in any notice of nominations or permit a change in the nominees or nominations proposed to be made at a meeting of the stockholders.

(e) Defective Nominations. Notwithstanding anything in these Bylaws to the contrary, no person shall be eligible for election as a director of the Corporation unless nominated in accordance with this Section 1.14. The presiding officer at the meeting shall, if the facts warrant, determine that a nomination was not properly made in accordance with this Section 1.14, and if he or she should so determine, he or she shall so declare such determination to the meeting and the defective nomination shall be disregarded.

 

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(f) Compliance with Exchange Act. In addition to the requirements of this Section 1.14 with respect to any nomination proposed to be made at a meeting, each Nominating Person shall comply with all applicable requirements of the Exchange Act with respect to any such nominations.

ARTICLE II

BOARD OF DIRECTORS

Section 2.1 Number; Qualifications. The Board of Directors shall consist of one or more members. The number of directors shall be fixed from time to time exclusively by resolution of the Board of Directors. No decrease in the authorized number of directors constituting the Board of Directors shall shorten the term of any incumbent director. Directors need not be stockholders of the Corporation.

Section 2.2 Election.

(a) The directors shall be elected as provided in the Certificate of Incorporation.

(b) Each director to be elected by the stockholders of the Corporation shall be elected by the affirmative vote of a majority of the votes cast with respect to such director by the shares represented and entitled to vote therefor at a meeting of the stockholders for the election of directors at which a quorum is present (an “Election Meeting”); provided, however, that if the Board of Directors determines that the number of nominees exceeds the number of directors to be elected at such meeting (a “Contested Election”), and the Board of Directors has not rescinded such determination by the date that is twenty (20) days prior to the date of the Election Meeting as initially announced, each of the directors to be elected at the Election Meeting shall be elected by the affirmative vote of a plurality of the votes cast by the shares represented and entitled to vote at such meeting with respect to the election of such director. For purposes of this Section 2.2, a “majority of the votes cast” means that the number of votes cast “for” a candidate for director exceeds the number of votes cast “against” that director. In an election other than a Contested Election, stockholders will be given the choice to cast votes “for” or “against” the election of directors or to “abstain” from such vote and shall not have the ability to cast any other vote with respect to such election of directors. In a Contested Election, stockholders will be given the choice to cast “for” or “withhold” votes for the election of directors and shall not have the ability to cast any other vote with respect to such election of directors. In the event an Election Meeting involves the election of directors by separate votes by class or classes or series, the determination as to whether an election constitutes a Contested Election shall be made on a class by class or series by series basis, as applicable.

(c) In the event one or more incumbent directors (each, a “Subject Director”) fails to receive the affirmative vote of a majority of the votes cast at an Election Meeting at which there was no Contested Election, either (i) the Corporate Governance and Nominating Committee or (ii) if one or more of the members of the Corporate Governance and Nominating Committee is a Subject Director or the Board of Directors determines that any decision to be made with respect to a Subject Director should be made by a committee other than the Corporate

 

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Governance and Nominating Committee, a committee consisting solely of independent directors (as determined in accordance with any stock exchange rules and regulations applicable to the Corporation and any additional criteria set forth in the Corporation’s Governance Guidelines for the Board of Directors or Corporate Governance and Nominating Committee Charter, as applicable) who are not Subject Directors (the committee described in clause (i) or (ii) of this sentence, the “Committee”) will make a determination as to whether to accept or reject any previously tendered Resignations (as defined below), or whether other action should be taken (including whether to request that a Subject Director resign from the Board of Directors if no Resignation had been tendered prior to the relevant Election Meeting). The Committee will act with respect to any Subject Directors within ninety (90) days from the date of the certification of the election results and shall notify the Subject Directors of its decision. The Committee may consider all factors it considers relevant, including any stated reasons for “against” votes, whether the underlying cause or causes of the “against” votes are curable, the relationship between such causes and the actions of such Subject Director, the factors, if any, set forth in the Corporation’s Governance Guidelines for the Board of Directors or other policies that are to be considered by the Corporate Governance and Nominating Committee in evaluating potential candidates for the Board of Directors as such criteria relate to such Subject Director, the length of service of such Subject Director, the size and holding period of such Subject Director’s stock ownership in the Corporation, and such Subject Director’s contributions to the Corporation. Subject Directors shall not participate in the deliberation or decision(s) of the Committee. The Corporation shall publicly disclose the decision(s) of the Committee in a Current Report on Form 8-K filed with the Securities and Exchange Commission. Notwithstanding the foregoing, if the result of accepting all tendered Resignations then pending and requesting resignations from incumbent directors who did not submit a Resignation prior to the relevant Election Meeting, would be that the Corporation would have fewer than three (3) directors who were in office before the election of directors, the Committee may determine to extend such ninety (90)-day period by an additional ninety (90) days if it determines that such an extension is in the best interests of the Corporation and its stockholders. For purposes of this Section 2.2, a “Resignation” is an irrevocable resignation submitted by an incumbent director nominated for re-election prior to the relevant Election Meeting that will become effective upon the occurrence of both (i) the failure to receive the affirmative vote of a majority of the votes cast at an Election Meeting at which there was no Contested Election and (ii) acceptance of such resignation by the Committee.

(d) If a Subject Director’s tendered Resignation is not accepted by the Committee or such Subject Director does not otherwise submit his or her resignation to the Board of Directors, such director shall continue to serve until his or her successor is duly elected, or his or her earlier resignation or removal pursuant to Section 2.3. If a Subject Director’s Resignation is accepted by the Committee pursuant to this Section 2.2, or if a nominee for director is not elected and the nominee is not an incumbent director, then the Board of Directors, in its sole discretion, may fill any resulting vacancy pursuant to the provisions of Section 2.3 or decrease the size of the Board of Directors pursuant to the provisions of Section 2.1 of these Bylaws.

Section 2.3 Resignation; Removal; Vacancies. Subject to the provisions of the Certificate of Incorporation, each director shall serve until his or her successor is duly elected and qualified, or until his or her earlier death, resignation, retirement or removal from service as

 

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a director. Any director may resign at any time upon notice given in writing or by electronic transmission to the Corporation. Subject to the rights of any holders of Preferred Stock then outstanding and the Certificate of Incorporation:

(i) the holders of a majority of the shares entitled to vote in an election of directors may remove any director or the entire Board of Directors with or without cause, and

(ii) any vacancy occurring in the Board of Directors for any reason, and any newly created directorship resulting from any increase in the authorized number of directors to be elected by all stockholders having the right to vote as a single class, shall be filled only by a majority of the directors then in office, although less than a quorum, or by a sole remaining director.

Section 2.4 Regular Meetings. Regular meetings of the Board of Directors may be held at such places, within or without the State of Delaware, and at such times as the Board of Directors may from time to time determine. Notice of regular meetings need not be given if the date, times and places thereof are fixed by resolution of the Board of Directors.

Section 2.5 Special Meetings. Special meetings of the Board of Directors may be called by the Chairman of the Board, the Chief Executive Officer or a majority of the members of the Board of Directors then in office and may be held at any time, date or place, within or without the State of Delaware, as the person or persons calling the meeting shall fix. Notice of the time, date and place of such meeting shall be given, orally or in writing, by the person or persons calling the meeting to all directors at least four (4) days before the meeting if the notice is mailed, or at least twenty-four (24) hours before the meeting if such notice is given by telephone, hand delivery, overnight express courier, facsimile, electronic mail or other electronic transmission. Unless otherwise indicated in the notice, any and all business may be transacted at a special meeting. The notice shall be deemed given:

(i) in the case of hand delivery or notice by telephone, when received by the director to whom notice is to be given or by any person accepting such notice on behalf of such director,

(ii) in the case of delivery by mail, upon deposit in the United States mail, postage prepaid, directed to the director to whom notice is being given at such director’s address as it appears on the records of the Corporation,

(iii) in the case of delivery by overnight express courier, on the first business day after such notice is dispatched, and

(iv) in the case of delivery via facsimile, electronic mail or other electronic transmission, when sent to the director to whom notice is to be given or by any person accepting such notice on behalf of such director at such director’s facsimile number or electronic mail address, as the case may be, as it appears on the Corporation’s records.

 

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Section 2.6 Telephonic Meetings Permitted. Members of the Board of Directors, or any committee of the Board of Directors, may participate in a meeting of the Board of Directors or such committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to conference telephone or similar communications equipment shall constitute presence in person at such meeting.

Section 2.7 Quorum; Vote Required for Action. At all meetings of the Board of Directors a majority of the total number of authorized directors shall constitute a quorum for the transaction of business. Except as otherwise provided herein or in the Certificate of Incorporation, or as required by law, the vote of a majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. If a quorum is not present at any meeting of the Board of Directors, then the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present.

Section 2.8 Chairman of the Board. The Board of Directors shall have the power to elect the Chairman of the Board from among the members of the Board of Directors. The Chairman of the Board shall have the power to preside at all meetings of the Board of Directors and shall have such other powers and duties as provided in these Bylaws and as the Board of Directors may from time to time prescribe.

Section 2.9 Organization. Meetings of the Board of Directors shall be presided over by the Chairman of the Board, or in his or her absence by the Chief Executive Officer, or in his or her absence by a chairman chosen at the meeting. The Secretary shall act as secretary of the meeting, but in his or her absence the chairman of the meeting may appoint any person to act as secretary of the meeting.

Section 2.10 Written Action by Directors. Any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee thereof, may be taken without a meeting if all members of the Board or such committee, as the case may be, consent thereto in writing, or by electronic transmission and the writing or writings or electronic transmission or transmissions are filed with the minutes of proceedings of the Board or committee, respectively. Such filing shall be in paper form if the minutes are maintained in paper form and shall be in electronic form if the minutes are maintained in electronic form.

Section 2.11 Powers. The Board of Directors may, except as otherwise required by law or the notice is dispatched, and Certificate of Incorporation, exercise all such powers and do all such acts and things as may be exercised or done by the Corporation.

Section 2.12 Compensation of Directors. Directors, as such, may receive, pursuant to a resolution of the Board of Directors, fees and other compensation for their services as directors, including without limitation their services as members of committees of the Board of Directors.

 

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ARTICLE III

COMMITTEES

Section 3.1 Committees. The Board of Directors may, by resolution passed by a majority of the authorized number of directors, designate one or more committees, each committee to consist of one or more of the directors of the Corporation. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of the committee, the member or members thereof present at any meeting of such committee who are not disqualified from voting, whether or not he, she or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in place of any such absent or disqualified member. Any such committee, to the extent provided in a resolution of the Board of Directors, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation and may authorize the seal of the Corporation to be affixed to all papers that may require it; but no such committee shall have power or authority in reference to the following matters: (i) approving or adopting, or recommending to the stockholders, any action or matter (other than the election or removal of directors) expressly required by the Delaware General Corporation Law to be submitted to stockholders for approval, or (ii) adopting, amending or repealing any Bylaw of the Corporation.

Section 3.2 Committee Rules. Unless the Board of Directors otherwise provides, each committee designated by the Board of Directors may make, alter and repeal rules for the conduct of its business. In the absence of such rules each committee shall conduct its business in the same manner as the Board of Directors conducts its business pursuant to Article II of these Bylaws.

ARTICLE IV

OFFICERS

Section 4.1 Generally. The officers of the Corporation shall consist of a Chief Executive Officer and/or a President, one or more Vice Presidents, a Secretary, a Treasurer and such other officers, including a Chief Financial Officer, as may from time to time be appointed by the Board of Directors. All officers shall be elected by the Board of Directors; provided, however, that the Board of Directors may empower the Chief Executive Officer of the Corporation to appoint officers other than the Chief Executive Officer, the President, the Chief Financial Officer or the Treasurer. Each officer shall hold office until his or her successor is elected and qualified or until his or her earlier resignation or removal. Any number of offices may be held by the same person. Any officer may resign at any time upon written notice to the Corporation. Any vacancy occurring in any office of the Corporation by death, resignation, removal or otherwise may be filled by the Board of Directors.

 

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Section 4.2 Chief Executive Officer. Subject to the control of the Board of Directors and such supervisory powers, if any, as may be given by the Board of Directors, the powers and duties of the Chief Executive Officer of the Corporation are:

(a) To act as the general manager and, subject to the control of the Board of Directors, to have general supervision, direction and control of the business and affairs of the Corporation;

(b) To preside at all meetings of the stockholders;

(c) To call meetings of the stockholders to be held at such times and, subject to the limitations prescribed by law or by these Bylaws, at such places as he or she shall deem proper; and

(d) To affix the signature of the Corporation to all deeds, conveyances, mortgages, guarantees, leases, obligations, bonds, certificates and other papers and instruments in writing which have been authorized by the Board of Directors or which, in the judgment of the Chief Executive Officer, should be executed on behalf of the Corporation; to sign certificates for shares of stock of the Corporation; and, subject to the direction of the Board of Directors, to have general charge of the property of the Corporation and to supervise and control all officers, agents and employees of the Corporation.

The President shall be the Chief Executive Officer of the Corporation unless the Board of Directors shall designate another officer to be the Chief Executive Officer. If there is no President, and the Board of Directors has not designated any other officer to be the Chief Executive Officer, then the Chairman of the Board shall be the Chief Executive Officer.

Section 4.3 President. The President shall be the Chief Executive Officer of the Corporation unless the Board of Directors shall have designated another officer as the Chief Executive Officer of the Corporation. Subject to the provisions of these Bylaws and to the direction of the Board of Directors, and subject to the supervisory powers of the Chief Executive Officer (if the Chief Executive Officer is an officer other than the President), and subject to such supervisory powers and authority as may be given by the Board of Directors to the Chairman of the Board, and/or to any other officer, the President shall have the responsibility for the general management and the control of the business and affairs of the Corporation and the general supervision and direction of all of the officers, employees and agents of the Corporation (other than the Chief Executive Officer, if the Chief Executive Officer is an officer other than the President) and shall perform all duties and have all powers that are commonly incident to the office of President or that are delegated to the President by the Board of Directors.

Section 4.4 Vice President. Each Vice President shall have all such powers and duties as are commonly incident to the office of Vice President, or that are delegated to him or her by the Board of Directors or the Chief Executive Officer. A Vice President may be designated by the Board to perform the duties and exercise the powers of the Chief Executive Officer in the event of the Chief Executive Officer’s absence or disability.

 

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Section 4.5 Chief Financial Officer. Subject to the direction of the Board of Directors and the President, the Chief Financial Officer shall perform all duties and have all powers that are commonly incident to the office of chief financial officer.

Section 4.6 Treasurer. The Treasurer shall have custody of all monies and securities of the Corporation. The Treasurer shall make such disbursements of the funds of the Corporation as are authorized and shall render from time to time an account of all such transactions. The Treasurer shall also perform such other duties and have such other powers as are commonly incident to the office of Treasurer, or as the Board of Directors or the President may from time to time prescribe.

Section 4.7 Secretary. The Secretary shall issue or cause to be issued all authorized notices for, and shall keep, or cause to be kept, minutes of all meetings of the stockholders and the Board of Directors. The Secretary shall have charge of the corporate minute books and similar records and shall perform such other duties and have such other powers as are commonly incident to the office of Secretary, or as the Board of Directors or the President may from time to time prescribe.

Section 4.8 Delegation of Authority. The Board of Directors may from time to time delegate the powers or duties of any officer to any other officers or agents, notwithstanding any provision hereof.

Section 4.9 Removal. Any officer of the Corporation shall serve at the pleasure of the Board of Directors and may be removed at any time, with or without cause, by the Board of Directors. Such removal shall be without prejudice to the contractual rights of such officer, if any, with the Corporation.

ARTICLE V

STOCK

Section 5.1 Certificates. The shares of the Corporation may be uncertificated or may be represented by certificates. The Board of Directors may provide by resolution or resolutions that some or all of any or all classes or series of the Corporation’s stock shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the Corporation. Every holder of stock represented by certificates shall be entitled to have a certificate signed by or in the name of the Corporation by the Chairman or Vice-Chairman of the Board of Directors, or the President or a Vice President, and by the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary, of the Corporation, representing the number of shares registered in certificate form. Any or all of the signatures on the certificate may be a facsimile.

Section 5.2 Lost, Stolen or Destroyed Stock Certificates; Issuance of New Certificates or Uncertificated Shares. The Corporation may issue a new certificate of stock or uncertificated shares in the place of any certificate previously issued by it, alleged to have been lost, stolen or destroyed, and the Corporation may require the owner of the lost, stolen or destroyed certificate, or such owner’s legal representative, to agree to indemnify the Corporation

 

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and/or to give the Corporation a bond sufficient to indemnify it, against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate or uncertificated shares.

Section 5.3 Other Regulations. The issue, transfer, conversion and registration of stock certificates or uncertificated shares shall be governed by such other regulations as the Board of Directors may establish.

ARTICLE VI

INDEMNIFICATION

Section 6.1 Indemnification of Officers and Directors. Each person who was or is made a party to, or is threatened to be made a party to, or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (a “proceeding”), by reason of the fact that he or she (or a person of whom he or she is the legal representative), is or was a director or officer of the Corporation or a Reincorporated Predecessor (as defined below) or is or was serving at the request of the Corporation or a Reincorporated Predecessor (as defined below) as a director, officer or employee of another corporation, or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans (each such director, officer or employee, a “Covered Person”), shall be indemnified and held harmless by the Corporation to the fullest extent permitted by the Delaware General Corporation Law, against all expenses, liability and loss (including attorneys’ fees, judgments, fines, ERISA excise taxes and penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith; provided, however, that the Corporation shall indemnify any such Covered Person seeking indemnity in connection with a proceeding (or part thereof) initiated by such Covered Person only if such proceeding (or part thereof) was authorized by the Board of Directors of the Corporation. As used herein, the term “Reincorporated Predecessor” means a corporation that is merged with and into the Corporation in a statutory merger where (a) the Corporation is the surviving corporation of such merger; and (b) the primary purpose of such merger is to change the corporate domicile of the Reincorporated Predecessor to Delaware.

Section 6.2 Advance of Expenses. The Corporation shall pay all expenses (including attorneys’ fees) incurred by a Covered Person in defending any such proceeding as they are incurred in advance of its final disposition; provided, however, that if the Delaware General Corporation Law then so requires, the payment of such expenses incurred by a Covered Person in advance of the final disposition of such proceeding shall be made only upon delivery to the Corporation of an undertaking, by or on behalf of such Covered Person, to repay all amounts so advanced if it should be determined ultimately that such Covered Person is not entitled to be indemnified under this Article VI or otherwise; and provided, further, that the Corporation shall not be required to advance any expenses to a Covered Person against whom the Corporation directly brings a claim, in a proceeding, alleging that such person has breached his or her duty of loyalty to the Corporation, committed an act or omission not in good faith or that involves intentional misconduct or a knowing violation of law, or derived an improper personal benefit from a transaction.

 

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Section 6.3 Non-Exclusivity of Rights. The rights conferred on any person in this Article VI shall not be exclusive of any other right that such person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, Bylaw, agreement, vote or consent of stockholders or disinterested directors, or otherwise. Additionally, nothing in this Article VI shall limit the ability of the Corporation, in its discretion, to indemnify or advance expenses to persons whom the Corporation is not obligated to indemnify or advance expenses pursuant to this Article VI. The Board of Directors of the Corporation shall have the power to delegate to such officer or other person as the Board of Directors shall specify the determination of whether indemnification shall be given to any person pursuant to this Section 6.3.

Section 6.4 Indemnification Contracts. The Board of Directors is authorized to cause the Corporation to enter into indemnification contracts with any director, officer, employee or agent of the Corporation, or any person serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, including employee benefit plans, providing indemnification rights to such person. Such rights may be greater than those provided in this Article VI.

Section 6.5 Continuation of Indemnification. The rights to indemnification and to advancement of expenses provided by, or granted pursuant to, this Article VI shall continue notwithstanding that the person has ceased to be a Covered Person and shall inure to the benefit of his or her estate, heirs, executors, administrators, legatees and distributees; provided, however, that the Corporation shall indemnify any such person seeking indemnity in connection with a proceeding (or part thereof) initiated by such person only if such proceeding (or part thereof) was authorized by the Board of Directors of the Corporation.

Section 6.6 Effect of Amendment or Repeal. The provisions of this Article VI shall constitute a contract between the Corporation, on the one hand, and, on the other hand, each individual who serves or has served as a Covered Person (whether before or after the adoption of these Bylaws), in consideration of such person’s performance of such services, and pursuant to this Article VI, the Corporation intends to be legally bound to each such current or former Covered Person. With respect to current and former Covered Persons, the rights conferred under this Article VI are present contractual rights and such rights are fully vested, and shall be deemed to have vested fully, immediately upon adoption of these Bylaws. With respect to any Covered Persons who commence service following adoption of these Bylaws, the rights conferred under this Article VI shall be present contractual rights, and such rights shall fully vest, and be deemed to have vested fully, immediately upon such Covered Person’s service in the capacity which is subject to the benefits of this Article VI.

ARTICLE VII

NOTICES

Section 7.1 General Notice. Except as otherwise specifically provided herein or required by law, all notices required to be given pursuant to these Bylaws shall be in writing and may in every instance be effectively given by hand delivery (including use of a delivery service), by depositing such notice in the mail, postage prepaid, or by sending such notice by prepaid overnight express courier or facsimile. Any such notice shall be addressed to the person to whom notice is to be given at such person’s address or facsimile number, as the case may be, as it appears on the records of the Corporation. The notice shall be deemed given

 

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(i) in the case of hand delivery, when received by the person to whom notice is to be given or by any person accepting such notice on behalf of such person;

(ii) in the case of delivery by mail, upon deposit in the United States mail, postage prepaid, directed to the person to whom notice is being given at such person’s address as it appears on the records of the Corporation;

(iii) in the case of delivery by overnight express courier, on the first business day after such notice is dispatched; and

(iv) in the case of delivery via facsimile, when directed to the person to whom notice is to be given or by any person accepting such notice on behalf of such person.

Section 7.2 Waiver of Notice. Whenever notice is required to be given under any provision of these Bylaws, a written waiver of notice, signed by the person entitled to notice, or a waiver by electronic transmission by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting at the beginning of the meeting to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders, directors or members of a committee of directors need be specified in any written waiver of notice or any waiver by electronic transmission.

ARTICLE VIII

INTERESTED DIRECTORS

Section 8.1 Interested Directors; Quorum. No contract or transaction between the Corporation and one or more of its directors or officers, or between the Corporation and any other corporation, partnership, association or other organization in which one or more of its directors or officers are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the Board of Directors or committee thereof that authorizes the contract or transaction, or solely because his, her or their votes are counted for such purpose, if:

(i) the material facts as to his, her or their relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors or the committee, and the Board of Directors or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum;

 

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(ii) the material facts as to his, her or their relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or

(iii) the contract or transaction is fair as to the Corporation as of the time it is authorized, approved or ratified by the Board of Directors, a committee thereof, or the stockholders. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee which authorizes the contract or transaction.

ARTICLE IX

MISCELLANEOUS

Section 9.1 Fiscal Year. The fiscal year of the Corporation shall be determined by resolution of the Board of Directors.

Section 9.2 Seal. The Board of Directors may provide for a corporate seal, which shall have the name of the Corporation inscribed thereon and shall otherwise be in such form as may be approved from time to time by the Board of Directors.

Section 9.3 Form of Records. Any records maintained by the Corporation in the regular course of its business, including its stock ledger, books of account and minute books, may be kept on, or by means of, or be in the form of, any information storage device or method provided that the records so kept can be converted into clearly legible paper form within a reasonable time. The Corporation shall so convert any records so kept upon the request of any person entitled to inspect such records pursuant to any provision of the Delaware General Corporation Law.

Section 9.4 Reliance Upon Books and Records. A member of the Board of Directors, or a member of any committee designated by the Board of Directors shall, in the performance of his or her duties, be fully protected in relying in good faith upon records of the Corporation and upon such information, opinions, reports or statements presented to the Corporation by any of the Corporation’s officers or employees, or committees of the Board of Directors, or by any other person as to matters the member reasonably believes are within such other person’s professional or expert competence and who has been selected with reasonable care by or on behalf of the Corporation.

Section 9.5 Certificate of Incorporation Governs. In the event of any conflict between the provisions of the Certificate of Incorporation and Bylaws, the provisions of the Certificate of Incorporation shall govern.

Section 9.6 Severability. If any provision of these Bylaws shall be held to be invalid, illegal, unenforceable or in conflict with the provisions of the Certificate of Incorporation, then such provision shall nonetheless be enforced to the maximum extent possible consistent with such holding and the remaining provisions of these Bylaws (including without limitation, all portions of any section of these Bylaws containing any such provision held to be

 

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invalid, illegal, unenforceable or in conflict with the Certificate of Incorporation, that are not themselves invalid, illegal, unenforceable or in conflict with the Certificate of Incorporation) shall remain in full force and effect.

ARTICLE X

AMENDMENT

Section 10.1 Amendments. Subject to Section 6.6 of these Bylaws, stockholders of the Corporation holding at least a majority of the Corporation’s outstanding voting stock shall have the power to adopt, amend or repeal Bylaws. To the extent provided in the Certificate of Incorporation, the Board of Directors of the Corporation shall also have the power to adopt, amend or repeal Bylaws of the Corporation.

 

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CERTIFICATION OF BYLAWS

OF

PAYPAL HOLDINGS, INC.

(a Delaware Corporation)

KNOW ALL BY THESE PRESENTS:

I, Daniel H. Schulman, certify that I am President and Chief Executive Officer of PayPal Holdings, Inc., a Delaware corporation (the “Company”), that I am duly authorized to make and deliver this certification, that the attached Bylaws are a true and correct copy of the Bylaws of the Company in effect as of the date of this certificate.

 

Dated:             , 2015

 

Daniel H. Schulman

President and Chief Executive Officer

EX-10.22

Exhibit 10.22

PAYPAL HOLDINGS, INC. CHANGE IN CONTROL SEVERANCE PLAN

FOR KEY EMPLOYEES

AND

SUMMARY PLAN DESCRIPTION

 

1. PURPOSE OF THE PLAN

The purpose of the PayPal Holdings, Inc. Change in Control Severance Plan (the “Plan”) is to encourage the full attention and dedication of those officers at and above the level of Vice President, and certain PayPal Holdings, Inc. Fellows as may be selected by the Plan Administrator, in light of the distractions a potential change in control may cause, and otherwise to provide severance benefits designed to give financial assistance to any Eligible Participants upon their separation from PayPal Holdings, Inc. (“Company”) or any of its participating subsidiaries or affiliates under the conditions described herein during any Change in Control Period (as such term is defined below).

 

2. DEFINITIONS/GENERAL RULES

Definitions

Accrued Benefits – means prompt payment by the Company to an Eligible Participant of (a) any accrued but unpaid annual base salary through the last day of employment, (b) any unreimbursed expenses incurred through the last day of employment subject to the Eligible Participant’s prompt delivery to the Company of all required documentation of such expenses pursuant to applicable employer policies, (c) all other vested payments, benefits or fringe benefits to which the Eligible Participant is entitled under the terms of any applicable compensation arrangement or benefit, equity or fringe benefit plan or program or grant (excluding any other severance plan, policy or program) of the Company or any of its affiliates in accordance with the terms of such plan, program or grant, including any unpaid annual bonus under the Company Employee Incentive Plan or applicable successor plan (the “eIP”)) for any prior fiscal year when it otherwise would have been paid (see Section 4, eIP, below).

Board – means the Board of Directors of the Company.

Cause – Cause is defined as (a) an Eligible Participant’s failure to attempt in good faith to substantially perform his or her assigned duties, other than failure resulting from his or her death or incapacity due to physical or mental illness or impairment, which is not remedied within thirty (30) days after receipt of written notice from the Company specifying such failure; (b) an Eligible Participant’s indictment for, conviction of or plea of nolo contendere to any felony (or any other crime involving fraud, dishonesty or moral turpitude); or (c) an Eligible Participant’s commission of an act of fraud,

 

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embezzlement, misappropriation, willful misconduct, or breach of fiduciary duty against the Company, except good faith expense account disputes.

Change in Control – shall have the meaning of such term as specified in that certain Company Inc. Equity Incentive Award Plan under which the Company is then granting equity awards, as the same shall be in effect from time to time. The Compensation Committee of the Board shall have full and final authority, which shall be exercised in its discretion, to determine conclusively whether a Change in Control of the Company has occurred pursuant to the above definition, and the date of the occurrence of such Change in Control and any incidental matters relating thereto.

Change in Control Period – means the period that begins ninety (90) days prior to the closing date of, and ends 24 months following, a Change in Control.

Company – means Company or any of its participating U.S. subsidiaries, as applicable, and after a Change in Control, any Successor Entity (as such term is defined in that certain Company Equity Incentive Award Plan, as the same shall be in effect from time to time).

Company Equity Awards – means incentive awards granted (or deemed granted for accounting purposes) to an Eligible Participant on shares of common stock of the Company (“Stock”) and, after a Change in Control, any common equity of any Successor Entity, pursuant to the Company Equity Incentive Plan or otherwise, including without limitation any stock options, performance-based restricted stock units, and restricted stock units.

Disability – means “disability” within the meaning of the long-term disability plan by which the Eligible Participant is covered as of his or her Separation Date.

Effective Date – this Plan will be effective immediately following the distribution of the Stock by eBay Inc. to the shareholders of eBay Inc. Except as otherwise provided by the Company, in writing, this Plan replaces all prior plans, programs, and arrangements providing severance type benefits to eligible employees.

Eligible Employee – is an individual who meets all of the eligibility requirements set forth in Section 3 (Eligibility), and is not otherwise excluded from such eligibility requirements.

Eligible Participant – means any Eligible Employee holding a position that is at or above the level of Vice President, and certain Company Fellows, in each case as may be selected by the Plan Administrator in its sole discretion to participate in this Plan at any one of the levels specified in the CIC Severance Pay Guidelines attached to this Plan as the Plan Administrator shall, in its sole discretion, designate.

Employer – means the Company and any U.S. subsidiary or U.S. affiliate of the Company whose voting equity is, directly or indirectly, at least 50.1% owned by the Company.

 

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Good Reason – means:

(A) for any Eligible Participant who is designated by the Plan Administrator as a Direct Report or an SVP/Certain VP (as identified on the CIC Severance Pay Guidelines): (i) a material reduction in the Eligible Participant’s annual total target cash compensation (which is comprised of his or her annual base salary rate and annual target bonus opportunity under the eIP; (ii) a material reduction in the Eligible Participant’s reporting relationship and/or diminution in his or her scope of responsibilities; or (iii) a relocation of the Eligible Participant’s principal workplace location by more than thirty-five (35) miles, in any case of the foregoing without such Eligible Participant’s written consent.

(B) for any Eligible Participant who is designated by the Plan Administrator as a VP/Fellow (as identified on the CIC Severance Pay Guidelines): (i) a material reduction in the Eligible Participant’s annual total target cash compensation (which is comprised of his or her annual base salary rate and annual target bonus opportunity under the eIP; or (ii) a relocation of the Eligible Participant’s principal workplace location by more than thirty-five (35) miles, in any case of the foregoing without such Eligible Participant’s written consent.

In addition, in any case of an occurrence described in clause (A) or clause (B) of this definition with respect to a given Eligible Participant, the Eligible Participant will be deemed to have given such consent to any of the condition(s) described in any of the applicable clauses of this definition if the Eligible Participant does not provide written notice to the Company of such Good Reason event(s) within 60 days from the first occurrence of such Good Reason event(s), following which the Company shall have 30 days to cure such event, and to the extent the Company has not cured such Good Reason event(s) during the 30-day cure period, the Eligible Participant must terminate his/her employment for Good Reason no later than 60 days following the occurrence of such Good Reason event(s) by providing the Company 30 days’ prior written notice of termination, which may run concurrently with the Company’s cure period.

Make-Good Payment – Make-Good Payment is the sum total of an Eligible Participant’s unpaid cash “make-good” awards, if any, that the Eligible Participant has received in connection with his or her employment with the Company.

Plan Administrator – is the Compensation Committee of the Board or such other person or committee appointed from time to time by the Compensation Committee of the Board to administer the Plan.

Premium Payment – Premium Payment is the sum total of an Eligible Participant’s monthly premium payments for health insurance continuation coverage under COBRA, or similar payments for employees outside the U.S., if applicable. The Company shall withhold such amounts from payments under this Plan as it determines necessary to

 

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fulfill any applicable federal, state, or local wage or compensation withholding requirements. A more detailed description of the Premium Payment follows in Section 4 (Severance Benefits).

Salary Amount – Salary Amount is an Eligible Participant’s base salary rate in effect upon the occurrence of the Employee’s severance event (expressed in weekly, semi-monthly, monthly, or annual terms, as applicable) without considering bonuses, back-pay or other awards, or Company contributions to any employee plans.

Separation from Service – means, except as provided in subsections (a) and (b) below, an employee’s termination from employment (whether by retirement or resignation from or discharge by the Company).

(a) A Separation from Service shall be deemed to have occurred if an employee and the Company reasonably anticipate, based on the facts and circumstances, that the employee will not provide any additional services for an Employer after a certain date; provided, however, that if any payments or benefits that may be provided under this Plan constitute deferred compensation within the meaning of Section 409A of the Code, a Separation from Service also shall be deemed to have occurred in the event that the level of bona fide services performed by the employee after a certain date will permanently decrease to no more than 20% of the average level of bona fide services performed by the employee over the immediate preceding 36-month period.

(b) Notwithstanding the foregoing, for purposes of this Plan, an employee’s employment relationship is treated as continuing intact while the employee is on military leave, sick leave, or other bona fide leave of absence if the period of such leave does not exceed six months, or if longer, so long as the individual retains a right to reemployment with an Employer under an applicable statute or by contract. For purposes of this Plan, a leave of absence constitutes a bona fide leave of absence only if there is a reasonable expectation that the employee will return to perform services for an Employer. If the period of leave exceeds six months and the employee does not retain a right to reemployment under an applicable statute or by contract, the employment relationship is deemed to terminate on the first date immediately following such six-month period due to such employee’s Disability, in which case such employee shall not be an Eligible Participant except as otherwise provided in Section 3 of this Plan.

The definition of “Separation from Service” shall at all times be interpreted in accordance with the terms of Treasury Regulations Section 1.409A-1(h) and any guidance issued thereunder, and the term “Separation Date” shall mean the effective date of the Eligible Participant’s Separation from Service.

Severability – the provisions of the Plan are severable. If any provision of the Plan is deemed legally or factually invalid or unenforceable to any extent or in any application,

 

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then the remainder of the provisions of the Plan, except to such extent or in such application, shall not be affected, and each and every provision of the Plan shall be valid and enforceable to the fullest extent and in the broadest application permitted by law.

Severance Bonus Amount – Severance Bonus Amount is an Eligible Participant’s target annual bonus opportunity as provided under the eIP for the bonus year in which the Separation Date occurs.

Severance Pay – Severance Pay is the sum total of an Eligible Participant’s Salary Amount and Severance Bonus Amount. The Company shall withhold such amounts from payments under this Plan as it determines necessary to fulfill any federal, state, or local wage or compensation withholding requirements. A more detailed description of Severance Pay follows in Section 4 (Severance Benefits).

General Rules

Amendment and Termination – The Company (as defined below) shall be under no obligation to continue this Plan for any period of time. The Plan Administrator, in its sole discretion, reserves the right to modify, amend, or terminate this Plan (including any of the CIC Severance Pay Guidelines, form of Separation Agreement and/or Schedule 1 of Designated Participants attached to this Plan), in whole or in part, at any time and for any or no reason with respect to any employee or all employees at any time prior to his, her or their receipt of any Severance Benefits under Section 4 of this Plan; provided, however, that in no event shall this Plan be terminated, or modified or amended in any manner that is adverse to any Eligible Participants at any time during the Change in Control Period nor to any Eligible Participant who is receiving payments or benefits under this Plan as a result of a Qualifying Termination occurring during a Change in Control Period. Such foregoing prohibition shall not require that all Eligible Participants receive the same Severance Pay, Premium Payment, treatment of Company Equity Awards or other additional payments and benefits that the Plan Administrator may in its sole discretion choose to provide to any given Eligible Employee.

Benefits Non-Assignable – Benefits under the Plan may not be anticipated, assigned or alienated. The exception being if an employee becomes eligible and dies before payment is made, the heirs will be entitled to the payment.

Governing Laws – The provision of the Plan shall be construed, administered and enforced according to the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) and, to the extent applicable, according to applicable Federal law or the laws of the State of California.

No Right to Continued Employment – Neither the Plan nor any action taken with respect to it shall confer upon any person the right to continue in the employ of the Company or any of its subsidiaries or affiliates. Company employees shall continue to be employed “at-will,” as defined under applicable law.

 

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Funding – The Company will make all payments under the Plan, and pay all expenses of the Plan, from its general assets. Nothing contained in this Plan shall give any eligible employee any right, title, or interest in any property of the Company or any of its affiliates.

 

3. ELIGIBILITY

General Eligibility

The benefits under this Plan are limited to employees of the Employer who satisfy each of the following conditions, as determined by the Plan Administrator in its sole discretion:

 

    Are classified as Eligible Participants, whether or not based in the United States of America (“USA”) and paid through the payroll system based in the USA, such that data is received and processed in the USA.

 

    Are being terminated involuntarily without Cause by Employer; or are terminating voluntarily for Good Reason (either such event, a “Qualifying Termination”), in either such case occurring during a Change in Control Period.

 

    Are actively at work through the last day of work designated by Employer, unless the employee is absent due to an approved absence from work (including leave under the Family and Medical Leave Act) or unless otherwise designated by his or her agreement with the Employer.

 

    Execute and do not revoke a Separation Agreement and Release in a form attached to this Plan as Exhibit I (with only those changes as may be required to maintain such a form to be compliant with applicable law) within the period specified by Plan Administrator or its delegates (the “Separation Agreement”); and,

 

    Return all property of any Employer and settle satisfactorily all expenses owed to Employer and any of its subsidiaries or affiliates.

