Capital structure

Capital

Under Swiss company law, shareholders must approve in a shareholders' meeting any increase in the total number of issued shares, which may arise from an ordinary share capital increase or the creation of conditional or authorized capital. At year-end 2008, 2,932,580,549 shares were issued with a par value of CHF 0.10 each, leading to ordinary share capital of CHF 293,258,054.90 (including shares issued for the capital increase out of authorized and conditional capital in 2008).

Conditional share capital

At year-end 2008, conditional share capital of CHF 15,009,471.10 was available to settle employee option exercises, corresponding to a maximum of 150,094,711 shares.

Conditional capital was created in 2000 in connection with the acquisition of PaineWebber Group Inc. (PaineWebber) to cover option rights previously granted by PaineWebber to its employees. Additionally, at the annual general meeting (AGM) held in 2006, shareholders approved conditional capital in the amount of 150 million UBS shares to be used for employee option grants limited to a period of three years. Options under both plans are exercisable at any time between their vesting and the expiry date. Shareholders' pre-emptive rights are excluded. In 2008, options with respect to 39,270 shares were exercised under the PaineWebber option plans, and 4,653 options expired without being exercised. No options were settled with conditional capital shares in 2008 under the UBS employee stock option plans.

At the extraordinary general meeting (EGM) held on 27 February 2008, UBS shareholders approved the creation of conditional capital through the issuance of 277,750,000 shares to satisfy the settlement in shares of CHF 13 billion in mandatory convertible notes (MCNs) with maturity 5 March 2010 placed with two financial investors.

At the 27 November 2008 EGM, UBS shareholders approved the creation of conditional capital through the issuance of 365,000,000 shares to satisfy the settlement in shares of CHF 6 billion in MCNs with maturity 9 June 2011 issued to the Swiss Confederation.

Authorized share capital

At the 27 February 2008 EGM, UBS shareholders approved the creation of authorized capital for a maximum amount of CHF 10,370,000 or 103,700,000 new shares (approximately 5% of the issued share capital at year-end 2007). A total of 98,698,754 new shares were issued on the basis of entitlements alloted. The authorized capital created was used to replace the cash dividend for the financial year 2007 with a stock dividend paid in 2008.

Changes of shareholders' equity

According to International Financial Reporting Standards ­(IFRS), equity attributable to UBS shareholders amounted to CHF 32.5 billion on 31 December 2008.

Refer to the "Statement of changes in equity" in the financial statements of this report for more information on changes in shareholders' equity over the last three years

Shares, participation and bonus certificates, capital securities

UBS shares are issued in registered form, traded and settled as so-called global registered shares. Each registered share has a par value of CHF 0.10 and carries one vote. Voting rights may, however, only be exercised if the holder expressly declares that he or she acquired these shares in his or her own name and for his or her own account. Global registered shares provide direct and equal ownership for all shareholders, irrespective of the country and stock exchange in which they are traded. Refer to the "Shareholders' participation rights" section of this report for more information.

On 31 December 2008, 1,682,820,523 shares carried voting rights, 211,917,438 shares were entered in the share register without voting rights, and 1,037,842,588 shares were not registered. All 2,932,580,549 shares were fully paid up and eligible for dividends. There are no preferential rights for shareholders.

UBS did not issue any participation certificates or bonus certificates in 2008.

In 2008, UBS Capital Securities (Jersey) Ltd. raised EUR 1 billion hybrid tier 1 capital in the form of preferred securities. Additionally, UBS increased an existing CHF 350 million subordinated bond issue maturing in 2017 by CHF 50 million. At year-end 2008, UBS had outstanding CHF 7,393 million in preferred securities, which count as hybrid tier 1 capital ­under regulatory rules. Outstanding tier 2 capital securities accounted for CHF 12,290 million in total capital on 31 December 2008.

Limitation on transferability and nominee registration

UBS does not apply any restrictions or limitations on the transferability of its shares. Shares registered in the share register with voting rights may be voted without any restrictions, according to the provisions of the "Articles of Association of UBS AG" (which require an express declaration of beneficial ownership).

UBS has special provisions for the registration of fiduciaries and nominees. Fiduciaries and nominees are entered in the share register with voting rights up to a total of 5% of all shares issued, if they agree to disclose, upon request from the firm, beneficial owners holding 0.3% or more of all UBS shares. An exception to the 5% rule exists for securities clearing organizations such as The Depository Trust Company in New York.

Convertible bonds and options

On 31 December 2008, there were 236 million employee options outstanding, of which 124 million were exercisable. UBS satisfies share delivery obligations under its option-based participation plans either by purchasing UBS shares in the market on grant date or shortly thereafter, or through the issuance of new shares out of conditional capital. At exercise, shares held in treasury or newly issued shares are delivered to the employee against receipt of the strike price. On 31 December 2008, UBS held approximately 48.9 million shares in treasury and an additional 150 million unissued shares in conditional share capital, which were available to be used for future employee option exercises. The shares available cover all vested (i.e. exercisable) employee options.

The Investment Bank, acting as liquidity provider to the equity futures market and as a market-maker in UBS shares and derivatives, issues derivatives linked to UBS stock. Most of these instruments are classified as cash-settled derivatives and are held for trading purposes only. To hedge the economic exposure, a limited number of UBS shares are held by the Investment Bank.

On 5 March 2008, UBS issued CHF 13 billion of MCNs as approved at the 27 February 2008 EGM. The notes were placed with two financial investors (Government of Singapore Investment Corporation and one other investor) and will pay a coupon of 9% until conversion into UBS shares, which must take place on or before a date two years after issuance. The MCNs contain market-standard provisions allowing for early conversion at the option of either UBS or the MCN holders. Early conversion is only possible from the date six months after issuance of the MCNs. The conversion of the MCNs is expected to increase the number of shares issued by 270,438,942, reflecting adjustments due to the ordinary capital increase approved by UBS shareholders at the 23 April 2008 AGM, subject to no further dilutive events occurring until conversion. The terms of the MCNs contain standard market provisions for the adjustment of the conversion price if any dilutive events occur between issuance and maturity, such as capital increases at a discount, dividends in cash or in specie in excess of CHF 2.05 per share per financial year, and similar events.

On 9 December 2008, in order to enable UBS to retain a strong tier 1 capital ratio after giving effect to the transaction with the Swiss National Bank, UBS issued CHF 6 billion of MCNs, following the 27 November 2008 EGM. The notes were placed with the Swiss Confederation and have a maturity date 30 months after the issue date (i.e. 9 June 2011). Until maturity of the MCNs, the holders will receive an annual coupon of 12.5% of their nominal value. The conversion of the MCNs is expected to increase the number of shares issued by 9.3%, depending on the development of the UBS share price and the absence of dilutive events (such as any dividend payments). The terms of the MCNs contain standard market provisions allowing for early conversion at the option of either UBS or MCN holders and for the adjustment of the conversion price if any dilutive events occur between issuance and maturity.

Refer to the discussion on shares and capital instruments in the "Treasury management" section of this report for more information on the MCNs

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