Case 1:22-cv-00974 Document 1 Filed 02/03/22 Page 1 of 17
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`UNITED STATES DISTRICT COURT
`SOUTHERN DISTRICT OF NEW YORK
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`SHIVA STEIN,
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`Plaintiff,
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`APPLIED MATERIALS, INC., RANI
`BORKAR, JUDY BRUNER, XUN (ERIC)
`CHEN, AART J. de GEUS, GARY E.
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`DICKERSON, THOMAS J. IANNOTTI,
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`ALEXANDER A. KARSNER,
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`ADRIANNA C. MA, YVONNE McGILL,
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`and SCOTT A. McGREGOR,
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`Defendants.
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`CIVIL ACTION NO.
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`COMPLAINT
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`Plaintiff, Shiva Stein, alleges, upon information and belief based upon, inter alia, the
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`investigation made by and through her attorneys, except as to those allegations that pertain to the
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`plaintiff herself, which are alleged upon knowledge, as follows:
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`PRELIMINARY STATEMENT
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`1.
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`In 2006, in the wake of the Enron, WorldCom and Tyco options-related scandals,
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`the Securities and Exchange Commission (“SEC”) implemented a new set of rules dictating how
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`companies must disclose executive and director compensation to their stockholders. Among
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`these requirements, the SEC mandated that companies disclose the “grant date fair value” of
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`stock awards and option awards in their proxy statements following the fiscal year in which such
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`awards were granted. This requirement has been codified in Regulation S-K, 17 C.F.R. § 229
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`(Item 402 (c)(2)(v) and (vi)).
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`2.
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`In doing so, the SEC affirmed that full disclosure of executive and director
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`compensation decisions is important for investors to know at the time – or soon after – those
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`Case 1:22-cv-00974 Document 1 Filed 02/03/22 Page 2 of 17
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`decisions are made. Where that compensation is an unconditional cash award to an executive or
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`director, the disclosure is transparent. Where the compensation is, however, an award of options
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`or a complex equity instrument that expires or vests years later, the value of the compensation
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`award on the date of grant is somewhat opaque. Providing the “grant date fair value” of such
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`compensation in the proxy statement using approved accounting methods makes such
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`compensation transparent to investors by assigning a dollar value to the awards.
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`3.
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`But this rule mandating that companies provide the grant date fair value of equity-
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`pay instruments is not as simple as disclosing the maximum possible award value. Instead, to
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`determine the fair value of such awards on the date of grant often requires the use of
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`mathematical models. Such models in turn require the implementation of assumptions
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`concerning such awards. Such assumptions can include, but are not limited to: expected
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`volatility, interest rates, and expected dividend yields.
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`4.
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`Company managers have discretion over the assumptions that are fed into the
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`models. Moreover, companies are incentivized to manipulate these assumptions to reduce the
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`reported grant date fair value of equity awards. Indeed, many studies have demonstrated the
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`selective discounting of such awards, thereby making the compensation appear less than it truly
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`is. See, e.g., Eli Bartov et al., Managerial Discretion and the Economic Determinants of the
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`Disclosed Volatility Parameter for Valuing ESOs, 12 Rev. Acct. Stud. 155, 158 (2007) (finding
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`in a sample of over 9000 firm-years from 1998 to 2004 that firms opportunistically selected
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`volatility measures to reduce reported compensation); Preeti Choudhary, Evidence on
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`Differences Between Recognition and Disclosure: A Comparison of Inputs to Estimate Fair
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`Values of Employee Stock Options, 51 J. Acct. & Econ. 77, 91 (2011) (finding that opportunistic
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`selection of volatility assumptions to minimize option value and compensation cost increased
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`after stock option expensing was mandated in 2004); Leslie Davis Hodder et al., Employee Stock
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`2
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`Case 1:22-cv-00974 Document 1 Filed 02/03/22 Page 3 of 17
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`Option Fair-Value Estimates: Do Managerial Discretion and Incentives Explain Accuracy?, 23 J.
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`Contemp. Acct. Res. 933, 938-39 (2006) (finding use of discretion to reduce pro forma earnings
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`among a subset of firms).
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`5.
