Distributions and Corporate Actions - GMSLA Provision
6. Distributions and Corporate Actions
- 6.1 Income Received
- 6.2 Manufactured payments in respect of Loaned Securities
- 6.3 Manufactured payments in respect of Non-Cash Collateral
- 6.4 Indemnity for failure to redeliver Equivalent Non-Cash Collateral
- 6.5 Income in the form of Securities
- 6.6 Exercise of voting rights
- 6.7 Corporate actions
This section deals with the rights of parties with regard to "their" Securities and Collateral while it is "out on loan". In a nutshell:
- Under 6.2 a Borrower of Securities must "manufacture" payments equal to Income received on those Securities and pay it to the Lender;
- Under 6.3 a Lender holding Non Cash Collateral for a Loan must "manufacture" payments equal to Income received on that Collateral and pay it to the Borrower;
- Under 6.4 the Lender indemnifies the Borrower for failing to redeliver Equivalent Non Cash Collateral;
- Under 6.5 Income in the form of Securities are rolled up into the Loan and not redelivered immediately;
- Under 6.5 unless otherwise required, a Borrower is NOT obliged to vote shares on behalf of the Lender;
- Under 6.6, however, where a Borrower acquires rights as a result of any corporate action or takeover activity, (including those requiring specific elections by the holder for the time being), upon Lender's request Borrower must return Equivalent Securities or Collateral "in such form as would arise if exercised".
There is a slight tension between 6.5 and 6.6: while a Borrower is not obliged to vote in a certain way, if it does so and acquires a certain benefit and the Lender requests, it has to pass over that benefit. Best illustrated by way of example:
- Under Italian Law a shareholder on the Record Date who does not vote in favour of a proposed merger acquires a “withdrawal right” if the merger is approved. The withdrawal right allows a shareholder who abstained or voted against the merger to be cashed out of the equity at a pre-defined price equal to the average closing price published by Borsa Italiana for the six months prior to the notification date for the merger. It is therefore possible that the withdrawal right as a call option over the stock. It is only exercisable if the shareholder does not vote.
In this case the Lender who has lent out over the record date could not (without prior agreement) oblige the Borrower to vote against the merger, but if the Borrower has done so, the Lender can, by request under 6.7, require the Borrower to deliver the proceeds of the withdrawal in lieu of Equivalent Securities.
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