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Corporate Event

JC uses his own personal label, Corporate Event, to refer to any kind of Merger, Tender Offer or corporate event leading to the combination or separation of Issuers.

Determining Party

Note that where an Extraordinary Event occurs, the Determining Party, rather than the Calculation Agent, may be called on to calculate a Cancellation Amount. This seems like a big deal, but isn’t as the Determining Party will always be the Calculation Agent, or at least someone greatly inclined to agree with it. The Calculation Agent will always be the dealer, who will always be the Hedging Party, and will have definite ideas about how to value cancellation vis a vis its own hedge and will be most interested in the customer’s ideas about this).

Extraordinary Event

Break these “Extraordinary Events” into four categories:

1. Corporate events on Issuers: Corporate Events are generally benign — “benign” from the point of view of the target company’s solvency and market prospects; not quite so benign from its management team’s prospects of ongoing employment — but not always expected or even wanted adjustments to the corporate structure and management of specific underlying Shares: Tender Offers, Mergers, management buyouts and events that change the economic proposition represented by those Shares, and not the equity derivative contract. So: Merger Events and Tender Offers.
2. Index adjustments: For Index trades, unexpected adjustments and changes to methodologies and publishing strategies of underlying Index (as opposed to changes in the composition of the Index according to its pre-existing rules) — collectively call these “Index Adjustment Events”. So, Index Modifications: changes in the calculation methodology for the Index; Index Cancellation: where Indexes are discontinued with replacement; and Index Disruption: disruption in the calculation and publication of Index values.
3. Negative events affecting Issuers: Nationalizations, Insolvency, Delisting of underlying Issuers.
4. Additional Disruption Events: Events which directly impair performance and risk management of the Transaction itself. These often cross over with market- and Issuer-dependent events above, but the emphasis here is their direct impact on the parties’ abilities to perform and hedge the derivative Transaction itself. So:
   1. The Triple Cocktail: The Triple Cocktail of Change in Law, Hedging Disruption and Increased Cost of Hedging;
   2. Stock borrow events: Specific issues relating to short-selling (Loss of Stock Borrow and Increased Cost of Stock Borrow); and
   3. Random ones that aren’t needed or used: Two random ones that don’t brilliantly fit with this theory, and which people tend to disapply — possibly for that exact reason, but they are fairly well covered by the Triple Cocktail anyway — Failure to Deliver under the Transaction on account of illiquidity and, even more randomly, Insolvency Filing.

Merger Event

In summary, this breaks down into:

1. Transfer: an irrevocable commitment to transfer all the Shares to another entity;
2. Merger: merger or binding share exchange of the Issuer with or into another entity where the other entity survives;
3. 100% Takeover offer: A takeover or tender offer for 100% of outstanding Shares by any entity;
4. Reverse Merger: merger binding share exchange of the Issuer with or into another entity where the Issuer survives but represents less than 50% of the resulting entity;

Where the Merger Date is before the final settlement date.

Note that, by contrast, the “Tender Offer” is triggered by greater than 10% but less than 100% of the Issuer’s outstanding voting shares. So the two do not overlap.

Tender Offer and Tender Offer Date

If you’re like the JC you will be wondering how a single holder could acquire more than 100 per cent of the extant Shares of an Issuer. But, to an ISDA ninja, that is rather to miss the point. We are not talking about the practical, but the conceptually possible. Perhaps in a parallel universe, where normal rules of Euclidean geometry don’t apply. Or down a gravity well or something.

Also, is not clear what is meant to happen if the Tender Offer relates to exactly 100 per cent of the outstanding Shares.

Share-for-Share, Share-for-Other, Share-for-Combined, New Shares, Other Consideration, Combined Consideration

Here we find the mechanical ways of describing the different ways a shareholder can be persuaded to part with its existing Shares and thereby agree to a Merger or accept a Tender Offer.

Our friends in the M&A advisory business — they are better paid and more impressively heeled than we — have no shortage of imaginative ways for investors to stump up the necessary to acquire new companies, or parts of old ones the current owner no longer wants, but basically they boil down to (i) being given New Shares (usually in the acquiror, or a “newco” it has established for the purpose), (ii) being paid cash (or given something else that isn’t New Shares, or (iii) a combination of the two.

Announcement Date

The date that one of the Additional Disruption Events becomes a thing, such that the parties to the Transaction have to do something about it.

This is something of an analogue to the “Notice of Publicly Available Information” concept in the credit derivatives world: the point at which an event, whether or not it eventually happens, becomes public knowledge is the event horizon from a help-the-credit-department-is-running-around-with-its-hair-on-fire perspective, hence all that slightly cute talk of “a firm intention to engage in a transaction (whether or not subsequently amended) that leads to ...” and so on. That, and ISDA’s crack drafting squad™’s congenital inability to write plain, elegant sentences that say what they mean, of course.

Affected Shares

Applies only to Merger Events and Tender Offers and is, you won’t be surprised to hear, the Shares that are affected by one of them.