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`To police such manipulation, at the same time the SEC required the disclosure of
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`the grant date fair values of such equity-based awards in 2006, the SEC also required that
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`companies disclose the model and assumptions they use to calculate such values. This
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`requirement is codified in Instruction 1 to Regulation S-K, 17 C.F.R. § 229 (Item 402 (c)(2)(v)
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`and (vi)). Using these assumptions, it is possible for analysts (and shareholders) to re-run the
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`calculation to confirm the disclosed grant date fair values by using a free online pricing
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`calculator.1
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`6.
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`But despite this SEC requirement, Defendant Applied Materials Inc. (“Applied
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`Materials” or the “Company”) does not disclose such information. For every year since at least
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`fiscal 2008, Applied Materials has represented in its proxy statements that the assumptions
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`used to calculate its most highly-compensated executives’ equity-based compensation are
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`available in the corresponding annual report on Form 10-K provided with the proxy
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`statement. But that has never been true. From fiscal 2008 to fiscal 2018, the Company did not
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`even divulge the type of model used to value this compensation, and instead it represented that
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`such valuations were arrived at by simply using the price of the stock on the date of grant, which
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`is verifiably false as demonstrated below. Since fiscal 2019, the Company has claimed to use a
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`Monte Carlo simulation, but it continues to withhold the assumptions it makes with this model.
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`These omissions are all the more glaring because Applied Materials does provide the model and
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`assumptions used to calculated employee purchases of common stock under its Employee Stock
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`1 For example, Radford, a compensation consulting company, provides such a calculator.
`https://www.radford.com/home/portal/underwater_exchange_calculator.asp
`3
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`Case 1:22-cv-00974 Document 1 Filed 02/03/22 Page 4 of 17
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`Purchase Plans, and these are disclosed in the exact place in the Form 10-K where Applied
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`Materials should (and claims it does) disclose the assumptions regarding executive
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`compensation.
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`7.
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`A review of the Form 10-Ks from these years, including the most recent Form 10-
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`K published on December 17, 2021 in advance of the upcoming March 10, 2022 annual
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`stockholders meeting, shows that Applied Materials has failed to provide this information to
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`stockholders.
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`8.
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`Plaintiff brings this action to rectify this failure to provide essential information
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`concerning the compensation granted to Applied Materials’ most highly-compensated executives
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`and directors. Plaintiff also brings this action to determine whether Defendants have failed to
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`accurately disclose the fair value of their compensation, which can only be done by knowing the
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`assumptions Applied Materials makes to calculate the grant date fair values.
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`JURISDICTION
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`9.
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`The jurisdiction of this court is founded upon the application of questions of
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`federal law pursuant to § 27 of the Securities Exchange Act of 1934, as amended (the “Exchange
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`Act”), 15 U.S.C. § 78aa, and 28 U.S.C. § 1331.
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`10.
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`The claims herein arise under § 14(a) of the Exchange Act, 15 U.S.C. §78n(a) and
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`Rule 14a-3, 17 C.F.R. § 240.14a-3, Rule 14a-9, 17 C.F.R. § 240.14a-9, Schedule 14A, 17 C.F.R.
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`§ 240.14a-101, and Regulation S-K, 17 C.F.R. § 229, of the United States Securities and
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`Exchange Commission (the “SEC”).
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`THE PARTIES
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`11.
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`Plaintiff Shiva Stein is a stockholder of Defendant Applied Materials, and she has
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`been such since June 11, 2014, and continuously to date.
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`12.
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`Applied is a Delaware corporation with its principal place of business in Santa
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`Clara, California. It is authorized to do business in the State of New York and is found in New
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`York County, as it states in its filing with the New York Secretary of State. Its stock is traded on
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`the Nasdaq Global Select Market under the symbol AMAT. It is in the computer technology
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`business. Its fiscal year ends on the last Sunday of October so that its last fiscal year ended
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`October 31, 2021.
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`13.
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`Defendants Rani Borkar, Judy Bruner, Xun (Eric) Chen, Aart J. de Geus, Gary E.
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`Dickerson, Thomas J. Iannotti, Alexander A. Karsner, Adrianna C. Ma, Yvonne McGill, and
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`Scott A. McGregor are all the members of the Applied board of directors. Defendant Gary E.
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`Dickerson is also Applied’s president and chief executive officer.
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`WRONGFUL ACTS AND OMISSIONS
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`14.
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`The compensation of corporate directors and key officers is a matter of direct and
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`deep concern to shareholders in the exercise of their right to vote. The SEC addresses this
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`concern with detailed, explicit disclosure rules and regulations. This complaint challenges
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`Applied Materials’ proxy statements for omitting information specifically required by those rules
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`and regulations and providing misinformation.
