Mergers - Equity Derivatives Provision: Difference between revisions
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{{ | {{eqderivanat|12.1(b)}} | ||
In summary, this breaks down into: | In summary, this breaks down into: | ||
*'''Transfer''': an irrevocable commitment to transfer all the {{eqderivprov|Shares}} to another entity; | *'''Transfer''': an irrevocable commitment to transfer all the {{eqderivprov|Shares}} to another entity; | ||
Line 10: | Line 9: | ||
Note that, by contrast, the "{{eqderivprov|Tender Offer}}" {{eqderivprov|Extraordinary Event}} is triggered by greater than 10% but less than 100% of the outstanding voting shares of the {{eqderivprov|Issuer}}. So the two do not in fact overlap. | Note that, by contrast, the "{{eqderivprov|Tender Offer}}" {{eqderivprov|Extraordinary Event}} is triggered by greater than 10% but less than 100% of the outstanding voting shares of the {{eqderivprov|Issuer}}. So the two do not in fact overlap. | ||
===Introductory Comment=== | |||
The introduction to the Equity Derivatives definitions says: | The introduction to the Equity Derivatives definitions says: | ||
:''Merger Events. A major objective in developing the 2002 Definitions was to ensure that the Consequences of {{eqderivprov|Merger Events}} were updated to reflect the broad and diverse needs of parties in a variety of situations. This work involved a range of alterations to the 1996 Definitions. For example, one refinement has been to include {{eqderivprov|Partial Cancellation and Payment}}, as described above. The 2002 Definitions also allow the application of relevant consequence provisions in the event of a {{eqderivprov|Tender Offer}} (defined as an offer for more than 10% but fewer than 100% of the outstanding voting shares) affecting a share, as well as other events, including ‘reverse’ mergers.'' | |||
Some {{eqderivprov|Merger Event}} provisions will be familiar to users of the 1996 Definitions, including {{eqderivprov|Alternative Obligation}} and {{eqderivprov|Options Exchange Adjustment}}. There have, however, been fundamental changes to the way certain provisions operate. In particular, the mechanisms underlying {{eqderivprov|Cancellation and Payment}} (including the new {{eqderivprov|Partial Cancellation and Payment}}) have been reworked, with two alternatives available for option transactions. One alternative, {{eqderivprov|Calculation Agent Determination}}, affords a significant degree of flexibility in relation to the determination of the amount payable in respect of a {{eqderivprov|Cancellation and Payment}}. In the other, an {{eqderivprov|Agreed Model}} sets out in considerable detail how the value of the {{eqderivprov|Transaction}} upon cancellation should be determined, taking into account changes in the level of {{eqderivprov|Implied Volatility}} and other specified factors relevant to the price of an option. These changes are determined at specified points in relation to the occurrence of the {{eqderivprov|Merger Event}}. | :''Some {{eqderivprov|Merger Event}} provisions will be familiar to users of the 1996 Definitions, including {{eqderivprov|Alternative Obligation}} and {{eqderivprov|Options Exchange Adjustment}}. There have, however, been fundamental changes to the way certain provisions operate. In particular, the mechanisms underlying {{eqderivprov|Cancellation and Payment}} (including the new {{eqderivprov|Partial Cancellation and Payment}}) have been reworked, with two alternatives available for option transactions. One alternative, {{eqderivprov|Calculation Agent Determination}}, affords a significant degree of flexibility in relation to the determination of the amount payable in respect of a {{eqderivprov|Cancellation and Payment}}. In the other, an {{eqderivprov|Agreed Model}} sets out in considerable detail how the value of the {{eqderivprov|Transaction}} upon cancellation should be determined, taking into account changes in the level of {{eqderivprov|Implied Volatility}} and other specified factors relevant to the price of an option. These changes are determined at specified points in relation to the occurrence of the {{eqderivprov|Merger Event}}.'' | ||
This choice, between {{eqderivprov|Agreed Model}} and {{eqderivprov|Calculation Agent Determination}} for option transactions, is one to which users of these 2002 Definitions should consider carefully when selecting {{eqderivprov|Cancellation and Payment}} or {{eqderivprov|Partial Cancellation and Payment}}. | :''This choice, between {{eqderivprov|Agreed Model}} and {{eqderivprov|Calculation Agent Determination}} for option transactions, is one to which users of these 2002 Definitions should consider carefully when selecting {{eqderivprov|Cancellation and Payment}} or {{eqderivprov|Partial Cancellation and Payment}}. '' | ||
