VMware 2010 Annual Report Download - page 32

Table of Contents
If we fail to comply with our customer contracts or government contracting regulations, our business could be adversely affected.
Our contracts with our customers may include unique and specialized performance requirements. In particular, our contracts with federal,
state, and local and non-U.S. governmental customers are subject to various procurements regulations, contract provisions and other
requirements relating to their formation, administration and performance. Any failure by us to comply with provisions in our customer contracts
or any violation of government contracting regulations could result in the imposition of various civil and criminal penalties, which may include
termination of contracts, forfeiture of profits, suspension of payments and, in the case of our government contracts, fines and suspension from
future government contracting. Further, any negative publicity related to our customer contracts or any proceedings surrounding them, regardless
of its accuracy, may damage our business and affect our ability to compete for new contracts. If our customer contracts are terminated, if we are
suspended from government work, or if our ability to compete for new contracts is adversely affected, we could suffer an adverse affect on our
business, operating results or financial condition.
Changes in accounting principles and guidance, or their interpretation, could result in unfavorable accounting charges or effects, including
changes to our previously-filed financial statements, which could cause our stock price to decline.
We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of
America. These principles are subject to interpretation by the SEC and various bodies formed to interpret and create appropriate accounting
principles and guidance. A change in these principles or guidance, or in their interpretations, may have a significant effect on our reported results
and retroactively affect previously reported results.
Risks Related to Our Relationship with EMC
As long as EMC controls us, other holders of our Class A common stock will have limited ability to influence matters requiring stockholder
approval.
As of December 31, 2010, EMC owned 33,012,000 shares of our Class A common stock and all 300,000,000 shares of our Class B
common stock, representing approximately 80% of the total outstanding shares of common stock or 97% of the voting power of outstanding
common stock. The holders of our Class A common stock and our Class B common stock have identical rights, preferences and privileges
except with respect to voting and conversion rights, the election of directors, certain actions that require the consent of holders of Class B
common stock and other protective provisions as set forth in our certificate of incorporation. Holders of our Class B common stock are entitled
to 10 votes per share of Class B common stock on all matters except for the election of our Group II directors, in which case they are entitled to
one vote per share, and the holders of our Class A common stock are entitled to one vote per share of Class A common stock. The holders of
Class B common stock, voting separately as a class, are entitled to elect 80% of the total number of directors on our board of directors that we
would have if there were no vacancies on our board of directors at the time. These are our Group I directors. Subject to any rights of any series
of preferred stock to elect directors, the holders of Class A common stock and the holders of Class B common stock, voting together as a single
class, are entitled to elect our remaining directors, which at no time will be less than one director—our Group II director(s). Accordingly, the
holders of our Class B common stock currently are entitled to elect 7 of our 8 directors.
If EMC transfers shares of our Class B common stock to any party other than a successor-in-interest or a subsidiary of EMC prior to a
distribution to its stockholders under Section 355 of the Internal Revenue Code of 1986, as amended, (a “355 distribution”), those shares will
automatically convert into Class A common stock. Additionally, if, prior to a 355 distribution, EMC’s ownership falls below 20% of the
outstanding shares of our common stock, all outstanding shares of Class B common stock will automatically convert to Class A common stock.
Following a 355 distribution, shares of Class B common stock may convert to Class A common stock if such conversion is approved by
VMware stockholders after the 355 distribution. For so long as EMC or its
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