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`The False and Misleading 2022 Proxy Statement
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`15. While, as demonstrated further below, Applied Materials has failed to accurately
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`and adequately disclose how it calculates the equity compensation awarded to its top executive
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`officers since at least fiscal 2008, this Action is principally concerned with remedying the
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`January 26, 2022 proxy statement furnished in advance of the March 10, 2022 annual
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`stockholders meeting (the “2022 Proxy Statement”).
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`16.
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`In the 2022 Proxy Statement, the board of directors solicits the stockholders’
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`proxies to vote in favor of the election of the ten Defendant directors named therein, including
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`Case 1:22-cv-00974 Document 1 Filed 02/03/22 Page 6 of 17
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`Defendant Dickerson, Applied Materials’ President and CEO, and in favor of Dickerson’s fiscal
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`2021 compensation and that of the other named executive officers (“NEOs”) on a non-binding,
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`advisory basis under §14A of the Exchange Act, 15 U.S.C. §78n-1 (the “say-on-pay vote”).
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`17.
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`Section 14(a) of the Exchange Act makes it unlawful for any person to solicit or
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`to permit the use of his name to solicit any proxy in contravention of the SEC’s rules and
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`regulations.
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`18.
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`SEC Rule 14a-9 forbids the solicitation of a proxy by means of a proxy statement
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`containing materially false or misleading misrepresentations or omissions.
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`19.
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`SEC Rule 14a-3(a) requires that public companies may not solicit stockholder
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`votes without furnishing a proxy statement “containing the information specified in Schedule
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`14A.” It is a violation of § 14(a) of the Exchange Act to misrepresent or to omit information
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`specifically required by the SEC’s rules and regulations.
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`20.
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`Because the 2022 Proxy Statement solicits action to be taken at the meeting for
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`the election of directors, SEC Schedule 14A (Item 8(a)) requires the 2022 Proxy Statement to
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`furnish the information required by SEC Reg. S-K (Item 402), concerning Director and
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`Executive Compensation.
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`21.
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`In addition, 15 U.S.C. §78n-1 requires proxy statements for which the SEC
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`requires compensation disclosure to include a separate resolution for a stockholder vote on
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`executive compensation as disclosed pursuant to SEC Reg. S-K (Item 402), i.e. the “say-on-pay
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`vote.”
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`22.
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`SEC Schedule 14A (Item 8(a)) and Reg. S-K (Item 402(c)(1)) require such proxy
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`statements to report the compensation of the NEOs for the company’s last three completed fiscal
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`years in the form of the Summary Compensation Table.
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`23.
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`SEC Reg. S-K (Item 402(c)) requires strict compliance with the Summary
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`Compensation Table so that it can accomplish its stated purpose of helping stockholders
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`understand how compensation components relate to each other and use the Table to compare
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`compensation from year to year and from company to company. SEC Release No. 8732A,
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`Executive Compensation and Related Person Disclosure, 2006 WL 2589711 at *21 (Sept. 8,
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`2006). SEC Release No. 8732A at *24 and SEC Reg. S-K (Item 402 (c)(2)(v) and (vi)) both
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`require stock awards to be reported in column (e) and option awards to be reported in column (f)
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`of the Summary Compensation Table.
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`24.
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` Instruction 1 to Item 402(c)(2)(v) and (vi) requires for awards reported in
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`columns (e) and (f) the inclusion of a footnote disclosing all assumptions made in the valuation
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`by reference to a discussion of those assumptions in the registrant’s financial statements, or
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`discussion in the Management’s Discussion and Analysis. The sections so referenced are
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`deemed part of the disclosure provided pursuant to this Item. FASB ASC Topic 718-10-50-
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`2(f)(2) requires disclosure of those assumptions. FASB ASC Topic 718 means Financial
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`Accounting Standards Board Accounting Standards Codification. Topic 718 covers the
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`accounting and disclosure standards concerning stock and option compensation. The SEC
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`requires entities under its jurisdiction to comply with FASB’s standards and interpretations.
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`25.
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`The disclosure of the NEOs’ compensation in the Summary Compensation Table
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`in the 2022 Proxy Statement is in contravention of SEC Schedule 14A (Item 8(a)), SEC Reg. S-
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`K (Items 402(c)(1) and 402(c)(2)(v) and (vi)) and Instruction 1 thereto, and SEC Release No.
