Mergers - Equity Derivatives Provision
2002 ISDA Equity Derivatives Definitions
Section 12.1(b) in a Nutshell™
Full text of Section 12.1(b)
Content and comparisons
- 12.1(a). “Extraordinary Event”
- 12.1(b). “Merger Event”
- 12.1(c). “Merger Date”
- 12.1(d). “Tender Offer”
- 12.1(e). “Tender Offer Date”
- 12.1(f). “Share-for-Share”
- 12.1(g). “Share-for-Other”
- 12.1(h). “Share-for-Combined”
- 12.1(i). “New Shares”
- 12.1(j). “Other Consideration”
- 12.1(k). “Combined Consideration”
- 12.1(l). “Announcement Date”
- 12.1(m). “Implied Volatility”
- 12.1(n). “Affected Shares”
Section 12.1(b) Merger Event
In summary, this breaks down into:
- Transfer: an irrevocable commitment to transfer all the Shares to another entity;
- Merger: merger or binding share exchange of the Issuer with or into another entity where the other entity survives;
- 100% Takeover offer: takeover or tender offer for 100% of outstanding Shares by any entity;
- 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.
Section 12.1(c) Merger Date
...and in Nutshell™:
Not really much to see here, we think you will agree.
Basically, they are all ways of combining businesses. The difference is identity of the resulting entity.
A merger is the combination of two or more companies into a single one, where one of the companies you started out with at the beginning is left at the end: this is the continuing entity. A takeover is really just a form of merger: the difference between them is really one of relative size. A bib bastard of a company takes over a smaller one; two similar sized companies merge. Either way, at the end, only one company remains. The other has dissolved itself into the stomach lining of its acquirer, its assets and liabilities slipping easily down the gizzard.
Consolidation, known in some places as amalgamation, is the action of combining two or more companies into a single new company. Unlike a merger, in a consolidation, none of the originally joining companies survives: in the consolidation process a brand new company is incorporated and all the assets and liabilities of all of the joining companies are transferred to the new entity. At some profound metaphysical level — a place that appeals at a deep, subconscious level, to legal eagles though they don’t understand it and cannot rationalise it, but it manifests itself in them having to describe it, bloody-mindedly — these things are profoundly different. But from a practical point of view — meaning we are excluding tax considerations, needless to say — they are exactly the same.
A share exchange is a way of combining businesses in which shares of one company are exchanged for shares of another. However, unlike in a merger, where only one company survives the interaction, or a consolidation, where neither comnpany does, in a share exchange both companies continue to exist as separate going concerns, though they are now part of the same consolidated group and will have some kind or other of a familial relationship (being a parent, child, siblings, long lost cousins from Australia, black sheep of family etc.)
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 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 Partial Cancellation and Payment, as described above. The 2002 Definitions also allow the application of relevant consequence provisions in the event of a 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 Merger Event provisions will be familiar to users of the 1996 Definitions, including Alternative Obligation and Options Exchange Adjustment. There have, however, been fundamental changes to the way certain provisions operate. In particular, the mechanisms underlying Cancellation and Payment (including the new Partial Cancellation and Payment) have been reworked, with two alternatives available for option transactions. One alternative, Calculation Agent Determination, affords a significant degree of flexibility in relation to the determination of the amount payable in respect of a Cancellation and Payment. In the other, an Agreed Model sets out in considerable detail how the value of the Transaction upon cancellation should be determined, taking into account changes in the level of 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 Merger Event.
- This choice, between Agreed Model and Calculation Agent Determination for option transactions, is one to which users of these 2002 Definitions should consider carefully when selecting Cancellation and Payment or Partial Cancellation and Payment.
- A further change concerns the addition of Calculation Agent Adjustment as a possible consequence specified for a Merger Event. Moreover, another new consequence has been introduced: Modified Calculation Agent Adjustment. The main difference between the two consequences is that, under Modified Calculation Agent Adjustment, the Calculation Agent may adjust the Transaction to account for changes in volatility, expected dividends, stock loan rate or liquidity relevant to the Shares but is prohibited from doing so under Calculation Agent Adjustment. Both elections allow the Calculation Agent to proceed to Cancellation and Payment (in which case the Calculation Agent Determination method will apply to option transactions and a Cancellation Amount will be determined by the Determining Party or Parties for forward and swap transactions) in the event that, in its view, no adjustment it could make to the Transaction would produce a commercially reasonable result.
- Another alteration is that, with regards to a 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 New Shares and (b) the portion of the consideration that consists of Other Consideration. Under this provision, the consequence selected by the parties for a Share-for-Share Merger Event will apply to the former and that selected for a Share-for-Other Merger Event will apply to the latter.
- Finally, with regards to Merger Events, users may wish to note that there is a certain amount of flexibility built into the determination of 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.
- Corporate action
- Calculation Agent Adjustment;
- Modified Calculation Agent Adjustment.
- Adjustments and Modifications
- Adjustments to Indices
- Adjustments to Share Transactions and Share Basket Transactions