Exclusions from Eligibility

Unless the Plan Administrator provides otherwise in writing, the following employees are NOT eligible to participate in this Plan:

 

   

Any Eligible Participant who is eligible to receive severance payments and/or benefits under an individual employment letter agreement or other agreement between such employee and the Company under circumstances that would otherwise give rise to a right to receive payments and benefits under this Plan (any such agreement, an “Individual Agreement”); except, if the total present value, as of the Separation Date, of the aggregate amount of all payments and benefits payable under any Individual Agreement that covers an Eligible Participant who is not subject to income taxation in

 

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the USA is less than the total present value of the aggregate amount of all payments and benefits that would be payable to him or her under Section 4 of this Plan, then the Eligible Participant shall not be excluded from eligibility to participate in this Plan;

 

    Any Eligible Participant who terminates employment prior to the stated Separation Date as set forth in their Separation Agreement;

 

    Any Eligible Participant whose employment is terminated for any of the following reasons:

 

    Resignation or other voluntary termination of employment, other than for Good Reason as provided in this Plan;

 

    Death or Disability; except as expressly otherwise provided in Section 4 of this Plan; or

 

    Termination for Cause.

 

4. SEVERANCE BENEFITS

Severance Pay

 

    Amount of Severance Pay

The amount of Severance Pay payable to an Eligible Participant will be determined in accordance with the CIC Severance Pay Guidelines attached to this Plan subject to the reductions set forth below; provided, however, that the Plan Administrator, in its sole discretion, and on a case-by-case basis, may increase (but not decrease, except as provided below) the amount of Severance Pay payable to an Eligible Participant.

 

    Reduction of Severance Pay Benefits

Unless Employer, in its sole discretion, provides otherwise in writing, the amount of Severance Pay payable to an Eligible Participant shall be reduced as follows:

In the event that an Employer triggers Worker Adjustment and Retraining Notification Act (“WARN”) (or other similar federal or state statute), the WARN period will run concurrently with the Severance Pay under this Plan and any lump sum Severance Pay remaining will be paid out following the Separation Date as set forth in the Separation Agreement. If the Employer provides pay-in-lieu-of-notice to the Eligible Participant instead of advance notice of his or her termination of employment in accordance with the requirements of WARN then the amount of such Eligible Participant’s Severance Pay will be reduced (but not below zero) any amount required to be paid or otherwise owing to the employee under WARN.

 

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Severance Pay will be reduced by any outstanding debt owed by the employee to Employer or any of its affiliates, where permitted by law, including but not limited to loans granted by Employer, advanced commissions, bonuses, vacation pay, salary and/or expenses.

In addition, Severance Pay will be inclusive of, and not be in addition to, any severance or termination payments that may be required to be paid by statute or other governmental mandate of the laws of a country outside of the USA.

In the event of a Change in Control, where an accounting firm designated by the Company determines that (x) the aggregate amount of the payments and benefits that (but for the application of this paragraph) would be payable to an Eligible Participant under this Plan and/or any other plan, policy or arrangement of the Company or of its affiliates, exceeds (y) the greatest amount of payments and benefits that could be paid or provided to the Eligible Participant without giving rise to any liability for any excise tax imposed by Section 4999 of the Code (the “Excise Tax”), then the Eligible Participant shall either (1) pay the Excise Tax and receive all such payments and benefits as may be payable to him or her, or (2) only receive the aggregate amount of such payments and benefits payable or to be provided to the Eligible Participant that would not exceed the greatest amount of payments and benefits that could be paid or provided to the Eligible Participant without giving rise to any liability for any Excise Tax (such reduced amount of payments and benefits, the “Reduced Benefit Amount”), whichever of the two courses of action in clause (1) or clause (2) hereof produces the greatest after-tax benefit to the Eligible Participant. In the event the Reduced Benefit Amount is paid, the reduction in such payments or benefits pursuant to the immediately preceding sentence shall be made in the following order: (1) by reducing the Salary portion of the Severance Pay, and then the Severance Bonus Amount, and then (2) by reducing amounts in respect of any then outstanding Company Equity Awards, first in the form of cash payments, if any are due under this Plan or any other arrangement (e.g., in connection with the Change in Control), and then in respect of any vesting of any such awards under this Plan, and only thereafter in respect of any vesting of any such awards under any other plan or arrangement.

 

    Payment of Severance Pay

The Company will pay the Severance Pay in a lump sum. Payment will be made as soon as practicable after the later of the Eligible Participant’s Separation Date or the date on which such employee’s Separation Agreement becomes effective (i.e., cannot be revoked by the employee), but not later than ninety (90) days following the Eligible Participant’s Separation Date.

Other Severance Benefits

 

    Medical/Dental Benefits

 

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Eligible Participants employed by the Company in the USA (and their eligible dependents) who participate in a Company health insurance plan and who are eligible to continue to participate in such plan under the Consolidated Omnibus Budget Reconciliation Act of 1986, as amended (“COBRA”), will receive a lump sum cash payment that is equal to the product of (x) the monthly premium payable by the Eligible Participant for himself or herself (and his or her eligible dependents) under the Company’s health insurance plan in which he or she participates immediately prior to the Separation Date; (y) the Multiple of Premium Payment (as set forth in the CIC Severance Pay Guidelines attached hereto) applicable to such Eligible Participant (such resulting product, the “Premium Payment”) and (z) two (2).

Eligible Participants employed by the Company outside of the USA (and their eligible dependents) shall be eligible for medical and dental insurance coverage that is comparable to such coverage provided to such individuals immediately prior to the Separation Date, with such coverage to be provided for the period beginning with the Separation Date and running through a number of full calendar months equal to the Multiple of Premium Payment (as set forth in the CIC Severance Pay Guidelines attached hereto) applicable to such Eligible Participant, to the extent permissible under applicable local law. If, and to the extent, the Eligible Participant is obligated to pay all or a portion of the premiums for such continuation coverage, the Eligible Employee will receive a Premium Payment calculated in the manner described above.

The Company will pay the Premium Payment in a lump sum. Payment will be made as soon as practicable after the later of the Eligible Participant’s Separation Date or the date on which such employee’s Separation Agreement becomes effective (i.e., cannot be revoked by the employee), but not later than ninety (90) days following the Eligible Participant’s Separation Date.

 

    eIP

(The Eligible Participant will be eligible to receive the amount of the eIP bonus that he or she otherwise would have earned and been paid in respect of the fiscal year of the Company in which his or her Separation Date occurs, assuming target company performance had been achieved in such year; except, if the Eligible Participant’s eIP bonus is intended to constitute performance-based compensation within the meaning of Section 162(m) of the Code, then the Eligible Participant will only be eligible to receive the amount of such eIP bonus, if any, that he or she otherwise would have earned and been paid in respect of the fiscal year of the Company in which his or her Separation Date occurs, based solely on the actual performance of the Company through the date immediately prior to the Eligible Participant’s Separation Date. In all cases, Eligible Participants who are eligible to receive payments of his or her eIP bonus will be paid based on target individual performance, to the extent applicable.

 

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The Company will pay the eIP bonus amount determined above in a lump sum. Payment will be made as soon as practicable after the later of the Eligible Participant’s Separation Date or the date on which such employee’s Separation Agreement becomes effective (i.e., cannot be revoked by the employee), but not later than ninety (90) days following the Eligible Participant’s Separation Date.

 

    Company Equity Awards.

Effective immediately prior to the Separation Date, the following provisions shall apply to the Eligible Participant’s Company Equity Awards that are unvested as of the date prior to the Eligible Participant’s Separation Date:

(1) All unvested Company Equity Awards that vest solely based on the continued service of the Eligible Participant (including any restricted stock units that have been granted in respect of any performance-based restricted stock units whose target value has been established prior to such Separation Date), will be treated as though immediately vested on the Eligible Participant’s Separation Date; and

(2) Effective immediately prior to the Separation Date, all unvested Company Equity Awards that are unvested as of the date prior to the Eligible Participant’s Separation Date shall be treated as though immediately vested on the Separation Date; and, for purposes of the foregoing, if the Eligible Participant’s Separation Date occurs during the performance period with respect to a given award of performance-based restricted stock units whose target value has been established prior to such Separation Date, but whose number of shares of applicable employer stock that would be subject to such award based on achievement of applicable performance targets has not yet been granted, then any such award shall be deemed to have been earned and granted assuming achievement of target performance in respect of the applicable performance period in effect immediately prior to such Separation Date for purposes of determining the number of such awards that shall be treated as though vested hereunder; provided, further, however, that

(3) if the Eligible Participant’s unvested Company Equity Awards are intended to constitute performance-based compensation within the meaning of Section 162(m) of the Code (a “Section 162(m) Award”), then, any such Company Equity Awards shall remain outstanding and eligible to vest, based solely on the achievement of the applicable Company performance targets upon which the awards are subject to vesting for the relevant performance period; and to the extent such performance targets are determined (in a manner compliant with the requirements of Section 162(m) of the Code) to have been achieved following the completion of such performance period, the Eligible Participant shall, upon the date of such determination (the “PBRSU Vesting Determination Date”), be treated as though fully vested in the resulting amount of such Company Equity Awards that would have become vested pursuant to the service-vesting schedule that would have applied to such Company Equity Awards on and after the PBRSU Vesting Determination Date.

 

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All such Company Equity Awards shall be settled in a lump sum, through the vesting of shares of Stock, through the payment of cash in lieu of vesting shares of Stock, or a combination thereof as determined in the discretion of the Plan Administrator, as soon as practicable after (x) for any Company Equity Awards that are treated as though vested pursuant to clause (1) or clause (2) above, the later of the Eligible Participant’s Separation Date or the date on which such employee’s Separation Agreement becomes effective (i.e., cannot be revoked by the employee), but not later than ninety (90) days following the Eligible Participant’s Separation Date; and (y) for any Company Equity Awards that are treated as though vested pursuant to clause (3) above, promptly following the date the determination regarding the amount of such Company Equity Awards will be treated as though vested (but in no event later than the last day of the calendar year in which the PBRSU Vesting Determination Date occurs). In the event the Company elects to settle any such awards through the payment of cash in lieu of vesting shares of Stock, the Company will pay the Eligible Participant a lump sum cash amount equal to the value of all of the Company Equity Awards that are treated as though vested in accordance with the foregoing clauses (with such value calculated based on the Valuation Assumptions).

For purposes of the foregoing, the term “Valuation Assumptions” means, collectively, the following assumptions: (x) each share of common equity underlying an award has a value equal to the average of the closing prices of Company (or, after the Change in Control, the applicable Successor Entity) common stock as reported on the NASDAQ Global Select Market for the period of 10 consecutive trading days ending on (and including) the last trading day prior to I) for any Company Equity Awards that are treated as though vested pursuant to clause (1) or clause (2) above, or pursuant to the provisions under “Death and Disability”, below, the Separation Date, and (II) for any Company Equity Awards that are treated as though vested pursuant to clause (3) above, the PBRSU Vesting Determination Date, and (y) any Company stock options that the Eligible Participant holds that are outstanding immediately prior to the Separation Date will be valued based on their spread (i.e., the positive difference, if any, of the value of each share of Company (or, after the Change in Control, the applicable Successor Entity) common equity underlying the stock option, as determined pursuant to clause (x) above), less the per share exercise price of such stock option).

 

    Make-Good Payment

The Make-Good Payment shall be paid in a lump sum and subject to the same terms as Severance Pay, as set forth above.

 

    Death and Disability

Notwithstanding anything else in this Plan or Company Equity Award agreement to the contrary, upon the occurrence of an Eligible Participant’s death or Disability, all unvested Company Equity Awards that are unvested as of the date prior to the Eligible Participant’s death or Disability shall be treated in the same manner as if the Eligible

 

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Participant had experienced a Qualifying Termination pursuant to clauses (1) and (2) under “Company Equity Awards”, above, except all references to the term “Separation Date” shall refer to the date of the Eligible Participant’s death or Disability, and no Separation Agreement shall be required to be executed, such that all such awards shall be settled in a lump sum, through the vesting of shares of Stock, through the payment of cash in lieu of vesting shares of Stock, or a combination thereof as determined in the discretion of the Plan Administrator, as soon as practicable after the date of the Eligible Participant’s death or Disability, but not later than ninety (90) days following such date. In the event the Company elects to settle any such awards through the payment of cash in lieu of vesting shares of Stock, the Company will pay the Eligible Participant a lump sum cash amount equal to the value of all of the Company Equity Awards that are treated as though vested in accordance with the foregoing clauses (with such value calculated based on the Valuation Assumptions).

 

    Accrued Benefits

The Company shall make payment or otherwise provide all Accrued Benefits when due. Such obligation shall not be subject to the Eligible Participant’s execution of a Separation Agreement.

 

5. RIGHT TO TERMINATE BENEFITS

Notwithstanding anything in this Plan to the contrary, in the event that:

 

    Employer determines that an Eligible Participant or Eligible Employee has breached any of the terms and conditions set forth in any agreement executed by the employee as a condition to receiving benefits under this Plan (i.e., the Separation Agreement), THEN

 

    Employer shall have the right to terminate the benefits payable under this Plan at any time. Further, the Eligible Participant shall be obligated to return to the Employer any benefits paid to such employee: (i) due to the employee’s breach of the terms and conditions set forth in any agreement executed by such employee or (ii) due to any overpayments of benefits paid under this Plan to such employee.

 

6. ADMINISTRATION OF THE PLAN

The Plan Administrator shall have sole authority and discretion to administer and construe the terms of this Plan. Without limiting the generality of the foregoing, the Plan Administrator shall have the following powers and duties:

 

    To make and enforce such rules and regulations as it deems necessary or proper for the efficient administration of the Plan;

 

    To Amend and Terminate the Plan as defined in, and in accordance with, Section 2;

 

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    To interpret the Plan, its interpretation thereof to be final and conclusive on all persons claiming benefits under the Plan;

 

    To decide all questions concerning the Plan, including the eligibility of any person to participate in, and receive benefits under, the Plan; and

 

    To appoint and/or retain such employees, agents, counsel, accountants, consultants and other persons as may be required to assist in administering the Plan.

 

7. CLAIMS PROCEDURE

The Plan Administrator reviews and authorizes payment of severance benefits for those employees who qualify under the provisions of the Plan. No claim forms need be submitted. Questions regarding payment of severance benefits under the Plan should be directed to the Plan Administrator.

If an employee believes he or she is not receiving severance payments and benefits hereunder which are due, the employee should file a written claim for the benefits with the Plan Administrator. A decision on whether to grant or deny the claim will be made within 90 days following receipt of the claim. If more than 90 days is required to render a decision, the employee will be notified in writing of the reasons for delay. In any event, however, a decision to grant or deny a claim will be made by not later than 180 days following the initial receipt of the claim.

If the claim is denied, in whole or in part, the employee will receive a written explanation containing the following information:

 

    The specific reason(s) for the denial, including a reference to the Plan provisions on which the denial is based;

 

    A description of any additional material or information necessary for the employee to perfect the claim and an explanation of why such material or information is necessary; and

 

    A description of the Plan’s review procedures and the time limits applicable to such procedures, including a statement of the employee’s right to bring a civil action under Section 502(a) of ERISA following an adverse determination on review.

If the employee wishes to appeal this denial, the employee may write within 60 days after receipt of the notification of denial. The claim will then be reviewed by the Plan Administrator, and the employee will receive written notice of the final decision within 60 days after the request for review. If more than 60 days are required to render a decision, the employee will be notified in writing of the reasons for delay. In any event, however, the employee will receive a written notice of the final decision within 120 days after the request for review.

 

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As part of the Plan’s appeal process, the employee shall be afforded:

 

    The opportunity to submit written comments, documents, records, and other information relating to the claim for benefits;

 

    Upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant to the employee’s claim for benefits; and

 

    A review that takes into account all comments, documents, records and other information submitted by the employee relating to the claim, without regard to whether such information was submitted or considered in the initial benefit determination.

If the decision on appeal is upheld, in whole or in part, the employee will receive a written explanation containing the following information:

 

    The specific reason(s) for the decision, including a reference to the Plan provisions on which the decision is based;

 

    A statement that the employee is entitled to receive, upon request and free of charge, reasonable access to, and copies of all documents, records and other information relevant to the employee’s claim for benefits; and

 

    A statement of the employee’s right to bring an action under Section 502(a) of ERISA.

No legal action for benefits under this Plan may be brought unless the action is commenced within one (1) year from the date of the final decision on appeal has been made. No person may bring an action for any alleged wrongful denial of Plan benefits in a court of law unless the claims procedures set forth above are exhausted and a final determination is made. If the employee or other interested person challenges a decision, a review by the court of law will be limited to the facts, evidence and issues presented during the claims procedure set forth above. Facts and evidence that become known to the employee or other interested person after having exhausted the claims procedure must be brought to the attention of the Plan Administrator for reconsideration of the claims determination. Issues not raised with the Plan Administrator will be deemed waived.

 

8. SECTION 409A

Notwithstanding anything contained in this Plan to the contrary, to the maximum extent permitted by applicable law, no employee shall have a legally binding right to payments under this Plan unless and until amounts are actually paid to them. To the extent that an employee is deemed to have a legally binding right to a payment under this Plan, then amounts payable under this Plan shall be made in reliance upon Treasury Regulation Section 1.409A-1(b)(9) (Separation Pay Plans) or Treasury Regulation Section 1.409A-1(b)(4) (Short-Term Deferrals) and exempt from Section 409A of the Code as a result of such reliance. To the extent that the Plan Administrator determines that the Company will pay severance benefits in a form other

 

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than a lump sum, any installment or monthly payment to which an employee is entitled under this Plan shall be considered a separate and distinct payment. In addition, (i) no amount payable hereunder shall be payable unless the employee’s termination of employment constitutes a Separation from Service and (ii) if the employee is deemed at the time of his or her separation from service to be a “specified employee” for purposes of Section 409A(a)(2)(B)(i) of the Code, then to the extent delayed commencement of any portion of the termination benefits to which Eligible Participant is entitled under this Plan is required in order to avoid a prohibited distribution under Section 409A(a)(2)(B)(i) of the Code, such portion of the employee’s termination benefits shall not be provided to the employee prior to the earlier of (A) the expiration of the six-month period measured from the Eligible Participant’s Separation Date or (B) the date of the employee’s death. Upon the earlier of such dates, all payments deferred pursuant to this Section 8 shall be paid in a lump sum to the employee without interest, and any remaining payments due under this Plan shall be paid as otherwise provided herein. The determination of whether the employee is a “specified employee” for purposes of Section 409A(a)(2)(B)(i) of the Code as of the time of his or her Separation from Service shall be made by the Company in accordance with the terms of Section 409A of the Code (including without limitation Treas. Reg. Section 1.409A-1(i) and any successor provision thereto). To the extent applicable, if payment of an amount under the Plan could be paid in one of two calendar years subject to the delivery of the Separation Agreement and it is determined that payment of such amount in the earlier of such two years could constitute noncompliance with Section 409A of the Code, then such amount shall be paid in the later of such two years.

 

9. STATEMENT OF ERISA RIGHTS

Eligible Participants in this Plan are entitled to certain rights and protections under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). ERISA provides that all plan Eligible Participants shall be entitled to:

 

    Examine, without charge, at the Plan Administrator’s office and at other specified locations, such as worksites, all documents governing the plan and a copy of the latest annual report (Form 5500 Series) filed by the plan with the U.S. Department of Labor and available at the Public Disclosure Room of the Employee Benefits Security Administration.

 

    Obtain, upon written request to the Plan Administrator, copies of documents governing the operation of the plan and copies of the latest annual report (Form 5500 Series) and updated summary plan description. The administrator may make a reasonable charge for the copies.

 

    Obtain a complete list of the Employers sponsoring the Plan upon written request to the Plan Administrator.

 

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    Receive a summary of the Plan’s annual financial report, if any. The Plan Administrator is required by law to furnish each Eligible Participant with a copy of this summary annual report.

Prudent Actions by Plan Fiduciaries

In addition to creating rights for plan Eligible Participants, ERISA imposes duties upon the people who are responsible for the operation of the employee benefit plan. The people who operate the Plan, called “fiduciaries” of the Plan, have a duty to do so prudently and in the interest of all Plan Eligible Participants and beneficiaries. No one, including any Employer, any union, or any other person, may fire an employee or otherwise discriminate against him or her in any way to prevent them from obtaining a benefit under this Plan or exercising their rights under ERISA.

Enforce Your Rights

If an employee’s claim for a severance benefit is denied or ignored, in whole or in part, he or she has a right to know why this was done, to obtain copies of documents relating to the decision without charge, and to appeal any denial, all within certain time schedules.

Under ERISA, there are steps an employee can take to enforce the above rights. For instance, if he or she requests a copy of plan documents or the latest annual report from the plan and does not receive them within 30 days, he or she may file suit in a Federal court. In such a case, the court may require the Plan Administrator to provide the materials and pay him or her up to $110 a day until he or she receives the materials, unless the materials were not sent because of reasons beyond the control of the administrator. If an employee has a claim for benefits which is denied or ignored, in whole or in part, he or she may file suit in a state or Federal court. In addition, if he or she disagrees with the Plan’s decision or lack thereof concerning the qualified status of a domestic relations order or a medical child support order, he or she may file suit in Federal court. If it should happen that Plan fiduciaries misuse the Plan’s money, or if an employee is discriminated against for asserting his or her rights, he or she may seek assistance from the U.S. Department of Labor, or may file suit in a Federal court. The court will decide who should pay court costs and legal fees. If an employee is successful the court may order the person he or she has sued to pay these costs and fees. If the employee loses, the court may order him or her to pay these costs and fees, for example, if it finds the claim is frivolous.

 

10. ASSISTANCE WITH QUESTIONS

If an employee has any questions about the Plan, he or she should contact the Plan Administrator. If he or she has any questions about this statement or about his or her rights under ERISA, or if he or she needs assistance in obtaining documents from the Plan Administrator, he or she should contact the nearest office of the Employee Benefits Security Administration, U.S. Department of Labor, listed in the telephone directory or the Division of Technical Assistance and Inquiries, Employee Benefits Security Administration, U.S. Department of Labor, 200 Constitution Avenue N.W., Washington, D.C. 20210. An employee may also

 

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obtain certain publications about his or her rights and responsibilities under ERISA by calling the publications hotline of the Employee Benefits Security Administration.

 

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ADMINISTRATIVE INFORMATION

REQUIRED BY ERISA

 

Plan Sponsor and Plan Administrator, including address and telephone:

PayPal Holdings, Inc.

Compensation Committee of the

PayPal Holdings, Inc. Board of Directors

2211 North First Street

San Jose, CA 95131

(408) 967-7400

Name and address of person designated as agent for service of process:

A. Louise Pentland

Senior Vice President, General Counsel and Secretary

PayPal Holdings, Inc.

2211 North First Street

San Jose, CA 95131

(408) 967-7400

Basis on which Plan records are kept: Calendar year - January 1 to December 31
Type of Plan: Unfunded welfare benefit severance plan
Plan Number:
EIN: [INSERT]

 

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Appendix A

CIC Severance Pay Guidelines

Under the Plan, Eligible Participants are entitled to: (i) the Severance Pay and (ii) the Premium Payment, to be calculated based on the Multiples identified below as applying to the Tier for which the Eligible Participant has been selected.

 

Severance Pay and Premium Payment Calculations

   SVPs Direct
Reports
     SVPs/
Certain VPs
     VPS/
Fellows
 

Multiple of Salary

     2.0x         1.0x         0.5x   

Multiple of Severance Bonus Amount

     2.0x         1.0x         0.5x   

Multiple of Premium Payment

     24         12         6   

The Company will pay the Severance Pay and the Premium Payment in accordance with the terms of the Plan to which this Appendix A is attached.

 

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Appendix B

Form of Separation Agreement

[On file with the Company]

 

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Schedule I1

Designation of Eligible Participants, as of the Effective Date

Direct Reports:2

Chief Executive Officer

Senior Vice Presidents who are direct reports to the Chief Executive Officer

SVPs/Certain VPs:

Senior Vice Presidents not designated as Tier I Employees

Vice Presidents who are specifically selected by the Compensation Committee to participate in this Plan as Tier II Employees

VPs/Fellows:

All Vice Presidents not designated as Tier II Employees

Fellows

 

1  This Schedule is subject to change, from time to time, in the discretion of the Plan Administrator.
2  Note: As of the Effective Date, all Senior Vice Presidents who are CEO Direct Reports are excluded from the Plan due to their holding Individual Agreements.

 

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EX-10.23

Exhibit 10.23

PAYPAL HOLDINGS, INC. SVP AND ABOVE STANDARD

SEVERANCE PLAN

AND

SUMMARY PLAN DESCRIPTION

 

1. PURPOSE OF THE PLAN

The purpose of the PayPal Holdings, Inc. SVP and Above Standard Severance Plan (the “Plan”) is to encourage the full attention and dedication of certain officers at and above the level of Senior Vice President by providing severance benefits designed to give financial assistance to any Eligible Participants upon their separation from PayPal Holdings, Inc. (“Company”) or any of its participating subsidiaries or affiliates under the conditions described herein, upon certain terminations of employment occurring outside the occurrence of any Change in Control Period (as such term is defined below).

 

2. DEFINITIONS/GENERAL RULES

Definitions

Accrued Benefits – means (a) prompt payment by the Company to an Eligible Participant of any accrued but unpaid annual base salary through the last day of employment, (b) prompt payment by the Company to an Eligible Participant of any unreimbursed expenses incurred through the last day of employment subject to the Eligible Participant’s prompt delivery to the Company of all required documentation of such expenses pursuant to applicable employer policies, (c) all other vested payments, benefits or fringe benefits to which the Eligible Participant is entitled under the terms of any applicable compensation arrangement or benefit, equity or fringe benefit plan or program or grant (excluding any other severance plan, policy or program) of the Company or any of its affiliates in accordance with the terms of such plan, program or grant, including any unpaid annual bonus under the Company Employee Incentive Plan or applicable successor plan (the “eIP”)) for any prior fiscal year when it otherwise would have been paid (see Section 4, eIP, below).

Board – means the Board of Directors of the Company.

Cause – Cause is defined as (a) an Eligible Participant’s failure to attempt in good faith to substantially perform his or her assigned duties, other than failure resulting from his or her death or incapacity due to physical or mental illness or impairment, which is not remedied within thirty (30) days after receipt of written notice from the Company specifying such failure; (b) an Eligible Participant’s indictment for, conviction of or plea of nolo contendere to any felony (or any other crime involving fraud, dishonesty or moral turpitude); or (c) an Eligible Participant’s commission of an act of fraud,

 

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embezzlement, misappropriation, willful misconduct, or breach of fiduciary duty against the Company, except good faith expense account disputes.

Change in Control Period – means the period that begins ninety (90) days prior to the closing date of, and ends 24 months following, a “Change in Control,” as such term is defined in that certain Company Equity Incentive Award Plan under which the Company is then granting equity awards, as the same shall be in effect from time to time.

Company – means PayPal Holdings, Inc. (and any successor thereto) or any of its participating U.S. subsidiaries, as applicable.

Company Equity Awards – means incentive awards granted (or deemed granted for accounting purposes) to an Eligible Participant on Stock, including without limitation any stock options, performance-based restricted stock units, and restricted stock units.

Disability – means “disability” within the meaning of the long-term disability plan by which the Eligible Participant is covered as of his or her Separation Date.

Effective Date – this Plan will be effective immediately following the distribution of the shares of Stock by eBay Inc. to the shareholders of eBay Inc. Except as otherwise provided by the Company, in writing, this Plan replaces all prior plans, programs, and arrangements providing severance type benefits to eligible employees upon a Qualifying Termination occurring outside of a Change in Control Period.

Eligible Employee – is an individual who meets all of the eligibility requirements set forth in Section 3 (Eligibility), and is not otherwise excluded from such eligibility requirements (i.e., is a party to an Individual Agreement, as such term is defined in Section 3).

Eligible Participant – means any Eligible Employee holding a position that is at or above the level of Senior Vice President who is designated as eligible to participate in this Plan as set forth on Schedule I attached to this Plan, as the Plan Administrator may, in its sole discretion, from time to time, designate.

Employer – means the Company and any U.S. subsidiary or U.S. affiliate of the Company whose voting equity is, directly or indirectly, at least 50.1% owned by the Company.

Make-Good Payment – Make-Good Payment is the sum total of an Eligible Participant’s unpaid cash “make-good” awards, if any, that the Eligible Participant has received in connection with his or her employment with the Company.

Plan Administrator – is the Compensation Committee of the Board or such other person or committee appointed from time to time by the Compensation Committee of the Board to administer the Plan.

Premium Payment – Premium Payment is the sum total of an Eligible Participant’s monthly premium payments for health insurance continuation coverage under COBRA, or similar payments for employees outside the U.S., if applicable. The Company shall

 

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withhold such amounts from payments under this Plan as it determines necessary to fulfill any applicable federal, state, or local wage or compensation withholding requirements. A more detailed description of the amount of the Premium Payment that will be paid to an Eligible Participant follows in Section 4 (Severance Benefits).

Salary Amount – Salary Amount is an Eligible Participant’s base salary rate in effect upon the occurrence of the Employee’s severance event (expressed in weekly, semi-monthly, monthly, or annual terms, as applicable) without considering bonuses, back-pay or other awards, or Company contributions to any employee plans.

Separation from Service – means, except as provided in subsections (a) and (b) below, an employee’s termination from employment (whether by retirement or resignation from or discharge by the Company).

(a) A Separation from Service shall be deemed to have occurred if an employee and the Company reasonably anticipate, based on the facts and circumstances, that the employee will not provide any additional services for an Employer after a certain date; provided, however, that if any payments or benefits may be provided under this Plan constitute deferred compensation within the meaning of Section 409A of the Code, a Separation from Service also shall be deemed to have occurred in the event that the level of bona fide services performed by the employee after a certain date will permanently decrease to no more than 20% of the average level of bona fide services performed by the employee over the immediate preceding 36-month period.

(b) Notwithstanding the foregoing, for purposes of this Plan, an employee’s employment relationship is treated as continuing intact while the employee is on military leave, sick leave, or other bona fide leave of absence if the period of such leave does not exceed six months, or if longer, so long as the individual retains a right to reemployment with an Employer under an applicable statute or by contract. For purposes of this Plan, a leave of absence constitutes a bona fide leave of absence only if there is a reasonable expectation that the employee will return to perform services for an Employer. If the period of leave exceeds six months and the employee does not retain a right to reemployment under an applicable statute or by contract, the employment relationship is deemed to terminate on the first date immediately following such six-month period due to such employee’s Disability, in which case such employee shall not be an Eligible Participant except as otherwise provided in Section 3 of this Plan.

The definition of “Separation from Service” shall at all times be interpreted in accordance with the terms of Treasury Regulations Section 1.409A-1(h) and any guidance issued thereunder, and the term “Separation Date” shall mean the effective date of the Eligible Participant’s Separation from Service.

 

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Severability – the provisions of the Plan are severable. If any provision of the Plan is deemed legally or factually invalid or unenforceable to any extent or in any application, then the remainder of the provisions of the Plan, except to such extent or in such application, shall not be affected, and each and every provision of the Plan shall be valid and enforceable to the fullest extent and in the broadest application permitted by law.

Severance Bonus Amount – Severance Bonus Amount is an Eligible Participant’s target annual bonus opportunity as provided under the eIP for the bonus year in which the Separation Date occurs.

Severance Pay – Severance Pay is the sum total of an Eligible Participant’s Salary Amount and Severance Bonus Amount. The Company shall withhold such amounts from payments under this Plan as it determines necessary to fulfill any federal, state, or local wage or compensation withholding requirements. A more detailed description of Severance Pay follows in Section 4 (Severance Benefits).

General Rules

Amendment and Termination – The Company (as defined below) shall be under no obligation to continue this Plan for any period of time. The Plan Administrator, in its sole discretion, reserves the right to modify, amend, or terminate this Plan (including any of the Standard Severance Pay Guidelines, form of Separation Agreement and/or Schedule 1 of Designated Participants attached to this Plan), in whole or in part, at any time and for any or no reason with respect to any employee or all employees at any time prior to his, her or their receipt of Severance Benefits provided under Section 4 of this Plan; provided, however, that in no event shall this Plan be terminated, or modified or amended in any manner that is adverse to any Eligible Participants at any time during the thirty-six (36) months following the Effective Date nor to any Eligible Participant who is receiving payments or benefits under this Plan as a result of a Qualifying Termination. Such foregoing prohibition shall not require that all Eligible Participants receive the same Severance Pay, Premium Payment, treatment of Company Equity Awards or other additional payments and benefits that the Plan Administrator may in its sole discretion choose to provide to any given Eligible Employee.

Benefits Non-Assignable – benefits under the Plan may not be anticipated, assigned or alienated. The exception being if an employee becomes eligible and dies before payment is made, the heirs will be entitled to the payment.

Governing Laws – the provision of the Plan shall be construed, administered and enforced according to the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) and, to the extent applicable, according to applicable Federal law or the laws of the State of California.

No Right to Continued Employment – neither the Plan nor any action taken with respect to it shall confer upon any person the right to continue in the employ of the

 

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Company or any of its subsidiaries or affiliates. Company employees shall continue to be employed “at-will,” as defined under applicable law.

Funding – the Company will make all payments under the Plan, and pay all expenses of the Plan, from its general assets. Nothing contained in this Plan shall give any eligible employee any right, title, or interest in any property of the Company or any of its affiliates.

 

3. ELIGIBILITY

General Eligibility

The benefits under this Plan are limited to employees of the Employer who satisfy each of the following conditions, as determined by the Plan Administrator in its sole discretion:

 

    Are classified as Eligible Participants, whether or not based in the United States of America (“USA”) and paid through the payroll system based in the USA.

 

    Are being terminated involuntarily without Cause by Employer (such event, a “Qualifying Termination”) occurring other than during any Change in Control Period.

 

    Are actively at work through the last day of work designated by Employer, unless the employee is absent due to an approved absence from work (including leave under the Family and Medical Leave Act) or unless otherwise designated by his or her agreement with the Employer.

 

    Execute and do not revoke a Separation Agreement and Release in a form attached to this Plan as Exhibit I (with only those changes as may be required to maintain such a form to be compliant with applicable law) within the period specified by Plan Administrator or its delegates (the “Separation Agreement”); and,

 

    Return all property of any Employer and settle satisfactorily all expenses owed to Employer and any of its subsidiaries or affiliates.

Exclusions from Eligibility

Unless the Plan Administrator provides otherwise in writing, the following employees are NOT eligible to participate in this Plan:

 

   

Any Eligible Participant who is eligible to receive severance payments and/or benefits under an individual employment letter agreement or other agreement between such employee and the Company under circumstances that would otherwise give rise to a right to receive payments and benefits under this Plan (any such agreement, an “Individual Agreement”); except, if the total present value, as of the Separation Date, of the aggregate amount of all payments and benefits payable under any Individual

 

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Agreement that covers an Eligible Participant who is not subject to income taxation in the USA is less than the total present value of the aggregate amount of all payments and benefits that would be payable to him or her under Section 4 of this Plan, then the Eligible Participant shall not be excluded from eligibility to participate in this Plan; Any Eligible Participant who terminates employment prior to the stated Separation Date as set forth in their Separation Agreement;

 

    Any Eligible Participant whose employment is terminated for any of the following reasons:

 

    Resignation or other voluntary termination of employment;

 

    Death or Disability; except as expressly otherwise provided in Section 4 of this Plan; or

 

    Termination for Cause.

 

4. SEVERANCE BENEFITS

Severance Pay

 

    Amount of Severance Pay

The amount of Severance Pay payable to an Eligible Participant will be determined in accordance with the Standard Severance Pay Guidelines attached to this Plan subject to the reductions set forth below; provided, however, that the Plan Administrator, in its sole discretion, and on a case-by-case basis, may increase (but not decrease, except as provided below) the amount of Severance Pay payable to an Eligible Participant.

 

    Reduction of Severance Pay Benefits

Unless Employer, in its sole discretion, provides otherwise in writing, the amount of Severance Pay payable to an Eligible Participant shall be reduced as follows:

In the event that an Employer triggers Worker Adjustment and Retraining Notification Act (“WARN”) (or other similar federal or state statute), the WARN period will run concurrently with the Severance Pay under this Plan and any lump sum Severance Pay remaining will be paid out following the Separation Date as set forth in the Separation Agreement. If the Employer provides pay-in-lieu-of-notice to the Eligible Participant instead of advance notice of his or her termination of employment in accordance with the requirements of WARN then the amount of such Eligible Participant’s Severance Pay will be reduced (but not below zero) any amount required to be paid or otherwise owing to the employee under WARN.

Severance Pay will be reduced by any outstanding debt owed by the employee to Employer or any of its affiliates, where permitted by law, including but not limited to

 

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loans granted by Employer, advanced commissions, bonuses, vacation pay, salary and/or expenses.

In addition, Severance Pay will be inclusive of, and not be in addition to, any severance or termination payments that may be required to be paid by statute or other governmental mandate of the laws of a country outside of the USA.

 

    Payment of Severance Pay

The Company will pay the Severance Pay in a lump sum. Payment will be made as soon as practicable after the later of the Eligible Participant’s Separation Date or the date on which such employee’s Separation Agreement becomes effective (i.e., cannot be revoked by the employee), but not later than sixty (60) days following the Eligible Participant’s Separation Date.