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`8732A.
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`26.
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`The 2022 Proxy Statement represents that in fiscal year 2021, Applied awarded its
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`NEOs stock awards that were based in part on relative total shareholder return (“TSR”) measured
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`against the S&P 500. In the table of Summary Compensation Table in the 2022 Proxy
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`Statement, it reports that the grant date fair value of these stock awards, awarded to all five
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`NEOs was $58,564,647.
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`27.
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`The 2022 Proxy Statement represents that in fiscal year 2020, Applied awarded its
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`NEOs stock awards that were based in part on relative TSR measured against the S&P 500. In
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`the Summary Compensation Table in the 2022 Proxy Statement, it reports that the grant date fair
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`value of these stock awards, awarded to all five NEOs was $26,365,454.
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`28.
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`The 2022 Proxy Statement represents that in fiscal year 2019, Applied awarded its
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`NEOs stock awards that were based in part on relative TSR measured against the S&P 500. In
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`the Summary Compensation Table in the 2022 Proxy Statement, it reports that the grant date fair
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`value of these stock awards, awarded to all five NEOs was $22,450,696.
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`29.
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`Footnote 2 to the Summary Compensation Table says:
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`Amounts shown do not reflect compensation actually received by the executive
`officer. Instead, the amounts reported represent the aggregate grant date fair value
`of target stock awards granted in the respective fiscal years, as determined
`pursuant to ASC 718 (but excluding the effect of estimated forfeitures for
`performance-based awards). For fiscal 2021, the grant date fair value of the
`maximum number of stock awards that may be earned by each NEO was as
`follows: Mr. Dickerson: $44,453,109; Mr. Durn: $13,063,767; Dr. Raja:
`$12,357,270; Mr. Salehpour: $5,985,380; and Dr. Nalamasu: $4,015,178. See
`“Fiscal 2021 Equity Awards” on page 38 for more information regarding the
`stock awards, including the non-recurring performance-based Value Creation
`Awards awarded to Mr. Dickerson, Mr. Durn and Dr. Raja during fiscal 2021.
`The assumptions used to calculate the value of awards are set forth in Note 14
`of the Notes to Consolidated Financial Statements included in Applied’s
`Annual Report on Form 10-K for fiscal 2021 filed with the SEC on December
`17, 2021.
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`30.
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`SEC Reg. S-K (Item 402(d)) also requires that proxy statements include a table of
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`Grants of Plan-Based Awards. In the 2022 Proxy Statement, Footnote 3 to the Grants of Plan-
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`Based Awards for Fiscal 2021 table concerning the “Grant Date Fair Value of Stock and Option
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`Awards,” repeats:
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`Amounts shown do not reflect compensation actually received by the NEOs.
`Instead, the amounts represent the aggregate grant date fair value of the awards as
`determined pursuant to ASC 718 (but excluding the effect of estimated forfeitures
`for performance-based awards). The assumptions used to calculate the awards’
`value are set forth in Note 14 of the Notes to Consolidated Financial Statements
`included in Applied’s Annual Report on Form 10-K for fiscal 2021 filed with
`the SEC on December 17, 2021.
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`31.
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`Both of these bolded statements are false. There are no “assumptions used to
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`calculate the awards’ value … in Note 14 of the Notes to Consolidated Financial Statements
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`included in Applied’s Annual Report on Form 10-K for fiscal 2021 filed with the SEC on
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`December 17, 2021.” And these assumptions are not provided by Applied Materials anywhere
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`else. As a result, investors are left in the dark as to how Applied Materials determines the fair
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`value of the compensation provided to the Company’s most senior executives in violation of
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`SEC regulations.
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`32.
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`Elsewhere, when disclosing director compensation, the 2022 Proxy Statement
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`also references “assumptions used to calculate the value of stock awards” in footnote 1 to the
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`Director Compensation for Fiscal 2021 Table. These stock awards are in the form of non-
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`discretionary grants of restricted stock units. While it is not clear why determining the fair value
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`of such awards requires the use of complex mathematical models and assumptions (these awards
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`are not dependent on, for example, TSR performance goals), the fiscal 2021 Form 10-K also
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`contains no assumptions or explanation as to what model is being used to calculate such fair
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`values.
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`33.
