20. Share-Based Compensation

Compensation expense related to employee restricted share awards was $1.1 million and $1.4 million for the three months ended September 30, 2012 and 2011, respectively, and $24.1 million and $6.6 million for the nine months ended September 30, 2012 and the eight months ended September 30, 2011, respectively. Compensation expense related to restricted share awards granted to the Board of Directors was $0.3 million and $0.4 million for the three months ended September 30, 2012 and 2011, respectively, and $3.4 million and $1.1 million for the nine months ended September 30, 2012 and the eight months ended September 30, 2011, respectively. Compensation expense related to the Company’s nonqualified option awards for the three and nine months ended September 30, 2012 was $0.2 million and $1.1 million, respectively.

Tronox Limited Management Equity Incentive Plan

On the Transaction Date, Tronox Limited adopted the Tronox Limited management equity incentive plan (the “Tronox Limited MEIP”), which permits the grant of awards that constitute incentive options, nonqualified options, share appreciation rights, restricted shares, restricted share units, performance awards and other share-based awards, cash payments and other forms such as the compensation committee of the Board in its discretion deems appropriate, including any combination of the above. Subject to further adjustment, the maximum number of shares which may be the subject of awards (inclusive of incentive options) is 12,781,225 Class A Shares.

Restricted Shares

During 2012, the Company granted 161,411 restricted share awards to employees, which have both time requirements and performance requirements. The time provisions are graded vesting, while the performance provisions are cliff vesting and have a variable payout. During 2012, the Company granted 23,160 restricted share awards with graded vesting to members of its Board of Directors. In accordance with ASC 718, Compensation – Stock Compensation, the restricted share awards issued during 2012 are classified as equity awards and are accounted for using the fair value established at the grant date.

The following table summarizes restricted share activity with employees for the nine months ended September 30, 2012.


	Number of Shares			Fair Value(1)
Balance at December 31, 2011		—			—
Awards converted from Tronox Incorporated to Tronox Limited in connection with the Transaction		420,765			16.99
Awards granted		161,411			27.28
Awards earned		(7,550	)		25.90
Awards forfeited		(7,985	)		29.29

Balance at September 30, 2012		566,641		$	19.62

Outstanding awards expected to vest		559,727		$	19.53

(1)	Represents the weighted-average grant-date fair value.

The following table summarizes restricted share activity with Tronox Limited Board of Directors for the nine months ended September 30, 2012.


	Number of Shares		Fair Value(1)
Balance at December 31, 2011		—		—
Awards granted		23,160		25.90

Balance at September 30, 2012		23,160	$	25.90

Outstanding awards expected to vest		23,160	$	25.90

(1)	Represents the weighted-average grant-date fair value.

Options

During 2012, the Company granted 158,960 options to employees to purchase Class A Shares, which vest over a three year period. The following table presents a summary of activity for the Tronox Limited options for the nine months ended September 30, 2012:


	Number of Options			Price (1)		Contractual Life Years (1)		Intrinsic Value(2)
Balance at December 31, 2011		—		$	—		—	$	—
Options converted to Tronox Limited in connection with the Transaction		517,330			24.56		9.34		—
Options issued		158,960			25.62		9.75		—
Options forfeited		(152,320	)		22.38		—		—

Outstanding at September 30, 2012		523,970		$	25.52		9.49	$	0.1

Outstanding options expected to vest		488,791		$	25.59		9.50	$	0.1

(1)	Represents weighted average exercise price and weighted average remaining contractual life, as applicable. The fair value of awards granted in connection with the stock split has been adjusted to reflect the estimated fair value on the date of such stock split.

(2)	Reflects aggregate intrinsic value based on the difference between the market price of the Company’s share at September 30, 2012 and the options’ exercise price. Options issued in connection with the stock split had no effect on the intrinsic value of outstanding options.

July 31, 2012 Grant

Valuation and Cost Attribution Methods. The fair value of the options issued was determined on the date of grant using the Black-Scholes option-pricing model and is recognized in earnings on a straight-line basis over the employee service period of three years necessary to earn the awards.

The Company ran the Black-Scholes option-pricing model for the 15,808 options granted on July 31, 2012 and used the following assumptions:


	2012
Risk-free interest rate		0.83	%
Expected dividend yield		4.32	%
Expected volatility		56	%
Expected term (years)		10.0
Per-unit fair value of options granted	$	8.21

The Company used the fair market value and exercise price of $23.17, which was the closing price of Class A Shares, New York Stock Exchange symbol TROX, recorded on July 31, 2012.