Other Severance Benefits

 

    Medical/Dental Benefits

Eligible Participants employed by the Company in the USA (and their eligible dependents) who participate in a Company health insurance plan and who are eligible to continue to participate in such plan under the Consolidated Omnibus Budget Reconciliation Act of 1986, as amended (“COBRA”), will receive a lump sum cash payment that is equal to the product of (x) the monthly premium payable by the Eligible Participant for himself or herself (and his or her eligible dependents) under the Company’s health insurance plan in which he or she participates immediately prior to the Separation Date; (y) the Multiple of Premium Payment (as set forth in the Standard Severance Pay Guidelines attached hereto) applicable to such Eligible Participant (such resulting product, the “Premium Payment”) and (z) two (2).

Eligible Participants employed by the Company outside of the USA (and their eligible dependents) shall be eligible for medical and dental insurance coverage that is comparable to such coverage provided to such individuals immediately prior to the Separation Date, with such coverage to be provided for the period beginning with the Separation Date and running through a number of full calendar months equal to the Multiple of Premium Payment (as set forth in the Standard Severance Pay Guidelines attached hereto) applicable to such Eligible Participant, to the extent permissible under applicable local law. If, and to the extent, the Eligible Participant is obligated to pay all or a portion of the premiums for such continuation coverage, the Eligible Employee will receive a Premium Payment calculated in the manner described above.

The Company will pay the Premium Payment in a lump sum. Payment will be made as soon as practicable after the later of the Eligible Participant’s Separation Date or the date on which such employee’s Separation Agreement becomes effective (i.e., cannot

 

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be revoked by the employee), but not later than sixty (60) days following the Eligible Participant’s Separation Date.

 

    eIP

Eligible Participants will be eligible to receive a prorated portion of the eIP bonus, if any, that he or she otherwise would have earned and been paid in respect of the fiscal year of the Company in which his or her Separation Date occurs, based on the actual performance of the Company for the full year, with such prorated portion calculated based on the period of time during such fiscal year that the Eligible Participant was employed, relative to the full fiscal year, and based on the achievement by the Company of the applicable performance target(s) for such year.

Additionally, Eligible Participants who remain employed through the end of a given fiscal year but who experience a Qualifying Termination prior to the payment date of eIP bonuses for such year will remain eligible to receive a full eIP bonus, also based on the achievement by the Company of the applicable performance target(s) for such year. In all cases, Eligible Participants who are eligible to receive payments of his or her eIP bonus will be paid based on target individual performance, to the extent applicable.

Any payment under the eIP will be made, in a lump sum, at the time when the Company pays bonuses under the applicable bonus plan to employees (and in no event later than March 15 of the year following the year in which the Qualifying Termination occurs).

 

    Company Equity Awards.

Effective immediately prior to the Separation Date, all Company Equity Awards that are unvested as of the date prior to the Eligible Participant’s Separation Date and:

(1) vest solely based on the continued service of the Eligible Participant (i.e., time-vesting awards), will be treated as though immediately vested on the Eligible Participant’s Separation Date as to the portion of such Company Equity Awards (including any restricted stock units that have been granted in respect of any performance-based restricted stock units whose target value has been established prior to such Separation Date), that would have otherwise become vested pursuant to their ordinary vesting schedule within the twelve (12) calendar months (including any partial month in which the Qualifying Termination occurs) following the Separation Date; and

(2) are Company Equity Awards that vest subject to the achievement of performance targets over a given performance period (“performance-based awards”) then: any such Company Equity Awards shall remain outstanding and eligible to vest, based solely on the achievement of the applicable Company performance targets upon which the awards are subject to vesting for any relevant performance period that ends within the

 

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first anniversary of the Eligible Participant’s Separation Date; and to the extent such performance targets are determined (in a manner compliant with the requirements of Section 162(m) of the Code) to have been achieved following the completion of such performance period, the Eligible Participant shall, upon the date of such determination (the “PBRSU Vesting Determination Date”), be treated as though immediately vested in that percentage of the resulting amount of such Company Equity Awards that would, on or prior to such first anniversary, have otherwise become vested pursuant to the ordinary vesting schedule that would have applied to such Company Equity Awards.

All such Company Equity Awards shall be settled in a lump sum, through the vesting of shares of Stock, through the payment of cash in lieu of vesting shares of Stock, or a combination thereof as determined in the discretion of the Plan Administrator, as soon as practicable after (x) for any Company Equity Awards that are treated as though vested pursuant to clause (1) above the later of the Eligible Participant’s Separation Date or the date on which such employee’s Separation Agreement becomes effective (i.e., cannot be revoked by the employee), but not later than sixty (60) days following the Eligible Participant’s Separation Date; and (y) for any Company Equity Awards that are treated as though vested pursuant to clause (2) above, promptly following the PBRSU Vesting Determination Date (but in no event later than the last day of the calendar year in which the PBRSU Vesting Determination Date occurs). In the event the Company elects to settle any such awards through the payment of cash in lieu of vesting shares of Stock, the Company will pay the Eligible Participant a lump sum cash amount equal to the value of all of the Company Equity Awards that are treated as though vested in accordance with the foregoing clauses (with such value calculated based on the Valuation Assumptions).

For purposes of the foregoing, the term “Valuation Assumptions” means, collectively, the following assumptions: (x) each share of common equity underlying an award has a value equal to the average of the closing prices of Company common stock as reported on the NASDAQ Global Select Market for the period of 10 consecutive trading days ending on (and including) the last trading day prior to (I) for any Company Equity Awards that are treated as though vested pursuant to clause (1) above, or pursuant to the provisions under “Death and Disability”, below, the Separation Date and (II) for any Company Equity Awards that are treated as though vested pursuant to clause (2) above, the PBRSU Vesting Determination Date, and (y) any Company stock options that the Eligible Participant holds that are outstanding immediately prior to the Separation Date will be valued based on their spread (i.e., the positive difference, if any, of the value of each share of Company.

 

    Make-Good Payments

The Make-Good Payment shall be paid in a lump sum and subject to the same terms as Severance Pay as set forth above.

 

    Death and Disability

 

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Notwithstanding anything else in this Plan or Company Equity Award agreement to the contrary, upon the occurrence of an Eligible Employee’s death or Disability, all unvested Company Equity Awards that are unvested as of the date prior to the Eligible Participant’s death or Disability shall:

(1) vest solely based on the continued service of the Eligible Participant, will be treated as though immediately vested on the Eligible Participant’s date of death or Disability as to the portion of such Company Equity Awards (including any restricted stock units that have been granted in respect of any performance-based restricted stock units whose target value has been established prior to such date), that would have otherwise become vested pursuant to their ordinary vesting schedule within the twenty-four (24) calendar months (including any partial month in which such event occurs) following the date of such event; and

(2) be treated as though vested as to the portion of such Company Equity Awards that would have otherwise become vested pursuant to their ordinary vesting schedule within the twenty-four (24) calendar months (including any partial month in which such event occurs) following the date of such event. For purposes of the foregoing, if the Eligible Participant’s date of death or Disability occurs during the performance period with respect to a given award of performance-based restricted stock units whose target value has been established prior to such date, but whose number of shares of applicable employer stock that would be subject to such award based on achievement of applicable performance targets has not yet been granted, then any such award shall be deemed to have been earned and granted assuming achievement of target performance in respect of the applicable performance period immediately prior to such date for purposes of determining the number of such awards that shall be treated as though vested hereunder.

All such awards shall be settled in a lump sum, through the vesting of shares of Stock, through the payment of cash in lieu of vesting shares of Stock, or a combination thereof as determined in the discretion of the Plan Administrator, as soon as practicable after the date of the Eligible Participant’s death or Disability, but not later than sixty (60) days following such date. In the event the Company elects to settle any such awards in through the payment of cash in lieu of shares of Stock, the Company will pay the Eligible Participant a lump sum cash amount equal to the value of all of the Company Equity Awards that are treated as though vested in accordance with the foregoing clauses (with such value calculated based on the Valuation Assumptions).

 

    Accrued Benefits

The Company shall make payment or otherwise provide all Accrued Benefits when due. Such obligation shall not be subject to the Eligible Participant’s execution of a Separation Agreement.

 

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5. RIGHT TO TERMINATE BENEFITS

Notwithstanding anything in this Plan to the contrary, in the event that:

 

    Employer determines that an Eligible Participant or Eligible Employee has breached any of the terms and conditions set forth in any agreement executed by the employee as a condition to receiving benefits under this Plan (i.e., the Separation Agreement), THEN

 

    Employer shall have the right to terminate the benefits payable under this Plan at any time. Further, the Eligible Participant shall be obligated to return to the Employer any benefits paid to such employee: (i) due to the employee’s breach of the terms and conditions set forth in any agreement executed by such employee or (ii) due to any overpayments of benefits paid under this Plan to such employee.

 

6. ADMINISTRATION OF THE PLAN

The Plan Administrator shall have sole authority and discretion to administer and construe the terms of this Plan. Without limiting the generality of the foregoing, the Plan Administrator shall have the following powers and duties:

 

    To make and enforce such rules and regulations as it deems necessary or proper for the efficient administration of the Plan;

 

    To Amend and Terminate the Plan as defined in, and in accordance with, Section 2;

 

    To interpret the Plan, its interpretation thereof to be final and conclusive on all persons claiming benefits under the Plan;

 

    To decide all questions concerning the Plan, including the eligibility of any person to participate in, and receive benefits under, the Plan; and

 

    To appoint and/or retain such employees, agents, counsel, accountants, consultants and other persons as may be required to assist in administering the Plan.

 

7. CLAIMS PROCEDURE

The Plan Administrator reviews and authorizes payment of severance benefits for those employees who qualify under the provisions of the Plan. No claim forms need be submitted. Questions regarding payment of severance benefits under the Plan should be directed to the Plan Administrator.

If an employee believes he or she is not receiving severance payments and benefits hereunder which are due, the employee should file a written claim for the benefits with the Plan Administrator. A decision on whether to grant or deny the claim will be made within 90 days following receipt of the claim. If more than 90 days is required to render a decision, the employee will be notified in writing of the reasons for delay. In any event, however, a decision

 

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to grant or deny a claim will be made by not later than 180 days following the initial receipt of the claim.

If the claim is denied, in whole or in part, the employee will receive a written explanation containing the following information:

 

    The specific reason(s) for the denial, including a reference to the Plan provisions on which the denial is based;

 

    A description of any additional material or information necessary for the employee to perfect the claim and an explanation of why such material or information is necessary; and

 

    A description of the Plan’s review procedures and the time limits applicable to such procedures, including a statement of the employee’s right to bring a civil action under Section 502(a) of ERISA following an adverse determination on review.

If the employee wishes to appeal this denial, the employee may write within 60 days after receipt of the notification of denial. The claim will then be reviewed by the Plan Administrator, and the employee will receive written notice of the final decision within 60 days after the request for review. If more than 60 days are required to render a decision, the employee will be notified in writing of the reasons for delay. In any event, however, the employee will receive a written notice of the final decision within 120 days after the request for review.

As part of the Plan’s appeal process, the employee shall be afforded:

 

    The opportunity to submit written comments, documents, records, and other information relating to the claim for benefits;

 

    Upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant to the employee’s claim for benefits; and

 

    A review that takes into account all comments, documents, records and other information submitted by the employee relating to the claim, without regard to whether such information was submitted or considered in the initial benefit determination.

If the decision on appeal is upheld, in whole or in part, the employee will receive a written explanation containing the following information:

 

    The specific reason(s) for the decision, including a reference to the Plan provisions on which the decision is based;

 

    A statement that the employee is entitled to receive, upon request and free of charge, reasonable access to, and copies of all documents, records and other information relevant to the employee’s claim for benefits; and

 

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    A statement of the employee’s right to bring an action under Section 502(a) of ERISA.

No legal action for benefits under this Plan may be brought unless the action is commenced within one (1) year from the date of the final decision on appeal has been made. No person may bring an action for any alleged wrongful denial of Plan benefits in a court of law unless the claims procedures set forth above are exhausted and a final determination is made. If the employee or other interested person challenges a decision, a review by the court of law will be limited to the facts, evidence and issues presented during the claims procedure set forth above. Facts and evidence that become known to the employee or other interested person after having exhausted the claims procedure must be brought to the attention of the Plan Administrator for reconsideration of the claims determination. Issues not raised with the Plan Administrator will be deemed waived.

 

8. SECTION 409A

Notwithstanding anything contained in this Plan to the contrary, to the maximum extent permitted by applicable law, no employee shall have a legally binding right to payments under this Plan unless and until amounts are actually paid to them. To the extent that an employee is deemed to have a legally binding right to a payment under this Plan, then amounts payable under this Plan shall be made in reliance upon Treasury Regulation Section 1.409A-1(b)(9) (Separation Pay Plans) or Treasury Regulation Section 1.409A-1(b)(4) (Short-Term Deferrals) and exempt from Section 409A of the Code as a result of such reliance. To the extent that the Plan Administrator determines that the Company will pay severance benefits in a form other than a lump sum, any installment or monthly payment to which an employee is entitled under this Plan shall be considered a separate and distinct payment. In addition, (i) no amount payable hereunder shall be payable unless the employee’s termination of employment constitutes a Separation from Service and (ii) if the employee is deemed at the time of his or her separation from service to be a “specified employee” for purposes of Section 409A(a)(2)(B)(i) of the Code, then to the extent delayed commencement of any portion of the termination benefits to which Eligible Participant is entitled under this Plan is required in order to avoid a prohibited distribution under Section 409A(a)(2)(B)(i) of the Code, such portion of the employee’s termination benefits shall not be provided to the employee prior to the earlier of (A) the expiration of the six-month period measured from the Eligible Participant’s Separation Date or (B) the date of the employee’s death. Upon the earlier of such dates, all payments deferred pursuant to this Section 8 shall be paid in a lump sum to the employee without interest, and any remaining payments due under this Plan shall be paid as otherwise provided herein. The determination of whether the employee is a “specified employee” for purposes of Section 409A(a)(2)(B)(i) of the Code as of the time of his or her Separation from Service shall be made by the Company in accordance with the terms of Section 409A of the Code (including without limitation Treas. Reg. Section 1.409A-1(i) and any successor provision thereto). To the extent applicable, if payment of an amount under the Plan could be paid in one of two calendar years subject to the delivery of the Separation Agreement and it is determined that payment of such amount in the earlier of such two years could constitute

 

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noncompliance with Section 409A of the Code, then such amount shall be paid in the later of such two years.

 

9. STATEMENT OF ERISA RIGHTS

Eligible Participants in this Plan are entitled to certain rights and protections under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). ERISA provides that all plan Eligible Participants shall be entitled to:

 

    Examine, without charge, at the Plan Administrator’s office and at other specified locations, such as worksites, all documents governing the plan and a copy of the latest annual report (Form 5500 Series) filed by the plan with the U.S. Department of Labor and available at the Public Disclosure Room of the Employee Benefits Security Administration.

 

    Obtain, upon written request to the Plan Administrator, copies of documents governing the operation of the plan and copies of the latest annual report (Form 5500 Series) and updated summary plan description. The administrator may make a reasonable charge for the copies.

 

    Obtain a complete list of the Employers sponsoring the Plan upon written request to the Plan Administrator.

 

    Receive a summary of the Plan’s annual financial report, if any. The Plan Administrator is required by law to furnish each Eligible Participant with a copy of this summary annual report.

Prudent Actions by Plan Fiduciaries

In addition to creating rights for plan Eligible Participants, ERISA imposes duties upon the people who are responsible for the operation of the employee benefit plan. The people who operate the Plan, called “fiduciaries” of the Plan, have a duty to do so prudently and in the interest of all Plan Eligible Participants and beneficiaries. No one, including any Employer, any union, or any other person, may fire an employee or otherwise discriminate against him or her in any way to prevent them from obtaining a benefit under this Plan or exercising their rights under ERISA.

Enforce Your Rights

If an employee’s claim for a severance benefit is denied or ignored, in whole or in part, he or she has a right to know why this was done, to obtain copies of documents relating to the decision without charge, and to appeal any denial, all within certain time schedules.

Under ERISA, there are steps an employee can take to enforce the above rights. For instance, if he or she requests a copy of plan documents or the latest annual report from the plan and does not receive them within 30 days, he or she may file suit in a Federal court. In such a case, the

 

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court may require the Plan Administrator to provide the materials and pay him or her up to $110 a day until he or she receives the materials, unless the materials were not sent because of reasons beyond the control of the administrator. If an employee has a claim for benefits which is denied or ignored, in whole or in part, he or she may file suit in a state or Federal court. In addition, if he or she disagrees with the Plan’s decision or lack thereof concerning the qualified status of a domestic relations order or a medical child support order, he or she may file suit in Federal court. If it should happen that Plan fiduciaries misuse the Plan’s money, or if an employee is discriminated against for asserting his or her rights, he or she may seek assistance from the U.S. Department of Labor, or may file suit in a Federal court. The court will decide who should pay court costs and legal fees. If an employee is successful the court may order the person he or she has sued to pay these costs and fees. If the employee loses, the court may order him or her to pay these costs and fees, for example, if it finds the claim is frivolous.

 

10. ASSISTANCE WITH QUESTIONS

If an employee has any questions about the Plan, he or she should contact the Plan Administrator. If he or she has any questions about this statement or about his or her rights under ERISA, or if he or she needs assistance in obtaining documents from the Plan Administrator, he or she should contact the nearest office of the Employee Benefits Security Administration, U.S. Department of Labor, listed in the telephone directory or the Division of Technical Assistance and Inquiries, Employee Benefits Security Administration, U.S. Department of Labor, 200 Constitution Avenue N.W., Washington, D.C. 20210. An employee may also obtain certain publications about his or her rights and responsibilities under ERISA by calling the publications hotline of the Employee Benefits Security Administration.

 

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ADMINISTRATIVE INFORMATION

REQUIRED BY ERISA

 

Plan Sponsor and Plan Administrator, including address and telephone:

PayPal Holdings, Inc.

Compensation Committee of the

PayPal Holdings, Inc. Board of Directors

2211 North First Street

San Jose, CA 95131

(408) 967-7400

Name and address of person designated as agent for service of process:

A. Louise Pentland

Senior Vice President, General Counsel and Secretary

PayPal Holdings, Inc.

2211 North First Street

San Jose, CA 95131

(408) 967-7400

Basis on which Plan records are kept: Calendar year - January 1 to December 31
Type of Plan: Unfunded welfare benefit severance plan
Plan Number:
EIN: [INSERT]

 

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Appendix A

Standard Severance Pay Guidelines

Under the Plan, Eligible Participants are entitled to: (i) the Severance Pay and (ii) the Premium Payment, to be calculated based on the Multiples identified below.

 

Severance Pay and Premium Payment Calculations

   Eligible
Participants
 

Multiple of Salary

     1.0x   

Multiple of Severance Bonus Amount

     1.0x   

Multiple of Premium Payment

     12x   

The Company will pay the Severance Pay and the Premium Payment in accordance with the terms of the Plan to which this Appendix A is attached.

 

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Appendix B

Form of Separation Agreement

[On file with the Company]

 

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Schedule I1

Eligible Participants, as of the Effective Date

All Senior Vice Presidents2

 

1  This Schedule is subject to change, from time to time, in the discretion of the Plan Administrator.
2  Note: As of the Effective Date, all Senior Vice Presidents who are CEO Direct Reports are excluded from the Plan due to their holding Individual Agreements.

 

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EX-99.1
Table of Contents

Exhibit 99.1

 

LOGO

[●], 2015

Dear eBay Inc. (“eBay”) Stockholder:

In September 2014, we announced plans to separate our Payments business and our Marketplaces business. The separation will occur by means of a distribution of a newly formed corporation named PayPal Holdings, Inc. (“PayPal”), which will contain the businesses that make up our Payments segment. eBay, the existing publicly traded corporation, will continue to operate our Marketplaces business. As two distinct publicly traded corporations, eBay and PayPal will be better positioned to capitalize on significant growth opportunities and focus their resources on their respective businesses and strategic priorities.

eBay and PayPal are two great businesses with leading global positions in commerce and payments, respectively. For more than a decade, eBay and PayPal have mutually benefited from being part of one company, creating substantial stockholder value. As part of its strategic planning process, the board of directors has assessed whether eBay and PayPal should remain together. Until September 2014, the combination of the two businesses and the synergies and benefits they offered to each other were so valuable that the board determined that separation was not appropriate. But the commerce and payments landscape is rapidly changing, and each business faces different competitive opportunities and challenges. Consequently, in September 2014 the board decided to separate the businesses. As independent companies, we expect eBay and PayPal will be sharper and stronger, and more focused and competitive as leading, standalone companies in their respective markets. eBay and PayPal also will benefit from additional flexibility and agility to pursue new market and partnership opportunities.

The new eBay will be a global commerce leader and, we believe, the most inspiring and engaging place to discover great value and unique selection anytime, anywhere. We have an incredibly strong position, with 155 million active buyers globally as of the end of 2014. In 2014, eBay Marketplaces handled approximately $83 billion of gross merchandise volume, growing 9% year over year. Additionally, eBay is one of the world’s top 30 global brands. Offering consumers worldwide extraordinary value and selection, eBay had more than 800 million live listings at the end of 2014, and approximately 80% of sold items are new. And the company is well-positioned as a leader in the growth areas of mobile and cross-border commerce. With over 250 million eBay app downloads since inception, eBay generated $28 billion in mobile volume in 2014. During the same time, cross-border commerce represented approximately 17% of eBay’s gross merchandise volume, and 60% of Marketplaces’ revenue was international. Looking ahead, eBay will continue to focus on enhancing its unique assets and capabilities and creating new commerce experiences to ensure long-term growth and on-going commerce leadership.

The separation will provide current eBay stockholders with equity ownership in both eBay and PayPal. We expect that the distribution of PayPal common stock will be tax-free, for U.S. federal income tax purposes, to eBay stockholders.

The separation will be effected by means of a pro rata distribution of 100% of the outstanding shares of PayPal common stock to holders of eBay common stock. Each eBay stockholder will receive one share of PayPal common stock for each share of eBay common stock held as of the close of business on [●], 2015, the record date for the distribution. No vote of eBay stockholders is required for the distribution. You do not need to take any action to receive shares of PayPal common stock to which you are entitled as an eBay stockholder, and you do not need to pay any consideration or surrender or exchange your shares of eBay common stock.

We encourage you to read the attached information statement, which is being provided to all eBay stockholders who held shares of eBay common stock on the record date for the distribution. The information statement describes the separation in detail and contains important business and financial information about PayPal.

We believe the separation provides tremendous opportunities for our businesses and our stockholders, as we work to continue building long-term stockholder value. We appreciate your continuing support of eBay, and look forward to your future support of both companies.

Sincerely,

 

 

John J. Donahoe

President and Chief Executive Officer

Pierre M. Omidyar

Chairman of the Board


Table of Contents

LOGO

[●], 2015

Dear Future PayPal Stockholder:

It is my pleasure to welcome you as a future stockholder of our company, PayPal Holdings, Inc. Following the distribution of all of the outstanding shares of PayPal common stock by eBay Inc. to its stockholders, PayPal will be an independent, publicly traded company focused on making money work better for people and businesses around the world.

The access to and movement of money is an important market that affects the lives of almost everyone. Our mission is to increase our relevance for consumers, merchants, friends and family to access and move their money anywhere in the world, anytime, on any platform and through any device (e.g., mobile, tablets, personal computers or wearables).

We operate a proprietary global technology platform that connects merchants and consumers around the globe. In 2014, approximately 162 million active customer accounts processed payments on our platform. Total payment volume over the last 12 months increased by 26% to $235 billion, as more consumers and merchants trusted PayPal to pay and get paid. We have significant global reach, processing transactions in more than 200 markets, allowing our customers to receive payments in more than 100 currencies, withdraw funds to their bank accounts in 57 currencies and hold balances in their PayPal accounts in 26 currencies. We are a leader in mobile payments and processed nearly 1 billion mobile transactions in 2014 for our customers.

Our stockholder value proposition is simple. We strive to provide superior returns to PayPal stockholders by maintaining our leadership position in the payments industry and investing in the growth of our newly standalone company.

We invite you to learn more about PayPal, our business and our strategic initiatives by reading the enclosed information statement. We urge you to read the information statement carefully and in its entirety. We are excited by the tremendous opportunity we have in front of us and look forward to your support as a holder of our common stock.

Sincerely,

Daniel H. Schulman

President and CEO-Designee

PayPal Holdings, Inc.


Table of Contents

Information contained herein is subject to completion or amendment. A Registration Statement on Form 10 relating to these securities has been filed with the U.S. Securities and Exchange Commission under the U.S. Securities Exchange Act of 1934, as amended.

 

PRELIMINARY AND SUBJECT TO COMPLETION, DATED JUNE 18, 2015

INFORMATION STATEMENT

 

LOGO

PayPal Holdings, Inc.

 

 

This information statement is being furnished in connection with the distribution by eBay Inc. (“eBay”) to its stockholders of all of the outstanding shares of common stock of PayPal Holdings, Inc. (“PayPal”), a wholly owned subsidiary of eBay that will hold directly or indirectly the assets and liabilities associated with eBay’s Payments business. To implement the distribution, eBay will distribute all of the shares of PayPal common stock on a pro rata basis to eBay stockholders in a transaction that is intended to qualify as tax-free for U.S. federal income tax purposes. Please refer to the “Presentation of Information” below for how we refer to “eBay Inc.,” “eBay” and “PayPal” in this Information Statement.

You will receive one share of PayPal common stock for each share of eBay common stock held of record by you as of the close of business on [●], 2015, the record date for the distribution. As discussed under “The Separation and Distribution—Trading Between the Record Date and Distribution Date,” if you sell your eBay common stock in the “regular-way” market after the record date and before the distribution, you also will be selling your right to receive shares of PayPal common stock in connection with the separation. The separation and distribution is subject to the satisfaction (or to the extent waiveable, waiver by eBay in its sole discretion) of certain conditions set forth in more detail in this information statement. Subject to the satisfaction or waiver of these conditions, PayPal expects the shares of PayPal common stock to be distributed by eBay to you at 11:59 p.m., Eastern Time, on [●], 2015. We refer to the date of the distribution of the shares of PayPal common stock as the “distribution date.”

No vote of eBay stockholders is required for the distribution. Therefore, you are not being asked for a proxy, and you are requested not to send eBay a proxy, in connection with the distribution. You do not need to pay any consideration, exchange or surrender your existing shares of eBay common stock or take any other action to receive your shares of PayPal common stock.

There is no current trading market for PayPal common stock, although PayPal expects that a limited market, commonly known as a “when-issued” trading market, will develop on or shortly before the record date for the distribution, and PayPal expects “regular-way” trading of PayPal common stock to begin on the first trading day following the completion of the distribution. PayPal has applied to have its common stock authorized for listing on The NASDAQ Stock Market under the symbol “PYPL.” Following the spin-off, eBay common stock will continue to trade on The NASDAQ Stock Market under the symbol “EBAY.”

 

 

In reviewing this information statement, you should carefully consider the matters described under the caption “Risk Factors” beginning on page 16.

Neither the U.S. Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities or determined if this information statement is truthful or complete. Any representation to the contrary is a criminal offense.

This information statement does not constitute an offer to sell or the solicitation of an offer to buy any securities.

The date of this information statement is [], 2015.

This information statement was first mailed to eBay stockholders on or about [], 2015.


Table of Contents

TABLE OF CONTENTS

 

     Page  

Questions and Answers About the Separation and Distribution

     1   

Information Statement Summary

     8   

Risk Factors

     16   

Cautionary Statement Concerning Forward-Looking Statements

     44   

The Separation and Distribution

     45   

Dividend Policy

     51   

Capitalization

     52   

Selected Historical Combined Financial Data of PayPal

     53   

Unaudited Pro Forma Condensed Combined Financial Statements

     54   

Business

     60   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     72   

Management

     98   

Directors

     100   

Compensation Discussion and Analysis

     109   

Potential Payments Upon Termination or Change in Control

     145   

Certain Relationships and Related Party Transactions

     157   

Material U.S. Federal Income Tax Consequences

     170   

Description of Material Indebtedness

     174   

Security Ownership of Certain Beneficial Owners and Management

     175   

Description of PayPal’s Capital Stock

     177   

Where You Can Find More Information

     182   

Index to Financial Statements

     F-1   

Presentation of Information

On September 30, 2014, eBay Inc. (“eBay”) announced its intent to separate its payments business into an independent, publicly-traded company. To accomplish this separation, in January 2015, eBay incorporated PayPal Holdings, Inc. (“PayPal Holdings”), which will become the parent of PayPal, Inc. and will hold directly or indirectly all of the assets and liabilities associated with PayPal, Inc. References to “we,” “our,” “us,” “the Company” or “PayPal” refer to the combined entities of the payments business of eBay, including PayPal, Inc. and certain other assets and liabilities that have been historically held at the eBay corporate level, but are specifically identifiable and attributable to the payments business.

Except as otherwise indicated or unless the context otherwise requires, the information included in this information statement about PayPal assumes the completion of all of the transactions referred to in this information statement in connection with the separation and distribution. References in this information statement to “eBay” refer to eBay Inc., a Delaware corporation, and its consolidated subsidiaries, which prior to the separation and distribution, but not after such date, includes the business and operations of PayPal.

Trademarks, Trade Names and Service Marks

PayPal owns or has rights to use the trademarks, service marks and trade names that it uses in conjunction with the operation of its business. Some of the more important trademarks that PayPal owns or has rights to use that appear in this information statement include: PayPal®, Braintree and Venmo, which may be registered or trademarked in the United States and other jurisdictions. PayPal’s rights to some of these trademarks may be limited to select markets. Each trademark, trade name or service mark of any other company appearing in this information statement is, to PayPal’s knowledge, owned by such other company.


Table of Contents

QUESTIONS AND ANSWERS ABOUT THE SEPARATION AND DISTRIBUTION

 

What is PayPal and why is eBay separating PayPal’s business and distributing PayPal stock?

PayPal Holdings, Inc., which is currently a wholly owned subsidiary of eBay, was formed to own and operate eBay’s Payments business. The separation of PayPal from eBay and the distribution of PayPal common stock are intended to provide you with equity ownership in two separate, publicly traded companies that will be able to focus exclusively on each of their respective businesses. eBay and PayPal expect that the separation will result in enhanced long-term performance of each business for the reasons discussed in the section entitled “The Separation and Distribution—Reasons for the Separation.”

 

Why am I receiving this document?

eBay is delivering this document to you because you are a holder of eBay common stock. Each holder of eBay common stock as of the record date will be entitled to receive one share of PayPal common stock for each share of eBay common stock held at the close of business on such date. This document will help you understand how the separation and distribution will affect your post-separation ownership in eBay and PayPal, respectively.

 

How will the separation of PayPal from eBay work?

To accomplish the separation, eBay will distribute all of the outstanding shares of PayPal common stock to eBay stockholders on a pro rata basis in a distribution intended to be tax-free for U.S. federal income tax purposes.

 

Why is the separation of PayPal structured as a distribution?

eBay believes that a tax-free distribution, for U.S. federal income tax purposes, of shares of PayPal stock to eBay stockholders is an efficient way to separate its Payments business in a manner that will create long-term value for eBay, PayPal and their respective stockholders.

 

What is the record date for the distribution?

The record date for the distribution will be [●], 2015.

 

When will the distribution occur?

It is expected that all of the shares of PayPal common stock will be distributed by eBay at 11:59 p.m., Eastern Time, on [●], 2015 to holders of record of shares of eBay common stock at the close of business on [●], 2015, the record date for the distribution. eBay may delay or rescind the distribution. See “Risk Factors—Risks Related to the Separation—The distribution of PayPal common stock may be delayed or rescinded if certain required regulatory approvals are not obtained.”

 

What do stockholders need to do to participate
in the distribution?

Stockholders of eBay as of the record date for the distribution will not be required to take any action to receive PayPal common stock in the distribution, but you are urged to read this entire information statement carefully. No stockholder approval of the distribution is required. You are not being asked for a proxy. You do not need to pay any consideration, exchange or surrender your existing shares of eBay common stock or take any other action to receive your shares of PayPal common stock. Please do not send in your eBay stock certificates. The distribution will not affect the number of outstanding

 

1


Table of Contents
 

shares of eBay common stock or any of your rights as an eBay stockholder, although it will affect the market value of each outstanding share of eBay common stock.

 

How will shares of PayPal common stock be issued?

You will receive shares of PayPal common stock through the same channels that you currently use to hold or trade shares of eBay common stock, whether through a brokerage account, 401(k) plan or other channel. Receipt of PayPal shares will be documented for you in the same manner that you typically receive shareholder updates, such as monthly broker statements and 401(k) statements.

 

  If you own shares of eBay common stock, including shares owned in certificate form, as of the close of business on [●], 2015, the record date for the distribution, eBay, with the assistance of Computershare Trust Company, N.A., or Computershare, the distribution agent, will electronically distribute shares of PayPal common stock to you or to your brokerage firm on your behalf in book-entry form. Computershare will mail you a book-entry account statement that reflects your shares of PayPal common stock, or your bank or brokerage firm will credit your account for the shares.

 

How many shares of PayPal common stock
will I receive in the distribution?

eBay will distribute to you one share of PayPal common stock for each share of eBay common stock held by you as of the close of business on the record date for the distribution. Based on approximately 1.22 billion shares of eBay common stock outstanding as of June 1, 2015, a total of approximately 1.22 billion shares of PayPal common stock will be distributed. For additional information on the distribution, see “The Separation and Distribution.” PayPal shares are being issued on a pro rata basis, which means that every eBay stockholder will have the same ownership percentage in PayPal following the distribution as they held in eBay as of the record date.

 

Will PayPal issue fractional shares of its common stock in the distribution?

No. PayPal will not issue fractional shares of its common stock in the distribution. Fractional shares that eBay stockholders would otherwise have been entitled to receive, if any, will be aggregated and sold in the public market by the distribution agent. The aggregate net cash proceeds of these sales will be distributed pro rata (based on the fractional share such holder would otherwise be entitled to receive) to those stockholders who would otherwise have been entitled to receive fractional shares. Recipients of cash in lieu of any fractional shares will not be entitled to any interest on the amounts of payment made in lieu of fractional shares.

 

What conditions must be satisfied to complete
the distribution?

The distribution is subject to the satisfaction (or if such condition is waiveable, waiver by eBay in its sole discretion) of the following conditions:

 

    the transfer of assets and liabilities from eBay to PayPal shall be completed in accordance with the separation and distribution agreement;

 

   

eBay shall have received an opinion from eBay’s outside legal counsel regarding the qualification of the distribution, together

 

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with certain related transactions, as transactions that are generally tax free for U.S. federal income tax purposes under Sections 368(a)(1)(D) and 355 of the Internal Revenue Code (the “Code”);

 

    the U.S. Securities and Exchange Commission (the “SEC”) shall have declared effective the registration statement of which this information statement forms a part, and no stop order suspending the effectiveness of the registration statement shall be in effect and no proceedings for such purpose shall be pending before or threatened by the SEC;

 

    this information statement shall have been made available to the eBay stockholders;

 

    all actions or filings necessary or appropriate under applicable U.S. federal, U.S. state or other securities laws shall have been taken and, where applicable, have become effective or been accepted by the applicable governmental entity;

 

    any approvals of any governmental entities required for the consummation of the separation and distribution have been obtained, including any required approvals of the Commission de Surveillance du Secteur Financier (the “CSSF”), the Bank Centrale du Luxembourg (the “BCL”) and the European Central Bank (the “ECB”);

 

    the transaction agreements relating to the separation shall have been duly executed and delivered by the parties;

 

    no order, injunction, or decree issued by any court of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the separation, distribution or any of the related transactions shall be in effect;

 

    the shares of PayPal common stock to be distributed shall have been accepted for listing on The NASDAQ Stock Market, subject to official notice of distribution;

 

    eBay shall have transferred or caused the other members of the eBay Group to transfer an aggregate of $3.8 billion of cash to PayPal (including through one or more capital contributions); and

 

    no other event or development shall exist or have occurred that, in the judgment of eBay’s board of directors, in its sole discretion, would make it inadvisable to effect the separation or the distribution.

 

 

eBay and PayPal cannot assure you that any or all of these conditions will be met and may also waive any of the conditions to the distribution. In addition, eBay may delay or rescind its declaration of the distribution even after the record date for the distribution, as discussed in more detail under “Risk Factors—Risks Related to the Separation—The distribution of PayPal common stock may be delayed or rescinded if certain required regulatory approvals are not obtained.” For a complete discussion of all of the conditions to the

 

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distribution, see “The Separation and Distribution—Conditions to the Distribution.”

 

What is the expected date of completion of the separation?

The completion and timing of the separation are dependent upon a number of conditions. It is expected that the shares of PayPal common stock will be distributed by eBay at 11:59 p.m., Eastern Time, on [●], 2015 to the holders of record of shares of eBay common stock at the close of business on [●], 2015, the record date for the distribution. However, no assurance can be provided as to the timing of the separation or that all conditions to the distribution will be met.

 

Can eBay decide to cancel the distribution of PayPal common stock even if of all the conditions have been met?

Yes. Until the distribution has occurred, eBay has the right to terminate the distribution, even if all of the conditions are satisfied.

 

 

 

What if I want to sell my shares of eBay
common stock or my PayPal common stock?

You should consult with your financial advisors, such as your stockbroker, bank or tax advisor.

 

 

What is “regular-way” and “ex-distribution” trading of eBay common stock?

Beginning on or shortly before the record date for the distribution and continuing up to and through the distribution date, it is expected that there will be two markets in eBay common stock: a “regular-way” market and an “ex-distribution” market. Shares of eBay common stock that trade in the “regular-way” market will trade with an entitlement to shares of PayPal common stock distributed pursuant to the distribution. Shares that trade in the “ex-distribution” market will trade without an entitlement to shares of PayPal common stock distributed pursuant to the distribution. If you hold shares of eBay common stock on the record date and then decide to sell any shares of eBay common stock before the distribution date, you should make sure your stockbroker, bank or other nominee understands whether you want to sell your shares of eBay common stock with or without your entitlement to PayPal common stock pursuant to the distribution.

 

Where will I be able to trade shares of PayPal common stock?