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`In the 2021 Form 10-K, Applied Materials states that it uses a Monte Carlo
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`simulation to calculate the grant date fair values of the TSR based Performance Shares. Pursuant
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`to FASB ASC Topic 718, the assumptions for a Monte Carlo simulation are (a) expected
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`volatility, (b) dividend yield, (c) risk-free interest rate, and (d) expected life.2 But none of these
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`assumptions (or any others) are disclosed in the 2021 Form 10-K.
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`34.
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`Applied Materials’ management selects and quantifies those assumptions. But (as
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`discussed above in paragraph 4) authoritative surveys reveal that corporate managements tend to
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`select assumptions that reduce reported executive compensation. Disclosure of those
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`assumptions is material because the technology is available to confirm the results and re-run the
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`analysis with different assumptions. SEC rules and regulations and the accounting standard
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`require those quantitative disclosures. FASB ASC Topic 718-10-50-2(f)(2). Their omission
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`contravenes the aforesaid SEC regulation, and the 2022 proxy solicitation violates §14(a) of the
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`Exchange Act.
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`35.
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`Because of these contraventions of the SEC rules and regulations, the 2022 Proxy
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`Statement is in violation of §14(a) of the Exchange Act. As a result, the Court should enjoin the
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`election of the directors and the non-binding, advisory vote on the named executive officers’
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`fiscal 2021 compensation. In addition, to the extent discovery reveals that Defendants have
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`understated the grant date fair value of executive compensation, the Court should reduce
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`Defendants’ compensation and impose damages.
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`36.
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`Also, the Court should order corrective disclosures to Applied Material’s 2022
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`Proxy Statement. That Proxy Statement must include a Summary Compensation Table
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`2 “A Monte Carlo simulation model projects future stock prices for the granting company and its
`peers based upon a risk-neutral stock price framework (similar to the financial modeling used for
`other employee equity such as BlackScholes or a binomial model). In fact, using identical
`assumptions, a Monte Carlo simulation would yield identical results to a Black-Scholes or
`binomial model. However, a Monte Carlo simulation allows for greater flexibility and
`customization of the assumptions and plan design parameters which is necessary to value a
`Relative TSR program.”
`https://www.radford.com/home/press_room/pdf/Radford_alert_RelativeTSR_09232009.pdf
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`disclosing the assumptions made to value the named-executive officers’ 2019, 2020 and 2021
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`compensation and the method used to arrive at the grant date fair values of such compensation.
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`37.
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`In addition, while it is perhaps only possible to remedy this problem going
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`forward, it should be made clear the Applied Materials has never (or at least since fiscal 2008)
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`adequately or accurately disclosed how it calculates its named executive officers’ compensation.
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`Applied Materials’ History of Failing to Accurately Disclose Executive Compensation
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`38.
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`The disclosure in the 2021 Form 10-K concerning Applied Materials’ use of a
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`Monte Carlo simulation to calculate named executive officer compensation was first included in
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`the Company’s 2019 Form 10-K concerning fiscal 2019 compensation. This additional, but
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`unhelpful, explanation of how the grant date fair values of Performance Shares were calculated
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`with regard to fiscal 2019 compensation is below:
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`The fair value of the portion of the awards subject to targeted levels of adjusted operating
`margin is estimated on the date of grant. If the performance goals are not achieved as of
`the end of the performance period, no compensation expense is recognized and any
`previously recognized compensation expense is reversed. The expected cost is based on
`the awards that are probable to vest and is reflected over the service period and reduced
`for estimated forfeitures.
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`The fair value of the portion of the awards subject to targeted levels of TSR is estimated
`on the date of grant using a Monte Carlo simulation model. Compensation expense is
`recognized based upon the assumption of 100% achievement of the TSR goal and will
`not be reversed even if the threshold level of TSR is never achieved, and is reflected over
`the service period and reduced for estimated forfeitures.
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`39.
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`This was the first time Applied Materials revealed that any kind of mathematical
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`model was being used to determine the fair value of the Performance Shares. It disclosed that
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`part of the grant date fair value of Performance Share awards was being calculated using a Monte
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`Carlo simulation due to the use of a performance goal of “targeted levels of” Total Shareholder
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`Return in fiscal 2019. But fiscal 2019 was not the first time the Company has used TSR as a
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`goal for its Performance Shares. It also used this as a performance goal in fiscal 2012, fiscal
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`2013, fiscal 2015, and fiscal 2016, but none of these years disclosed the use of a Monte Carlo
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`simulation to perform the grant date fair value calculation of executive awards.
