Former members of the Chicago Board of Trade (CBOT) and the Chicago Board Options Exchange (CBOE) will have to find something new to feud over. In early June, they reached an agreement in principle over CBOT member claims to an equity stake in CBOE. The CBOE board agreed to exchange an 18% equity stake and $300 million to end all claims on CBOE membership resulting from CBOT member exercise right privileges (ERPs), ending a dispute that dates back nearly to the founding of CBOE and which has involved multiple legal actions. The agreement, which was reached just days before the matter was to go before a Delaware court, could allow the CBOE to demutualize and eventually hold an initial public offering or entertain a merger.
To qualify for an allocation from the agreement, a person must directly own, on a date to be specified, one CBOT B-1 membership, one ERP and 10,251.5 shares of Class A Common Stock of CME Group Inc.
“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,” said CBOE Chairman and CEO Bill Brodsky in a letter to CBOE members. “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 12 months. Given these alternatives we believe that the proposed settlement is in the best interest of CBOE and its seat owners.”
Following the CBOT IPO, a settlement was reached that maintained the ERP and allowed it to be traded separately. In early 2007, CBOE asserted that due to the CBOT’s merger with the CME there were no longer CBOT members to exercise the ERP and CBOT members filed suit. The SEC approved the rule change eliminating the right but the matter was still in play in the Delaware Court.
“I am glad they made a settlement. It’s been a long time coming and the devil is in the details,” says Paul L. Richards, independent trader, ERP holder and former member of CBOT and CBOE. “This seems to split the baby in half. Our question is how many people will qualify.” As of last August, there were 827 full CBOT members holding the necessary shares to utilize the exercise right and 252 CBOT members were trading at the CBOE. The CME Group acquired 159 ERPs from CBOT members during its merger with the CBOT and the CBOE has bought back and retired 71 ERPs.
“We overpaid by 18% and $300 million. They are entitled to nothing,” says CBOE seat owner Norman Friedland. “We had the facts, the law and the precedent. They would never beat us in court,” but considering the pace of change in the industry, he says he will grudgingly vote for the deal and expects CBOE members to approve it.
“Everybody is interested in getting the liquidity a deal will provide,” says Richard Lund, managing member of TRO Trading. “CBOE would be hamstrung without public currency to do acquisitions and have a bigger balance sheet. For seat owners, this is a big asset. They want to capitalize on the success of the CBOE by being able to sell off some pieces of their asset,” adding that as a private company, members are holding a stock position worth between $3 million and $7 million.