PayPal has applied to list its common stock on The NASDAQ Stock Market under the symbol “PYPL.” PayPal anticipates that trading in shares of its common stock will begin on a “when-issued” basis on or shortly before [●], 2015, the record date for the distribution, and will continue up to and through the distribution date and that “regular-way” trading in PayPal common stock will begin on the first trading day following the completion of the separation. If trading begins on a “when-issued” basis, you may purchase or sell PayPal common stock up to and through the distribution date, but your transaction will not settle until after the distribution date. PayPal cannot predict the trading prices for its common stock before, on or after the distribution date.

 

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What will happen to the listing of eBay
common stock?

eBay common stock will continue to trade on The NASDAQ Stock Market after the distribution under the symbol “EBAY.”

 

Will the number of shares of eBay common
stock that I own change as a result of the distribution?

No. The number of shares of eBay common stock that you own will not change as a result of the distribution.

 

 

Will the distribution affect the market price of
my eBay common stock?

Yes. As a result of the distribution, eBay expects the trading price of shares of eBay common stock immediately following the distribution to be lower than the “regular-way” trading price of such shares immediately prior to the distribution because the trading price will no longer reflect the value of the Payments business. There can be no assurance that the aggregate market value of the eBay common stock and the PayPal common stock following the separation will be higher or lower than the market value of eBay common stock if the separation and distribution did not occur. This means, for example, that the combined trading prices of one share of eBay common stock and one share of PayPal common stock after the distribution may be equal to, greater than or less than the trading price of one share of eBay common stock before the distribution.

 

What are the material U.S. federal income tax consequences of the distribution?

It is a condition to the completion of the distribution that eBay receive an opinion from eBay’s outside legal counsel regarding the qualification of the distribution, together with certain related transactions, as transactions that are generally tax-free for U.S. federal income tax purposes under Sections 368(a)(1)(D) and 355 of the Code. Assuming that the distribution, together with certain related transactions, so qualifies, you will not recognize any gain or loss and no amount will be included in your income, upon your receipt of shares of PayPal common stock pursuant to the distribution for U.S. federal income tax purposes. You will, however, recognize gain or loss for U.S. federal income tax purposes with respect to cash received in lieu of a fractional share of PayPal common stock.

 

  You should consult your own tax advisor as to the particular consequences of the distribution to you, including the applicability and effect of any U.S. federal, state and local tax laws, as well as foreign tax laws. For more information regarding the material U.S. federal income tax consequences of the distribution, see the section entitled “Material U.S. Federal Income Tax Consequences.”

 

What will PayPal’s relationship be with eBay following the separation?

After the distribution, eBay and PayPal will be separate companies with separate management teams and separate boards of directors. PayPal will enter into a separation and distribution agreement with eBay to effect the separation and provide a framework for PayPal’s relationship with eBay after the separation and will enter into certain other agreements, such as an operating agreement, a transition services agreement, a tax matters agreement, an employee matters agreement, an intellectual property matters agreement, colocation services agreements, a data sharing addendum and a product development agreement. These agreements will provide for the allocation between PayPal and eBay of eBay’s assets, employees,

 

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liabilities and obligations (including its investments, property and employee benefits and tax-related assets and liabilities) attributable to periods prior to, at and after PayPal’s separation from eBay and will govern the relationships between PayPal and eBay subsequent to the completion of the separation. For additional information regarding the separation and distribution agreement and other transaction agreements, see the sections entitled “Risk Factors—Risks Related to the Separation” and “Certain Relationships and Related Party Transactions.”

 

Who will manage PayPal after the separation?

PayPal will benefit from a management team with an extensive background in the payments industry. Led by Daniel H. Schulman, who will be PayPal’s Chief Executive Officer and President after the separation, PayPal’s management team will possess deep knowledge of, and extensive experience in, its industry. For more information regarding PayPal’s management, see “Management.”

 

Are there risks associated with
owning PayPal common stock?

Yes. Ownership of PayPal common stock is subject to both general and specific risks relating to PayPal’s business, the industry in which it operates, its ongoing contractual relationships with eBay and its status as a separate, publicly traded company. Ownership of PayPal common stock is also subject to risks relating to the separation. These risks are described in the “Risk Factors” section of this information statement beginning on page 15. You are encouraged to read that section carefully.

 

Does PayPal plan to pay dividends?

PayPal does not currently expect that it will pay a regular cash dividend. The declaration and payment of any dividends in the future by PayPal will be subject to the sole discretion of its board of directors and will depend upon many factors. See “Dividend Policy.”

 

Will PayPal incur any indebtedness prior
to or at the time of the distribution?

See “Description of Material Indebtedness” and “Risk Factors—Risks Related to PayPal’s Business.”

 

 

Who will be the distribution agent, transfer
agent and registrar for the PayPal common stock?

The distribution agent, transfer agent and registrar for the PayPal common stock will be Computershare. For questions relating to the transfer or mechanics of the stock distribution, you should contact Computershare toll free at (877) 373-6374.

 

Where can I find more information about
eBay and PayPal?

Before the distribution, if you have any questions relating to eBay’s business performance, you should contact:

 

  eBay Inc.

2065 Hamilton Avenue

San Jose, California 95125

Attention: Investor Relations

(408) 376-7493

 

  After the distribution, PayPal stockholders who have any questions relating to PayPal’s business performance should contact PayPal at:

 

  PayPal Holdings, Inc.

2211 North First Street

 

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San Jose, California 95131

Attention: Investor Relations

investorrelations@paypalcorp.com

 

  The PayPal investor relations website will be accessible prior to the distribution at http://investor.paypal-corp.com.

 

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INFORMATION STATEMENT SUMMARY

Except as otherwise indicated or unless the context otherwise requires, the information included in this information statement about PayPal assumes the completion of all of the transactions referred to in this information statement in connection with the separation and distribution. Unless the context otherwise requires, references in this information statement to “PayPal” refer to PayPal Holdings, Inc., a Delaware corporation, and its combined subsidiaries. References to PayPal’s historical business and operations refer to the business and operations of eBay’s Payments business that will be transferred to PayPal in connection with the separation and distribution. References in this information statement to “eBay” refer to eBay Inc., a Delaware corporation, and its consolidated subsidiaries, which prior to the distribution, but not after such date, includes the business and operations of PayPal.

PayPal

PayPal is a leading technology platform company that enables digital and mobile payments on behalf of consumers and merchants worldwide. We put our customers at the center of everything we do. We strive to increase our relevance for consumers, merchants, friends and family to access and move their money anywhere in the world, anytime, on any platform and through any device (e.g., mobile, tablets, personal computers or wearables). We provide safer and simpler ways for businesses of all sizes to accept payments from merchant websites, mobile devices and applications, and at offline retail locations through a wide range of payment solutions across our Payments Platform, including PayPal, PayPal Credit, Venmo and Braintree products.

We enable global commerce by providing payment solutions for our approximately 162 million active customer accounts in over 200 markets, while providing customers a choice of how they would like to pay or get paid. A market is a geographic area or political jurisdiction, such as a country, territory or protectorate, in which we offer our services. A country, territory or protectorate is identified by a distinct set of laws and regulations. An active customer account is a registered account that successfully sent or received at least one payment or payment reversal through our Payments Platform, excluding transactions processed through our gateway products, in the past 12 months. Our gateway products include our Payflow Payments and certain Braintree products. A payment gateway links a merchant’s website to that merchant’s processing network and merchant account.

 

 

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We offer our customers the flexibility to use their account to both purchase and be paid for goods, as well as transfer and withdraw funds. A consumer can typically fund a purchase using a bank account, a PayPal account balance, a PayPal Credit account, a credit or debit card, or other stored value products such as coupons and gift cards. Our PayPal and Venmo products also make it safer and simpler for friends and family to transfer funds to each other using several of these funding sources. We offer merchants an end-to-end payments solution that provides authorization and settlement capabilities, as well as instant access to funds. We help merchants connect with their customers and manage risk. We measure the relevance of our products in the lives of our customers, and therefore the success of our business, through both payment volume and payment transactions. Payment volume is the value of payments, net of payment reversals, successfully completed through our Payments Platform, excluding transactions processed through our gateway products (“Total Payment Volume” or “TPV”). During 2014, our TPV was approximately $235 billion, representing growth of 26% over 2013. “Payment transactions” is the total number of payments, net of payment reversals, successfully completed through our Payments Platform, excluding transactions processed through our gateway products. During 2014, payment transactions were approximately 4.0 billion, representing growth of 22% over 2013.

 

LOGO

Our Payments Platform is built to make the existing global financial infrastructure work for people in the digital age. PayPal allows people to make seamless transactions between different markets and networks. Our Payments Platform connects with financial institutions around the world, and allows consumers to make purchases using a broad range of payment methods, regardless of where a merchant is located. Consumers who use our Payments Platform can engage in cross-border shopping by sending payments to each other in over 200 markets across the globe and in more than 100 currencies. This enables merchants to increase sales volume by allowing them to sell across borders to a much larger base of consumers.

We generate revenues by charging fees for providing transaction processing and other payment-related services, primarily based on the volume of activity, or TPV, processed through our Payments Platform. We also

 

 

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earn revenue by providing value added services to consumers and merchants, such as PayPal Credit products. Our revenue growth is influenced by, among other things, consumer spending patterns, merchant adoption of payment methods other than traditional credit and debit cards and cash, the expansion of multi-channel retail, the growth of mobile devices and merchant applications on those devices, the growth of consumers with access to the internet globally, the pace of transition from paper-based forms of payment to digital forms of payment, our share of the digital payments market, and our ability to innovate new methods of payment that merchants and consumers find to be valuable. Our strategy is to drive revenue growth by:

 

    Growing our core businesses globally through expanding our base of active customer accounts, increasing our customers’ use of our products and services by better addressing our customers’ everyday needs in managing and moving money and expanding the adoption of our solutions by new merchants and consumers;

 

    Diversifying our existing business by seeking new areas of growth in markets around the world and focusing on innovation both in the digital and the physical world;

 

    Providing software application developers with tools to quickly and easily integrate PayPal’s smart payment solutions into merchant and next generation mobile applications; and

 

    Leveraging the data we accumulate through processing transactions to build strong risk capabilities that enable the identification of illegal, high-risk, or fraudulent transactions with the highest level of accuracy, without impacting legitimate transactions and while incurring minimal losses.

 

LOGO

PayPal is a popular form of payment for mobile commerce, and our business has grown with the increased adoption of mobile devices. In December 2013, we completed our acquisition of Braintree to strengthen our position in mobile payments and extend our coverage to a new class of retailers who offer their services primarily through mobile applications. As part of that acquisition, we also acquired Venmo, which offers a leading mobile application to move money between friends and family using their mobile device.

 

 

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We operate globally and in a rapidly evolving regulatory environment characterized by a heightened regulatory focus on all aspects of the payments industry. Some of the laws and regulations to which we are subject were enacted recently and many such laws and regulations, including those enacted prior to the advent of digital and mobile payments, are continuing to evolve through legislative and regulatory action and judicial interpretation. Changes in or non-compliance with laws and regulations, changes in the interpretation of laws and regulations, and the enactment of new laws and regulations applicable to us could have a material adverse impact on our business. Therefore, we monitor these areas closely to ensure compliant solutions for our customers who depend on us.

Summary of Risk Factors

An investment in our common stock is subject to a number of risks, including risks relating to PayPal’s business, results of operations and financial condition, risks related to the separation and risks related to our common stock. Set forth below are some, but not all, of these risks. Please read the information in the section captioned “Risk Factors” for a more thorough description of these and other risks.

Risks Related to PayPal’s Business, Results of Operations and Financial Condition

 

    Our operating and financial results come primarily from transactions involving payments made in a reporting period and are therefore subject to fluctuations that could adversely affect our business, financial condition, results of operations and cash flows, as well as the trading price of our common stock.

 

    Global and regional economic conditions could harm our business.

 

    Our success depends to a large degree on our ability to successfully address the rapidly evolving market for transactions on mobile devices.

 

    If we cannot keep pace with rapid technological developments to provide new and innovative programs, products and services, the use of our products and our revenues could decline.

 

    Changes in how consumers fund their PayPal transactions could harm our business.

 

    Our business is subject to online security risks, including security breaches.

 

    Systems failures and resulting interruptions in the availability of our websites, applications, products or services could harm our business.

 

    Changes to payment card networks or bank fees, rules, or practices could harm our business.

 

    Failure to deal effectively with fraud, fictitious transactions, bad transactions, and negative customer experiences would increase our loss rate and harm our business, and could severely diminish merchant and consumer confidence in and use of our services.

 

    Any factors that reduce cross-border trade or make such trade more difficult could harm our business.

 

    Our business is subject to extensive government regulation and oversight relating to the provision of financial services.

 

    We are subject to consumer protection laws and regulations.

 

    We are subject to anti-money laundering and counter-terrorist financing laws and regulations.

 

    Regulation in the areas of privacy and protection of user data could harm our business.

 

    PayPal is not a bank or licensed lender in the United States and relies upon third parties to make loans and provide the other products critical to our business.

 

    Our credit products expose us to additional risks.

 

    New and proposed laws and regulations could harm our business.

 

    Substantial and increasingly intense competition worldwide in the global payments industry may harm our business.

 

 

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Risks Related to the Separation

 

    The distribution of PayPal common stock may be delayed or rescinded if certain required regulatory approvals are not obtained.

 

    The combined post-separation value of eBay and PayPal common stock may not equal or exceed the pre-separation value of eBay common stock.

 

    We may not achieve some or all of the expected benefits of the separation, and the separation could harm our business.

 

    If the distribution, together with certain related transactions, does not qualify as a transaction that is generally tax-free for U.S. federal income tax purposes under Sections 368(a)(1)(D) and 355 of the Internal Revenue Code, or the “Code,” eBay, PayPal and eBay stockholders could be subject to significant tax liabilities and, in certain circumstances, we could be required to indemnify eBay for material taxes pursuant to indemnification obligations under the tax matters agreement.

 

    eBay will be a significant source of our revenues after the distribution.

Risks Related to our Common Stock

 

    We cannot be certain that an active trading market for our common stock will develop or be sustained after the separation, and following the separation, and the price of our common stock may fluctuate significantly.

 

    There may be substantial changes in our stockholder base.

The Separation and Distribution

On September 30, 2014, eBay announced its intent to separate its Payments business and its Marketplaces business into two independent, publicly traded companies—PayPal and eBay. The separation will occur by means of a pro rata distribution to the eBay stockholders of 100% of the shares of common stock of PayPal, which was formed to own and operate eBay’s Payments business.

On [●], 2015, the eBay board of directors approved the distribution of all of PayPal’s issued and outstanding shares of common stock on the basis of one share of PayPal common stock for each share of eBay common stock held as of the close of business on [●], 2015, the record date for the distribution.

PayPal’s Post-Separation Relationship with eBay

After the distribution, eBay and PayPal will be separate companies with separate management teams and separate boards of directors. PayPal will have entered into a separation and distribution agreement with eBay, which is referred to in this information statement as the “separation agreement” or the “separation and distribution agreement.” In connection with the separation, PayPal will also enter into various other agreements to effect the separation and provide a framework for its relationship with eBay after the separation, such as an operating agreement, a transition services agreement, a tax matters agreement, an employee matters agreement, an intellectual property matters agreement, colocation services agreements, a data sharing addendum and a product development agreement. These agreements will provide for the allocation between PayPal and eBay of eBay’s assets, employees, liabilities and obligations (including its investments, property and employee benefits and tax-related assets and liabilities) attributable to periods prior to, at and after PayPal’s separation from eBay and will govern key relationships between PayPal and eBay after the separation. For additional information regarding the separation agreement and other transaction agreements, see the sections entitled “Risk Factors—Risks Related to the Separation” and “Certain Relationships and Related Party Transactions.”

Reasons for the Separation

In the past, the eBay Inc. board of directors has considered whether and when it would make sense to separate PayPal from eBay. Until September 2014, the combination of the two businesses and the synergies and benefits they offered to each other were so valuable that the board determined that separation was not appropriate. The eBay board of directors believes that the creation of two independent public companies, with the

 

 

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new PayPal operating eBay’s Payments business, and eBay operating the Marketplaces business is in the best interests of eBay and its stockholders for a number of reasons. The eBay board of directors believes that:

 

    The separation will allow each business to more effectively pursue its own distinct operating priorities, strategies and opportunities for long-term growth and profitability in the global commerce and payments landscape.

 

    The separation will speed up decision-making at each company and allow each to adapt more quickly to the rapidly changing market and customer dynamics in their respective markets.

 

    The separation will provide each company with increased flexibility to pursue new partnership and strategic opportunities that may have previously been unavailable for strategic or other reasons.

 

    The separation will permit each company to implement a capital structure appropriate to its strategy and business needs and to concentrate its financial resources solely on its own operations, providing greater flexibility to invest capital in its business in a time and manner appropriate for its distinct strategy and business needs. This will facilitate a more efficient allocation of capital.

 

    The separation will facilitate incentive compensation arrangements for employees more directly tied to the performance of each company’s business, and enhance employee hiring and retention by, among other things, improving the alignment of management and employee incentives with performance and growth objectives.

 

    The separation will provide each company with direct access to capital markets and facilitate the ability for each to capitalize on its unique growth opportunities and effect future acquisitions utilizing its common stock.

 

    The separation will allow investors to separately value eBay and PayPal based on their distinct investment identities, including the merits, performance, growth profile, and future prospects of their respective businesses. The separation will also provide investors with two distinct and targeted investment opportunities.

The eBay board of directors also considered a number of potentially negative factors in evaluating the creation of independent public companies, including, among others, risks relating to the loss of synergy benefits between eBay and PayPal, and increased operating costs and one-time separation costs relating to the creation of a new public company, but concluded that certain of the synergy benefits could be preserved, at least for some significant period of time, through the operating and other agreements and that the potential benefits from separation outweighed these factors. For more information, see the sections entitled “The Separation and Distribution—Reasons for the Separation” and “Risk Factors” included elsewhere in this information statement.

Corporate Information

PayPal Holdings, Inc. was incorporated in Delaware in January 2015 for the purpose of owning and operating eBay’s Payments business in connection with the separation and distribution described herein. Prior to the contribution of this business to PayPal, which will occur prior to the distribution, PayPal will have no operations. The address of PayPal’s principal executive offices is PayPal Holdings, Inc., 2211 North First Street, San Jose, California 95131. PayPal’s telephone number after the distribution will be (408) 967-1000. PayPal maintains an Internet site at www.paypal.com, and its investor relations site will be accessible prior to the distribution at http://investor.paypal-corp.com. PayPal’s websites and the information contained therein or connected thereto shall not be deemed to be incorporated herein, and you should not rely on any such information in making an investment decision.

Reason for Furnishing this Information Statement

This information statement is being furnished solely to provide information to stockholders of eBay who will receive shares of PayPal common stock in the distribution. It is not and is not to be construed as an inducement or encouragement to buy or sell any of PayPal’s securities. The information contained in this information statement is believed by PayPal to be accurate as of the date set forth on the cover of this information statement. Changes may occur after that date and neither eBay nor PayPal will update the information except in the normal course of their respective disclosure obligations and practices, or as required by applicable law.

 

 

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Summary Historical and Unaudited Pro Forma Condensed Combined Financial Data

The following summary financial data reflects the combined operations of PayPal. PayPal derived the summary combined statement of income data for the years ended December 31, 2014, 2013 and 2012, and summary combined balance sheet data as of December 31, 2014 and 2013, as set forth below, from its audited combined financial statements, included elsewhere in this information statement. PayPal derived the summary combined statement of income data for the quarter ended March 31, 2015 and 2014 and summary combined balance sheet data as of March 31, 2015, as set forth below, from its unaudited combined financial statements, included elsewhere in this information statement. PayPal derived the summary combined balance sheet data as of March 31, 2014 and December 31, 2012 from PayPal’s underlying financial records, which were derived from the financial records of eBay. The historical results do not necessarily indicate the results expected for any future period. To ensure a full understanding of this summary financial data, you should read the summary combined financial data presented below in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the combined financial statements and accompanying notes included elsewhere in this information statement.

The summary unaudited pro forma condensed combined balance sheet data as of March 31, 2015 has been prepared to reflect the separation as of March 31, 2015. The unaudited pro forma condensed combined statement of income data presented for the year ended December 31, 2014 and for the quarter ended March 31, 2015 assumes the spin-off occurred on January 1, 2014. The assumptions used and pro forma adjustments derived from such assumptions are based on currently available information and PayPal believes such assumptions are reasonable under the circumstances.

The unaudited pro forma condensed combined financial statements may not be indicative of PayPal’s results of operations or financial condition had the distribution and its anticipated post-separation capital structure been completed on the dates assumed. Also, they may not reflect the results of operations or financial condition that would have resulted had PayPal been operating as an independent, publicly traded company during such periods. In addition, they are not necessarily indicative of its future results of operations or financial condition.

Historical basic and diluted earnings per share are not presented because PayPal’s financial information has been prepared on a combined basis. These financial statements have not been prepared for a single legal entity that had share capital throughout the entire historical period and, accordingly, earnings per share for these periods has not been provided.

 

 

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You should read this summary financial data together with “Unaudited Pro Forma Condensed Combined Financial Statements,” “Capitalization,” “Selected Historical Combined Financial Data of PayPal,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the combined financial statements and accompanying notes included in this information statement.

 

    3 Months Ended March 31,     Year Ended December 31,  
    Pro Forma
2015
    2015     2014     Pro Forma
2014
    2014     2013     2012  
    (In millions)     (In millions)  

Combined statement of income data

   

Net revenue

  $ 2,134      $ 2,137      $ 1,874      $ 8,012      $ 8,025      $ 6,727      $ 5,662   

Operating income

    314        322        318        1,237        1,268        1,091        880   

Net income

    248        255        (382     391        419        955        778   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma earnings per share

Basic

  $0.20      $0.31   

Diluted

  $0.20      $0.31   
    3 Months Ended March 31,           Year Ended December 31,  
    Pro Forma
2015
    2015     2014           2014     2013     2012  
    (In millions)           (In millions)  

Combined balance sheet data

             

Cash and cash equivalents

  $ 6,165      $ 2,365      $ 2,198        $ 2,201      $ 1,604      $ 1,414   

Current assets

    21,381        18,207        15,382          17,565        14,620        12,403   

Non-current assets

    4,563        4,372        4,451          4,352        4,540        3,780   

Total assets

    25,944        22,579        19,833          21,917        19,160        16,183   

Current liabilities

    12,797        13,549        12,252          13,283        11,261        9,574   

Long term liabilities

    618        390        461          386        509        428   

Total liabilities

    13,415        13,939        12,713          13,669        11,770        10,002   

Total equity

    12,529        8,640        7,120          8,248        7,390        6,181   

 

 

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RISK FACTORS

The following discussion is divided into three sections. The first section, which begins immediately following this paragraph, discusses some of the risks that may affect our business, results of operations and financial condition. The second section, captioned “Risk Related to the Separation,” discusses some of the risks relating to our plan to separate PayPal into an independent publicly traded company. The third section, captioned “Risks Related to Our Common Stock,” discusses some of the risks relating to an investment in PayPal’s Common Stock. You should carefully review all of these sections, as well as our combined financial statements and notes thereto and the other information appearing in this report, for important information regarding risks that affect us.

Risk Factors That May Affect Our Business, Results of Operations and Financial Condition

Our operating and financial results come primarily from transactions involving payments made in a reporting period and are therefore subject to fluctuations that could adversely affect our business, financial condition, results of operations and cash flows, as well as the trading price of our common stock.

Our operating and financial results have varied on a quarterly basis during our operating history and may continue to fluctuate significantly as a result of a variety of factors, including as a result of the risks set forth in this “Risk Factors” section. It is difficult for us to forecast the level or source of our revenues or earnings (loss) accurately. In view of the rapidly evolving nature of our business, period-to-period comparisons of our operating results may not be meaningful, and you should not rely upon them as an indication of future performance. We do not have backlog, and substantially all of our net revenues each quarter come primarily from transactions involving payments during that quarter. Due to the inherent difficulty in forecasting revenues, it is also difficult to forecast expenses as a percentage of net revenues. Quarterly and annual expenses as a percentage of net revenues reflected in our combined financial statements may be significantly different from historical or projected rates. Our operating results in one or more future quarters may fall below the expectations of securities analysts and investors. The trading price of our common stock could decline, perhaps substantially, as a result of the factors described in this paragraph.

Global and regional economic conditions could harm our business.

Our operations and performance depend significantly on global and regional economic conditions. Adverse economic conditions and events (including volatility or distress in the equity and/or debt or credit markets and fluctuations in foreign currency exchange rates) have in the past negatively impacted regional and global financial markets and will likely continue to do so from time to time in the future. These events and conditions could have a negative and adverse impact on the companies and customers with which we do business. In addition, financial turmoil affecting the banking system or financial markets could cause additional consolidation of the financial services industry, or significant financial service institution failures, new or incremental tightening in the credit markets, low liquidity, and extreme volatility in fixed income, credit, currency, and equity markets. Adverse impacts to the companies and customers with which we do business, the banking system, or financial markets could have a material adverse effect on our business, including a reduction in the volume and prices of transactions on our payments platforms.

Our success depends to a large degree on our ability to successfully address the rapidly evolving market for transactions on mobile devices.

Mobile devices are increasingly used for ecommerce transactions and payments. A significant and growing portion of our customers access our platforms through mobile devices. We may lose customers if we are not able to continue to meet our customers’ mobile and multi-screen experience expectations. The variety of technical and other configurations across different mobile devices and platforms increases the challenges associated with this environment. In addition, a number of other companies with significant resources and a number of innovative startups have introduced products and services focusing on mobile markets.

 

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Our ability to successfully address the challenges posed by the rapidly evolving market for mobile transactions is crucial to our continued success, and any failure to continuously increase the volume of mobile transactions effected through our platforms could harm our business.

If we cannot keep pace with rapid technological developments to provide new and innovative programs, products and services, the use of our products and our revenues could decline.

Rapid, significant technological changes continue to confront the industries in which we operate, including developments in smart cards, tokenization, ecommerce, mobile, and radio frequency and proximity payment devices, such as contactless payments. We cannot predict the effect of technological changes on our business. In addition to our own initiatives and innovations, we rely in part on third parties, including some of our competitors, for the development of and access to new technologies. We expect that new services and technologies applicable to the industries in which we operate will continue to emerge. These new services and technologies may be superior to, or render obsolete, the technologies we currently use in our products and services. Incorporating new technologies into our products and services may require substantial expenditures and take considerable time, and ultimately may not be successful. In addition, our ability to adopt new services and develop new technologies may be inhibited by industry-wide standards, payments networks, new laws and regulations, resistance to change from consumers or merchants, or third parties’ intellectual property rights. Our success will depend on our ability to develop new technologies and adapt to technological changes and evolving industry standards.

Changes in how consumers fund their PayPal transactions could harm our business.

We pay significant transaction fees when consumers fund payment transactions using credit cards, lower fees when consumers fund payments with debit cards, nominal fees when consumers fund payment transactions by electronic transfer of funds from bank accounts, and no fees when consumers fund payment transactions from an existing PayPal account balance or through the PayPal Credit products. Our financial success is highly sensitive to changes in the rate at which our consumers fund payments using credit and debit cards, which can significantly increase our costs. Some of our consumers may prefer to use credit and debit cards if these cards offer functionality and benefits not associated with the use of their bank accounts. Some of our offerings, including the ability of consumers to make a limited number of “guest” payments without opening a PayPal account, have a higher rate of payment card funding than our basic product offering. An increase in the portion of our payment volume using credit and debit cards would materially and adversely affect our financial performance. Some of our plans to lower our funding costs, including both the PayPal Credit products and the ability for consumers to defer payment for a short period of time on some transactions, may increase the risk to us of nonpayment by consumers. An increase in fees associated with our funding mix or in losses associated with nonpayment by consumers could harm our business.

Our business is subject to online security risks, including security breaches.

Our business involves the storage and transmission of customers’ personal financial information. In addition, a significant number of our customers authorize us to bill their payment card accounts directly for all transaction and other fees charged by us. We have built our reputation on the premise that our payments platform offers customers a secure way to make payments. An increasing number of websites, including those owned by several other large Internet and offline companies, have disclosed breaches of their security, some of which have involved sophisticated and highly targeted attacks on portions of their websites or infrastructure. In May 2014, eBay Inc. publicly announced that criminals were able to penetrate and steal certain data, including user names, encrypted user passwords and other non-financial user data from certain of its Marketplaces business unit databases, which led to Marketplaces requiring a password reset and fewer transactions using our PayPal services. A breach of security at PayPal could have negative consequences to our reputation, which could result in our customers using our services less often, and have significant out-of-pocket financial impact.

 

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The techniques used to obtain unauthorized access, disable, or degrade service, or sabotage systems, change frequently, may be difficult to detect for a long time, and often are not recognized until launched against a target. Certain efforts may be state sponsored and supported by significant financial and technological resources and therefore may be even more difficult to detect. As a result, we may be unable to anticipate these techniques or to implement adequate preventative measures. Unauthorized parties may also attempt to gain access to our systems or facilities through various means, including hacking into our systems or facilities, fraud, trickery or other means of deceiving our employees, contractors and temporary staff. A party that is able to circumvent our security measures could misappropriate our or our customers’ personal proprietary information, cause interruption in our operations and damage our computers or those of our customers. In addition, our customers have been and likely will continue to be targeted by parties using fraudulent “spoof” and “phishing” emails to misappropriate user names, passwords, payment card numbers, or other personal information or to introduce viruses or other malware through “trojan horse” programs to our customers’ computers. Also, our information technology and infrastructure may be vulnerable to cyberattacks or security incidents and third parties may be able to access our customers’ proprietary information and payment card data that are stored on or accessible through our systems. Any security breach at a company providing services to us or our customers could have similar effects. Because we promote to our customers that our payments platform offers a secure way to make payments, a security breach would have a significant impact on our reputation.

In addition, under payment card rules and our contracts with our card processors, if there is a breach of payment card information that we store, or that is stored by our direct payment card processing customers, we could be liable to the payment card issuing banks for their cost of issuing new cards and related expenses. If we were unable to accept payment cards, our business would be harmed. Additionally, financial services regulators in various jurisdictions, including the United States and the European Union, have implemented or are considering proposals to impose new authentication requirements on banks and payment processors intended to reduce online fraud, which could impose significant costs, require us to change our business practices, make it more difficult for new customers to join PayPal, and reduce the ease of use of our products, which could harm our business.

We may also need to expend significant additional resources to protect against security breaches or to redress problems caused by breaches. These issues are likely to become more difficult and costly as we expand the number of markets where we operate. Additionally, our insurance policies carry low coverage limits, which may not be adequate to reimburse us for losses caused by security breaches and we may not be able to fully collect, if at all, under these insurance policies.

Systems failures and resulting interruptions in the availability of our websites, applications, products or services could harm our business.

Our systems may experience service interruptions or degradation because of hardware and software defects or malfunctions, computer denial-of-service and other cyberattacks, human error, earthquakes, hurricanes, floods, fires, natural disasters, power losses, disruptions in telecommunications services, fraud, military or political conflicts, terrorist attacks, computer viruses, or other events. Our systems are also subject to break-ins, sabotage and intentional acts of vandalism. Some of our systems are not fully redundant and our disaster recovery planning is not sufficient for all eventualities. In addition, as a provider of payments solutions, we are subject to increased scrutiny by regulators that may require specific business continuity and disaster recovery plans and more rigorous testing of such plans. This increased scrutiny may be costly and time consuming and may divert our resources from other business priorities.

We have experienced and will likely continue to experience system failures, denial of service attacks and other events or conditions from time to time that interrupt the availability or reduce the speed or functionality of our websites and mobile applications. These events have resulted and likely will result in loss of revenue. A prolonged interruption in the availability or reduction in the speed or other functionality of our websites and mobile applications could materially harm our business. Frequent or persistent interruptions in our services could

 

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cause current or potential customers to believe that our systems are unreliable, leading them to switch to our competitors or to avoid our sites, and could permanently harm our reputation and brands. Moreover, to the extent that any system failure or similar event results in damages to our customers or their businesses, these customers could seek significant compensation from us for their losses and those claims, even if unsuccessful, would likely be time-consuming and costly for us to address.

Our website has suffered significant intermittent unavailability, including for example, transaction failures which affected some customers in the United Kingdom for over 24 hours in August 2014 and mobile login failures which affected some customers for several hours in April 2014. Reliability is particularly critical for us because the full-time availability of our PayPal services is critical to our goal of gaining widespread acceptance among consumers and merchants for digital and mobile payments. We have undertaken certain system upgrades and re-platforming efforts designed to improve our reliability and speed. These efforts are costly and time consuming, involve significant technical risk and may divert our resources from new features and products, and there can be no guarantee that these efforts will succeed. Because we are a regulated financial institution, frequent or persistent site interruptions could lead to regulatory scrutiny, significant fines and penalties, or mandatory and costly changes to our business practices, and ultimately could cause us to lose existing licenses we need to operate or prevent us from obtaining additional licenses that we need to expand.

We also rely on facilities, components and services supplied by third parties, including eBay, and our business may be materially adversely affected to the extent these components or services do not meet our expectations or these third parties cease to provide the services or facilities. In particular, a decision by any of our third party hosting providers to close a facility that we use could cause system interruptions and delays, result in loss of critical data and cause lengthy interruptions in our services. We do not carry business interruption insurance sufficient to compensate us for losses that may result from interruptions in our service as a result of systems failures and similar events.

Changes to payment card networks or bank fees, rules, or practices could harm our business.

We do not directly access the payment card networks, such as Visa and MasterCard, that enable our acceptance of credit cards and debit cards (including some types of prepaid cards). As a result, we must rely on banks or other payment processors to process transactions, and must pay fees for the services. From time to time, payment card networks have increased, and may increase in the future, the interchange fees and assessments that they charge for each transaction which accesses their networks. Our payment card processors have the right to pass any increases in interchange fees and assessments on to us as well as increase their own fees for processing. Any changes in interchange fees and assessments could increase our operating costs and reduce our operating income.

In addition, in some jurisdictions, governments have required Visa and MasterCard to reduce interchange fees, or have opened investigations as to whether Visa’s or MasterCard’s interchange fees and practices violate antitrust law. In the United States, the Federal Reserve Board issued a final rule capping debit card interchange fees at significantly lower rates than Visa or MasterCard previously charged. In the European Union, the Multilateral Interchange Fee (“MIF”) Regulation limits credit and debit interchange fees for payments to 0.3% and 0.2%, respectively. The MIF Regulation, which is expected to become effective in the second half of 2015, may significantly impact our pricing policy in the European Union. Any such material reduction in credit or debit card interchange rates in the United States or other markets could jeopardize our competitive position against traditional credit and debit card processors, although it would also lower our costs. Future changes to those regulations or to our business could potentially cause us to be treated as a payment card network, which could subject us to additional regulation and require us to change our business practices, which could reduce our revenue and adversely affect our business.

We are required by our processors to comply with payment card network operating rules, including special operating rules for payment service providers to merchants, and we have agreed to reimburse our processors for

 

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any fines they are assessed by payment card networks as a result of any rule violations by us or our merchants. The payment card networks set and interpret the card operating rules. Payment card networks have from time to time alleged that various aspects of our business model violate these operating rules. If such allegations are not resolved, they could result in material fines and penalties or require changes in our business that may be costly. The payment card networks could adopt new operating rules or interpret or re-interpret existing rules that we or our processors might find difficult or even impossible to follow, or costly to implement. As a result, we could lose our ability to give consumers the option of using payment cards to fund their payments or the choice of currency in which they would like their card to be charged. If we were unable to accept payment cards or were meaningfully limited in our ability to do so, our business would be harmed.

We and our payment card processors have implemented specific business processes for merchants in order to comply with operating rules for providing services to merchants, but any failure to comply could result in fines. We also could be, and in the past have been, subject to fines from payment card networks if we fail to detect that merchants are engaging in activities that are illegal or that are considered “high risk,” primarily the sale of certain types of digital content. For “high risk” merchants, we must either prevent such merchants from using our PayPal services or register such merchants with the payment card networks and conduct additional monitoring with respect to such merchants. Although the amount of these fines has not been material to date, any additional fines in the future could become material and could result in a termination of our ability to accept payment cards or require changes in our process for registering new customers. This would significantly damage our business. Our retail point-of-sale solution and PayPal Here product are also subject to payment card network operating rules, which may increase the costs of those products or otherwise negatively impact their deployment.

Failure to deal effectively with fraud, fictitious transactions, bad transactions, and negative customer experiences would increase our loss rate and harm our business, and could severely diminish merchant and consumer confidence in and use of our services.

We incur substantial losses due to claims from consumers that merchants have not performed or that their goods or services do not match the merchant’s description. We seek to recover such losses from the merchant, but may not be able to recover in full if the merchant is unwilling or unable to pay. We also incur losses from claims that the consumer did not authorize the purchase, from consumer fraud, from erroneous transmissions and from customers who have closed bank accounts or have insufficient funds in them to satisfy payments. In addition, if losses incurred by us related to payment card transactions become excessive, they could potentially result in our losing the right to accept payment cards for payment. In the event that we were unable to accept payment cards, the number of transactions processed through our PayPal services would decrease substantially and our business could be harmed. We are similarly subject to the risk of fraudulent activity associated with merchants, consumers of PayPal Credit products and third parties handling our user information. We have taken measures to detect and reduce the risk of fraud, but these measures need to be continually improved and may not be effective against new and continually evolving forms of fraud or in connection with new product offerings. If these measures do not succeed, our business could be harmed.

Any factors that reduce cross-border trade or make such trade more difficult could harm our business.

Cross-border trade is an important source of both revenue and profits for us. For the year ended December 31, 2014, approximately 24% of total payment volume (“TPV”) involved cross-border trade (i.e., transactions where the merchant and consumer were in different countries). Cross-border transactions generally provide higher revenues and operating income than similar transactions that take place within a single country or market. Cross-border trade also represents our primary (or in some cases, only) presence in certain important markets, such as China.

