

16.	Share Plans

Total share-based compensation cost from continuing operations was $58.5 million, $41.4 million, $115.0 million and $10.6 million for fiscal 2017, 2016, 2015 and the three months ended December 30, 2016, respectively. These amounts are generally included within SG&A expenses in the consolidated statements of income. In conjunction with the Questcor Acquisition, Questcor equity awards were converted to Mallinckrodt equity awards which resulted in post-combination expense of $90.4 million in fiscal 2015, included in the above total share-based compensation, of which $80.6 million is included within SG&A expenses and $9.8 million is included within restructuring charges, net. The Company recognized a related tax benefit associated with this expense of $11.0 million, $13.1 million, $41.3 million and $3.6 million in fiscal 2017, 2016, 2015 and the three months ended December 30, 2016, respectively. During fiscal 2017, the $11.0 million tax benefit was comprised of $16.0 million associated with amortization and net stock exercises, partially offset by $5.0 million associated with U.S. Tax Reform re-measurement.

Stock Compensation Plans

Prior to the Separation, the Company adopted the 2013 Mallinckrodt Pharmaceuticals Stock and Incentive Plan ("the 2013 Plan"). The 2013 Plan provides for the award of share options, share appreciation rights, annual performance bonuses, long-term performance awards, restricted units, restricted shares, deferred share units, promissory shares and other share-based awards (collectively, "Awards"). The 2013 Plan provided for a maximum of 5.7 million common shares to be issued as Awards, subject to adjustment as provided under the terms of the 2013 Plan. In fiscal 2015, the Company amended the 2013 Plan and adopted the 2015 Mallinckrodt Pharmaceuticals Stock and Incentive Plan ("the 2015 Plan"). The 2015 Plan provides for a maximum of 17.8 million common shares to be issued as Awards (an incremental 12.1 million Awards from the 2013 Plan subject to issuance), subject to adjustment as provided under the terms of the 2015 Plan. As of December 29, 2017, all equity awards held by the Company's employees were either converted from Covidien equity awards at the Separation, converted from Questcor equity awards, or granted under the 2013 Plan or 2015 Plan.

Share options. Share options are granted to purchase the Company's ordinary shares at prices that are equal to the fair market value of the shares on the date the share option is granted. Share options generally vest in equal annual installments over a period of four years and expire ten years after the date of grant. The grant-date fair value of share options, adjusted for estimated forfeitures, is recognized as expense on a straight-line basis over the requisite service period, which is generally the vesting period. Forfeitures are estimated based on historical experience.

Share option activity and information is as follows:



	Share Options		Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value
Outstanding at September 26, 2014	3,526,789		$	36.84
Granted	635,567		102.20
Exercised	(1,132,778	)	29.79
Expired/Forfeited	(243,135	)	58.00
Outstanding at September 25, 2015	2,786,443		52.76
Granted	1,248,828		72.44
Exercised	(413,830	)	32.76
Expired/Forfeited	(199,585	)	72.65
Outstanding at September 30, 2016	3,421,856		61.17
Granted	3,742		60.01
Exercised	(16,382	)	36.42
Expired/Forfeited	(22,522	)	70.82
Outstanding at December 30, 2016	3,386,694		61.24
Granted	1,719,532		51.57
Exercised	(113,605	)	47.74
Expired/Forfeited	(348,637	)	68.08
Outstanding at December 29, 2017	4,643,984		57.78		6.9	$	0.2

Vested and non-vested expected to vest as of December 29, 2017	3,882,733		60.62		7.5	$	(0.6	)
Exercisable at December 29, 2017	1,944,709		52.19		4.7	0.2

As of December 29, 2017, there was $37.7 million of total unrecognized compensation cost related to non-vested share option awards, which is expected to be recognized over a weighted-average period of 2.5 years.