Expected Volatility — In setting the volatility assumption, the Company considered the most recent reported volatility of each compensation peer company. For the 2012 valuation, the peer company group included the following companies: Cabot Corporation, Celanese Corporation, Cliffs Natural Resources Inc., Cytec Industries Inc., Eastman Chemical Company, FMC Corporation, Freeport-McMoRan Copper & Gold Inc., Georgia Gulf Corporation, Huntsman Corporation, Kronos Worldwide, Inc., PPG Industries, Inc., Rockwood Holdings, Inc., RPM International Inc., The Sherwin-Williams Company, Southern Copper Corporation, Teck Resources Limited, The Valspar Corporation, W.R. Grace & Co, and Westlake Chemical Corporation.

Risk-free interest rate — The Company used a risk-free interest rate of 0.83%, which was the risk-free interest rate based on U.S. Treasury Strips available with maturity period consistent with expected life assumption.

August 31, 2012 Grant

Valuation and Cost Attribution Methods. Options’ fair value was determined on the date of grant using the Black-Scholes option-pricing model and is recognized in earnings on a straight-line basis over the employee service period of three years necessary to earn the awards. The Company ran the Black-Scholes option-pricing model for the 7,257 options granted on August 31, 2012 and used the following assumptions:


	2012
Risk-free interest rate		0.85	%
Expected dividend yield		3.88	%
Expected volatility		56	%
Expected term (years)		10.0
Per-unit fair value of options granted	$	9.51

The Company used the fair market value and exercise price of $25.79, which was the closing price of Class A Shares, New York Stock Exchange symbol TROX, recorded on August 31, 2012.

Risk-free interest rate — The Company used a risk-free interest rate of 0.85%, which was the risk-free interest rate based on U.S. Treasury Strips available with maturity period consistent with expected life assumption.

T-Bucks Employee Participation Plan (“T-Bucks EPP”)

During the third quarter of 2012, the Company created the T-Bucks EPP for the benefit of certain qualifying employees (the “Participants”) of Tronox subsidiaries in South Africa (the “Employer Companies”). In accordance with the terms of the Trust Deed of the T-Bucks Trust (the “T-Bucks Trust Deed”), the Employer Companies funded the T-Bucks Trust (the “Trust”) in the amount of R123.8 million (approximately $14.6 million), which represents a capital contribution equal to R75,000 for each Participant. The funded amount was used to acquire 548,234 Class A Shares. Additional contributions may be made in the future at the discretion of the Board.

On September 3, 2012, the Participants were awarded shares units in the Trust which entitles them to receive shares of Tronox Limited upon completion of the vesting period on May 31, 2017. The Participants are also entitled to receive dividends on the Tronox shares during the vesting period. Forfeited shares are retained by the Trust and are allocated to future participants in accordance with the Trust Deed. Under certain conditions, as outlined in the Trust Deed, Participants may receive share units awarded before May 31, 2017. The fair value of the awards is the fair value of the shares determined at the Grant Date. Compensation costs are recognized over the vesting period using the straight-line method. Compensation expense for the three months ended September 30, 2012 was $0.2 million. In accordance with ASC 718, the T-Bucks EPP is classified as an equity-settled shared-based payment plan.


	Number of Shares		Fair Value(1)
Balance at December 31, 2011		—		—
Shares acquired by the Trust		548,234		25.79

Balance at September 30, 2012		548,234	$	25.79

Outstanding awards expected to vest		548,234	$	25.79

(1)	Represents the fair value on the date of purchase by the Trust.

Long-Term Incentive Plan

In connection with the Transaction, the Company acquired a long-term incentive plan (the “LTIP”) for the benefit of certain qualifying employees of Tronox subsidiaries in South Africa and Australia. The LTIP is classified as cash settled compensation plan and is re-measured to fair value at each reporting date. At the Transaction Date, the fair value of the LTIP plan was $10.5 million.

Tronox Incorporated Management Equity Incentive Plan

On the Effective Date, Tronox Incorporated adopted the Tronox Incorporated management equity incentive plan (the “Tronox Incorporated MEIP”), which permitted the grant of awards that constitute incentive options, nonqualified options, share appreciation rights, restricted share, restricted share units, performance awards and other share-based awards, cash payments and other forms such as the compensation committee of the Tronox Incorporated Board of Directors in its discretion deems appropriate, including any combination of the above. The number of shares available for delivery pursuant to the awards granted under the Tronox Incorporated MEIP was 1.2 million shares.