Cross-border trade is subject to, and may be impacted by, foreign exchange rate fluctuations. In addition, the potential interpretation and application of laws of multiple jurisdictions (e.g., the jurisdiction of the merchant and the consumer) are often extremely complicated in the context of cross-border trade. The interpretation and/or

 

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application of such laws could impose restrictions on cross-border trade. Any factors that increase the costs of cross-border trade or restrict, delay, or make cross-border trade more difficult or impractical would lower our revenues and profits and could harm our business.

Our business is subject to extensive government regulation and oversight relating to the provision of financial services.

We are subject to various laws and regulations in the United States and other countries where we operate. Such laws and regulations include those governing banking, deposit taking, cross-border and domestic money transmission, foreign exchange, and payment services, such as payment processing and settlement services. The legal and regulatory requirements that apply to us vary in the markets where we operate and have increased over time as the geographical scope and complexity of our business and products have expanded. While we have a compliance program focused on compliance with applicable laws and regulations and have increased the resources allocated to that program in the last several years, we may still be subject to fines or other enforcement actions in one or more jurisdictions or be required to make changes to our business practices or compliance programs in the future. Non-compliance could also result in significant criminal and civil lawsuits, penalties, forfeiture of significant assets, or other enforcement actions. Costs associated with fines, enforcement actions, as well as reputational harm, changes in compliance requirements or limits on our ability to expand our product offerings could harm our business.

PayPal has obtained licenses to operate as a money transmitter (or its equivalent) in the United States, in the states where it is required, and the District of Columbia, the U.S. Virgin Islands and Puerto Rico. Our subsidiary, Venmo, is also licensed as a money transmitter in certain U.S. states. As licensed money transmitters, PayPal and Venmo are subject to restrictions with respect to their investment of customer funds, reporting requirements, bonding requirements and inspection by state regulatory agencies. Accordingly, we could be subject to liability and/or additional restrictions, forced to cease doing business with residents of certain states, forced to change our business practices or be required to obtain additional licenses or regulatory approvals that could impose substantial cost if we violate these laws or regulations.

While we currently allow our consumers with credit cards to send payments from approximately 200 markets, we allow customers in only approximately half of those markets (including the United States) to also receive payments, in some cases with significant restrictions on the manner in which customers can withdraw funds. These limitations may affect our ability to grow in these markets. Of the markets whose residents can use our PayPal services, approximately 30 markets are in member states of the European Union. We provide localized versions of our service to customers in the European Union through PayPal (Europe) S.à r.l. et Cie, SCA (“PayPal (Europe)”), our wholly-owned subsidiary that is licensed and subject to regulation as a bank in Luxembourg. Accordingly, PayPal (Europe) is subject to significant fines or other enforcement action if it violates the disclosure, reporting, anti-money-laundering, capitalization, funds management, corporate governance, privacy, information security, bank secrecy, taxation, sanctions, or other requirements imposed on Luxembourg banks. Any fines or other enforcement actions could adversely affect our business. In addition, European Union laws and regulations are typically subject to different and potentially inconsistent interpretations by the countries that are members of the European Union, which can make compliance more costly and operationally difficult to manage.

In many markets, such as China, much of Southeast Asia and South America, we serve our customers through PayPal Pte. Ltd., our wholly-owned subsidiary that is based in Singapore. PayPal Pte. Ltd. is supervised by the Monetary Authority of Singapore as a holder of a stored value facility and does not hold a remittance license. As a result, PayPal Pte. Ltd. is not able to offer remittance payments (including donations to charities) in Singapore, and can only offer payments for the purchase of goods and services. In many of the markets (other than Singapore) served by PayPal Pte. Ltd., it is not clear whether our Singapore-based service is subject only to Singapore law or, if it is subject to local laws, whether such local laws would require a payment processor like us to be licensed as a bank or financial institution or otherwise.

 

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In Australia, we serve our customers through PayPal Australia Pty. Ltd., which is licensed by the Australian Securities and Investments Commission as a financial product and by the Australian Prudential Regulation Authority as a purchased payment facility provider, which is a type of authorized depository institution. Accordingly, PayPal Australia would be subject to significant fines or other enforcement action if it violates the disclosure, reporting, anti-money laundering, capitalization, privacy, corporate governance or other requirements imposed on Australian depository institutions.

We are also subject to regulation in other markets in which we do business and we have been and expect to continue to be required to apply for various licenses, certifications and regulatory approvals in a number of the countries where we have operations, such as Canada, Turkey, China, Mexico, Brazil and Hong Kong. There can be no assurance that PayPal will be able to obtain any such licenses. Even if PayPal were able to obtain such licenses, there are substantial costs and potential product changes involved in maintaining such licenses, and PayPal would be subject to fines or other enforcement action if it violates disclosure, reporting, anti-money laundering, capitalization, corporate governance or other requirements of such licenses. These factors could impose substantial additional costs and involve considerable delay to the development or provision of PayPal’s products in certain countries.

In many other countries it may not be clear whether we are required to be licensed as a bank, financial institution or otherwise. In such markets, we may rely on partnerships with local banks to process payments and conduct foreign exchange in local currency. Local regulators may use their power to slow or halt payments to local merchants conducted through our local banking partner. Such regulatory actions or the need to obtain licenses, certifications or other regulatory approvals could impose substantial costs and involve considerable delay to the provision or development of our PayPal services in a given market, or could require significant and costly operational changes or prevent us from providing any services in a given market.

We are subject to consumer protection laws and regulations.

We are subject to consumer protection laws and regulations in the United States and the other countries in which we operate. We are focused on compliance with these laws and regulations and have programs designed to comply with new and existing consumer protection requirements. However, any errors, failures, or delays in complying with such consumer protection laws and regulations could result in significant criminal and civil lawsuits, penalties, forfeiture of significant assets, or other enforcement actions, as well as reputational harm. Any new consumer protection laws and regulations (or changes to, or expansion of, the interpretation or application of existing laws and regulations) applicable to us could subject us to additional restrictions on our operations, additional compliance and licensure requirements, and increased regulatory scrutiny, which could force us to change our business practices or limit our ability to grow our business. Costs associated with fines or enforcement actions, changes in compliance requirements, or limitations on our ability to grow our business, could have an adverse effect on our financial results and harm our business.

Although there have been no definitive interpretations to date, we have taken actions as though our services are subject to the Electronic Fund Transfer Act and Regulation E issued by the Consumer Financial Protection Bureau (“CFPB”). Under such regulations, among other things, we are required to provide advance disclosure of changes to our services, to follow specified error resolution procedures and to reimburse consumers for losses from certain transactions not authorized by the consumer. Additionally, even technical violations of these laws can result in penalties of up to $1,000 for each non-compliant transaction or up to $500,000 per violation in any class action, and we could also be liable for plaintiffs’ attorneys’ fees. In the second quarter of 2010, two putative class-action lawsuits (Devinda Fernando and Vadim Tsigel v. PayPal, Inc. and Moises Zepeda v. PayPal, Inc.) were filed in the U.S. District Court for the Northern District of California. These lawsuits contain allegations related to violations of aspects of the Electronic Fund Transfer Act and Regulation E and violations of a previous settlement agreement related to Regulation E, and/or allege that we improperly held consumer funds or otherwise improperly limited consumer accounts. These lawsuits seek damages as well as changes to our business practices, among other remedies. A determination that there have been violations of the Electronic Fund Transfer

 

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Act, Regulation E or violations of other laws relating to our business practices could expose us to significant liability. Any changes to our business practices resulting from these lawsuits could require us to incur significant costs and to expend substantial resources, which could delay other planned product launches or improvements and further harm our business.

The financial services sector has been increasingly subject to regulatory scrutiny. In January 2012, the CFPB finalized rules under Regulation E, mandated by the Dodd-Frank Act, which required us, beginning in October 2013, to provide additional disclosures, error resolution rights, and cancellation rights to U.S. consumers who make international remittance payments. In November 2014, the CFPB proposed a new prepaid account rule that would apply to prepaid cards and mobile wallets, including PayPal accounts. In December 2014, we became subject to CFPB supervision and examination pursuant to a new regulation that allows the CFPB to supervise all companies, including PayPal, that provide more than one million international money transfers per year. Under the regulation, CFPB examiners are now able to examine us for compliance with the remittance transfer rule and other laws and regulations. For other matters relating to regulation by the CFPB, please see the section of this information statement entitled “Business—Legal and Regulatory Proceedings.”

PayPal (Europe) implements its localized services in European Union countries through a “passport” notification process through the Luxembourg regulator to regulators in other European Union member states pursuant to European Union Directives, and has completed the “passport” notification process in all European Union member countries other than Croatia. The regulators in these countries could notify PayPal (Europe) of local consumer protection laws that apply to its business, in addition to Luxembourg consumer protection law, and could also seek to persuade the Luxembourg regulator to order PayPal (Europe) to conduct its activities in the local country through a branch office. These or similar actions by these regulators could increase the cost of, or delay, our plans for expanding our business in European Union countries. In addition, the countries that are members of the European Union may each have different and potentially inconsistent interpretations of regulations implementing the European Union Payment Services Directive, which could make compliance more costly and operationally difficult to manage. The European Commission has proposed revisions to the Payments Services and Anti-Money Laundering Directives, which could further make compliance more costly and operationally difficult to manage. Finally, if the assets of PayPal (Europe) exceed certain thresholds, or if the European Central Bank determines that PayPal is a significant supervised entity, PayPal (Europe) could become directly regulated by the European Central Bank rather than primarily by Luxembourg as a less significant supervised entity, which would likely increase its costs.

We are subject to anti-money laundering and counter-terrorist financing laws and regulations.

We are subject to various anti-money laundering and counter-terrorist financing laws and regulations around the world that prohibit, among other things, our involvement in transferring the proceeds of criminal activities. We have programs designed to comply with new and existing legal and regulatory requirements. However, any errors, failures, or delays in complying with federal, state or foreign anti-money laundering or counter-terrorist financing laws and regulations could result in significant criminal and civil lawsuits, penalties, forfeiture of significant assets, or other enforcement actions, as well as reputational harm. For a discussion of our dealings with the U.S. Department of Treasury’s Office of Foreign Assets Control (“OFAC”), please see the section of this information statement entitled “Business—Legal and Regulatory Proceedings.”

U.S. regulators have increased their scrutiny of compliance with these obligations, which may require us to further revise or expand our compliance program, including the procedures we use to verify the identity of our customers and to monitor international and domestic transactions. Several countries in which we are regulated have also implemented new anti-money laundering and counter-terrorist financing laws and regulations, and we have had to make changes to our compliance program in response. Regulators regularly re-examine the transaction volume thresholds at which we must obtain and keep applicable records or verify identities of customers and any change in such thresholds could result in greater costs for compliance. Costs associated with fines or enforcement actions, changes in compliance requirements, or limitations on our ability to grow our

 

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business could harm our business and any new requirements or changes to existing requirements could impose significant costs, result in delays to planned product improvements, make it more difficult for new customers to join our network and reduce the attractiveness of our products and services.

Regulation in the areas of privacy and protection of user data could harm our business.

We are subject to laws relating to the collection, use, retention, security, and transfer of personally identifiable information about our customers around the world. Much of the personal information that we collect, especially financial information, is regulated by multiple laws. User data protection laws may be interpreted and applied inconsistently from country to country. In many cases, these laws apply not only to third-party transactions, but also to transfers of information between or among ourselves, our subsidiaries, and other parties with which we have commercial relations. These laws continue to develop in ways we cannot predict and that may harm our business.

Regulatory scrutiny of privacy, user data protection, use of data and data collection is increasing on a global basis. We are subject to a number of privacy and similar laws and regulations in the countries in which we operate and these laws and regulations will likely continue to evolve over time, both through regulatory and legislative action and judicial decisions. Some of these laws impose requirements that are inconsistent with one another, yet regulators may claim that both apply. Complying with these varying national requirements could cause us to incur substantial costs or require us to change our business practices in a manner adverse to our business and violations of privacy-related laws can result in significant penalties. In addition, compliance with these laws may restrict our ability to provide services to our customers that they may find to be valuable. A determination that there have been violations of laws relating to our practices under communications-based laws could expose us to significant damage awards, fines and other penalties that could, individually or in the aggregate, materially harm our business. In particular, because of the enormous number of texts, emails and other communications we send to our customers, communications laws that provide a specified monetary damage award or fine for each violation (such as those described below) could result in particularly large awards or fines.

For example, the Federal Communications Commission amended certain of its regulations under the Telephone Consumer Protection Act, or TCPA, in 2012 and 2013 in a manner that could increase our exposure to liability for certain types of telephonic communication with customers, including but not limited to text messages to mobile phones. Under the TCPA, plaintiffs may seek actual monetary loss or statutory damages of $500 per violation, whichever is greater, and courts may treble the damage award for willful or knowing violations. We are regularly subject to class-action lawsuits, as well as individual lawsuits, containing allegations that our business violated the TCPA. We recently settled Murray v. Bill Me Later (filed in the U.S. District Court for the Northern District of Illinois in June 2012), which alleged that Bill Me Later made calls featuring artificial or prerecorded voices without prior consent. These lawsuits, and other private lawsuits not currently alleged as class actions, seek damages (including statutory damages) and injunctive relief, among other remedies. Given the enormous number of communications we send to our customers, a determination that there have been violations of the TCPA or other communications-based statutes could expose us to significant damage awards that could, individually or in the aggregate, materially harm our business. We have also received inquiries from regulators regarding future revisions to our user agreement. See “Business—Legal and Regulatory Proceedings—Regulatory Proceedings.”

We post on our websites our privacy policies and practices concerning the collection, use and disclosure of user data. Any failure, or perceived failure, by us to comply with our posted privacy policies or with any regulatory requirements or orders or other federal, state or international privacy or consumer protection-related laws and regulations could result in proceedings or actions against us by governmental entities or others (e.g., class action privacy litigation), subject us to significant penalties and negative publicity, require us to change our business practices, increase our costs and adversely affect our business. Data collection, privacy and security have become the subject of increasing public concern. If Internet and mobile customers were to reduce their use of our websites, mobile platforms, products, and services as a result of these concerns, our business could be harmed. As noted above, we are also subject to the possibility of security breaches, which themselves may result in a violation of these laws.

 

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PayPal is not a bank or licensed lender in the United States and relies upon third parties to make loans and provide the other products critical to our business.

As PayPal is neither a chartered financial institution nor licensed to make loans in any state, we must rely on a bank or licensed lender to offer the PayPal Credit products in the United States. Currently, when a U.S. consumer makes a purchase using a PayPal Credit product, a chartered financial institution extends credit to the consumer, funds the extension of credit at the point of sale, and advances funds to the merchant. We subsequently purchase and retain most of the receivables related to the consumer loans made by the chartered financial institution and, as a result, bear most of the risk of loss in the event of loan defaults. Although the chartered financial institution continues to own each of the consumer accounts, we own most of the related consumer loan receivables, and we are also responsible for servicing functions related to the consumer account.

Comenity Capital Bank and WebBank, which are both industrial banks chartered by the State of Utah, currently issue PayPal Credit products in the United States, with Comenity Capital Bank originating the majority of new loans. As part of this arrangement, WebBank has agreed to take ownership of (and originate loans with respect to) all consumer accounts in the event of a termination or interruption in Comenity Capital Bank’s ability to lend. Nevertheless, any termination or interruption of WebBank’s or Comenity Capital Bank’s ability to lend could result in the inability to originate any new PayPal Credit products, which would require us either to reach a similar arrangement with another chartered financial institution, which, if possible at all, may not be available on favorable terms, or to obtain our own bank charter, which would be a time-consuming and costly process and would subject us to a number of additional laws and regulations, compliance with which would be burdensome.

The PayPal Credit products also rely on third-party merchant processors and payment gateways to process transactions. For the year ended December 31, 2014, approximately 16% of all transaction volume by dollar amount through the PayPal Credit products was settled through the facilities of a single vendor. Any disruption to these third-party payment processing and gateway services would adversely affect the PayPal Credit products.

Our credit products expose us to additional risks.

Our PayPal Credit products are offered to a wide range of consumers, and the financial success of these products depends on our ability and the ability of the banks issuing the PayPal Credit products to manage the credit risk related to these products. The lenders extend credit at the point of sale using our proprietary segmentation and credit scoring algorithms and other analytical techniques designed to analyze the credit risk of specific consumers based on their past purchasing and payment history as well as their credit scores. These algorithms and techniques may not accurately predict the creditworthiness of a consumer due to inaccurate assumptions about a particular consumer or the economic environment, among other factors. The accuracy of the predictions and the ability of the lenders and our ability to manage credit risk related to the PayPal Credit products may also be affected by legal or regulatory changes (e.g., bankruptcy laws and minimum payment regulations), competitors’ actions, changes in consumer behavior, and other factors. A lender may incorrectly interpret the data produced by these algorithms in setting its credit policies, which may impact the financial performance of the PayPal Credit products. In addition, economic and financial conditions may affect consumer confidence levels and reduce consumers’ ability or willingness to use credit, including the credit extended by a lender to PayPal Credit account holders who use the PayPal Credit products, which could harm our business. As of December 31, 2014, approximately $20.2 billion of unused credit was available to PayPal Credit account holders. While this amount represents the total unused credit available, we have not experienced, and do not anticipate, that all of our PayPal Credit account holders will access their entire available credit at any given point in time. In addition, the individual lines of credit that make up this unused credit are subject to periodic review and termination by the chartered financial institutions that are the issuers of PayPal Credit products based on, among other things, account usage and consumer creditworthiness.

Over the past several years, the volume of credit extended by the financial institutions issuing the PayPal Credit products has increased. In the United States, we purchase the receivables relating to these consumer loans

 

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extended by the issuing banks, and therefore bear the risk of loss in the event of loan defaults. Like other businesses with significant exposure to losses from consumer credit, we face the risk that PayPal Credit account holders will default on their payment obligations, making the receivables uncollectible and creating the risk of potential charge-offs. The rate at which receivables were charged off as uncollectible, or the net charge-off rate, was approximately 5.67% for the year ended December 31, 2014. The non-payment rate among PayPal Credit account holders may increase due to, among other things, changes to underwriting standards by us and the financial institutions issuing the PayPal Credit products, worsening economic conditions, such as a recession or greater austerity in various countries, and high unemployment rates. Consumers who miss payments often fail to repay their loans, and consumers who file for protection under the bankruptcy laws generally do not repay their loans.

We have entered into an agreement with Synchrony (formerly GE Capital Retail Bank) pursuant to which we, one of our affiliates, or a third party partner of ours, will purchase, subject to certain conditions, a dual-branded retail credit card portfolio from Synchrony. We will ultimately own the related consumer loan receivables. This transaction is currently expected to close in the fourth quarter of 2016, although there can be no assurance that this transaction will close on terms currently contemplated, or at all. If this transaction is consummated, it will increase the risks relating to our ownership of consumer loan receivables.

In 2013, we began a program, working with WebBank, for WebBank to offer working capital financing to selected merchants in the United States, and for us to purchase the related receivables. Similar programs are also available in the United Kingdom and Australia. Loans to merchants present risks similar to those discussed above associated with the PayPal Credit products.

We purchase receivables related to PayPal Credit products and other credit accounts. If we are unable to fund our purchase of these receivables adequately or in a cost-effective manner, or if we are unable to efficiently manage the cash resources utilized to purchase these receivables, our business could be harmed.

New and proposed laws and regulations could harm our business.

We are subject to laws and regulations affecting our domestic and international operations in a number of other areas, including data privacy requirements, intellectual property ownership and infringement, tax, anti-competition, export requirements, anti-corruption, labor, advertising, billing, promotions, quality of services, environmental, and health and safety regulations. It is not always clear how these laws and regulations apply to our business. Many of these laws and regulations were adopted prior to the advent of the Internet, mobile, and related technologies and, as a result, do not contemplate or address the unique issues of the Internet, mobile and related technologies. Many of these laws, including some of those that do reference the Internet, mobile and related technologies are subject to interpretation by the courts on an ongoing basis and, as a result, their applicability and scope remain uncertain.

Compliance with these laws, regulations, and similar requirements may be onerous and expensive, and variances and inconsistencies from jurisdiction to jurisdiction may further increase the cost of compliance and doing business. For example, new or proposed laws in certain countries require us to maintain separate servers in those countries so that all personal data of citizens of that country are maintained locally. Any such costs, which may rise in the future as a result of changes in these laws and regulations or in their interpretation, could individually or in the aggregate make our products and services less attractive to our customers, delay the introduction of new products or services in one or more regions, or cause us to change or limit our business practices. We have implemented policies and procedures designed to ensure compliance with applicable laws and regulations, but there can be no assurance that our employees, contractors, or agents will not violate such laws and regulations or our policies and procedures.

Financial and political events have increased the level of regulatory scrutiny on large companies, and regulatory agencies may view matters or interpret laws and regulations differently than they have in the past and

 

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in a manner adverse to our business. Our success and increased visibility have driven existing businesses that perceive us to be a threat to their businesses to raise concerns about our business models to policymakers and regulators. These businesses and their trade association groups employ significant resources in their efforts to shape the legal and regulatory regimes in countries where we have significant operations. They may employ these resources in an effort to change the legal and regulatory regimes in ways intended to reduce the effectiveness of our business and the ability of customers to use our products and services.

As we expand and localize our international activities, we are increasingly becoming obligated to comply with the laws of the countries or markets in which we operate. In addition, because our services are accessible worldwide and we facilitate sales of goods and provide services to customers worldwide, one or more jurisdictions may claim that we or our customers are required to comply with their laws. Laws regulating Internet, mobile and related technologies outside of the United States are generally less favorable to us than those in the United States. Compliance may be more costly or may require us to change our business practices or restrict our services, and the imposition of any regulations on us or our customers could harm our business. In addition, we may be subject to multiple overlapping legal or regulatory regimes that impose conflicting requirements on us (e.g., in cross-border trade). Our alleged failure to comply with foreign laws could subject us to penalties ranging from criminal prosecution to significant fines to bans on our services, in addition to the significant costs we may incur in defending against such actions.

Following the global financial crisis of 2008, U.S. federal lawmakers enacted the Dodd-Frank Act overhauling the federal government’s oversight of consumer financial products and systemic risk in the U.S. financial system. The general effect of the financial reform law has been, and we expect will continue to be, to require us to make additional disclosures to our consumers and to impose new restrictions and requirements on certain of our activities, resulting in new compliance requirements and obligations that could increase our costs, may result in increased litigation and the need to make expensive product changes, and could otherwise harm our business.

Substantial and increasingly intense competition worldwide in the global payments industry may harm our business.

The global payments industry is highly competitive. We compete against businesses in varied industries, many of whom are larger than we are, have a dominant and secure position in other industries, and offer other goods and services to consumers and merchants which we do not offer. As online and offline commerce increasingly converge, the pace of change, innovation and disruption is increasing. The global payments industry is rapidly changing, highly innovative and increasingly subject to regulatory scrutiny, which may negatively affect the competitive landscape. We compete against all forms of payments, including:

 

    paper-based transactions (principally cash and checks);

 

    providers of traditional payment methods, particularly credit and debit cards, money orders, and Automated Clearing House transactions (these providers are primarily well-established banks);

 

    providers of “digital wallets” which offer customers the ability to pay online and/or on mobile devices through a variety of payment methods, including with mobile applications, through contactless payments, and with a variety of payment methods;

 

    providers of mobile payments solutions that use tokenized card data approaches and Near Field Communication (“NFC”) functionality (including Host Based Card Emulation (“HCE”) functionality to eliminate the need for a physical NFC chip in the device);

 

    payment-card processors that offer their services to merchants;

 

    providers of “person-to-person” payments that facilitate individuals sending money with an email address or mobile phone number;

 

    providers of mobile payments; and

 

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    providers of card readers for mobile devices and of other new point of sale and multi-channel technologies.

We also face competition and potential competition from:

 

    money remitters;

 

    services that provide online merchants the ability to offer their customers the option of paying for purchases from their bank account or paying on credit in the United States and abroad;

 

    issuers of stored value targeted at online payments;

 

    other international online payment-services providers;

 

    other providers of online account-based payments;

 

    payment services targeting users of social networks and online gaming, often through billing to the consumer’s mobile phone account;

 

    mobile payment services between bank accounts;

 

    payment services enabling banks to offer their online banking customers the ability to send and receive payments through their bank account;

 

    online shopping services that provide special offers linked to a specific payment provider; and

 

    services that help merchants accept and manage virtual currencies.

Some of these payment providers have greater customer bases, volume, scale, and market share than we do, which may provide significant competitive advantages. Some of these competitors may also be subject to less burdensome licensing, anti-money laundering, counter-terrorist financing, and other regulatory requirements. They may devote greater resources to the development, promotion, and sale of products and services, and they may offer lower prices or more effectively introduce their own innovative programs and services that adversely impact our growth. We also expect new entrants to offer competitive products and services. In addition, some merchants provide such services to themselves. Competing services tied to established banks and other financial institutions may offer greater liquidity and engender greater consumer confidence in the safety and efficacy of their services. In addition, in certain countries, such as Germany, Netherlands and Australia, electronic funds transfer is a leading method of payment for both online and offline transactions. As in the United States, established banks and other financial institutions that do not currently offer online payments could quickly and easily develop such a service.

We compete primarily on the basis of the following:

 

    ability to attract, retain and engage both merchants and consumers with relatively low marketing expense;

 

    ability to show that merchants will achieve incremental sales by offering our PayPal services;

 

    security of transactions and the ability for consumers to use our PayPal services without sharing their financial information with the merchant;

 

    simplicity of our fee structure;

 

    ability to develop services across multiple commerce channels, including mobile payments and payments at the retail point of sale;

 

    trust in our dispute resolution and buyer and seller protection programs;

 

    customer service;

 

    brand recognition;

 

    website, mobile platform and application onboarding, ease-of-use and accessibility;

 

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    system reliability and data security;

 

    ease and quality of integration into third-party mobile applications; and

 

    quality of developer tools such as our application programming interfaces and software development kits.

If we are not able to differentiate our business from those of our competitors, drive value for our customers, and/or effectively align our resources with our goals and objectives, we may not be able to compete effectively against our competitors. Our failure to compete effectively against any of the foregoing competitive threats could materially and adversely harm our business.

We are exposed to fluctuations in foreign currency exchange rates.

We have significant operations internationally that are denominated in foreign currencies, primarily the Euro, British Pound, and Australian Dollar, subjecting us to foreign currency risk. The strengthening or weakening of the U.S. dollar versus the Euro, British Pound, and Australian Dollar impacts the translation of our net revenues generated in these foreign currencies into the U.S. dollar. In 2014, foreign currency movements relative to the U.S. dollar negatively impacted net revenues by approximately $25 million (inclusive of a $36 million negative impact from hedging activities). In 2013, foreign currency movements relative to the U.S. dollar negatively impacted net revenues by approximately $8 million (inclusive of a $4 million negative impact from hedging activities). Additionally, in connection with our services in multiple currencies, we set our foreign exchange rates twice per day, and may face financial exposure if we incorrectly set our foreign exchange rates or as a result of fluctuations in foreign exchange rates between the times that we set our foreign exchange rates. Given that we also hold some corporate and customer funds in non-U.S. currencies, our financial results are affected by the translation of these non-U.S. currencies into U.S. dollars. While we regularly enter into transactions to hedge portions of our foreign currency translation exposure, it is impossible to predict or eliminate the effects of this exposure. Fluctuations in foreign exchange rates could significantly impact our financial results.

We are exposed to fluctuations in interest rates.

We are exposed to interest rate risk from our investment portfolio and from interest-rate sensitive assets underlying the customer balances we hold on our combined balance sheet as customer accounts. As of December 31, 2014, approximately 97% of our total cash and investment portfolio was held in cash and cash equivalents. The assets underlying our customer balances we hold on our combined balance sheet as customer accounts are maintained in interest and non-interest bearing bank deposits, time deposits, and U.S. and foreign government and agency securities. We seek to preserve principal while holding eligible liquid assets, as defined by the regulatory requirements and commercial law in the jurisdictions in which we operate, equal to at least 100% of the aggregate amount of all customer balances. We do not pay interest on amounts due to customers. A 100 basis point adverse change in interest rates would not have a material impact on the Company’s financial assets or liabilities at December 31, 2014 and 2013.

Also, fluctuations in interest rates may adversely impact our customers’ spending levels and ability and willingness to pay outstanding amounts owed to us. Higher interest rates often lead to higher payment obligations by customers to us and other lenders under mortgage, credit card and other consumer loans, which may reduce our customers’ ability to remain current on their obligations to us and therefore lead to increased delinquencies, charge-offs and allowance for loan and interest receivable which could have an adverse effect on our net earnings.

In addition, we may enter into a new revolving credit facility that could bear interest at a floating rate. As a result, we will be exposed to fluctuations in interest rates to the extent of our borrowings under the revolving credit facility.

 

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Changes to our buyer and seller protection programs could increase our loss rate.

Our buyer and seller protection programs protect merchants and consumers from fraudulent transactions. In addition, consumers who pay through PayPal may have reimbursement rights from their payment card company or bank, which in turn will seek recovery from us. The risk of losses from our buyer and seller protection programs are specific to individual buyers, sellers and transactions, and may also be impacted by regional variations to these programs and modifications to these programs resulting from changes in regulatory requirements or changes that we decide to implement. Following the distribution, we will extend our protection programs to certain customers’ purchases on eBay, and our costs will therefore increase. See footnote (b) to “Unaudited Pro Forma Condensed Combined Financial Statements.” For the periods presented in the combined financial statements, payments under these programs have ranged between 0.08% and 0.12% of TPV on an annual basis. Historical trends may not be an indication of future payments under these programs. Increases in our loss rate resulting from changes to our buyer and seller protection programs could harm our business.

Our international operations are subject to increased risks, which could harm our business.

Our international operations, especially in the United Kingdom, Germany (and the other countries of the European Union) and China, have generated a majority of our net revenues in recent years. In addition to uncertainty about our ability to generate revenues from our foreign operations and expand into international markets, there are risks inherent in doing business internationally, including:

 

    expenses associated with localizing our products and services and customer data, including offering customers the ability to transact business in the local currency and adapting our products and services to local preferences (e.g., payment methods) with which we may have limited or no experience;

 

    trade barriers and changes in trade regulations;

 

    difficulties in developing, staffing, and simultaneously managing a large number of varying foreign operations as a result of distance, language, and cultural differences;

 

    stringent local labor laws and regulations;

 

    credit risk and higher levels of payment fraud;

 

    profit repatriation restrictions, foreign currency exchange restrictions or extreme fluctuations in foreign currency exchange rates for a particular currency;

 

    political or social unrest, economic instability, repression, or human rights issues;

 

    geopolitical events, including natural disasters, public health issues, acts of war, and terrorism;

 

    import or export regulations;

 

    compliance with U.S. laws such as the Foreign Corrupt Practices Act, and foreign laws prohibiting corrupt payments to government officials, as well as U.S. and foreign laws designed to combat money laundering and the financing of terrorist activities;

 

    antitrust and competition regulations;

 

    potentially adverse tax developments and consequences;

 

    economic uncertainties relating to sovereign and other debt;

 

    different, uncertain, or more stringent user protection, data protection, privacy, and other laws;

 

    risks related to other government regulation or required compliance with local laws;

 

    national or regional differences in macroeconomic growth rates;

 

    local licensing and reporting obligations; and

 

    increased difficulties in collecting accounts receivable.

Violations of the complex foreign and U.S. laws and regulations that apply to our international operations may result in fines, criminal actions, or sanctions against us, our officers, or our employees; prohibitions on the

 

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conduct of our business; and damage to our reputation. Although we have implemented policies and procedures designed to promote compliance with these laws, there can be no assurance that our employees, contractors, or agents will not violate our policies. These risks are inherent in our international operations and expansion and may increase our costs of doing business internationally and could harm our business.

Use of our payments services for illegal purposes could harm our business.

Our payment system is susceptible to potentially illegal or improper uses, including terrorist financing, illegal online gambling, fraudulent sales of goods or services, illicit sales of prescription medications or controlled substances, piracy of software, movies, music, and other copyrighted or trademarked goods, money laundering, bank fraud, child pornography trafficking, prohibited sales of alcoholic beverages or tobacco products, online securities fraud. There has been an increased focus by intellectual property rights owners and government officials on the role that payments systems play in the sale of, and payment for, pirated digital goods on the Internet, primarily through file sharing services. Changes in law have increased the penalties for intermediaries providing payment services for certain illegal activities and additional payments-related proposals are under active consideration by government authorities. Intellectual property rights owners may seek to bring legal action against providers of payments solutions, such as PayPal, and other entities that are peripherally involved in the sale of infringing items. Rights owners have also increasingly gone into U.S. courts and obtained injunctions requiring us to cease handling transactions for named websites and third parties (in most cases located outside the United States) and to hold the funds of such parties pending judicial resolution of the rights owners’ claims, which disrupts the relationship between such parties and us.

Any resulting claims could damage our reputation and any resulting liabilities, loss of transaction volume or increased costs could harm our business.

We are subject to risks associated with information disseminated through our services.

Online services companies may be subject to claims relating to information disseminated through their services, including claims alleging defamation, libel, breach of contract, invasion of privacy, negligence, copyright or trademark infringement, among other things. The laws relating to the liability of online services companies for information disseminated through their services are subject to frequent challenges both in the United States and foreign jurisdictions. Any liabilities incurred as a result of these matters could require us to incur additional costs and harm our reputation and our business.

Our potential liability to third parties for the customer-provided content on our sites, particularly in jurisdictions outside the United States where laws governing Internet transactions are unsettled, may increase. If we become liable for information provided by our customers and carried on our service in any jurisdiction in which we operate, we could be directly harmed and we may be forced to implement new measures to reduce our exposure to this liability, including expending substantial resources or discontinuing certain service offerings, which could harm our business.

Our failure to manage the assets underlying our customer funds properly could harm our business.

Our ability to manage and account accurately for the assets underlying our customer funds requires a high level of internal controls. As our business continues to grow and we expand our product offerings, we must continue to strengthen our internal controls accordingly. Our success requires significant public confidence in our ability to handle large and growing transaction volumes and amounts of customer funds. Any failure to maintain the necessary controls or to manage the assets underlying our customer funds accurately could severely diminish customer use of our products and/or result in penalties and fines, which could harm our business.

 

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We are subject to regulatory activity and antitrust litigation under competition laws.

We are subject to scrutiny by various government agencies under U.S. and foreign laws and regulations, including competition laws. Some jurisdictions also provide private rights of action for competitors or consumers to assert claims of anti-competitive conduct. Other companies and government agencies have in the past and may in the future allege that our actions violate the antitrust or competition laws of the United States, individual states, the European Commission or other countries, or otherwise constitute unfair competition. An increasing number of governments are regulating competition law activities, including increased scrutiny in large markets such as China. Our business partnerships or agreements or arrangements with customers or other companies could give rise to regulatory action or antitrust litigation. Some regulators, particularly those outside of the United States, may perceive our business to be used so broadly that otherwise uncontroversial business practices could be deemed anticompetitive. Any claims or investigations, even if without foundation, may be very expensive to defend or respond to, involve negative publicity and substantial diversion of management time and effort and could result in significant judgments against us or require us to change our business practices.

We are subject to patent litigation.

We have repeatedly been sued for allegedly infringing other parties’ patents. We are a defendant in a number of patent lawsuits and have been notified of several other potential patent disputes. We expect that we will increasingly be subject to patent infringement claims because, among other reasons:

 

    our products and services continue to expand in scope and complexity;

 

    we continue to expand into new business areas, including through acquisitions; and

 

    the universe of patent owners who may claim that we, any of the companies that we have acquired, or our customers infringe their patents, and the aggregate number of patents controlled by such patent owners, continues to increase.

Such claims may be brought directly against us and/or against our customers whom we may indemnify either because we are contractually obligated to do so or we choose to do so as a business matter. We believe that an increasing number of these claims against us and other technology companies have been, and continue to be, initiated by third parties whose sole or primary business is to assert such claims. In addition, we have seen significant patent disputes between operating companies in some technology industries. Patent claims, whether meritorious or not, are time-consuming and costly to defend and resolve, and could require us to make expensive changes in our methods of doing business, enter into costly royalty or licensing agreements, make substantial payments to satisfy adverse judgments or settle claims or proceedings, or cease conducting certain operations, which would harm our business.

We may be unable to adequately protect or enforce our intellectual property rights, or third parties may allege that we are infringing their intellectual property rights.

We believe the protection of our intellectual property, including our trademarks, patents, copyrights, domain names, trade dress, and trade secrets, is critical to our success. We seek to protect our intellectual property rights by relying on applicable laws and regulations in the United States and internationally, as well as a variety of administrative procedures. We also rely on contractual restrictions to protect our proprietary rights when offering or procuring products and services, including confidentiality and invention assignment agreements entered into with our employees and contractors and confidentiality agreements with parties with whom we conduct business.

However, effective intellectual property protection may not be available in every country in which our products and services are made available, and contractual arrangements and other steps we have taken to protect our intellectual property may not prevent third parties from infringing or misappropriating our intellectual property or deter independent development of equivalent or superior intellectual property rights by others. Trademark, copyright, patent, domain name, trade dress and trade secret protection is very expensive to maintain

 

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and may require litigation. We must protect our intellectual property rights and other proprietary rights in an increasing number of jurisdictions, a process that is expensive and time consuming and may not be successful in every jurisdiction. Also, we may not be able to discover or determine the extent of any unauthorized use of our proprietary rights. We have licensed in the past, and expect to license in the future, certain of our proprietary rights, such as trademarks or copyrighted material, to others. These licensees may take actions that diminish the value of our proprietary rights or harm our reputation. Any failure to adequately protect or enforce our intellectual property rights, or significant costs incurred in doing so, could materially harm our business.