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`40.
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`In addition, like with the 2022 Proxy Statement, the 2020 and 2021 Proxy
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`Statements also stated in footnotes to their compensation tables that the assumptions used to
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`calculate executive compensation were in the corresponding Form 10-Ks for those years, but no
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`such assumptions were included.
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`41.
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` Before fiscal 2019, these disclosures were even more obscure. Prior to fiscal year
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`2006, Applied Materials almost exclusively awarded its top executives equity compensation in
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`the form of stock options, but in fiscal 2006, the Company began providing its executives with
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`“Performance Shares” that vest over a period of several years and are subject to certain
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`performance goals that are determined at the time of the grant of the award. While the
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`performance goals have been different as the years have passed, from fiscal 2006 to fiscal 2018,
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`the Company always reported in its Form 10-Ks that the fair value of these awards has always
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`been calculated the same way: The Company multiplies the grant date price of the stock
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`underlying the award by the target number of shares. But this has never been true.
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`42. To illustrate, the Company’s fiscal 2008 Form 10-K stated,
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`Beginning in fiscal 2007, Applied initiated a performance-based equity award
`program for named executive officers and other key employees. The Human
`Resources and Compensation Committee of Applied’s Board of Directors (the
`Committee) approved grants of 1,565,000 and 1,950,000 performance-based
`restricted stock units under this program for fiscal 2008 and fiscal 2007,
`respectively. The Committee also approved the issuance to Applied’s President
`and Chief Executive Officer of performance-based restricted stock in the amounts
`of 100,000 and 150,000 shares for fiscal 2008 and fiscal 2007, respectively, at
`$0.01 per share. These awards vest only if specific performance goals set by the
`Committee are achieved. The goals require the achievement of specified levels of
`Applied’s annual operating profit as compared to Applied’s peer companies and
`also that the officer or key employee remain an employee of Applied through the
`vesting date. The fair value of the performance-based restricted stock awards
`and restricted stock is estimated using the fair value of Applied common stock
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`on the date of the grant and assumes that the applicable performance goals will
`be achieved.
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`43.
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`Such disclosures stating that the fair value of these awards was determined “using
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`the fair value of Applied common stock on the date of the grant” was never true, but Applied
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`Materials recycled this language in its Form 10-Ks for the next decade. Applied Materials said
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`nothing else about how the grant date fair values of these awards were determined. The fact that
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`the grant date prices were not the basis for the fair values of these awards can be demonstrated
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`by comparing the stock prices on the date of grants for these awards with the stock price as
`
`determined by dividing out the number of shares underlying such awards:
`
`Grant Date
`of
`Performance
`Shares3
`
`1/25/2007
`12/10/2007
`12/6/2010
`12/5/2011
`12/5/2012
`12/8/2014
`12/7/2015
`12/1/2016
`12/14/2017
`
`
`
`Grant Date
`Open Price
`
`Grant Date
`Low Price
`
`Grant Date
`High Price
`
`17.66
`18.37
`13.03
`11.01
`10.87
`25.12
`19.1
`32.14
`51
`
`17.44
`18.04
`12.9
`10.86
`10.77
`24.04
`18.88
`29.85
`50.57
`
`17.88
`18.75
`13.04
`11.0799
`10.93
`25.25
`19.15
`32.18
`51.81
`
`Grant Date
`Close Price
`
`Price Per
`Share Used To
`Determine
`Grant Date
`Fair Value of
`Target
`Awards In
`Proxy Tables
`17.48 $17.08
`18.64 $18.09
`13.019 $12.32
`10.99 $11.70
`10.8 $11.71
`24.24 $29.14
`18.91 $23.34
`30.1 $28.92
`51.31 $50.15
`
`44.
`
`As can been seen in the chart above, on every award date except for December
`
`10, 2007, the grant date stock price could not have served as the basis for the grant date fair
`
`value since the price per share used to determine the grant date fair value is outside of the
`
`window between the grant date low price and the grant date high price. Often the difference
`
`
`3 These dates are for the typical annual awards of Performance Shares granted to the named-
`executive officers each year and exclude certain special awards to particular executives in
`particular years for simplicity’s sake.