On the Transaction Date, 748,980 shares of Tronox Incorporated restricted stock vested in connection with the Transaction. The remaining shares of Tronox Incorporated restricted stock were converted to Tronox Limited restricted shares.

Grants to Tronox Incorporated Board Members

As noted above, the Tronox Incorporated MEIP authorized the issuance of restricted shares to eligible directors who were serving on the Tronox Incorporated Board of Directors on the Effective Date.

The following table summarizes restricted shares activity with Board of Directors of Tronox Incorporated members for the nine months ended September 30, 2012.


	Primary Award					Secondary Award
Restricted Shares	Number Of Shares			Weighted-Avg. Grant Date Fair Value		Number of Shares			Weighted-Avg. Grant Date Fair Value
Balance at December 31, 2011		50,040		$	24.50		122,485		$	24.50
Awards earned		(50,040	)		24.50		(122,485	)		24.50

Balance at September 30, 2012		—		$	—		—		$	—

Outstanding awards expected to vest		—		$	—		—		$	—

Grants to employees

During 2012, Tronox Incorporated granted 52,915 shares to employees, which have graded vesting provisions. The plan allows Tronox Incorporated to withhold, for tax purposes, the highest combined maximum rate imposed under all applicable federal, state, local and foreign tax laws on behalf of the employees that have received these awards. In accordance with ASC 718, such restricted share awards were classified as liability awards and were re-measured to fair value at each reporting date. The following table summarizes restricted share activity with employees for the nine months ended September 30, 2012.


	Number of Shares			Fair Value(1)
Balance at December 31, 2011		1,005,470		$	21.58
Awards granted		52,915			24.36
Awards earned		(637,620	)		24.21
Awards converted to Tronox Limited restricted shares in connection with the Transaction		(420,765	)		16.99

Balance at September 30, 2012		—		$	—

(1)	Represents the weighted-average grant-date fair value.

Options

The following table presents a summary of activity for the Tronox Incorporated options for the nine months ended September 30, 2012:


	Number of Options			Price (1)		Contractual Life Years (1)		Intrinsic Value(2)
Balance at December 31, 2011		345,000		$	22.00		9.95	$	0.7
Options issued		172,330			29.69		9.87		—
Options converted to Tronox Limited in connection with the Transaction		(517,330	)		24.56		9.59		0.7

Outstanding at September 30, 2012		—		$	—		—	$	—

(1)	Represents weighted average exercise price and weighted average remaining contractual life, as applicable.

(2)	Reflects aggregate intrinsic value based on the difference between the market price of the Company’s shares at September 30, 2012 and the options’ exercise price.

Predecessor

Upon emergence from bankruptcy, all predecessor common stock equivalents, including but not limited to stock options and restricted stock units of Tronox Incorporated were vested and immediately cancelled with the Plan.

Overview — Tronox Incorporated’s Long Term Incentive Plan (the “Predecessor LTIP”) authorized the issuance of shares of Tronox Incorporated common stock to certain employees and non-employee directors any time prior to November 16, 2015, in the form of fixed-price stock options, restricted stock, stock appreciation rights or performance awards. As of the Effective Date, all stock-based awards previously issued under the Predecessor’s LTIP plan vested and were immediately cancelled.

For the one month ended January 31, 2011, Tronox Incorporated recognized $0.1 million of compensation expense related to restricted stock-based awards, which was based on the fair value of the awards. During the one month ended January 31, 2011, the tax benefit associated with compensation expense had a corresponding offset to the valuation allowance, yielding no overall income tax benefit.

The following table summarizes information about restricted stock award, performance award and stock option activity for the one month ended January 31, 2011:


	Restricted Stock Awards & Stock Opportunity Grants					Performance Awards			Stock Options
Restricted Shares	Number of Shares			Fair Value(1)		Number Of Units			Number of Options			Price(2)		Contractual Life (Years)(2)		Intrinsic Value(3)
Balance at December 31, 2010		148,053		$	4.92		2,689,150			1,152,408		$	9.54		5.31	$	9.54
Awards vested/cancelled		(148,053	)		—		(2,689,150	)		(1,152,408	)		—		—		—

Balance at January 31, 2011		—		$	—		—			—		$	—		—	$	—

(1)	Represents the weighted average grant date fair value.

(2)	Represents weighted average exercise price and weighted average remaining contractual life, as applicable.

(3)	Reflects aggregate intrinsic value based on the difference between the market price of the Company’s stock and the options’ exercise price.