As the number of products in the software industry increases and the functionality of these products further overlap, and as we acquire technology through acquisitions or licenses, we may become increasingly subject to infringement claims, including patent, copyright, and trademark infringement claims. Litigation may be necessary to determine the validity and scope of the patent and other intellectual property rights of others. The ultimate outcome of any allegation is uncertain and, regardless of the outcome, any such claim, with or without merit, may be time-consuming, result in costly litigation, divert management’s time and attention from our business, require us to stop selling, delay shipping, or redesign our products, or require us to pay substantial amounts to satisfy judgments or settle claims or lawsuits or to pay substantial royalty or licensing fees, or to satisfy indemnification obligations that we have with some of our customers. Our failure to obtain necessary license or other rights, or litigation or claims arising out of intellectual property matters, may harm our business.

We are regularly subject to general litigation, regulatory disputes, and government inquiries.

We are regularly subject to claims, lawsuits (including class actions and individual lawsuits), government investigations, and other proceedings involving competition and antitrust, intellectual property, privacy, consumer protection, accessibility claims, securities, tax, labor and employment, commercial disputes, content generated by our customers, services and other matters. In particular, our business faces ongoing consumer protection and intellectual property litigation, as discussed above. The number and significance of these disputes and inquiries have increased as our company has grown larger, our business has expanded in scope and geographic reach, and our products and services have increased in complexity. In addition, some of the laws and regulations affecting Internet and mobile commerce and consumer credit are subject to ongoing interpretation by the courts and governmental authorities, and the resulting uncertainty in the scope and application of these laws and regulations increases the risk that we will be subject to private claims and governmental actions alleging violations of those laws and regulations.

The outcome and impact of such claims, lawsuits, government investigations, and proceedings cannot be predicted with certainty. Regardless of the outcome, such investigations and proceedings can have an adverse impact on us because of legal costs, diversion of management resources, and other factors. Determining reserves for our pending litigation is a complex, fact-intensive process that is subject to judgment calls. It is possible that a resolution of one or more such proceedings could require us to make substantial payments to satisfy judgments, fines or penalties or to settle claims or proceedings, any of which could materially adversely affect our business. These proceedings could also result in reputational harm, criminal sanctions, consent decrees, or orders preventing us from offering certain products, or services, or requiring a change in our business practices in costly ways, or requiring development of non-infringing or otherwise altered products or technologies. Any of these consequences could materially adversely affect our business.

We may have exposure to greater than anticipated tax liabilities.

The determination of our worldwide provision for income taxes and other tax liabilities requires estimation and significant judgment, and there are many transactions and calculations where the ultimate tax determination is uncertain. Like many other multinational corporations, we are subject to tax in multiple U.S. and foreign tax jurisdictions and have structured our operations to reduce our effective tax rate. Our determination of our tax liability is always subject to audit and review by applicable domestic and foreign tax authorities, and we are currently undergoing a number of investigations, audits and reviews by taxing authorities throughout the world,

 

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including with respect to our tax structure. Any adverse outcome of any such audit or review could have a negative effect on our business and the ultimate tax outcome may differ from the amounts recorded in our financial statements and may materially affect our financial results in the period or periods for which such determination is made. While we have established reserves based on assumptions and estimates that we believe are reasonable to cover such eventualities, these reserves may prove to be insufficient.

In addition, our future income taxes could be adversely affected by earnings being lower than anticipated (or by the incurrence of losses) in jurisdictions that have lower statutory tax rates and higher than anticipated in jurisdictions that have higher statutory tax rates, by changes in the valuation of our deferred tax assets and liabilities, as a result of gains on our foreign exchange risk management program, or changes in tax laws, regulations, or accounting principles, as well as certain discrete items.

In light of continuing fiscal challenges in certain U.S. states and in many countries in Europe, various levels of government are increasingly focused on tax reform and other legislative action to increase tax revenue, including corporate income taxes. For example, the economic downturn reduced tax revenues for United States federal and state governments, and a number of proposals to increase taxes from corporate entities have been implemented or are being considered at various levels of government. These include a number of proposals to modify the U.S. federal income tax laws applicable to companies, like ours, operating in multiple U.S. and foreign jurisdictions which, if enacted, could materially increase our effective tax rate. A number of U.S. states have attempted to increase corporate tax revenues by taking an expansive view of corporate presence to attempt to impose corporate income taxes and other direct business taxes on companies that have no physical presence in their state, and taxing authorities in foreign jurisdictions may take similar actions. Many U.S. states are also altering their apportionment formulas to increase the amount of taxable income or loss attributable to their state from certain out-of-state businesses. Similarly, in Europe, and elsewhere in the world, there are various tax reform efforts underway designed to ensure that corporate entities are taxed on a larger percentage of their earnings. If more taxing authorities are successful in applying direct taxes to Internet companies that do not have a physical presence in their respective jurisdictions, this could increase our effective tax rate.

We and our merchants may be subject to sales reporting and record-keeping obligations.

One or more states or the federal government or foreign countries may seek to impose reporting or record-keeping obligations on companies that engage in or facilitate ecommerce. Such an obligation could be imposed by legislation intended to improve tax compliance (and legislation to such effect has been contemplated by several states and a number of foreign jurisdictions) or if one of our companies was ever deemed to be the legal agent of our merchants by a jurisdiction in which it operates. We are required to report to the Internal Revenue Service, (“IRS”), on customers subject to U.S. income tax who receive more than $20,000 in payments and more than 200 payments in a calendar year. As a result, we are required to request tax identification numbers from certain payees, track payments by tax identification number and, under certain conditions, withhold a portion of payments and forward such withholding to the IRS. We have modified our software to meet these requirements and expect increased operational costs and changes to our customer experience in connection with complying with these reporting obligations. The IRS regulations also require us to collect a certification of non-U.S. taxpayer status from certain international merchants. The Foreign Account Tax Compliance Act, which took effect at the start of 2013, is likely to require an increase in the number of non-U.S. customers from whom we must obtain a similar certification, and to increase the compliance burdens on us. Any failure by us to meet these new requirements could result in substantial monetary penalties and other sanctions and could harm our business.

Acquisitions, joint ventures, and strategic investments could result in operating difficulties and could harm our business.

We have acquired a significant number of businesses of varying size and scope, technologies, services, and products. We also expect to continue to evaluate and consider a wide array of potential strategic transactions as part of our overall business strategy, including business combinations, acquisitions, and dispositions of businesses, technologies, services, products, and other assets, as well as strategic investments and joint ventures.

 

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These transactions may involve significant challenges and risks, including:

 

    the potential loss of key customers, vendors and other key business partners of the companies we acquire, or dispose of, following and continuing after announcement of our transaction plans;

 

    declining employee morale and retention issues affecting employees of companies that we acquire or dispose of, which may result from changes in compensation, or changes in management, reporting relationships, future prospects or the direction of the acquired or disposed business;

 

    difficulty making new and strategic hires of new employees;

 

    diversion of management time and a shift of focus from operating the business to the transaction, and in the case of an acquisition, integration and administration;

 

    the need to integrate the operations, systems (including accounting, management, information, human resource and other administrative systems), technologies, products and personnel of each acquired company, which is an inherently risky and potentially lengthy and costly process;

 

    the inefficiencies and lack of control that may result if such integration is delayed or not implemented, and unforeseen difficulties and expenditures that may arise as a result;

 

    the need to implement or improve controls, procedures and policies appropriate for a larger public company at companies that prior to acquisition may have lacked such controls, procedures and policies or whose controls, procedures and policies did not meet applicable legal and other standards;

 

    risks associated with our expansion into new international markets;

 

    derivative lawsuits resulting from the acquisition;

 

    liability for activities of the acquired company before the acquisition, including intellectual property and other litigation claims or disputes, violations of laws, rules and regulations, commercial disputes, tax liabilities and other known and unknown liabilities;

 

    the potential loss of key employees following the transaction;

 

    the acquisition of new customer and employee personal information, which in and of itself may require regulatory approval and or additional controls, policies and procedures and subject us to additional exposure; and

 

    our dependence on the acquired business’ accounting, financial reporting, operating metrics and similar systems, controls and processes and the risk that errors or irregularities in those systems, controls and processes will lead to errors in our combined financial statements or make it more difficult to manage the acquired business.

At any given time we may be engaged in discussions or negotiations with respect to one or more of these types of transactions and any of these transactions could be material to our financial condition and results of operations. In addition, it may take us longer than expected to fully realize the anticipated benefits of these transactions, and those benefits may ultimately be smaller than anticipated or may not be realized at all, which could adversely affect our business and operating results. Any acquisitions or dispositions may also require us to issue additional equity securities, spend our cash, or incur debt (and increased interest expense), liabilities, and amortization expenses related to intangible assets or write-offs of goodwill, which could adversely affect our results of operations and dilute the economic and voting rights of our stockholders.

In addition, we may make certain investments, including through joint ventures, in which we have a minority equity interest and/or lack management and operational control. Under such circumstances, the controlling joint venture partner in a joint venture investment may have business interests, strategies or goals that are inconsistent with ours, and business decisions or other actions or omissions of the controlling investor, joint venture partner or joint venture company may result in harm to our reputation or adversely affect the value of our investment in the investment or joint venture.

 

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Problems with or price increases by third parties who provide services to us or to our customers could harm our business.

A number of third parties provide services to us or to our customers. We are dependent on caching services that make our sites load faster, the processing companies and banks that link us to the payment card, and bank clearing networks to process transactions, among others. We are subject to, among other things, increases in interchange fees and assessments that payment card networks such as Visa and MasterCard charge for each transaction using one of their cards (which our payment card processors have the right to pass on to us), as well as changes in payment card network operating rules, including special operating rules for Internet payment services providers, such as PayPal. Similarly, we rely on unaffiliated lenders to make the consumer and other loans originated through the PayPal Credit products and also rely heavily on third parties to operate our services, including merchant processors and payment gateways to process transactions and third parties that provide loan receivable tracking and customer statements processing. Financial or regulatory issues, labor issues (e.g., strikes, lockouts, or work stoppages), or other problems that prevent these companies from providing services to us or our customers could harm our business.

Price increases by, or service terminations, disruptions or interruptions at, companies that provide services to us and our customers and clients could also make it more difficult for our merchants to complete transactions, thereby harming our business. Some third parties who provide services to us may have or gain market power and be able to increase their prices to us without competitive constraint.

We have outsourced certain functions to third-party providers, including some customer support and product development functions, which are critical to our operations. If our service providers do not perform satisfactorily, our operations could be disrupted, which could result in customer dissatisfaction and could harm our business.

There can be no assurance that third parties who provide services directly to us or our customers will continue to do so on acceptable terms, or at all. If any third parties were to stop providing services to us or our merchants on acceptable terms, including as a result of bankruptcy, we may be unable to procure alternatives from other third parties in a timely and efficient manner and on acceptable terms, or at all.

Our developer platforms, which are open to merchants and third-party developers, subject us to additional risks.

We provide third-party developers with access to application programming interfaces, software development kits and other tools designed to allow them to produce applications for use, with a particular focus on mobile applications. There can be no assurance that merchants or third-party developers will develop and maintain applications and services on our open platforms on a timely basis or at all, and a number of factors could cause such third-party developers to curtail or stop development for our platforms. In addition, our business is subject to many regulatory restrictions. It is possible that merchants and third-party developers who utilize our development platforms or tools could violate these regulatory restrictions and we may be held responsible for such violations, which could harm our business.

Our retail point of sale solutions expose us to additional risks.

We have announced several retail point of sale solutions, which enable merchants to accept payments using a payments card reader attached to, or otherwise communicating with, a mobile device or to scan payment cards and codes using the mobile device’s embedded camera and which will enable consumers to use their mobile devices to pay hands-free. To the extent that we continue to expand our product and service offerings at the retail point of sale, we will face additional risks, including:

 

    increased expectations from offline retailers regarding the reliability and availability of our systems and services and correspondingly lower amounts of downtime, which we may not be able to meet;

 

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    significant competition at the retail point of sale, particularly from established payment card providers such as Visa, MasterCard and American Express, many of which have substantially greater resources than we do;

 

    increased targeting by fraudsters, and given that our fraud models are less developed in this area, we may experience increases in fraud and associated transaction losses as we adjust to fraudulent activity at the point of sale;

 

    exposure to product liability claims to the extent that hardware devices that we produce for use at the retail point of sale malfunction or are not in compliance with laws, which could result in substantial liability and require product recalls or other actions;

 

    exposure to new or additional laws and regulations;

 

    increased reliance on third parties involved with processing in-store payments, including independent software providers, electronic point of sale providers, hardware providers (such as cash register and pin-pad providers), payment processors and banks that enable in-store transactions; and

 

    lower operating income than our other payment solutions.

Unless we are able to successfully manage these risks, including driving adoption of, and significant volume through, our retail point of sale solutions over time, our business may be harmed.

Our success largely depends on key personnel. Because competition for our key employees is intense, we may not be able to attract, retain, and develop the highly skilled employees we need to support our business. The loss of senior management or other key personnel could harm our business.

Our future performance depends substantially on the continued services of our senior management and other key personnel, including key engineering and product development personnel, and our ability to attract, retain, and motivate key personnel. Competition for key personnel is intense, especially in the Silicon Valley where our corporate headquarters are located, and we may be unable to successfully attract, integrate, or retain sufficiently qualified key personnel. In making employment decisions, particularly in the Internet and high-technology industries, job candidates often consider the value of the equity awards they would receive in connection with their employment and fluctuations in our stock price may make it more difficult to attract, retain, and motivate employees. In addition, we do not have long-term employment agreements with any of our key personnel and do not maintain any “key person” life insurance policies. The loss of the services of any of our senior management or other key personnel, or our inability to attract highly qualified senior management and other key personnel, could harm our business.

Risks Related to the Separation

The distribution of PayPal common stock may be delayed or rescinded if certain required regulatory approvals are not obtained.

The distribution is subject to the satisfaction (or waiver by eBay in its sole discretion) of certain conditions set forth in the separation and distribution agreement. eBay may delay the distribution even after the record date set by the eBay board for the distribution, and (if the conditions to the distribution are not met) eBay may rescind the distribution even after having declared the dividend and set the record date. One of the conditions to the distribution is the receipt of any required approvals of the Commission de Surveillance du Secteur Financier of Luxembourg (the “CSSF”) and the European Central Bank (the “ECB”) to the distribution. The approval of the ECB is required under the European Union’s recently implemented system of financial supervision over credit institutions operating in the European Union, called the single supervisory mechanism. Under this system, for countries in the European Union that use the Euro (or have otherwise opted in), a national competent authority (“NCA”), in our case, the CSSF, must assess a proposed acquisition of holdings in a credit institution. If the NCA is satisfied that the application complies with national conditions for authorizations, it will propose to the ECB a draft decision containing its assessment and recommendations. The ECB will review the NCA’s assessment and has the right to oppose it. This process is very new, and procedures have only recently been developed.

 

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The ECB has informed eBay that it considers the distribution of PayPal common stock to constitute an acquisition of holdings in our Luxembourg banking subsidiary and, therefore, that the distribution is subject to this new review process. We have submitted our application to the CSSF, which has made its assessment and forwarded its dossier on our application to the ECB. Although we do not expect the ECB to oppose the distribution and currently expect to receive the approval of the ECB comfortably in advance of the scheduled distribution date, there is no assurance that the ECB will provide its approval on this timeline, or at all. If the ECB does not provide its approval prior to [●], 2015, the distribution will not occur on that date, and trades made in the “when-issued” market will not be settled until a later date. Should the delay be prolonged, eBay may be forced to formally rescind the declaration of the distribution and set a new record date. If the distribution is delayed due to this condition, changing market or other conditions during such delay could affect the aggregate market value of PayPal common stock following the separation.

The combined post-separation value of eBay and PayPal common stock may not equal or exceed the pre-separation value of eBay common stock.

As a result of the distribution, eBay expects the trading price of eBay common stock immediately following the distribution to be lower than the “regular-way” trading price of such common stock immediately prior to the distribution because the trading price will no longer reflect the value of the Payments business held by PayPal. The aggregate market value of the eBay common stock and the PayPal common stock following the separation may be higher or lower than the market value of eBay common stock immediately prior to the separation.

We may not achieve some or all of the expected benefits of the separation, and the separation could harm our business.

We may not be able to achieve the full strategic and financial benefits expected to result from the separation, or such benefits may be delayed or not occur at all. The separation and distribution is expected to provide the following benefits, among others: enhanced strategic and management focus; better ability to form strategic partnerships and relationships; faster decision-making; more efficient allocation of capital; alignment of incentives with performance objectives; direct access to the capital markets; and a distinct investment identity. For more information regarding the reasons for the separation, please refer to “The Separation and Distribution.”

We may not achieve these and other anticipated benefits for a variety of reasons, including, among others:

 

    the separation will require significant amounts of management’s time and effort, which may divert management’s attention from operating and growing our business;

 

    following the separation, we may be more susceptible to market fluctuations and other adverse events than if we were still a part of eBay;

 

    following the separation, our business will be less diversified than eBay’s business prior to the separation;

 

    following the separation, regulatory requirements may inhibit or prevent certain of the activities the parties intend to continue to preserve operating synergies; and

 

    the other actions required to separate the respective businesses could disrupt our operations.

If we fail to achieve some or all of the benefits expected to result from the separation, or if such benefits are delayed, our business could be harmed.

If the distribution, together with certain related transactions, does not qualify as a transaction that is generally tax-free for U.S. federal income tax purposes under Sections 368(a)(1)(D) and 355 of the Internal Revenue Code (the “Code”), eBay, PayPal and eBay stockholders could be subject to significant tax liabilities and, in certain circumstances, we could be required to indemnify eBay for material taxes pursuant to indemnification obligations under the tax matters agreement.

A condition to the distribution is the receipt by eBay of an opinion from eBay’s outside legal counsel regarding the qualification of the distribution, together with certain related transactions, as a transaction that is

 

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generally tax-free for U.S. federal income tax purposes under Sections 368(a)(1)(D) and 355 of the Code. The opinion will be based on and rely on, among other things, certain facts and assumptions, as well as certain representations, statements and undertakings of eBay and PayPal, including those relating to the past and future conduct of eBay and PayPal. If any of these representations, statements or undertakings are, or become, inaccurate or incomplete, or if eBay or PayPal breach any of their respective covenants in the separation documents, the opinion of counsel may be invalid and the conclusions reached therein could be jeopardized.

Notwithstanding the opinion of counsel, the IRS could determine that the distribution, together with certain related transactions, should be treated as a taxable transaction if the IRS determines that any of these representations, assumptions, or undertakings upon which such opinion was based are incorrect or have been violated or if the IRS disagrees with the conclusions in the opinion of counsel. An opinion of counsel is not binding on the IRS or any court and there can be no assurance that the IRS will not challenge the conclusions reached in the opinion. The IRS will not provide any opinion in advance of the separation that our proposed transaction will be tax-free.

If the distribution, together with certain related transactions, failed to qualify as a transaction that is generally tax-free under Sections 368(a)(1)(D) and 355 of the Code, in general, eBay would recognize taxable gain as if it had sold the PayPal common stock in a taxable sale for its fair market value, eBay stockholders who receive PayPal common stock in the distribution would be subject to tax as if they had received a taxable distribution equal to the fair market value of such shares and we could incur significant liabilities. For more information, please refer to “Material U.S. Federal Income Tax Consequences.”

We may not be able to engage in desirable strategic or capital-raising transactions following the separation. In addition, we could be liable for adverse tax consequences resulting from engaging in significant strategic or capital-raising transactions.

To preserve the tax-free treatment to eBay of the separation and the distribution, under the tax matters agreement that we will enter into with eBay, for a period of time following the distribution, we generally will be prohibited from taking certain actions that prevent the distribution and related transactions from qualifying as a transaction that is generally tax-free, for U.S. federal income tax purposes under Sections 368(a)(1)(D) and 355 of the Code.

These restrictions may limit our ability to pursue certain strategic transactions or other transactions that may maximize the value of our business. For more information, please refer to “Material U.S. Federal Income Tax Consequences” and “Certain Relationships and Related Person Transactions—The Tax Matters Agreement.”

We have no history of operating as an independent company in our current form, and our historical and pro forma financial information is not necessarily representative of the results that we would have achieved as a separate, publicly traded company and may not be a reliable indicator of our future results.

Our historical information provided in this information statement refers to our business as operated by and integrated with eBay. Our historical and pro forma financial information included in this information statement is derived from the consolidated financial statements and accounting records of eBay. Accordingly, the historical and pro forma financial information included in this information statement does not necessarily reflect the financial condition, results of operations, or cash flows that we would have achieved as a separate, publicly traded company during the periods presented or those that we will achieve in the future primarily as a result of the factors described below:

 

    Prior to the separation, our business has been operated by eBay as part of its broader corporate organization, rather than as an independent company. eBay or one of its affiliates performed various corporate functions for us, such as legal, finance, treasury, accounting, tax, auditing, human resources, and public affairs. Our historical and pro forma financial results reflect allocations of corporate expenses from eBay for such functions, which are likely to be less than the expenses we would have incurred had we operated as a separate publicly traded company.

 

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    Currently, our business is integrated with the other businesses of eBay. Historically, we have shared economies of scope and scale in costs, employees, vendor relationships and customer relationships. Although we will enter into transition agreements and an operating agreement with eBay, these arrangements may not retain or fully capture the benefits that we have enjoyed as a result of being integrated with eBay and may result in our paying higher charges than in the past for these services. This could have an adverse effect on our results of operations and financial condition following the completion of the separation.

 

    We may lose certain synergies and benefits we enjoyed as a result of being a part of eBay. As a part of eBay, we benefited from, among other things, the acquisition of new customers from eBay, capital to fund acquisitions, investments, and credit, and data from eBay that helps us to manage risks and maintain a low loss rate. In addition, being a part of eBay enables us to leverage eBay’s technology capabilities, data, commerce platforms and relationships with retailers, brands and large merchants worldwide. The loss of these synergies and benefits could have an adverse impact on our results of operations and financial condition following the completion of the separation.

 

    Generally, our working capital requirements and capital for our general corporate purposes, including acquisitions and capital expenditures, have historically been satisfied as part of the corporate-wide cash management policies of eBay. Following the completion of the separation, we may need to obtain additional financing from banks, through public offerings or private placements of debt or equity securities, or through strategic relationships or other arrangements, which may or may not be available and may be more costly.

 

    After the completion of the separation, the cost of capital for our business may be higher than eBay’s cost of capital prior to the separation.

Other significant changes may occur in our cost structure, management, financing, and business operations as a result of operating as a company separate from eBay. For additional information about the past financial performance of our business and the basis of presentation of the historical combined financial statements and the unaudited pro forma condensed combined financial statements of our business, see “Unaudited Pro Forma Condensed Combined Financial Statements,” “Selected Historical Combined Financial Data of PayPal,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical financial statements and accompanying notes included elsewhere in this information statement.

eBay will be a significant source of our revenues after the distribution.

After the distribution, we will derive a significant amount of revenues from eBay. If the operating agreement expires or if eBay terminates the operating agreement prior to its expiration or there is a significant change in our relationship with eBay, including if eBay becomes a merchant of record, eliminates or modifies any of its risk management or customer protection programs, directs transactions to a different provider of payment services or offers eBay customers more payment options, our business could be harmed.

Until the separation occurs, eBay has sole discretion to change the terms of the separation in ways which may be unfavorable to us.

Until the separation occurs, we will be a wholly owned subsidiary of eBay. Accordingly, eBay will effectively have the sole and absolute discretion to determine and change the terms of the separation, including the terms of any agreements between eBay and us. These changes could be unfavorable to us. In addition, eBay may decide at any time not to proceed with the separation and distribution.

 

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eBay may fail to perform under various transaction agreements that will be executed as part of the separation or it may fail to have necessary systems and services in place when certain of the transaction agreements expire.

In connection with the separation, we will enter into a separation and distribution agreement with eBay and will also enter into various other agreements, including an operating agreement, colocation services agreements, a transition services agreement, a tax matters agreement, an employee matters agreement, an intellectual property matters agreement, a data sharing addendum, and a product development agreement. The separation agreement, the tax matters agreement, the employee matters agreement, and intellectual property matters agreement will determine the allocation of assets and liabilities (including by means of licensing) between the companies following the separation for those respective areas and will include any necessary indemnifications related to liabilities and obligations. The operating agreement, colocation services agreements and data sharing addendum will establish certain commercial relationships between eBay and us related to payment processing, credit, information technology infrastructure and data sharing. The transition services agreement will provide for the performance of certain services by each company for the benefit of the other for a limited period of time after the separation. We will rely on eBay to satisfy its performance and payment obligations under these agreements. If eBay is unable to satisfy its obligations under these agreements, including its indemnification obligations, we could incur operational difficulties or losses. If we do not have in place our own systems and services, or if we do not have agreements with other providers of these services once these transaction agreements expire or terminate, we may not be able to operate our business effectively and our profitability may decline.

Our accounting and other management systems and resources may not be adequately prepared to meet the financial reporting and other requirements to which we will be subject following the distribution.

Our financial results previously were included within the consolidated results of eBay, and its reporting and control systems were appropriate for subsidiaries of a public company. Prior to the distribution, we were not directly subject to reporting and other requirements of the Securities Exchange Act of 1934, as amended, and Section 404 of the Sarbanes-Oxley Act of 2002. After the distribution, we expect to be subject to such reporting and other requirements in 2016, which will require, among other things, annual management assessments of the effectiveness of our internal controls over financial reporting and a report by our independent registered public accounting firm addressing these assessments. These and other obligations will place significant demands on our management, administrative, and operational resources, including accounting and information technology resources. To comply with these requirements, we anticipate that we will need to upgrade our systems, including duplicating computer hardware infrastructure, implement additional financial and management controls, reporting systems and procedures, and hire additional accounting, finance and information technology staff. If we are unable to do this in a timely and effective fashion, our ability to comply with our financial reporting requirements and other rules that apply to reporting companies could be impaired and our business could be harmed.

After the separation, certain of our directors may have actual or potential conflicts of interest because of their previous or continuing positions at eBay.

Because of their current or former positions with eBay, certain of our expected directors own eBay common stock and equity awards. Following the separation, even though our board of directors will consist of a majority of directors who are independent, some of our directors will continue to have a financial interest in eBay common stock and equity awards. In addition, it is expected that one of our directors will continue serving on the board of directors of eBay. Continuing ownership of eBay common stock and equity awards, or service as a director at both companies could create, or appear to create, potential conflicts of interest if PayPal and eBay have disagreements about the contracts between them that continue or face decisions that could have different implications for PayPal and eBay.

 

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Risks Related to Our Common Stock

We cannot be certain that an active trading market for our common stock will develop or be sustained after the separation, and following the separation, and the price of our common stock may fluctuate significantly.

A public market for our common stock does not currently exist. We anticipate that on or prior to the record date for the distribution, trading of shares of our common stock will begin on a “when-issued” basis which will continue through the distribution date. However, we cannot guarantee that an active trading market will develop or be sustained for our common stock after the separation. Nor can we predict the prices at which shares of our common stock may trade after the separation. Similarly, we cannot predict the effect of the separation on the price of our common stock or whether the combined market value of our common stock and the eBay common stock will be less than, equal to or greater than the market value of eBay common stock prior to the separation.

The price of our common stock may fluctuate significantly due to a number of factors, some of which may be beyond our control, including:

 

    actual or anticipated fluctuations in our operating results;

 

    changes in earnings estimated by securities analysts or our ability to meet those estimates;

 

    the change in our stockholder base due to the spin-off;

 

    the operating and stock price performance of comparable companies;

 

    changes to the regulatory and legal environment under which we operate; and

 

    market conditions in the payments industry, the industries of merchants and the domestic and worldwide economy as a whole.

There may be substantial changes in our stockholder base.

Many investors holding eBay common stock may hold that stock because of a decision to invest in a company with eBay’s profile. Following the distribution, the shares of our common stock held by those investors will represent an investment in a payments company with a different profile. This may not be aligned with a holder’s investment strategy and may cause the holder to sell the shares. As a result, our stock price may decline or experience volatility as our stockholder base changes.

PayPal’s amended and restated certificate of incorporation will designate the state courts of the State of Delaware, or, if no state court located in the State of Delaware has jurisdiction, the federal court for the District of Delaware, as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by PayPal’s stockholders, which could discourage lawsuits against PayPal and PayPal’s directors and officers.

PayPal’s amended and restated certificate of incorporation will provide that unless the corporation otherwise determines, the state courts of the State of Delaware, or, if no state court located in the state of Delaware has jurisdiction, the federal court for the District of Delaware, will be the sole and exclusive forum for any derivative action or proceeding brought on behalf of PayPal, any action asserting a claim of breach of a fiduciary duty owed by any director or officer of PayPal to PayPal or PayPal’s stockholders, creditors or other constituents, any action asserting a claim against PayPal or any director or officer of PayPal arising pursuant to any provision of the Delaware General Corporation Law or PayPal’s amended and restated certificate of incorporation or bylaws, or any action asserting a claim against PayPal or any director or officer of PayPal governed by the internal affairs doctrine. This exclusive forum provision may limit the ability of PayPal’s stockholders to bring a claim in a judicial forum that such stockholders find favorable for disputes with PayPal or PayPal’s directors or officers, which may discourage such lawsuits against PayPal and PayPal’s directors and officers. Alternatively, if a court outside of Delaware were to find this exclusive forum provision inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings described above, PayPal may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect PayPal’s business, financial condition or results of operations.

 

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Certain provisions in PayPal’s amended and restated certificate of incorporation and bylaws may prevent or delay an acquisition of PayPal, which could decrease the trading price of PayPal common stock.

PayPal’s amended and restated certificate of incorporation and amended and restated bylaws will contain certain provisions that may have the effect of deterring coercive takeover practices and inadequate takeover bids by making such practices or bids unacceptably expensive to the bidder and by encouraging prospective acquirers to negotiate with PayPal’s board of directors rather than to attempt a hostile takeover. These provisions include, among others:

 

    rules regarding how stockholders may present proposals or nominate directors for election at stockholder meetings;

 

    the fact that directors may not be elected, removed or replaced at stockholder-requested special meetings unless a person, entity or group owns at least a majority of PayPal’s outstanding common stock;

 

    the right of PayPal’s board to issue preferred stock without stockholder approval; and

 

    the ability of PayPal’s directors, and not stockholders, to fill vacancies on PayPal’s board of directors in most circumstances.

PayPal has also elected not to be governed by Section 203 of the DGCL, which provides that, subject to limited exceptions, persons that acquire, or are affiliated with a person that acquires, more than 15% of the outstanding voting stock of a Delaware corporation shall not engage in any business combination with that corporation, including by merger, consolidation or acquisitions of additional shares, for a three-year period following the date on which that person or its affiliates becomes the holder of more than 15% of the corporation’s outstanding voting stock. PayPal’s amended and restated certificate of incorporation will, however, contain a provision that generally mirrors Section 203 of the DGCL, except that there will be a 20% threshold instead of the 15% provided for by the DGCL. These provisions could delay or prevent a change of control that PayPal’s stockholders may favor.

Certain of the above provisions were added pursuant to the agreement between eBay Inc. and certain entities under the control of Carl C. lcahn. These provisions are not intended to make PayPal immune from takeovers. However, these provisions will apply even if the offer may be considered beneficial by some stockholders and could delay or prevent an acquisition that PayPal’s board of directors determines is not in the best interests of PayPal and PayPal’s stockholders. These provisions may also prevent or discourage attempts to remove and replace incumbent directors.

In addition, an acquisition or further issuance of PayPal’s stock could trigger the application of Section 355(e) of the Code. For a discussion of Section 355(e), see “Material U.S. Federal Income Tax Consequences.” Under the tax matters agreement, PayPal would be required to indemnify eBay for any resulting taxes, and this indemnity obligation might discourage, delay or prevent a change of control that PayPal’s stockholders may consider favorable. Please refer to “Certain Relationships and Related Person Transactions” and “Description of PayPal’s Capital Stock” for a more detailed description of these agreements and provisions.

 

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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

This information statement and other materials eBay and PayPal have filed or will file with the SEC contain, or will contain, certain forward-looking statements regarding business strategies, market potential, future financial performance and other matters. The words “believe,” “expect,” “anticipate,” “project” and similar expressions, among others, generally identify “forward-looking statements,” which speak only as of the date the statements were made. The matters discussed in these forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those projected, anticipated or implied in the forward-looking statements. In particular, information included under “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business,” and “The Separation and Distribution” contain forward-looking statements. Where, in any forward-looking statement, an expectation or belief as to future results or events is expressed, such expectation or belief is based on the current plans and expectations of PayPal management and expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the expectation or belief will result or be achieved or accomplished. Except as may be required by law, PayPal undertakes no obligation to modify or revise any forward-looking statements to reflect events or circumstances occurring after the date of this information statement. Factors that could cause actual results or events to differ materially from those anticipated include the matters described under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

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THE SEPARATION AND DISTRIBUTION

Overview

On September 30, 2014, eBay Inc. (“eBay”) announced its intent to separate its payments business into an independent, publicly-traded company. To accomplish this separation, in January 2015, eBay incorporated PayPal Holdings, Inc. (“PayPal Holdings”) which will ultimately become the parent of PayPal, Inc. and will hold directly or indirectly all of the assets and liabilities associated with PayPal, Inc. eBay intends to effect this separation through a pro rata distribution of the common stock of PayPal Holdings to its stockholders. References to “we,” “our,” “us,” “the Company” or “PayPal” refer to the combined entities of the payments business of eBay, including PayPal, Inc. and certain other assets and liabilities that have been historically held at the eBay corporate level, but are specifically identifiable and attributable to the payments business.

On [●], 2015, the eBay board of directors approved the distribution of the issued and outstanding shares of PayPal common stock on the basis of one share of PayPal common stock for each share of eBay common stock held as of the close of business on the record date of [●], 2015.

The separation and distribution as described in this information statement is subject to the satisfaction (or to the extent waiveable, waiver by eBay in its sole discretion) of certain conditions, including the receipt of any required approvals of the Commission de Surveillance du Secteur Financier (the “CSSF”) and the Bank Centrale du Luxembourg, as well as the European Central Bank (“ECB”). For a more detailed description of these conditions, see “—Conditions to the Distribution.” The CSSF has prepared a complete file regarding the separation and distribution for approval by the ECB. Although we currently expect to receive the approval of the ECB comfortably in advance of the scheduled distribution date, there is no assurance that the ECB will provide its approval on this timeline, or at all. See “Risk Factors—The distribution of PayPal common stock may be delayed or rescinded if certain required regulatory approvals are not obtained.” PayPal expects that at 11:59 p.m., Eastern Time, on [●], 2015 following the satisfaction or waiver of the conditions to the distribution, each eBay stockholder will receive one share of PayPal common stock for each share of eBay common stock held at the close of business on the record date for the distribution, as described below. We refer to the date of the distribution of the shares of PayPal common stock as the “distribution date.” You will not be required to make any payment, surrender or exchange your eBay common stock or take any other action to receive your shares of PayPal’s common stock in the distribution.

Reasons for the Separation

The eBay board of directors determined that the creation of two independent public companies, with PayPal operating the Payments business, and eBay operating the Marketplaces business is in the best interests of eBay and its stockholders and approved the plan of separation. A wide variety of factors were considered by the eBay board of directors in evaluating the creation of independent public companies. Among other things, the eBay board of directors considered the following expected benefits:

 

    Enhanced strategic and management focus. The separation will allow each of PayPal and eBay to more effectively pursue its distinct operating priorities and strategies and opportunities for long-term growth and profitability in the global commerce and payments landscape. PayPal’s management will be able to focus exclusively on its payments business, while eBay’s management will be dedicated solely to growing its marketplaces business.

 

    Faster decision-making. The separation will speed up decision-making at each company and allow each to adapt more quickly to the rapidly changing market and customer dynamics in their respective markets.

 

    Increased flexibility. The separation will provide each company with increased flexibility to pursue new partnership and strategic opportunities that may have previously been unavailable for strategic or other reasons.

 

   

More efficient allocation of capital. The separation will permit each company to implement a capital structure appropriate to its strategy and business needs and to concentrate its financial resources solely on its own operations without having to compete with each other for investment capital. This will

 

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provide each company with greater flexibility to invest capital in its businesses in a time and manner appropriate for its distinct strategy and business needs and facilitate a more efficient allocation of capital.

 

    Alignment of incentives with performance objectives. The separation will facilitate incentive compensation arrangements for employees more directly tied to the performance of the relevant company’s business, and enhance employee hiring and retention by, among other things, improving the alignment of management and employee incentives with performance and growth objectives of the business they support.

 

    Direct access to capital markets. The separation will provide each company with direct access to the capital markets and will facilitate PayPal’s ability to effect future acquisitions utilizing PayPal’s common stock. As a result, each company will have more flexibility to capitalize on its unique growth opportunities.

 

    Distinct investment identity. The separation will allow investors to separately value eBay and PayPal based on their distinct investment identities. PayPal’s payments business differs from eBay’s marketplaces business in several respects, such as the nature of the business, growth profile, competitors, regulation and technology. The separation will enable investors to evaluate the merits, performance and future prospects of each company’s respective business and to invest in each company separately based on these distinct characteristics, and may attract new investors to each business, who may not have properly assessed the value of the Payments and Marketplaces businesses as stand-alone entities relative to the value they are currently accorded.

Neither PayPal nor eBay can assure you that, following the separation, any of the benefits described above or otherwise will be realized to the extent anticipated or at all.

The eBay board of directors also considered a number of potentially negative factors in evaluating the creation of independent public companies, including the loss of synergies and joint purchasing power and increased costs resulting from operating as a separate public entity, one-time costs of the separation, and the risk of not realizing the anticipated benefits of the separation. The eBay board of directors concluded that the potential benefits outweighed these factors.

