Employment and Compensation Arrangements

3 Months Ended

Mar. 31, 2020

Share-based Payment Arrangement [Abstract]

Employment and Compensation Arrangements

Employee Incentive Plans

The 2019 Incentive Award Plan permits the granting of awards in the form of incentive stock options, non-qualified stock options, share appreciation rights, restricted shares, restricted share units and other stock-based or cash based awards. Equity awards may be issued in the form of restricted shares or restricted share units with dividend rights or dividend equivalent rights subject to vesting terms and conditions specified in individual award agreements. The Company’s Management Incentive Plan provides for employees of the Company to be eligible to purchase shares of the Company. See Note 14 — “Shareholders’ Equity” for additional information.

A maximum aggregate amount of 60,000,000 ordinary shares are reserved for issuance under the 2019 Incentive Award Plan. Equity awards under the 2019 Incentive Award Plan may be issued in the form of options to purchase shares of the Company which are exercisable upon the occurrence of conditions specified within individual award agreements. As of March 31, 2020 37,302,599 awards had been granted.

A summary of the Company’s share-based compensation is as follows:



	Three Months Ended March 31,
	2020			2019
Share-based compensation expense	$	17,469		$	3,176
Tax benefit recognized	$	(2	)	$	78

In the three months ended March 31, 2020, the Company recognized additional Share-based compensation expense related to the modification of certain awards under the 2019 Incentive Award Plan. As of March 31, 2020, there was $4,909 of total unrecognized compensation cost, related to outstanding stock options, which is expected to be recognized through 2024 with a remaining weighted-average service period of 2.1 years.

Stock Options

The Company’s stock option activity is summarized below:



	Number of Options		Weighted Average Exercise Price per Share		Weighted-Average Remaining Contractual Life (in years)	Aggregate Intrinsic Value
Balance at December 31, 2019	20,880,225		$	12.18	7.3	$	105,119
Forfeited	(334,295	)	13.95		0	—
Exercised	(3,715,455	)	9.53		0	—
Outstanding as of March 31, 2020	16,830,475		$	12.73	6.9	$	137,329
Vested and exercisable at March 31, 2020	11,605,933		$	12.79	6.5	$	92,785

The aggregate intrinsic value in the table above represents the difference between the closing price of the Company's common shares on March 31, 2020 and the exercise price of each in-the-money option. There were 3,715,455 stock options exercised in the three months ended March 31, 2020. The tax benefit from the exercised options was $1,372.

The Company accounts for awards issued under the 2019 Incentive Award Plan as additional contributions to equity. Share-based compensation includes expense associated with stock option grants which is estimated based on the grant date fair value of the award issued. Share-based compensation expense related to stock options is recognized over the vesting period of the award which is generally five years, on a graded-scale basis.

The Company uses the Black-Scholes option pricing model to estimate the fair value of options granted. The Black-Scholes model takes into account the fair value of an ordinary share and the contractual and expected term of the stock option, expected volatility, dividend yield, and risk-free interest rate. Prior to becoming a public company, the fair value of the Company’s ordinary shares were determined utilizing an external third-party pricing specialist.

The contractual term of the option ranges from the one year to 10 years. Expected volatility is the average volatility over the expected terms of comparable public entities from the same industry. The risk-free interest rate is based on a treasury rate with a remaining term similar to the contractual term of the option. The Company is recently formed and at this time does not expect to distribute any dividends. The Company recognizes forfeitures as they occur.

Restricted Stock Units (“RSUs”)

RSUs typically vest from one to three years and are generally subject to either cliff vesting or graded vesting. RSUs do not have nonforfeitable rights to dividends or dividend equivalents. The fair value of RSUs is typically based on the fair value of our common shares on the date of grant. We amortize the value of these awards to expense over the vesting period on a graded-scale basis. The Company recognizes forfeitures as they occur.



	Number of Shares		Weighted Average Grant Date Fair Value per Share
Outstanding as of December 31, 2019	293,182		$	16.75
Vested	(169,842	)	16.86
Outstanding as of March 31, 2020	123,340		$	16.60

The total fair value of RSUs that vested during the three months ended March 31, 2020 was $2,863.

2019 Transaction Related Awards

Upon consummation of the 2019 Transaction, there were 7,000,000 ordinary shares of Clarivate that are issuable if the last sale price of Clarivate’s ordinary shares is at least $20.00 for 40 days over a 60 consecutive trading day period on or before the sixth anniversary of the closing of the 2019 Transaction. On January 31, 2020, our Board agreed to waive this performance vesting condition, and all such merger shares are expected to be issued to persons designated by Messrs. Stead and Klein on or prior to December 31, 2020. We used a third-party specialist to fair value the awards at the modification date using the Monte Carlo simulation approach. The assumptions in the model include, but are not limited to, risk-free interest rate, 1.33%; expected volatility of the Company's and the peer group's stock prices, 20.00%; and dividend yield, 0.00%. The Company recognized $13,720 expense in Share-based compensation expense as a result of the waived performance vesting conditions.

In accordance with the terms of the sponsor agreement and in connection with our merger with Churchill in 2019, the merger shares are issued to persons designated by Messrs Stead and Klein. The Company has evaluated and recorded additional stock compensation expense as required upon the assignment of merger shares as applicable.