The grant-date fair value of share options has been estimated using the Black-Scholes pricing model. Use of a valuation model requires management to make certain assumptions with respect to selected model inputs. The expected volatility assumption is based on the historical and implied volatility of the Company's peer group with similar business models. The expected life assumption is based on the contractual and vesting term of the share option, employee exercise patterns and employee post-vesting termination behavior. The expected annual dividend per share is based on the Company's current intentions regarding payment of cash dividends. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a remaining term equal to the expected life assumed at the date of grant. The weighted-average assumptions used in the Black-Scholes pricing model for shares granted in fiscal 2017, 2016, 2015 and the three months ended December 30, 2016, along with the weighted-average grant-date fair value, were as follows:



	Fiscal Year Ended									Three Months Ended
	December 29, 2017			September 30, 2016			September 25, 2015			December 30, 2016
Expected share price volatility	36		%	31		%	29		%	35		%
Risk-free interest rate	2.00		%	1.74		%	1.72		%	1.23		%
Expected annual dividend per share	—		%	—		%	—		%	—		%
Expected life of options (in years)	5.3			5.3			5.3			5.3
Fair value per option	$	18.36		$	22.82		$	30.08		$	20.04

In fiscal 2017, 2016, 2015 and the three months ended December 30, 2016, the total intrinsic value of options exercised was $1.4 million, $15.3 million, $89.5 million and $0.3 million, respectively, and the related tax benefit was $0.5 million, $5.7 million, $33.1 million and $0.1 million, respectively.

Restricted share units. Recipients of restricted share units ("RSUs") have no voting rights and receive dividend equivalent units which vest upon the vesting of the related shares. RSUs generally vest in equal annual installments over a period of four years. Restrictions on RSUs lapse upon normal retirement, death or disability of the employee. The grant-date fair value of RSUs, adjusted for estimated forfeitures, is recognized as expense on a straight-line basis over the service period. The fair market value of RSUs granted after the Conversion is determined based on the market value of the Company's shares on the date of grant for periods after the Separation.

RSU activity is as follows:



	Shares		Weighted-Average Grant-Date Fair Value
Non-vested at September 26, 2014	589,222		$	47.88
Granted	273,733		105.68
Vested	(219,189	)	49.84
Expired/Forfeited	(71,272	)	68.15
Non-vested at September 25, 2015	572,494		73.45
Granted	615,074		70.10
Vested	(193,849	)	69.27
Expired/Forfeited	(99,260	)	79.95
Non-vested at September 30, 2016	894,459		70.40
Granted	36,731		69.08
Exercised	(30,919	)	47.54
Expired/Forfeited	(16,809	)	49.62
Non-vested at December 30, 2016	883,462		71.03
Granted	655,282		50.74
Exercised	(263,189	)	69.14
Expired/Forfeited	(169,789	)	68.57
Non-vested at December 29, 2017	1,105,766		60.08

The total fair value of Mallinckrodt RSU awards granted during fiscal 2017 was $50.7 million. The total vest date fair value of Mallinckrodt RSUs vested during fiscal 2017 was $69.1 million. As of December 29, 2017, there was $42.0 million of total unrecognized compensation cost related to non-vested restricted share units granted. The cost is expected to be recognized over a weighted-average period of 2.4 years.

Performance share units. Similar to recipients of RSUs, recipients of performance share units ("PSUs") have no voting rights and receive dividend equivalent units. The grant-date fair value of PSUs, adjusted for estimated forfeitures, is generally recognized as expense on a straight-line basis from the grant-date through the end of the performance period. The vesting of PSUs and related dividend equivalent units is generally based on various performance metrics and relative total shareholder return (total shareholder return for the Company as compared to total shareholder return of the PSU peer group), measured over a three-year performance period. The PSU peer group is comprised of various healthcare companies which attempts to replicate the Company’s mix of businesses. Depending on Mallinckrodt's relative performance during the performance period, a recipient of the award is entitled to receive a number of ordinary shares equal to a percentage, ranging from 0% to 200%, of the award granted.