Formation of PayPal Holdings

PayPal Holdings was formed in January 2015 for the purpose of owning and operating eBay’s payments business. As part of the plan to create two independent public companies, eBay plans to transfer the equity interests of certain entities that operate the payments business and the assets and liabilities of the payments business to PayPal Holdings prior to the distribution.

When and How You Will Receive the Distribution

With the assistance of Computershare Trust Company, N.A., or Computershare, eBay expects to distribute PayPal common stock at 11:59 p.m., Eastern Time, on the distribution date, to all holders of outstanding eBay common stock as of the close of business on [●], 2015, the record date for the distribution. Computershare will serve as the settlement and distribution agent in connection with the distribution and the transfer agent and registrar for PayPal common stock.

If you own shares of eBay common stock as of the close of business on the record date for the distribution, PayPal’s common stock that you are entitled to receive in the distribution will be issued electronically, as of the distribution date, to you in direct registration form or to your bank or brokerage firm on your behalf. If you are a registered holder, Computershare will then mail you a direct registration account statement that reflects your shares of PayPal common stock. If you hold your shares through a bank or brokerage firm, your bank or

 

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brokerage firm will credit your account for the shares. Direct registration form refers to a method of recording share ownership when no physical share certificates are issued to shareholders, as is the case in this distribution. If you sell eBay common stock in the “regular-way” market up to and including the distribution date, you will be selling your right to receive shares of PayPal common stock in the distribution.

Commencing on or shortly after the distribution date, if you hold physical stock certificates that represent your shares of eBay common stock and you are the registered holder of the shares represented by those certificates, the distribution agent will mail to you an account statement that indicates the number of shares of PayPal’s common stock that have been registered in book-entry form in your name.

Most eBay stockholders hold their shares of common stock through a bank or brokerage firm. In such cases, the bank or brokerage firm would be said to hold the shares in “street name” and ownership would be recorded on the bank or brokerage firm’s books. If you hold your shares of eBay common stock through a bank or brokerage firm, your bank or brokerage firm will credit your account for the PayPal common stock that you are entitled to receive in the distribution. If you have any questions concerning the mechanics of having shares held in “street name,” please contact your bank or brokerage firm.

Transferability of Shares You Receive

Shares of PayPal common stock distributed to holders in connection with the distribution will be transferable without registration under the U.S. Securities Act of 1933, as amended (the “Securities Act”), except for shares received by persons who may be deemed to be PayPal affiliates. Persons who may be deemed to be PayPal affiliates after the distribution generally include individuals or entities that control, are controlled by or are under common control with PayPal, which may include certain PayPal executive officers, directors or principal stockholders. Securities held by PayPal affiliates will be subject to resale restrictions under the Securities Act. PayPal affiliates will be permitted to sell shares of PayPal common stock only pursuant to an effective registration statement or an exemption from the registration requirements of the Securities Act, such as the exemption afforded by Rule 144 under the Securities Act.

Number of Shares of PayPal Common Stock You Will Receive

For each share of eBay common stock that you own at the close of business on [●], 2015, the record date for the distribution, you will receive one share of PayPal common stock on the distribution date. eBay will not distribute any fractional shares of PayPal common stock to its shareholders. Instead, if you are a registered holder of a fractional share of eBay common stock, Computershare (the distribution agent) will aggregate fractional shares into whole shares, sell the whole shares in the open market at prevailing market prices and distribute the aggregate cash proceeds (net of discounts and commissions) of the sales pro rata (based on the fractional share such holder would otherwise be entitled to receive) to each holder who otherwise would have been entitled to receive a fractional share in the distribution. The distribution agent, in its sole discretion, without any influence by eBay or PayPal, will determine when, how, and through which broker-dealer and at what price to sell the whole shares. Any broker-dealer used by the distribution agent will not be an affiliate of either eBay or PayPal. Computershare is not an affiliate of either eBay or PayPal. Neither PayPal nor eBay will be able to guarantee any minimum sale price in connection with the sale of these shares. Recipients of cash in lieu of fractional shares, if any, will not be entitled to any interest on the amounts of payment made in lieu of fractional shares.

The aggregate net cash proceeds of any sales of fractional shares will be taxable for U.S. federal income tax purposes. See “Material U.S. Federal Income Tax Consequences” for an explanation of the material U.S. federal income tax consequences of the distribution. If you hold physical certificates for shares of eBay common stock and are the registered holder, you will receive a check from the distribution agent in an amount equal to your pro rata share of the aggregate net cash proceeds of the sales. PayPal estimates that it will take approximately two weeks from the distribution date for the distribution agent to complete the distributions of the aggregate net cash

 

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proceeds. If you hold your shares of eBay common stock through a bank or brokerage firm, your bank or brokerage firm will receive, on your behalf, your pro rata share of the aggregate net cash proceeds of the sales and will electronically credit your account for your share of such proceeds.

Treatment of Equity Based Compensation

Outstanding awards granted under eBay’s equity compensation programs will be adjusted in accordance with the terms of such programs to reflect the impact of the separation on such awards, with such adjusted awards to relate to shares of eBay and/or PayPal common stock, as applicable, and with appropriate adjustments to the exercise prices (for options) and number of shares subject to such awards. For a more detailed discussion of the treatment of outstanding equity awards, see “Certain Relationships and Related Person Transactions—Employee Matters Agreement.”

Results of the Distribution

After the distribution, PayPal will be an independent, publicly traded company. The actual number of shares to be distributed will be determined at the close of business on [●], 2015, the record date for the distribution, and will reflect any exercise of eBay options between the date the eBay board of directors declares the distribution and the record date for the distribution. The distribution will not affect the number of outstanding shares of eBay common stock or any rights of eBay shareholders. eBay will not distribute any fractional shares of PayPal common stock.

PayPal will enter into a separation agreement and will enter into other related agreements with eBay before the distribution to effect the separation and provide a framework for PayPal’s relationship with eBay after the separation. These agreements will provide for the allocation between eBay and PayPal of eBay’s assets, liabilities and obligations (including its investments, property and employee benefits and tax-related assets and liabilities) attributable to periods prior to PayPal’s separation from eBay and will govern the relationship between eBay and PayPal after the separation. For a more detailed description of these agreements, see “Certain Relationships and Related Party Transactions.”

Market for PayPal’s Common Stock

There is currently no public trading market for PayPal’s common stock. PayPal has applied to have its common stock authorized for listing on The NASDAQ Stock Market under the symbol “PYPL.” PayPal has not and will not set the initial price of its common stock. The initial price will be established by the public markets.

PayPal cannot predict the price at which its common stock will trade after the distribution. The combined trading prices, after the separation, of the shares of PayPal common stock that each eBay shareholder will receive in the distribution and the shares of eBay common stock held at the record date for the distribution may not equal the “regular-way” trading price of a eBay share immediately prior to the separation. The price at which PayPal common stock trades may fluctuate significantly, particularly until an orderly public market develops. Trading prices for PayPal common stock will be determined in the public markets and may be influenced by many factors. See “Risk Factors—Risks Related to PayPal’s Common Stock.”

Trading Between the Record Date and Distribution Date

Beginning on or shortly before the record date for the distribution and continuing up to and including through the distribution date, eBay expects that there will be two markets in eBay common stock: a “regular-way” market and an “ex-distribution” market. Shares of eBay common stock that trade on the “regular-way” market will trade with an entitlement to PayPal common stock distributed pursuant to the separation. Shares of eBay common stock that trade on the “ex-distribution” market will trade without an entitlement to PayPal common stock distributed pursuant to the distribution. Therefore, if you sell shares of eBay common stock in the

 

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“regular-way” market up to and including through the distribution date, you will be selling your right to receive PayPal common stock in the distribution. If you own shares of eBay common stock at the close of business on the record date and sell those shares on the “ex-distribution” market up to and including through the distribution date, you will receive the shares of PayPal common stock that you are entitled to receive pursuant to your ownership as of the record date of the shares of eBay common stock.

Furthermore, beginning on or shortly before the record date for the distribution and continuing up to and including the distribution date, PayPal expects that there will be a “when-issued” market in its common stock. “When-issued” trading refers to a sale or purchase made conditionally because the security has been authorized but not yet issued. The “when-issued” trading market will be a market for shares of PayPal common stock that will be distributed to holders of shares of eBay common stock on the distribution date. If you owned shares of eBay common stock at the close of business on the record date for the distribution, you would be entitled to shares of PayPal common stock distributed pursuant to the distribution. You may trade this entitlement to shares of PayPal common stock, without the shares of eBay common stock you own, on the “when-issued” market, but your transaction will not settle until after the distribution date. On the first trading day following the distribution date, “when-issued” trading with respect to PayPal common stock will end, and “regular-way” trading will begin.

Conditions to the Distribution

eBay has announced that the distribution will be effective at 11:59 p.m., Eastern Time, on [●], 2015, provided that the following conditions shall have been satisfied (or if any such condition is waiveable, waived by eBay in its sole discretion):

 

    the transfer of assets and liabilities from eBay to PayPal shall be completed in accordance with the separation and distribution agreement;

 

    eBay shall have received an opinion from eBay’s outside legal counsel regarding the qualification of the distribution, together with certain related transactions, as a transaction that is generally tax-free, for U.S. federal income tax purposes, under Sections 368(a)(1)(D) and Section 355 of the Code;

 

    the SEC shall have declared effective the registration statement of which this information statement forms a part, and no stop order suspending the effectiveness of the registration statement shall be in effect and no proceedings for such purpose shall be pending before or threatened by the SEC;

 

    this information statement shall have been made available to the eBay stockholders;

 

    all actions or filings necessary or appropriate under applicable U.S. federal, U.S. state or other securities laws shall have been taken and, where applicable, have become effective or been accepted by the applicable governmental entity;

 

    any approvals of any governmental entities required for the consummation of the separation and distribution have been obtained, including any required approvals of the Commission de Surveillance du Secteur Financier (“CSSF”), the Bank Centrale du Luxembourg (“BCL”) and the ECB;

 

    the transaction agreements relating to the separation shall have been duly executed and delivered by the parties;

 

    no order, injunction, or decree issued by any court of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the separation, distribution or any of the related transactions shall be in effect;

 

    the shares of PayPal common stock to be distributed shall have been accepted for listing on The NASDAQ Stock Market, subject to official notice of distribution;

 

    eBay shall have transferred or caused its subsidiaries to transfer an aggregate of $3.8 billion of cash to PayPal (including through one or more capital contributions); and

 

    no other event or development shall exist or have occurred that, in the judgment of eBay’s board of directors, in its sole discretion, would make it inadvisable to effect the separation or the distribution.

 

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eBay and PayPal cannot assure you that any or all of these conditions will be met and may also waive any of the conditions to the distribution. In addition, eBay will have the sole and absolute discretion to determine (and change) the terms of, and whether to proceed with, the distribution and, to the extent it determines to so proceed, to determine the record date for the distribution and the distribution date and the distribution ratio. eBay may delay or rescind its declaration of the distribution even after the record date for the distribution, as discussed in more detail under “Risk Factors—Risks Related to the Separation—The distribution of PayPal common stock may be delayed or rescinded if certain required regulatory approvals are not obtained.” eBay does not intend to notify its shareholders of any modifications to the terms of the separation that, in the judgment of its board of directors, are not material. For example, the eBay board of directors might consider material such matters as significant changes to the distribution ratio, the assets to be contributed or the liabilities to be assumed in the separation. To the extent that the eBay board of directors determines that any modifications by eBay materially change the material terms of the distribution, eBay will notify eBay shareholders in a manner reasonably calculated to inform them about such modifications as may be required by law, by, for example, publishing a press release, filing a current report on Form 8-K, or circulating a supplement to this information statement.

 

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DIVIDEND POLICY

PayPal does not expect to pay a regular cash dividend following the distribution. The timing, declaration, amount of and payment of any dividends following the separation by PayPal is within the discretion of its board of directors and will depend upon many factors, including PayPal’s financial condition, earnings, capital requirements of its operating subsidiaries, debt service obligations, covenants associated with certain of PayPal’s debt service obligations, legal requirements, regulatory constraints, industry practice, ability to gain access to capital markets, and other factors deemed relevant by its board of directors. Moreover, if PayPal determines to pay any dividend in the future, there can be no assurance that it will continue to pay such dividends or the amount of such dividends.

 

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CAPITALIZATION

The following table sets forth PayPal’s capitalization on a historical basis and on a pro forma basis to give effect to the pro forma adjustments included in PayPal’s unaudited pro forma financial information as if the separation and distribution took place on March 31, 2015. The information below is not necessarily indicative of what PayPal’s capitalization would have been had the separation, distribution and related financing transactions been completed as of March 31, 2015. In addition, it is not indicative of PayPal’s future capitalization. This table should be read in conjunction with “Unaudited Pro Forma Condensed Combined Financial Statements,” “Selected Historical Combined Financial Data of PayPal,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and PayPal’s combined financial statements and notes included in the “Index to Financial Statements and Schedule” section of this information statement.

 

     As of March 31, 2015  
     Historical      Pro Forma  
     (In millions)  
     (Unaudited)  

Cash and equivalents(1)

   $ 2,365       $ 6,165   
  

 

 

    

 

 

 

Indebtedness:

Short-term debt

Notes and payable to affiliates(3)

  868      116   
  

 

 

    

 

 

 

Total Indebtedness

$ 868    $ 116   
  

 

 

    

 

 

 

Stockholders’ equity:

Common stock, par value $0.0001 per share on a pro forma basis(2)

         

Additional paid-in capital(1)

       12,387   

Net parent investment(1), (2)

  8,498        

Accumulated other comprehensive income (loss)

  142      142   
  

 

 

    

 

 

 

Total stockholders’ equity

$ 8,640    $ 12,529   
  

 

 

    

 

 

 

Total Capitalization

$ 9,508    $ 12,645   
  

 

 

    

 

 

 

 

(1) Reflects a $3.8 billion total cash contribution to PayPal from eBay.
(2) Represents the effect of the expected pro forma distribution of approximately 1.2 billion shares of our common stock at par value $0.0001 per share to holders of eBay common stock and the resulting elimination of eBay’s net parent investment.
(3) Represents the settlement of certain intercompany arrangements between PayPal and eBay in connection with the distribution.

 

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SELECTED HISTORICAL COMBINED FINANCIAL DATA OF PAYPAL

The following selected combined financial data reflects the combined operations of PayPal. PayPal derived the selected combined statement of income data for the years ended December 31, 2014, 2013 and 2012 and the selected combined balance sheet data as of December 31, 2014 and 2013, as set forth below, from its audited combined financial statements, which are included in the “Index to Financial Statements and Schedule” section of this information statement. PayPal derived the selected combined statement of income data for the years ended December 31, 2011 and 2010 and the selected combined balance sheet data as of December 31, 2012, 2011 and 2010 from PayPal’s underlying financial records, which were derived from the financial records of eBay. PayPal derived the selected combined statement of income data for the quarter ended March 31, 2015 and 2014 and selected combined balance sheet data as of March 31, 2015, as set forth below, from its unaudited combined financial statements, included elsewhere in this information statement. PayPal derived the selected combined balance sheet data as of March 31, 2014 from PayPal’s underlying financial records, which were derived from the financial records of eBay. The selected unaudited pro forma combined statement of income data for the quarter ended March 31, 2015 and the year ended December 31, 2014 and the selected pro forma balance sheet data as of March 31, 2015 are derived from the “Unaudited Pro Forma Condensed Combined Financial Statements” included elsewhere in this information statement. The selected unaudited pro forma combined statement of income data has been prepared to reflect certain pro forma transactions in the selected pro forma combined statement of income as if they had occurred or had become effective as of January 1, 2014. The selected unaudited pro forma condensed combined balance sheet has been prepared to give effect to certain pro forma transactions as though they had occurred on March 31, 2015. The assumptions used and pro forma adjustments derived from such assumptions are based on currently available information and we believe such assumptions are reasonable.

The historical and unaudited pro forma combined results do not necessarily indicate the results expected for any future period. To ensure a full understanding, you should read the selected combined financial data presented below in conjunction with “Unaudited Pro Forma Condensed Combined Financial Statements,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the combined financial statements and accompanying notes included elsewhere in this information statement.

Historical basic and diluted earnings per share are not presented because PayPal’s financial information has been prepared on a combined basis. These financial statements have not been prepared for a single legal entity that had share capital throughout the entire historical period and, accordingly, EPS for these periods has not been provided.

 

    3 Months Ended March 31,     Year Ended December 31,  
    Pro Forma
2015
    2015     2014     Pro Forma
2014
    2014     2013     2012     2011     2010  
   

(Unaudited in millions)

          (In millions)  

Combined Statement of Income Data:

                 

Net revenue

  $ 2,134      $ 2,137      $ 1,874      $ 8,012      $ 8,025      $ 6,727      $ 5,662      $ 4,499      $ 3,508   

Operating income

    314        322        318        1,237        1,268        1,091        880        556        390   

Net income

    248        255        (382     391        419        955        778        460        350   

Earnings Per Share

                 

Basic

  $ 0.20        N/A        N/A      $ 0.31        N/A        N/A        N/A        N/A        N/A   

Diluted

  $ 0.20        N/A        N/A      $ 0.31        N/A        N/A        N/A        N/A        N/A   

Combined Balance Sheet Data:

                 

Total assets

  $ 25,944      $ 22,579      $ 19,833        $ 21,917      $ 19,160      $ 16,183      $ 11,140      $ 8,300   

Total long term liabilities

    618        390        461          386        509        428        306        188   

 

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UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

The unaudited pro forma condensed combined financial statements presented below have been derived from PayPal’s historical combined financial statements for the year ended December 31, 2014 and as of and for the quarter ended March 31, 2015. The unaudited pro forma condensed combined financial statements should be read in conjunction with PayPal’s historical combined financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this information statement. The unaudited pro forma condensed combined statement of income has been prepared to give effect to the Pro Forma Transactions (as defined below) as if the Pro Forma Transactions had occurred or had become effective as of January 1, 2014. The unaudited pro forma condensed combined balance sheet has been prepared to give effect to the Pro Forma Transactions as though the Pro Forma Transactions had occurred on March 31, 2015.

Our unaudited pro forma condensed combined financial statements have been prepared based on available information, assumptions, and estimates that management believes are reasonable. The unaudited pro forma condensed combined financial statements are for illustrative and informational purposes only, and do not reflect what PayPal’s financial position and results of operations would have been had the separation occurred on the dates indicated and are not necessarily indicative of its future financial position and future results of operations.

Our unaudited pro forma condensed combined financial statements have been prepared to reflect adjustments to our audited historical combined financial statements that are: (i) factually supportable, (ii) directly attributable to the distribution, and, for purposes of the combined statements of income, (iii) expected to have continuing impact on our results of operations. The unaudited pro forma condensed combined financial statements have been adjusted to give effect to the following (the “Pro Forma Transactions”):

 

    The issuance of approximately 1.22 billion shares of PayPal common stock;

 

    The tax free distribution, for U.S. federal income tax purposes, of PayPal common stock to eBay shareholders and the resulting elimination of eBay’s historical net parent investment in PayPal;

 

    Our anticipated post distribution capital structure, including an anticipated $3.8 billion cash contribution to PayPal from eBay;

 

    The transfers of certain assets and liabilities to PayPal from eBay; and

 

    The impact of, and transactions contemplated by the separation and distribution agreement, operating agreement, transition services agreement, tax matters agreement, employee matters agreement, intellectual property matters agreement, colocation services agreements, a data sharing addendum and product development agreement.

Our historical combined statement of income includes allocations of certain expenses relating to support functions historically provided by eBay. These functions include, but are not limited to: finance, legal, human resources, information technology, employee benefits administration, treasury, investor relations, corporate development, risk management, shared services and other general and administrative costs. To operate as an independent public company, we expect to incur costs to replace those services previously provided by eBay in addition to incremental standalone costs. We expect these incremental costs to be $100 million to $150 million on an annual pre-tax basis. Due to the scope and complexity of these activities, the amount and timing of these incremental costs could vary and, consequently, are not included in the Pro Forma Transactions.

The unaudited pro forma condensed combined financial statements constitute forward-looking information and are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated. See “Cautionary Statement Concerning Forward-Looking Statements” and “Risk Factors” included elsewhere in this information statement.

 

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PayPal Holdings, Inc.

Unaudited Pro Forma Condensed Combined Statement of Income

Three Months Ended March 31, 2015

 

     As
Reported
    Pro Forma
Adjustments
    Pro
Forma
 
     (In millions, except per share
amounts)
 

Net revenues

   $ 2,137      $ (3 )(a)    $ 2,134   

Operating expenses:

      

Transaction expense

     575        —          575   

Transaction and loan losses

     178        10 (b)      188   

Customer support and operations

     275        3 (b) (c) (j)      278   

Sales and marketing

     236        (13 )(d)      223   

Product development

     224        —          224   

General and administrative

     138        1 (b)      139   

Depreciation and amortization

     141        4 (j)      145   

Restructuring

     48        —          48   
  

 

 

   

 

 

   

 

 

 

Total operating expenses

  1,815      5      1,820   
  

 

 

   

 

 

   

 

 

 

Operating income

  322      (8   314   

Other income (expense), net

  (1   —        (1
  

 

 

   

 

 

   

 

 

 

Income before income taxes

  321      (8   313   
  

 

 

   

 

 

   

 

 

 

Income tax expense (benefit)

  66      (1 )(e)    65   
  

 

 

   

 

 

   

 

 

 

Net income attributable to PayPal

$ 255    $ (7 $ 248   
  

 

 

   

 

 

   

 

 

 

Net Income Attributable to PayPal Per Share of Common Stock (dollars)

Basic

     (f)  $ 0.20   

Diluted

     (f)  $ 0.20   

Average Common Shares Outstanding

Basic

     (f)    1,216   

Diluted

     (f)    1,229   

 

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PayPal Holdings, Inc.

Unaudited Pro Forma Condensed Combined Statement of Income

Year Ended December 31, 2014

 

    As Reported     Pro Forma
Adjustments
    Pro
Forma
 
    (In millions, except per share amounts)  

Net revenues

  $ 8,025      $ (13 )(a)    $ 8,012   

Operating expenses:

     

Transaction expense

    2,170        —          2,170   

Transaction and loan losses

    646        43 (b)      689   

Customer support and operations

    1,055        13 (b)(c)(j)      1,068   

Sales and marketing

    998        (60 )(d)      938   

Product development

    890        —          890   

General and administrative

    482        6 (b)      488   

Depreciation and amortization

    516        16 (j)      532   

Restructuring

    —          —          —     
 

 

 

   

 

 

   

 

 

 

Total operating expenses

  6,757      18      6,775   
 

 

 

   

 

 

   

 

 

 

Operating income

  1,268      (31   1,237   

Other income (expense), net

  (7   —        (7
 

 

 

   

 

 

   

 

 

 

Income before income taxes

  1,261      (31   1,230   
 

 

 

   

 

 

   

 

 

 

Income tax expense (benefit)

  842      (3 )(e)    839   
 

 

 

   

 

 

   

 

 

 

Net income attributable to PayPal

$ 419    $ (28 $ 391   
 

 

 

   

 

 

   

 

 

 

Net Income Attributable to PayPal Per Share of Common Stock (dollars)

Basic

  (f $ 0.31   

Diluted

  (f $ 0.31   

Average Common Shares Outstanding

Basic

  (f   1,251   

Diluted

  (f   1,262   

 

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PayPal Holdings, Inc.

Unaudited Pro Forma Condensed Combined Balance Sheet

At March 31, 2015

 

     As Reported      Pro Forma
Adjustments
    Pro Forma  
     (In millions, except per share amounts)  
ASSETS        

Current assets:

       

Cash and cash equivalents

   $ 2,365       $ 3,800 (g)    $ 6,165   

Short-term investments

     10         —          10   

Accounts receivable, net

     53         —          53   

Loans and interest receivable, net

     3,566         —          3,566   

Funds receivable and customer accounts

     10,945         —          10,945   

Notes and receivable from affiliates

     788         (626 )(h)      162   

Other current assets

     480         —          480   
  

 

 

    

 

 

   

 

 

 

Total current assets

  18,207      3,174      21,381   
  

 

 

    

 

 

   

 

 

 

Long-term investments

  31      —        31   

Property and equipment, net

  989      165 (i)(j)    1,154   

Goodwill

  3,184      —        3,184   

Intangible assets, net

  138      14 (k)    152   

Other assets

  30      12 (l)    42   
  

 

 

    

 

 

   

 

 

 

Total assets

$ 22,579    $ 3,365    $ 25,944   
  

 

 

    

 

 

   

 

 

 
LIABILITIES AND EQUITY

Current liabilities:

Accounts payable

$ 125    $ —      $ 125   

Funds payable and amounts due to customers

  10,945      —        10,945   

Notes and payable to affiliates

  868      (752 )(h)    116   

Accrued expenses and other current liabilities

  1,565      —        1,565   

Income taxes payable

  46      —        46   
  

 

 

    

 

 

   

 

 

 

Total current liabilities

  13,549      (752   12,797   

Long-term liabilities

  390      228 (g)(j)(k)    618   
  

 

 

    

 

 

   

 

 

 

Total liabilities

  13,939      (524   13,415   
  

 

 

    

 

 

   

 

 

 

Commitments and contingencies (Note 8)

Equity:

Common stock, $0.0001 par value

  —        —   (m)    —     

Accumulated other comprehensive income (loss)

  142      —        142   

Net parent investment

  8,498      (8,498 )(m)    —     

Additional paid-in capital

  —        12,387 (m)    12,387   
  

 

 

    

 

 

   

 

 

 

Total equity

  8,640      3,889      12,529   
  

 

 

    

 

 

   

 

 

 

Total liabilities and equity

$ 22,579    $ 3,365    $ 25,944   
  

 

 

    

 

 

   

 

 

 

 

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Notes to Unaudited Pro Forma Condensed Combined Financial Statements

 

(a) Reflects the impact of lower transaction revenues from payment services provided by PayPal to eBay as the result of the terms of certain commercial agreements negotiated between the parties that stipulate lower transaction fees than those historically charged to eBay.
(b) Reflects the effect of the following costs that were historically reimbursed to PayPal by eBay for the administration of eBay’s customer protection programs as follows:

 

$ in millions

   March 31, 2015      December 31, 2014  

Protection program losses, historically reported as a reduction of transaction and loan losses

     10         43   

Protection program services, historically reported as a reduction of customer support and operations

     4         16   

Protection program services, historically reported as a reduction in general and administrative expenses

     1         6   

 

   Following the distribution, this program will no longer be administered by PayPal, and therefore these costs will not be reimbursed by eBay. PayPal’s customer protection programs will be extended to its customers’ purchases on eBay, and therefore PayPal expects to incur incremental costs associated with its customer protection programs.
(c) Reflects the impact of an additional $7 million and $2 million for the year ended December 31, 2014 and the quarter ended March 31, 2015, respectively, representing costs for shared data centers and information technology facilities, except for the facilities in Phoenix, Arizona and Denver, Colorado, that will continue to be managed by eBay after the separation pursuant to the colocation services agreements.
(d) Reflects the net reduction of costs charged to PayPal by eBay for referral services and user penetration. eBay charged PayPal a total of $119 million and $30 million for the year ended December 31, 2014 and the quarter ended March 31, 2015, respectively, for similar services. Pursuant to the terms of the operating agreement, these charges would have been $59 million and $17 million for the year ended December 31, 2014 and the quarter ended March 31, 2015, respectively, consisting of payments for customers acquired and incentives for the usage of PayPal products (including credit products) on certain eBay properties.
(e) Reflects the tax effect of pro forma adjustments using the respective statutory tax rate for the year ended December 31, 2014 and for the quarter ended March 31, 2015.
(f) The calculations of pro forma basic earnings per share and average shares outstanding for the period presented are based on the number of shares used to calculate eBay common stock outstanding for the year ended December 31, 2014 and the quarter ended March 31, 2015, adjusted for the expected distribution ratio of one share of our common stock for every share of eBay common stock outstanding.

The calculations of pro forma diluted earnings per share and weighted-average shares outstanding for the period presented are based on the number of shares used to calculate eBay diluted earnings per share for the year ended December 31, 2014 and the quarter ended March 31, 2015, adjusted for the same distribution ratio. This calculation may not be indicative of the dilutive effect that will actually result from PayPal stock-based awards issued in connection with the adjustment of outstanding eBay stock-based awards or the grant of new stock-based awards. The number of dilutive shares of our common stock underlying PayPal stock-based awards issued in connection with the adjustment of outstanding eBay stock-based awards will not be determined until after the distribution date.

We are unable to calculate historical basic and diluted earnings per share prior to the distribution because the financial information included in the filing has been prepared on a combined basis. These financial statements have not been prepared for a separate legal entity that had share capital throughout the historical periods presented and accordingly, earnings per share for these periods has not been provided.

(g)

Reflects a $3.8 billion cash contribution to PayPal from eBay, as well as the associated deferred tax impact of $235 million attributable to the contribution.

 

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(h) Reflects the settlement of certain intercompany agreements between PayPal and eBay pursuant to the separation and distribution agreement. These amounts are comprised principally of intercompany financing payables and receivables stemming from eBay’s and PayPal’s shared cash management and treasury program. Following the separation, PayPal will perform its own cash management and treasury functions.
(i) Reflects $14 million in carrying value of certain information technology equipment that will be transferred from eBay to PayPal in connection with the colocation services agreements.
(j) Reflects the contribution of data center facilities in Phoenix, Arizona and Denver, Colorado from eBay to PayPal at an estimated amount of $151 million, pursuant to the colocation services agreements. The amount is based on the historical book value of these facilities as of March 31, 2015. The Company’s pro forma income statements reflect the reversal of historically allocated amounts from eBay to PayPal of $10 million and $3 million for the year ended December 31, 2014 and the quarter ended March 31, 2015, respectively. Additionally, the pro forma income statements reflect depreciation expense $16 million and $4 million for the year ended December 31, 2014 and the quarter ended March 31, 2015, respectively.
(k) Reflects $14 million in carrying value of certain patents that will be transferred from eBay to PayPal in connection with the intellectual property matters agreement, as well as a corresponding reduction of deferred tax liabilities of $3 million associated with the transfer.
(l) Reflects the transfer of assets relating to certain eBay employee benefit plans pursuant to the terms of the employee matters agreement.
(m) Represents the distribution of approximately 1.2 billion shares of our common stock at par value $0.0001 per share to holders of eBay common stock and the resulting elimination of eBay’s net parent investment.

 

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BUSINESS

Overview

PayPal Holdings, Inc. (“we,” “our,” “us,” “the Company” or “PayPal”) is a leading technology platform company that enables digital and mobile payments on behalf of consumers and merchants worldwide. We put our customers at the center of everything we do. We strive to increase our relevance for consumers, merchants, friends and family to access and move their money anywhere in the world, anytime, on any platform and through any device (e.g., mobile, tablets, personal computers or wearables). We provide safer and simpler ways for businesses of all sizes to accept payments from merchant websites, mobile devices and applications, and at offline retail locations through a wide range of payment solutions across our Payments Platform, including PayPal, PayPal Credit, Venmo and Braintree products.

We enable global commerce by providing payment solutions for our approximately 162 million active customer accounts in over 200 markets, while providing customers a choice of how they would like to pay or get paid. A market is a geographic area or political jurisdiction, such as a country, territory, or protectorate, in which we offer our services. A country, territory or protectorate is identified by a distinct set of laws and regulations. An active customer account is a registered account that successfully sent or received at least one payment or payment reversal through our Payments Platform, excluding transactions processed through our gateway products, in the past 12 months. Our gateway products include our Payflow Payments and certain Braintree products. A payment gateway links a merchant’s website to that merchant’s processing network and merchant account.

We offer our customers the flexibility to use their account to both purchase and be paid for goods, as well as transfer and withdraw funds. A consumer can typically fund a purchase using a bank account, a PayPal account balance, a PayPal Credit account, a credit or debit card or other stored value products such as coupons and gift cards. Our PayPal and Venmo products also make it safer and simpler for friends and family to transfer funds to each other using several of these funding sources. We offer merchants an end-to-end payments solution that provides authorization and settlement capabilities, as well as instant access to funds. We help merchants connect with their customers and manage risk. We measure the relevance of our products in the lives of our customers, and therefore the success of our business, through both payment volume and payment transactions. Payment volume is the value of payments, net of payment reversals, successfully completed through our Payments Platform, excluding transactions processed through our gateway products (“Total Payment Volume” or “TPV”). During 2014, our TPV was approximately $235 billion, representing growth of 26% over 2013. “Payment transactions” is the total number of payments, net of payment reversals, successfully completed through our Payments Platform, excluding transactions processed through our gateway products. During 2014, payment transactions were approximately 4.0 billion, representing growth of 22% over 2013.

 

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LOGO

Our Payments Platform is built to make the existing global financial infrastructure work for people in the digital age. PayPal allows people to make seamless transactions between different markets and networks. Our Payments Platform connects with financial institutions around the world, and allows consumers to make purchases using a broad range of payment methods, regardless of where a merchant is located. Consumers who use our Payments Platform can engage in cross-border shopping by sending payments to each other in more than 200 markets across the globe and in more than 100 currencies. This enables merchants to increase sales volume by allowing them to sell across borders to a much larger base of consumers.

We generate revenues by charging fees for providing transaction processing and other payment-related services, primarily based on the volume of activity, or TPV, processed through our Payments Platform. We also earn revenue by providing value added services to consumers and merchants, such as PayPal’s Credit products. Our revenue growth is influenced by, among other things, consumer spending patterns, merchant adoption of payment methods other than traditional credit cards and cash, the expansion of multi-channel retail, the growth of mobile devices and merchant applications on those devices, the growth of consumers with access to the internet globally, the pace of transition from paper-based forms of payment to digital forms of payment, our share of the digital payments market, and our ability to innovate new methods of payment that merchants and consumers find to be valuable. Our strategy is to drive revenue growth by:

 

    Growing our core businesses globally through expanding our base of active customer accounts, increasing our customers’ use of our products and services by better addressing our customers’ everyday needs in managing and moving money and expanding the adoption of our solutions by new merchants and consumers;

 

    Diversifying our existing business by seeking new areas of growth in markets around the world and focusing on innovation both in the digital and the physical world;

 

    Providing software application developers with tools to quickly and easily integrate PayPal’s smart payment solutions into merchant and next generation mobile applications; and

 

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    Leveraging the data we accumulate through processing transactions to build strong risk capabilities that enable the identification of illegal, high-risk, or fraudulent transactions with the highest level of accuracy, without impacting legitimate transactions and while incurring minimal losses.

 

LOGO

PayPal is a popular form of payment for mobile commerce, and our business has grown with the increased adoption of mobile devices. In December 2013, we completed our acquisition of Braintree to strengthen our position in mobile payments and extend our coverage to a new class of retailers who offer their services primarily through mobile applications. As part of that acquisition, we also acquired Venmo, which offers a leading mobile application to move money between friends and family using their mobile device. Braintree’s and Venmo’s focus on mobile payments, their reach with a new class of retailers and the technology obtained through the acquisition have increased our payment capabilities, improved our current product offerings and expanded our footprint with earlier stage merchants and a diversified demographic of consumers.

We operate globally and in a rapidly evolving regulatory environment characterized by a heightened regulatory focus on all aspects of the payments industry. Some of the laws and regulations to which we are subject were enacted recently and many such laws and regulations, including those enacted prior to the advent of digital and mobile payments, are continuing to evolve through legislative and regulatory action and judicial interpretation. Changes in or non-compliance with laws and regulations, changes in the interpretation of laws and regulations, and the enactment of new laws and regulations applicable to us could have a material adverse impact on our business, results of operations and financial condition. Therefore, we monitor these areas closely to ensure compliant solutions for our customers who depend on us.

Connecting Merchants and Consumers

We operate a proprietary global technology platform that links merchants and consumers around the globe to facilitate the processing of payment transactions, allowing us to connect millions of merchants and consumers worldwide. Our Payments Platform facilitates an efficient and secure means for merchants to receive payments, and

 

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a convenient, secure way for consumers to make payments. We process transactions through our Payments Platform in more than 200 markets, allowing customers to pay and get paid in more than 100 currencies, withdraw funds to their bank accounts in 57 currencies and hold balances in their PayPal accounts in 26 currencies.

A transaction on our Payments Platform can involve up to three participants in addition to us: a merchant, a consumer and the consumer’s funding source provider. The following diagram illustrates a typical payment transaction between a consumer and a merchant on our Payments Platform:

 

LOGO

Consumers

We enable consumers to more safely exchange funds with merchants using their PayPal digital wallet. Our digital wallet provides consumers with the ability to draw funds from a variety of their financial resources, which may include both “internal” sources of funds (i.e., a PayPal account balance or PayPal Credit account) and sources of funds that are “external” to PayPal (e.g., bank transfers, credit and debit cards or gift cards), within one application. We generally do not charge consumers to fund or draw from their accounts; however, we generate revenue from consumers on fees charged to exchange currencies and on interest and fees from consumer loans originated through our PayPal Credit products.

We value our relationship with our consumers and invest in this relationship; we strive to provide efficient customer service, account support, protection from loss, and create relevant products. Approximately 8,000 people in our customer service organization work around the clock to provide our consumers with answers and solutions when and where they need them, in over 20 languages. We have operations centers around the world, including in Chandler, Arizona; Hunt Valley, Maryland; Omaha, Nebraska; Berlin, Germany; Dundalk, Ireland; Dublin, Ireland; Kuala Lumpur, Malaysia; Sao Paulo, Brazil; and Shanghai, China that strive to provide high-quality service and support for our customers. We have also developed a number of trust and security programs, including PayPal’s Buyer Protection Program, that provide additional protection to consumers for qualifying

 

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purchases by reimbursing the consumer for the full amount of the purchase if a purchased item does not arrive or does not match the seller’s description (see Protecting Merchants and Consumers discussion below).

