The Chicago Board Options Exchange’s (CBOE) board on Monday approved an agreement in principle to settle a dispute between CBOE and Chicago Board of Trade (CBOT) members over CBOE exercise rights.
According to the letter from the CBOE office of the chairman, the CBOT class members would receive an 18% equity interest in a CBOE demutualization plus a cash payment of $300 million. To qualify as a class member a CBOT member would need to own by a specified date, one CBOT membership, one exercise right privilege and 10,251.5 shares of CME Group class A common stock, the equivalent of a full CBOT membership share allotment at the time of the CBOT initial public offering.
Full CBOT members were awarded exercise rights on CBOE when they launched the first ever options exchange in 1973 and those right have become a matter of dispute off and on ever since. Most recently CBOE made a rule filing, which was approved by the Securities and Exchange Commission (SEC), to cancel the right and CBOT members filed a class action lawsuit in Delaware court against CBOE claiming each CBOT member should be awarded a full CBOE membership equity stake in any CBOE demutualization.
Below is the text of the letter:
To: CBOE Membership
From: Office of the Chairman
Date: June 2, 2008
Subject: Proposed Settlement of Exercise Right Litigation
We are pleased to report that a tentative agreement in principle has been reached that would settle the appeal of the SEC order and the Delaware exercise right litigation. Under the terms of the proposed settlement, which are subject to execution of a definitive Class Settlement Agreement and its approval by CBOE’s membership and the Delaware Court, the plaintiff class would receive an 18% equity interest in a CBOE demutualization plus a cash payment of $300 million. To qualify as a class member, a person must directly own, on a date to be specified, one CBOT B-1 membership, one Exercise Right Privilege (“ERP”) and 10,251.5 shares of Class A Common Stock of CME Group, Inc. The amount of equity and cash that any individual could receive in the settlement would be subject to caps.
As part of the agreement, following final court approval, the appeal of the SEC order will be withdrawn and the parties will agree that there are no longer any persons eligible to become CBOE members under the CBOE exercise right. All claims that were or could be brought in Delaware court would be dismissed. CBOE would be free to demutualize and would agree to take reasonable steps to demutualize as soon as commercially possible. Post demutualization, class members who remain temporary members of CBOE at demutualization will be offered trading permits on the same basis as other regular CBOE members.
Finally, individuals who owned a CBOT B-1 membership, an ERP and the required number of shares on July 1, 2007, and paid access fees to CBOE to continue trading on CBOE, would receive a payment equal to the access fees that the individual paid, subject to an aggregate cap.
Attempting to reach agreement on this contentious issue has been difficult. Both sides include a variety of constituents with a broad range of views on what is fair or appropriate, and each side believes they have strong legal cases. While we are quite comfortable with CBOE’s legal position, we also recognize that litigation is a distraction and always involves the risk of unexpected outcomes. More importantly, a protracted legal battle could significantly impede CBOE’s strategic options in a rapidly changing environment.
Over the past several years U.S. exchanges have largely migrated from floor-based to screen-based trading. Technology and regulatory changes have reduced barriers to entry. Most exchanges have demutualized and become for-profit entities. These changes have brought about multiple waves of consolidation that are now becoming global in scope. Many of our competitors are now partnered with larger, well-funded entities. In this environment, we believe that ongoing litigation would exact an unquantifiable cost to CBOE and its seat owners.
As we evaluated the various scenarios and timetables, it is clear that litigation, including appeals, could drag on for up to three years. We believe a settlement could be finalized in a period of six to twelve months. Given these alternatives we believe that the proposed settlement is in the best interest of CBOE and its seat owners.
A membership meeting is being scheduled for Wednesday, June 11 to answer your questions. The board has unanimously approved the agreement in principle. Once a definitive agreement has been drawn up a membership vote will be held to seek your endorsement of the board recommendation.