PSU activity is as follows ⁽¹⁾:



	Shares		Weighted-Average Grant-Date Fair Value
Non-vested at September 26, 2014	72,740		$	63.46
Granted	77,306		125.84
Forfeited	(19,072	)	92.05
Non-vested at September 25, 2015	130,974		96.05
Granted	145,192		83.00
Forfeited	(9,521	)	96.30
Non-vested at September 30, 2016	266,645		88.59
Forfeited	(997	)	154.42
Non-vested at December 30, 2016	265,648		88.51
Granted	348,963		51.73
Forfeited	(48,606	)	107.00
Vested	(61,554	)	62.65
Non-vested at December 29, 2017	504,451		64.44

(1) The number of shares disclosed within this table are at the target number of 100%.

The Company generally uses the Monte Carlo model to estimate the probability of satisfying the performance criteria and the resulting fair value of PSU awards. The assumptions used in the Monte Carlo model for PSUs granted during each year were as follows:



	Fiscal Year Ended						Three Months Ended
	December 29, 2017		September 30, 2016		September 25, 2015		December 30, 2016
Expected stock price volatility	48	%	41	%	27	%	48	%
Peer group stock price volatility	40	%	36	%	32	%	40	%
Correlation of returns	17	%	24	%	14	%	17	%

The weighted-average grant-date fair value per share of PSUs granted was $51.73 in fiscal 2017. As of December 29, 2017, there was $18.5 million of unrecognized compensation cost related to PSUs, which is expected to be recognized over a weighted-average period of 1.8 years.

Restricted stock awards. Recipients of restricted stock awards ("RSAs") pertain solely to converted awards from the Questcor Acquisition, which were converted at identical terms to their original award. The converted RSAs maintain voting rights and a non-forfeitable right to receive dividends. RSAs are subject to accelerated vesting as prescribed by the terms of the original award based on a change in control, and substantially all of which vested over a thirteen month period of time from the date of the Questcor Acquisition. Restrictions on RSAs lapse upon normal retirement, death or disability of the employee. The grant-date fair value of RSAs, adjusted for estimated forfeitures, is recognized as expense on a straight-line basis over the service period. The weighted average grant-date fair value per share is $70.88.



	Shares
Non-vested at September 26, 2014	1,432,031
Vested	(1,362,823	)
Forfeited	(34,646	)
Non-vested at September 25, 2015	34,562
Vested	(9,760	)
Forfeited	(7,936	)
Non-vested at September 30, 2016	16,866
Vested	(1,087	)
Forfeited	(911	)
Non-vested at December 30, 2016	14,868
Vested	(7,970	)
Forfeited	(2,223	)
Non-vested at December 29, 2017	4,675

The total vest date fair value of Mallinckrodt restricted share awards vested during fiscal 2017 was $0.4 million.

Employee Stock Purchase Plans

Effective March 16, 2016, upon approval by the shareholders of Mallinckrodt, the Company adopted a new qualified Mallinckrodt Employee Stock Purchase Plan ("ESPP"). Substantially all full-time employees of the Company's U.S. subsidiaries and employees of certain qualified non-U.S. subsidiaries are eligible to participate in the ESPP. Eligible employees authorize payroll deductions to be made to purchase shares at 15% below the market price at the beginning or end of an offering period. Employees are eligible to authorize withholdings such that purchases of shares may amount to $25,000 of fair market value for each calendar year as prescribed by the Internal Revenue Code Section 423. Mallinckrodt has elected to deliver shares under the period by utilizing treasury stock accumulated by the Company.

Prior to the first offering period of the ESPP (July 1, 2016), the Company maintained a non-qualified employee stock purchase plan ("the Old ESPP"). Substantially all full-time employees of the Company's U.S. subsidiaries and employees of certain qualified non-U.S. subsidiaries were eligible to participate in the Old ESPP. Eligible employees authorized payroll deductions to be made for the purchase of shares. The Company matched a portion of the employee contribution by contributing an additional 15% (25% in fiscal 2015) of the employee's payroll deduction up to a $25,000 per employee annual contribution. All shares purchased under the Old ESPP were purchased on the open market by a designated broker.