Traditional financial institutions often charge fees for basic services provided to their customers, and existing alternatives to these financial institutions, including services to cash a check or pay a bill, are often inconvenient and expensive. We focus on providing low cost consumer products that democratize the access to and movement of money. We believe that managing and moving a consumer’s hard earned money should be a right, not a privilege. Through our technology and products, we believe we can change the status quo and make digital payments more efficient and accessible. We expect person-to-person (or “P2P”) transfers to contribute to this strategy. These P2P products are believed to have network effects, helping to establish relationships with potential PayPal users by allowing them to join the Payments Platform at the time of making or receiving payments, which encourages our natural, user-driven growth. PayPal offers P2P payment solutions through its website, its PayPal mobile application, and through Venmo, a mobile application that enables payment transactions between non-merchant account holders.

Merchants

As commerce continues to transition from the physical world to the digital world and from domestic commerce to global commerce, our proprietary Payments Platform provides opportunities for merchants to grow their businesses. We partner with merchants to help them grow and expand their businesses by improving sales conversion, providing global reach, offering alternative payment methods (such as easy integration credit products and mobile capabilities), reducing losses through proprietary protection programs and leveraging data analytics. We continue to grow merchant acceptance through business development activities and direct relationships with merchants. We enable merchants to more safely and simply receive payments from our active customer accounts, providing global reach while reducing some of the complexity and friction involved in enabling overseas and cross-border trade. For the year ended December 31, 2014, approximately 48% of PayPal’s TPV involved a merchant outside of the U.S., and approximately 24% was cross-border (i.e., transactions where the merchant and consumer were in different countries).

A merchant can typically open a standard PayPal account and begin accepting payments through PayPal within a few minutes. Most online or mobile merchants can onboard quickly and are not required to invest in new or specialized hardware. Our Payments Platform supports growth with a variety of value added services designed to help businesses of all sizes manage their cash flow, invoice clients, pay bills, and reduce the need for merchants to receive and store sensitive customer financial information. For our standard service, we do not charge merchants setup or recurring fees. A merchant can also integrate with Braintree to begin accepting payments with credit or debit cards, PayPal, Venmo, digital currencies such as Bitcoin, or other payment solutions with a single integration.

Our payment and PayPal Credit products, are designed to help merchants increase the conversion rate of consumer purchases on their websites and mobile applications. For example, our One Touch product allows consumers to authenticate their account during their first One Touch purchase. This enables them to skip the login process for future payments and turn shopping into a one touch operation with near-instant authentication. We also provide the ability for merchants to offer (and consumers to fund) payments via a deferred payment option using our PayPal Credit products. When a consumer funds a purchase using PayPal Credit, our chartered financial institution in Luxembourg, or an independent chartered financial institution in the U.S. with whom we partner, extends credit to the consumer, funds the extension of credit at the point of sale (“POS”) and advances funds to the merchant. In the U.S., we subsequently purchase the consumer receivables related to the consumer loans from the independent chartered financial institution with whom we partnered and as a result of that purchase, bear the risk of loss on the related consumer receivables, less the participation interest held by the independent chartered financial institution. We are responsible for all servicing functions related to the PayPal Credit customer account balances. In addition, we have a program in which we offer certain of our merchants a line of credit, which may be paid back to PayPal through a percentage of their sales generated through PayPal.

 

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We value our relationship with merchants and invest in this relationship by providing customer service, account support, developer advocacy and support, and proprietary risk and security solutions. In addition to our consumer protection programs, we have also developed PayPal’s Seller Protection Program. This program provides protection to merchants against claims that a transaction was not authorized by the buyer or claims that an item was not received by covering the seller for the full amount of the payment on eligible sales. By offering dual buyer and seller protection programs, both the consumer and merchant can transact with confidence.

Our Payments Platform and open application programming interfaces (“APIs”) are designed to allow developers to innovate with ease and to offer cutting edge applications to a large ecosystem of merchants and consumers, while at the same time maintaining the security of our customers’ financial information. We provide developers with easy to use, flexible and powerful tools that are designed to leverage our global reach and payment capabilities. Our software developer kits (“SDKs”) are specifically focused on the mobile application market and are designed to remove friction by not requiring a redirect to PayPal.com or an additional log in. We are using a true “mobile first” approach to make payments simple and intuitive.

Revenue Sources

We earn revenues primarily by processing customer transactions on our Payments Platform and from other value added services. Our revenues are classified into the following two categories:

 

    Transaction revenues: Net transaction fees charged to consumers and merchants based on the volume of activity processed through our Payments Platform, including PayPal, PayPal Credit, Venmo and Braintree products.

 

    Other value added services: Net revenues derived principally from interest and fees earned on our PayPal Credit loans receivable portfolio, subscription fees, gateway fees, revenue share we earn through partnerships and other services that we provide to consumers and merchants.

Transaction revenues are generated from fees charged to merchants on the TPV that we enable. Growth in TPV is also directly impacted by the number of active customer accounts and the payment transactions that we enable on our payments platform. In 2014, transaction revenues generated from customers and merchants on eBay’s marketplace who completed a transaction using our products constituted 29% of our net revenues, down from 32% in 2013. The decline in percentage of revenues generated from eBay buyers and eBay sellers reflects the growth in adoption of PayPal solutions on platforms other than eBay. No other source of revenue represented more than 10% of our revenues.

Our pricing varies among regions and can be modified for individual merchants through customer-specific agreements, which provide merchants with financial incentives and other benefits to issue, accept, route, prioritize and promote our branded products and other payment programs. These financial incentives may be based on TPV or other performance-based criteria, such as issuance of new payment products, increased acceptance of our products, launch of new programs or execution of marketing initiatives.

Protecting Merchants and Consumers

Protecting merchants and consumers from loss is imperative to successfully competing in the payments industry. Trust and security are essential for our customers, and PayPal invests significantly in providing both merchants and consumers with comprehensive protection. The risk to merchants and consumers (and their payments partners) from fraudulent activities, such as account takeover, identity theft and counterparty mal-intent, is growing. Our ability to protect both consumers and merchants is based largely on our ability to leverage the data we collect on transactions and our analytical capabilities. We believe mobile devices will play an important part in the future of commerce, creating the opportunities to make our ecosystem safer. For example, PayPal is able to use accurate location data and growing protection for the mobile operating environment to reduce risk to merchants and consumers.

 

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We enable consumers to make payments safely and simply without sharing sensitive financial information, such as credit card or debit card numbers, with merchants or other consumers. To make payments using PayPal, consumers need to disclose only their email address or mobile phone number to merchants. The account-based nature of our Payments Platform helps us to better detect and prevent fraud when funds enter, flow through and exit the Payments Platform because our transactions are tokenized and because payment authorization credentials are separated from account holder information. Our ongoing investment in systems and processes designed to enhance the safety and security of our products reflects our goal of having PayPal recognized as one of the world’s most trusted payments brands.

We provide merchants and consumers with protection programs on substantially all transactions completed through our Payments Platform, except for transactions using our gateway products. These programs protect both merchants and consumers from loss primarily due to fraud and counterparty performance. Our risk management capabilities allow us to provide these protections, which are generally much broader than those protections provided by other participants in the payments industry. Most payments providers do not offer merchant protection in general, and those that do so generally do not provide protection of online or card not present transactions. As a result, merchants may incur losses for chargebacks and other claims on certain transactions when using other payments providers that they would not incur if they had used PayPal’s payments services. PayPal also provides consumer protection against losses and accepts claims for 180 days post transaction in the markets that PayPal serves. This protection is consistent with, or better than, that offered by other payments providers. We believe that as a result of these programs, consumers can be confident that they will only be required to pay if they receive the product in the condition as described, and merchants can be confident that they will receive payment for the product that they are delivering to the customer.

Our Payments Platform utilizes a combination of proprietary technologies and services as well as technologies and services provided by third parties. We have developed intuitive user interfaces, customer tools and transaction processing, database and network applications that help enable our users to reliably and securely complete transactions on our sites and help our customers to utilize its suite of services. Our technology infrastructure simplifies the storage and processing of large amounts of data, eases the deployment and operation of large-scale global products and services and automates much of the administration of large-scale clusters of computers. Our technology infrastructure has been designed around industry-standard architectures to reduce downtime in the event of outages or catastrophic occurrences. We strive to continually improve our technology infrastructure to enhance the customer experience and to increase efficiency, scalability and security.

Our Payments Platform’s architecture enables us to connect all parties regardless of whether the transaction is occurring at a traditional physical location, online or through a mobile device. The Payments Platform incorporates multiple layers of protection, both for continuity purposes and to help address cyber-security challenges. We engage in multiple efforts to protect the Payments Platform against these challenges, including regularly testing our systems to address potential vulnerabilities.

Intellectual Property

The protection of our intellectual property, including our trademarks (particularly those covering the PayPal name), patents, copyrights, domain names, trade dress and trade secrets is critical to our success. We aggressively protect our intellectual property rights by relying on federal, state and common law rights in the U.S. and internationally, as well as a variety of administrative procedures. We also rely on contractual restrictions to protect our proprietary rights in products and services. We have routinely entered into confidentiality and invention assignment agreements with our employees and contractors and nondisclosure agreements with parties with whom we conduct business to control access to and limit disclosure of our proprietary information.

We pursue the registration of our domain names, trademarks and service marks in the U.S. and internationally. Additionally, we have filed U.S. and international patent applications covering certain aspects of our proprietary

 

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technology. Effective trademark, copyright, patent, domain name, trade dress and trade secret protection is very expensive to maintain and may require litigation. We must protect our intellectual property and other proprietary rights in an increasing number of jurisdictions, a process that is expensive and time consuming and may not be successful.

We have registered our core brands as trademarks and domain names in the U.S. and a large number of other jurisdictions and have in place an active program to continue to secure trademarks and domain names that correspond to our brands in markets of interest.

Competition

Consumers may choose to pay merchants through a variety of alternative means, including credit and debit cards, automated clearing house and bank transfers, other online payment services, offline payment methods such as cash, check or money order and by using mobile phones. PayPal’s products compete with products from three-party networks (such as American Express and Discover), four-party networks (such as Visa and MasterCard) and other mobile payment solutions.

PayPal seeks to differentiate itself from industry participants on the safety of the transaction (our risk management capabilities as well as protection of consumer account details), the simplicity provided for digital transactions (use of an e-mail address, a mobile phone number or our One Touch product), and being both brand and technology agnostic. Further, unlike traditional four-party networks or other mobile payment solutions, PayPal has a direct financial relationship with both its consumers and merchants. As a result of our risk management capabilities, PayPal can provide its customers with protection from fraud and other losses incurred by participants to a transaction.

To compete effectively, we will need to continue to expend significant resources in technology and marketing. During 2014, PayPal incurred over $1 billion on product innovation and development, and enhancing our infrastructure, to ensure our customers have the capabilities they need and want to complete transactions safely and simply. Further, in 2014, we incurred over $270 million related to our efforts to promote our brands through advertising, promotions, and other strategic initiatives. Our marketing efforts play an important role in building brand visibility, usage and overall preference among consumers at checkout.

Government Regulation

Government regulation impacts key aspects of our business. We are subject to regulations that affect the payments industry in the countries we operate.

Payments Regulation. Various laws and regulations govern the payments industry in the U.S. and globally. In the U.S., several of our subsidiaries hold licenses to operate as a money transmitter (or its equivalent), which, among other things, subjects those subsidiaries to reporting requirements, bonding requirements, limitations on the investment of customer funds and inspection by state regulatory agencies. Outside the U.S., we provide localized versions of our service to customers through various foreign subsidiaries. The activities of those non-U.S. entities are, or may, be supervised by a financial regulatory authority in the jurisdictions in which they operate. Among other regulatory authorities, the Luxembourg Commission de Surveillance du Secteur Financier (the “CSSF”), the Australian Securities and Investments Commission, the Monetary Authority of Singapore, the Reserve Bank of India and the Central Bank of Russia have asserted jurisdiction over some or all of our activities in a particular country. This list is not exhaustive, as there are numerous other regulatory agencies that have or may assert jurisdiction. The laws and regulations applicable to the payments industry in any given jurisdiction are subject to interpretation and change.

Banking Agency Supervision. We serve our customers in the European Union through PayPal (Europe) S.a.r.l. et Cie, SCA, a wholly-owned subsidiary that is licensed and subject to regulation as a bank in Luxembourg by the CSSF. Consequently, we must comply with rules and regulations of the banking industry related to capitalization,

 

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funds management, corporate governance, anti-money laundering, disclosure, reporting and inspection. We also are, or may be, subject to banking-related regulations in other countries now or in the future related to our role in the financial industry. In addition, based on our relationships with our partner financial institutions in the U.S., we are subject to indirect regulation and examination by these financial institutions’ regulators.

Consumer Financial Protection Bureau. The Consumer Financial Protection Bureau (the “CFPB”) has significant authority to regulate consumer financial products in the United States, including consumer credit, deposit, payment, and similar products. The CFPB and other similar regulatory agencies in other jurisdictions may have broad consumer protection mandates that could result in the promulgation and interpretation of rules and regulations that may affect our business.

Anti-Money Laundering. PayPal is subject to anti-money laundering (“AML”) laws and regulations in the U.S. and other jurisdictions outside of the U.S. We have implemented a comprehensive AML program designed to prevent our payment network from being used to facilitate money laundering, terrorist financing, and other illicit activity, or to do business in countries or with persons and entities included on designated country or person lists promulgated by the U.S. Department of the Treasury’s Office of Foreign Assets Controls (“OFAC”) and equivalent authorities in other countries. Our AML compliance program is comprised of policies, procedures and internal controls, including the designation of a compliance officer, and is designed to address these legal and regulatory requirements and assist in managing money laundering and terrorist financing risks.

Interchange Fees. Interchange fees associated with four-party payments systems are being reviewed or challenged in various jurisdictions. For example, in the European Union, the Multilateral Interchange Fee (“MIF”) Regulation (which we expect to become effective in 2015) caps credit and debit interchange fees for cards payments and provides for business rules to be complied by any company dealing with card transactions, including PayPal. As a result, the fees that we collect in certain jurisdictions may become the subject of regulatory challenge.

Data Protection and Information Security. Aspects of our operations or business are subject to privacy and data protection regulation in the United States, the European Union and elsewhere. For example, in the United States, we are subject to information safeguarding requirements under the Gramm-Leach-Bliley Act that require the maintenance of a written, comprehensive information security program and in Europe, the operations of our Luxembourg bank are subject to information safeguarding requirements under the Luxembourg Banking Act, among other laws. Regulatory authorities around the world are considering numerous legislative and regulatory proposals concerning privacy and data protection. In addition, the interpretation and application of these privacy and data protection laws in the United States, Europe and elsewhere are often uncertain and in a state of flux.

Additional Regulatory Developments. Various regulatory agencies also continue to examine a wide variety of issues, including virtual currencies, identity theft, account management guidelines, privacy, disclosure rules, security and marketing that would impact PayPal.

For an additional discussion on governmental regulation affecting our business, please see the risk factors related to regulation of our payments business and regulation in the areas of consumer privacy, data use and/or security in “Risk Factors —Risk Factors That May Affect Our Business, Results of Operations and Financial Condition” included elsewhere in this Information Statement.

Legal and Regulatory Proceedings

We are involved in legal and regulatory proceedings on an ongoing basis. Many of these proceedings are in early stages, and may seek an indeterminate amount of damages. If we believe that a loss arising from such matters is probable and can be reasonably estimated, we accrue the estimated liability in our financial statements. If only a range of estimated losses can be determined, we accrue an amount within the range that, in our judgment, reflects the most likely outcome; if none of the estimates within that range is a better estimate than any other amount, we

 

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accrue the low end of the range. For those proceedings in which an unfavorable outcome is reasonably possible but not probable, we have disclosed an estimate of the reasonably possible loss or range of losses or we have concluded that an estimate of the reasonably possible loss or range arising directly from the proceeding (i.e., monetary damages or amounts paid in judgment or settlement) are not material. If we cannot estimate the probable or reasonably possible loss or range of losses arising from a legal proceeding, we have disclosed that fact. In assessing the materiality of a legal proceeding, we evaluate, among other factors, the amount of monetary damages claimed, as well as the potential impact of non-monetary remedies sought by plaintiffs (e.g., injunctive relief) that may require us to change our business practices in a manner that could have a material adverse impact on our business. With respect to the matters disclosed below, we are unable to estimate the possible loss or range of losses that could potentially result from the application of such non-monetary remedies.

Amounts accrued for legal and regulatory proceedings for which we believe a loss is probable were not material for the year ended December 31, 2014. Except as otherwise noted for the proceedings described below, we have concluded, based on currently available information, that reasonably possible losses arising directly from the proceedings (i.e., monetary damages or amounts paid in judgment or settlement) in excess of our recorded accruals are also not material to PayPal. However, legal and regulatory proceedings are inherently unpredictable and subject to significant uncertainties. If one or more matters were resolved against us in a reporting period for amounts in excess of management’s expectations, the impact on our operating results or financial condition for that reporting period could be material.

Regulatory Proceedings

We routinely report to the U.S. Department of Treasury’s Office of Foreign Assets Control (“OFAC”) on payments we have rejected or blocked pursuant to OFAC sanctions regulations and on any possible violations of those regulations. We have cooperated with OFAC in recent years regarding our review process over transaction monitoring and have self-reported a large number of small dollar amount transactions that could possibly be in violation of OFAC sanctions regulations. In March 2015, we reached a settlement with OFAC regarding the possible violations arising from our practices between 2009 and 2013, before our implementation of real-time monitoring processes. In addition, we continue to cooperate with OFAC regarding more recent self-reported transactions that could also possibly be in violation of OFAC sanctions regulations. Such self-reported transactions could result in claims or actions against us including litigation, injunctions, damage awards or require us to change our business practices that could result in a material loss, require significant management time, result in the diversion of significant operational resources or otherwise harm our business.

On August 7, 2013 and January 13, 2014, eBay, PayPal and certain wholly owned subsidiaries of PayPal received Civil Investigative Demands (“CIDs”) from the CFPB requesting that we provide testimony, produce documents and provide information relating primarily to the acquisition, management, and operation of our PayPal Credit products, including online credit products and services, advertising, loan origination, customer acquisition, servicing, debt collection, and complaints handling practices. We have cooperated with the CFPB throughout the course of the investigation. In May 2015, we entered into a Consent Order with the CFPB in which we settled potential allegations arising from PayPal Credit practices between 2011 and 2015. This settlement included $15 million in redress to consumers, a $10 million civil monetary penalty, and our agreement to various changes to our disclosures and business practices. We will continue to cooperate and engage with the CFPB and work to ensure compliance with the settlement terms. Violation of the settlement could result in claims or actions against us, including litigation, injunctions, or damage awards or require us to change our business practices that could result in a material loss, require significant management time, result in the diversion of significant operational resources or otherwise harm our business.

Following media reports about future revisions to our user agreement, the New York Attorney General’s office has sent us a letter expressing concern and asking us to respond to certain questions. The Federal Communications Commission, the Federal Trade Commission and four senators have also contacted us regarding this subject. We are in the process of responding to these parties.

 

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General Matters

Other third parties have from time to time claimed, and others may claim in the future, that we have infringed their intellectual property rights. We are subject to patent disputes, and expect that we will increasingly be subject to additional patent infringement claims involving various aspects of our business as our products and services continue to expand in scope and complexity. Such claims may be brought directly or indirectly against our companies and/or against our customers (who may be entitled to contractual indemnification under their contracts with us), and we are subject to increased exposure to such claims as a result of our recent acquisitions, particularly in cases where we are entering into new lines of business in connection with such acquisitions. We have in the past been forced to litigate such claims, and we believe that additional lawsuits alleging such claims will be filed against us. Intellectual property claims, whether meritorious or not, are time consuming and costly to defend and resolve, could require expensive changes in our methods of doing business or could require us to enter into costly royalty or licensing agreements on unfavorable terms.

From time to time, we are involved in other disputes or regulatory inquiries that arise in the ordinary course of business, including suits by our customers (individually or as class actions) alleging, among other things, improper disclosure of our prices, rules or policies, that our practices, prices, rules, policies or customer/user agreements violate applicable law or that we have acted unfairly and/or not acted in conformity with such prices, rules, policies or agreements. In addition to these types of disputes and regulatory inquiries, our operations are also subject to regulatory and/or legal review and/or challenges that tend to reflect the increasing global regulatory focus to which the payments industry is subject and, when taken as a whole with other regulatory and legislative action, such actions could result in the imposition of costly new compliance burdens on our business and customers and may lead to increased costs and decreased transaction volume and revenue. Further, the number and significance of these disputes and inquiries are increasing as our company has grown larger, our business has expanded in scope (both in terms of the range of products and services that we offer and our geographical operations) and our products and services have increased in complexity. Any claims or regulatory actions against us, whether meritorious or not, could be time consuming, result in costly litigation, damage awards (including statutory damages for certain causes of action in certain jurisdictions), injunctive relief or increased costs of doing business through adverse judgment or settlement, require us to change our business practices in expensive ways, require significant amounts of management time, result in the diversion of significant operational resources or otherwise harm our business.

Properties

We own and lease various properties in the U.S. and other countries around the world. We use the properties for executive and administrative offices, data centers, product development offices, fulfillment centers and customer service offices. As of December 31, 2014, our owned and leased properties provided us with aggregate square footage as follows:

 

     United States      Other Countries      Total  
     (In millions)  

Owned facilities

     1.0         —           1.0   

Leased facilities

     0.9         1.2         2.1   
  

 

 

    

 

 

    

 

 

 

Total facilities

  1.9      1.2      3.1   
  

 

 

    

 

 

    

 

 

 

Our corporate headquarters are located in San Jose, California and occupy approximately 0.7 million of owned square feet.

Seasonality

The Company does not experience meaningful seasonality. No individual quarter in 2014, 2013 or 2012 accounted for more than 30% of net revenue.

 

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Financial Information About Segments

See “Note 9—Segment and Geographical Information” to the combined financial statements included in this information statement for certain financial information about segments.

Employees

As of December 31, 2014, we employed approximately 15,800 people globally, of whom approximately 9,100 of our employees were located in the U.S. We consider our relationship with employees to be good.

Corporate Information

PayPal was incorporated in Delaware in January 2015 for the purpose of owning and operating eBay’s Payments business in connection with the separation and distribution described herein. Prior to the contribution of this business to PayPal, which will occur prior to the distribution, PayPal will have no operations.

The address of PayPal’s principal executive offices is PayPal Holdings, Inc., 2211 North First Street, San Jose, California 95131. PayPal’s telephone number after the distribution will be (408) 967-1000. PayPal maintains an Internet site at www.paypal.com, and its investor relations site will be accessible prior to the distribution at http://investor.paypal-corp.com. PayPal’s website and the information contained therein or connected thereto shall not be deemed to be incorporated herein, and you should not rely on any such information in making an investment decision.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Please read the following discussion in conjunction with the audited combined financial statements, which are comprised of the payments business of eBay Inc., including PayPal, Inc. and certain other assets and liabilities that have historically been held at the eBay Inc. corporate level, but are specifically identifiable and attributable to the payments business, and corresponding notes, and the unaudited pro forma condensed combined financial statements and corresponding notes included elsewhere in this information statement. This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements. The matters discussed in these forward-looking statements are subject to risk, uncertainties, and other factors that could cause actual results to differ materially from those projected or implied in the forward-looking statements. Please see “Risk Factors” and “Cautionary Statement Concerning Forward-Looking Statements” for a discussion of the uncertainties, risks and assumptions associated with these statements.

Overview

On September 30, 2014, eBay Inc. (“eBay”) announced its intent to separate its payments business into an independent, publicly traded company. To accomplish this separation, in January 2015, eBay incorporated PayPal Holdings, Inc. (“PayPal Holdings”) which will ultimately become the parent of PayPal, Inc. and will hold, directly or indirectly, all of the assets and liabilities associated with PayPal, Inc. References to “we,” “our,” “us,” “the Company” or “PayPal” refer to the combined entities of the payments business of eBay, including PayPal, Inc. and certain other assets and liabilities that have been historically held at the eBay corporate level, but are specifically identifiable and attributable to the payments business.

Years ended December 31, 2014, 2013 and 2012

We recorded net income of $419 million in 2014, $955 million in 2013 and $778 million in 2012. The decrease in net income in 2014 was primarily attributable to an increase in income tax expense of $713 million primarily resulting from the recognition of deferred tax liabilities relating to undistributed foreign earnings of certain foreign subsidiaries for 2013 and prior years. We recorded non-GAAP net income of $1.3 billion in 2014, $1.2 billion in 2013 and $1.0 billion in 2012. The increase in non-GAAP net income in 2014 and 2013 was attributable to an increase in operating income in each of these periods.

Net revenues increased 19% in 2014 and 2013. The increase was primarily driven by growth in total payment volume (“TPV”) of 26% in 2014 and 24% in 2013. Operating expenses increased $1.1 billion and $854 million, or 20% and 18% in 2014 and 2013, respectively. The increase was primarily due to an increase in transaction expense, transaction and loan losses, and additional investments in sales and marketing programs and product development initiatives.

Operating income increased $177 million, or 16% in 2014 compared to 2013, and $211 million, or 24% in 2013 compared to 2012. Non-GAAP operating income increased $237 million, or 17%, in 2014 compared to 2013 and $244 million, or 21%, in 2013 compared to 2012. Our non-GAAP operating margin was 21% in 2014, 21% in 2013 and 21% in 2012. Operating income and non-GAAP operating income increased in 2014 and 2013 as a result of the increase in net revenues.

We generated net cash flows from operations of $2.2 billion for the year ended December 31, 2014, compared to $2.0 billion and $1.6 billion for the years ended December 31, 2013 and 2012, respectively. We generated free cash flow of $1.7 billion, $1.6 billion and $1.1 billion in 2014, 2013 and 2012, respectively.

 

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The following table provides a summary of our combined operating results for the years ended December 31, 2014, 2013 and 2012:

 

     Year Ended December 31,     Percent Increase/(Decrease)  
     2014     2013     2012     2014     2013  
     (In millions, except percentages)  

Net Revenues

   $ 8,025      $ 6,727      $ 5,662        19     19

Operating Expenses

     6,757        5,636        4,782        20     18
  

 

 

   

 

 

   

 

 

     

Operating Income

  1,268      1,091      880      16   24

Income Tax Expense

  842      129      113      553   14

Effective Income Tax Rate

  67   12   13        **         ** 

Net Income

$ 419    $ 955    $ 778      (56 )%    23

 

** Not Meaningful

The following table provides a summary of our combined non-GAAP financial measures for the years ended December 31, 2014, 2013 and 2012:

 

     Year Ended December 31,     Percent Increase/(Decrease)  
     2014     2013     2012     2014     2013  
     (In millions, except percentages)  

Non-GAAP operating income

   $ 1,648      $ 1,411      $ 1,167        17     21

Non-GAAP operating margin

     21     21     21       **        ** 

Non-GAAP net income

   $ 1,343      $ 1,186      $ 961        13     23

 

** Not Meaningful

Please refer to “Non-GAAP Measures” below for discussion of the items excluded from non-GAAP operating income, non-GAAP operating margin and non-GAAP net income.

Three months ended March 31, 2015 and 2014

We recorded net income of $255 million and a net loss of $382 million in the three months ended March 31, 2015 and 2014, respectively. The increase in net income in 2015 was primarily attributable to a decrease in income tax expense of $628 million, primarily resulting from the recognition of deferred tax liabilities in the three months ended March 31, 2014 relating to undistributed foreign earnings of certain foreign subsidiaries for 2013 and prior years. We recorded non-GAAP net income of $360 million and $337 million in the three months ended March 31, 2015 and 2014, respectively.

Net revenues increased 14% in the three months ended March 31, 2015 compared to the same period of the prior year. The increase was primarily driven by growth in TPV of 17%. Operating expenses increased $259 million, or 17%, in the three months ended March 31, 2015 compared to the same period of the prior year. The increase was primarily due to an increase in transaction expense, transaction and loan losses, general and administrative expenses and additional investments in product development initiatives. Operating expenses in the three months ended March 31, 2015 also included $48 million in restructuring expense representing approximately 3% of the growth in total operating expenses compared to the same period in the prior year.

Operating income increased $4 million, or 1% in the three months ended March 31, 2015 compared to the same period of the prior year. Non-GAAP operating income increased $61 million, or 15%, in the three months ended March 31, 2015 compared to the same period of the prior year. Our non-GAAP operating margin was 22% in the three months ended March 31, 2015 and 2014. Operating income and non-GAAP operating income increased as a result of the increase in net revenues.

 

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We generated net cash flows from operations of $544 million for the three months ended March 31, 2015, compared to $425 million for the three months ended March 31, 2014. We generated free cash flow of $350 million and $325 million in the three months ended March 31, 2015 and 2014, respectively.

The following table provides a summary of our combined operating results for the three months ended March 31, 2015 and 2014:

 

     Three Months Ended
March 31,
    Percent
Increase/
(Decrease)
 
     2015     2014    
     (In millions, except percentages)  

Net Revenues

   $ 2,137      $ 1,874        14

Operating Expenses

     1,815        1,556        17
  

 

 

   

 

 

   

Operating Income

  322      318      1

Income Tax Expense

  66      694      (90 )% 

Effective Income Tax Rate

  21   222   *

Net Income/(Loss)

$ 255    $ (382   (167 )% 

 

** Not Meaningful

The following table provides a summary of our combined non-GAAP financial measures for the three months ended March 31, 2015 and 2014:

 

     Three Months Ended
March 31,
    Percent
Increase/
(Decrease)
 
     2015     2014    
     (In millions, except percentages)  

Non-GAAP operating income

   $ 473      $ 412        15

Non-GAAP operating margin

     22     22     *

Non-GAAP net income

   $ 360      $ 337        7

 

** Not Meaningful

Please refer to “Non-GAAP Measures” below for discussion of the items excluded from non-GAAP operating income, non-GAAP operating margin and non-GAAP net income.

Business Environment

We are a leading technology platform company that enables digital and mobile payments on behalf of consumers and merchants worldwide. We put our customers at the center of everything we do. We strive to increase our relevance for consumers, merchants, friends and family to manage and move their money anywhere in the world, anytime, on any platform and through any device (e.g., mobile, tablets, personal computers or wearables). We provide safer and simpler ways for businesses of all sizes to accept payments from merchant websites, mobile devices and applications, and at offline retail locations through a wide range of payment solutions across our Payments Platform, including PayPal, PayPal Credit, Braintree and Venmo products.

We provide merchants and consumers with protection programs on substantially all transactions completed through our Payments Platform, except for transactions using our gateway products. Our gateway products include our Payflow Payments and certain Braintree products. A payment gateway links a merchant’s website to their processing network and merchant account. Our protection programs protect both merchants and consumers from loss primarily due to fraud and counterparty performance. Our ability to protect both consumers and merchants is based largely on our risk management capabilities, which in turn depend on our ability to leverage the data we collect on transactions and our analytical capabilities. The protections we provide are generally much

 

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broader than those protections provided by other participants in the payments industry. We believe that as a result of these programs, consumers can be confident that they will only be required to pay if they receive the product in the condition as described, and that merchants can be confident that they will receive payment for the product that they are delivering to the customer.

Our Payments Platform and open application programming interfaces (“APIs”) are designed to allow developers to innovate with ease and to offer cutting edge applications to a large ecosystem of merchants and consumers, while at the same time maintaining the security of our customers’ financial information. We provide developers with easy to use, flexible and powerful tools that are designed to leverage our global reach and payment capabilities. Our software developer kits (“SDKs”) are specifically focused on the mobile application market and are designed to remove friction by not requiring a redirect to PayPal.com or an additional login. We are using a true “mobile first” approach to make payments simple and intuitive.

We generated approximately 52% of our 2014 net revenues, 52% of our 2013 net revenues and 51% of our 2012 net revenues from merchants or consumers domiciled outside of the United States. Other than the United States, the United Kingdom was the only country where we generated more than 10% of total net revenues in 2014, 2013 and 2012. During each of these periods, we have also generated more than 10% of total net revenues in the euro zone. Because we have generated substantial net revenues internationally in recent periods, including the years ended December 31, 2014, 2013 and 2012, we are subject to the risks of doing business in foreign countries as discussed under “Risk Factors—Risk Factors That May Affect Our Business, Results of Operations and Financial Condition.” In that regard, fluctuations in foreign currency exchange rates impact our results of operations. We have a foreign currency risk management program that is designed to reduce our exposure to fluctuations in foreign currencies; however, the effectiveness of this program in mitigating the impact of foreign currency fluctuations on our results of operations varies from period to period, and in any given period, operating results are usually affected, sometimes significantly, by changes in foreign currency exchange rates. We calculate the year-over-year impact of foreign currency movements on our business using prior period foreign currency exchange rates applied to current year transactional currency amounts.

The markets for our products are intensely competitive and are subject to rapid technological change, including but not limited to our products’ ability to complete transactions accurately, safely and quickly on merchant websites, within their mobile applications, or in a physical location. Since a large number of merchants accept forms of payment other than PayPal, the use of our product is ultimately a consumer choice. We compete for consumer preference by offering safer and simpler ways to access and move money through any mobile device or personal computer. We face competition from existing online, mobile and offline payment methods.

Our business is subject to regulation in the countries in which we operate, including regulations such as Anti-Money Laundering (“AML”) and Know Your Customer (“KYC”) policies. Information security risks for global payments and technology companies have significantly increased in recent years. Although we have not experienced any material impacts relating to cyber-attacks or other information security breaches on our Payments Platform, there can be no assurance that we are immune to these risks and will not suffer such losses in the future. See our risk factor in “Risk Factors—Risk Factors That May Affect Our Business, Results of Operations and Financial Condition” related to a failure or breach of our security systems or infrastructure as a result of cyber-attacks.

Impact of Foreign Currency Rates

We have significant operations internationally that are denominated in foreign currencies, primarily the Euro, British Pound, and Australian Dollar, subjecting us to foreign currency risk which may adversely impact our financial results. The strengthening or weakening of the U.S. dollar versus the Euro, British Pound and Australian Dollar impacts the translation of our net revenues generated in these foreign currencies into the U.S. dollar. In 2014, foreign currency movements relative to the U.S. dollar negatively impacted net revenues by approximately $58 million (inclusive of a $36 million negative impact from hedging activities). In 2013, foreign

 

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currency movements relative to the U.S. dollar negatively impacted net revenues by approximately $20 million (inclusive of a $4 million negative impact from hedging activities). In 2014 and 2013, foreign currency movements relative to the U.S. dollar did not have a significant impact on net income. Additionally, in connection with our services in multiple currencies, we set our foreign exchange rates twice per day, and may face financial exposure if we incorrectly set our foreign exchange rates or as a result of fluctuations in foreign exchange rates between the times that we set our foreign exchange rates. Given that we also hold some corporate and customer funds in non-U.S. currencies, our financial results are affected by the translation of these non-U.S. currencies into U.S. dollars. While from time to time we enter into transactions to hedge portions of our foreign currency translation exposure, it is impossible to predict or eliminate the effects of this exposure. Fluctuations in foreign exchange rates could significantly impact our financial results.

Three months ended March 31, 2015 and 2014

In the three months ended March 2015 and 2014, we generated approximately 52% of net revenues from customers domiciled outside of the United States. Other than the United States, the United Kingdom was the only country where we generated more than 10% of total net revenues in these periods.

In the three months ended March 31, 2015, foreign currency movements relative to the U.S.dollar negatively impacted net revenues by approximately $80 million (inclusive of a $50 million favorable impact from hedging activities), and decreased total operating expenses by approximately $75 million. Therefore, in the three months ended March 31, 2015, foreign currency movements relative to the U.S. dollar did not have a significant impact on net income. In the three months ended March 31, 2014, foreign currency movements relative to the U.S. dollar negatively impacted net revenues by approximately $8 million (inclusive of a $17 million negative impact from hedging activities).

Financial Results - Fiscal Years 2014, 2013 and 2012

Net Revenues

Revenue Description

We earn revenue from the following types of transactions:

 

    Transaction revenues: Net transaction fees charged to consumers and merchants based on the volume of activity processed through our Payments Platform, including PayPal, PayPal Credit, Venmo and Braintree products.

 

    Other value added services: Net revenues derived principally from interest and fees earned on our PayPal Credit loans receivable portfolio, subscription fees, gateway fees, revenue share we earn through partnerships and other services that we provide to consumers and merchants.

Transaction revenues are generated from fees charged to merchants on the volume of activity we enable (“Total Payments Volume” or “TPV”). We define TPV as the value of payments, net of payment reversals, successfully completed through our Payments Platform, excluding transactions processed through our gateway products. Our Payments Platform includes PayPal, PayPal Credit, Venmo and Braintree products. Growth in TPV is also directly impacted by the payment transactions that we enable on our payments platform. Payment transactions is the total number of payments, net of payment reversals, successfully completed through our Payments Platform, excluding transactions processed through our gateway products. We earn additional fees on transactions settled in foreign currencies when we enable cross-border transactions. We also earn interest and related fees on receivables from consumers and merchants that use our PayPal Credit products.

Our revenues can be significantly impacted by the following:

 

    The mix between merchant types;

 

    Mix between domestic and cross-border transactions;

 

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    Geographic region or country in which a transaction occurs; and

 

    The amount of PayPal Credit loans receivable outstanding with consumers and merchants.

Net revenues analysis

The significant components of our net revenue for the years ended December 31, 2014, 2013 and 2012 were as follows:

 

     Year Ended December 31,      Percent Increase/
(Decrease)
 
           2014                  2013                  2012                  2014                 2013        
     (In millions, except percentages)  

Transaction revenues

   $ 7,107       $ 5,992       $ 5,028         19     19

Other value added services

     918         735         634         25     16
  

 

 

    

 

 

    

 

 

      

Net revenues

$ 8,025    $ 6,727    $ 5,662      19   19