`
`
`
`13
`
`

`

`Case 1:22-cv-00974 Document 1 Filed 02/03/22 Page 14 of 17
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`
`
`between these stock prices is several dollars, which when applied to the tens of the thousands of
`
`shares underlying the awards at issue, provides very different values for the awards.
`
`45.
`
`Further confirming that the grant date prices are not the basis for these grant date
`
`fair value calculations is the fact that starting with the 2016 Proxy Statement and continuing to
`
`present, Applied Materials has provided a “target value” or “total value” for such awards in a
`
`separate part of the proxy statement’s Compensation Discussion & Analysis, and in a footnote to
`
`these charts it confirms that the “target value” or “total value” is based on the “closing price of
`
`Applied stock” on the date of grant. It states in another footnote to these tables that such values
`
`are not the same as the “grant date fair value determined pursuant to Accounting Standards
`
`Codification 718.” But it says nothing further about how such grant date fair values were
`
`calculated.
`
`46.
`
`Final confirmation that such grant date fair values were not determined based on a
`
`simple calculation involving the grant date stock price is that in each proxy statement when it
`
`says how the Company calculates the grant date fair value of such awards, it refers stockholders
`
`to the Form 10-K, but it also notes that “[t]he assumptions used to calculate the value of awards
`
`are set forth in” the Form 10-Ks corresponding to those years. But not only are there no
`
`assumptions provided in those Form 10-Ks concerning the valuation of the performance shares,
`
`if the grant date fair value were simply based on the stock price on the date of grant, there would
`
`be no need for assumptions of any kind. Assumptions such as expected volatility, interest rates,
`
`and expected dividend yields are only necessary when a mathematical model such as Black-
`
`Scholes or a Monte Carlo simulation is being used to calculate the grant date fair value. They
`
`are not necessary for a simple bit of multiplication.
`
`47.
`
`In sum, starting in fiscal 2007, Applied Materials’ proxy statements have stated
`
`the grant date fair values of performance shares in both the Summary Compensation Table and
`
`
`
`14
`
`

`

`Case 1:22-cv-00974 Document 1 Filed 02/03/22 Page 15 of 17
`
`
`
`the Grant of Plan-Based Awards Table, but they have never explained how these values are
`
`calculated. Instead, they have referred stockholders to the Company’s Form 10-Ks for such
`
`disclosures, but until fiscal 2019, these Form 10-Ks merely said the fair values were based on the
`
`grant date stock price. This is impossible and disproven by the fact that (1) the grant date stock
`
`price has always been different from the price per share derived from the values in the Summary
`
`Compensation Table and the Grant of Plan-Based Awards Table; (2) since the 2016 Proxy
`
`Statement, Applied Materials’ disclosures concerning the “target price” or “total price” of such
`
`awards shows this distinction; and (3) the Company’s reference to “assumptions” in the proxy
`
`statements makes no sense unless the grant date fair values of such awards are being calculated
`
`using a complicated mathematical model. Then, in fiscal 2019 and continuing with the 2022
`
`Proxy Statement, Applied Materials has stated that part of its calculation of executive
`
`compensation includes a Monte Carlo analysis, but it fails to disclose the assumptions made with
`
`regard to that analysis in contravention of SEC regulations. This Action seeks to remedy this
`
`decade and a half of false disclosures to the extent possible.
`
`COUNT I
`(Exchange Act Violations in the Election of Directors Proposal)
`
`48.
`
`Plaintiff incorporates all of the above paragraphs as if stated herein. The above
`
`paragraphs state a direct claim for relief against the Company under Section 14(a) of the
`
`Exchange Act for acting in contravention of the “rules and regulations” prescribed by the SEC.
`
`49.
`
`As a result of these actions, plaintiff will be injured, and she has no adequate
`
`remedy at law. She will suffer irreparable harm in the form of an uninformed vote on the
`
`director Defendants on March 10, 2022 if no action is taken to ameliorate this harm.
`
`50.
`
`To ameliorate the injury, injunctive relief is required in the form of an amended
`
`proxy statement that provides the information required by SEC Schedule 14A (Item 8(a)), SEC
`
`
`
`15
`
`

`

`Case 1:22-cv-00974 Document 1 Filed 02/03/22 Page 16 of 17
`
`
`
`Reg. S-K (Items 402(c)(1) and 402(c)(2)(v) and (vi)) and Instruction 1 thereto, and SEC Release
`
`No. 8732A, and which explains what assumptions are used to determine the grant date fair value
`
`of the