A further change concerns the addition of {{eqderivprov|Calculation Agent Adjustment}} as a possible consequence specified for a {{eqderivprov|Merger Event}}. Moreover, another new consequence has been introduced: {{eqderivprov|Modified Calculation Agent Adjustment}}. The main difference between the two consequences is that, under {{eqderivprov|Modified Calculation Agent Adjustment}}, the {{eqderivprov|Calculation Agent}} may adjust the {{eqderivprov|Transaction}} to account for changes in volatility, expected dividends, stock loan rate or liquidity relevant to the {{eqderivprov|Shares}} but is prohibited from doing so under {{eqderivprov|Calculation Agent Adjustment}}. Both elections allow the {{eqderivprov|Calculation Agent}} to proceed to {{eqderivprov|Cancellation and Payment}} (in which case the {{eqderivprov|Calculation Agent Determination}} method will apply to option transactions and a {{eqderivprov|Cancellation Amount}} will be determined by the {{eqderivprov|Determining Party}} or Parties for forward and swap transactions) in the event that, in its view, no adjustment it could make to the {{eqderivprov|Transaction}} would produce a commercially reasonable result. | :''A further change concerns the addition of {{eqderivprov|Calculation Agent Adjustment}} as a possible consequence specified for a {{eqderivprov|Merger Event}}. Moreover, another new consequence has been introduced: {{eqderivprov|Modified Calculation Agent Adjustment}}. The main difference between the two consequences is that, under {{eqderivprov|Modified Calculation Agent Adjustment}}, the {{eqderivprov|Calculation Agent}} may adjust the {{eqderivprov|Transaction}} to account for changes in volatility, expected dividends, stock loan rate or liquidity relevant to the {{eqderivprov|Shares}} but is prohibited from doing so under {{eqderivprov|Calculation Agent Adjustment}}. Both elections allow the {{eqderivprov|Calculation Agent}} to proceed to {{eqderivprov|Cancellation and Payment}} (in which case the {{eqderivprov|Calculation Agent Determination}} method will apply to option transactions and a {{eqderivprov|Cancellation Amount}} will be determined by the {{eqderivprov|Determining Party}} or Parties for forward and swap transactions) in the event that, in its view, no adjustment it could make to the {{eqderivprov|Transaction}} would produce a commercially reasonable result.'' | ||
Another alteration is that, with regards to a {{eqderivprov|Share-for-Combined Merger Event}}, parties may specify “Component Adjustment”, whereby they distinguish in terms of consequence between (a) that portion of the consideration that consists of {{eqderivprov|New Shares}} and (b) the portion of the consideration that consists of {{eqderivprov|Other Consideration}}. Under this provision, the consequence selected by the parties for a {{eqderivprov|Share-for-Share Merger Event}} will apply to the former and that selected for a {{eqderivprov|Share-for-Other Merger Event}} will apply to the latter. | :''Another alteration is that, with regards to a {{eqderivprov|Share-for-Combined Merger Event}}, parties may specify “Component Adjustment”, whereby they distinguish in terms of consequence between (a) that portion of the consideration that consists of {{eqderivprov|New Shares}} and (b) the portion of the consideration that consists of {{eqderivprov|Other Consideration}}. Under this provision, the consequence selected by the parties for a {{eqderivprov|Share-for-Share Merger Event}} will apply to the former and that selected for a {{eqderivprov|Share-for-Other Merger Event}} will apply to the latter. '' | ||
Finally, with regards to {{eqderivprov|Merger Events}}, users may wish to note that there is a certain amount of flexibility built into the determination of {{eqderivprov|Merger Date}}. While specific standards apply in many jurisdictions, the evidence suggested that this was not consistent across jurisdictions and, in some instances, within them. A standard is therefore offered, but the need for flexibility is explicitly recognized too. | :''Finally, with regards to {{eqderivprov|Merger Events}}, users may wish to note that there is a certain amount of flexibility built into the determination of {{eqderivprov|Merger Date}}. While specific standards apply in many jurisdictions, the evidence suggested that this was not consistent across jurisdictions and, in some instances, within them. A standard is therefore offered, but the need for flexibility is explicitly recognized too.'' | ||
See with respect to {{eqderivprov|Merger Events}}: | See with respect to {{eqderivprov|Merger Events}}: | ||
*{{eqderivprov|Calculation Agent Adjustment}}; | *{{eqderivprov|Calculation Agent Adjustment}}; | ||
*{{eqderivprov|Modified Calculation Agent Adjustment}}. | *{{eqderivprov|Modified Calculation Agent Adjustment}}. | ||