Template:M summ Equity Derivatives 12.9(a)(ii)

“It has become illegal”

For those inclined to look even gift horses in the mouth, this provision may appear to leave some things unsaid.

What if it has become illegal to hold Shares in one way but it remains legal to hold them some other way? What if there was a way of holding them legally, but it was different from the way you had chosen to hold them? For example, if Shares needed to be listed on a certain exchange, or cleared across a certain CCP? Don’t laugh: this was one of the potential consequences of Brexit

What if one could hedge via futures, derivatives or some other method without significant extra cost or inconvenience?

Even leaving aside the direction that one must act in good faith in arriving at one’s conclusion, it is hard to see how one could say it was “illegal to hold shares” if in fact one could legally hold those Shares some other way.

As for the argument that to “hold, acquire or dispose of Shares relating to such Transaction” too narrow when a Hedging Party may be able to hedge some other way (i.e., via futures or swaps) — well, as fussy as it may be, this seems hard to fault, and, not even good faith can win the day here. On the other hand, if a jurisdiction has declared the very act of holding a physical security illegal, it is hard to see anyone in the jurisdiction offering a derivative on it, so this may be more of a theoretical than a practical objection, especially where it is a synthetic equity swap where the hedging party has no incentive not to be accommodating its client in sourcing an alternative legal hedge if one exists.

All at the same, knee-slide and jet wings to the whoever the negotiator was who thought of that one.