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2002 ISDA Equity Derivatives Definitions
A Jolly Contrarian owner’s manual™
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Section 11.2 in a Nutshell™
Use at your own risk, campers!
11.2. Adjustments to Share Transactions and Share Basket Transactions.
- 11.2(a) “Method of Adjustment” means a method for working out how to adjust a Share Transaction or Share Basket Transaction following an event that the Calculation Agent determines diluted or concentrated the theoretical value of the Shares.
- 11.2(b): Options Exchange Adjustment: If the Method of Adjustment is “Options Exchange Adjustment” then following adjustment to exchange-traded options the Calculation Agent will adjust any relevant variable under that Transaction that it thinks necessary to reflect the Options Exchange adjustment, effective as of the same date.
- If there aren’t any exchange-traded options options on the Shares, the Calculation Agent will adjust the Transaction as it thinks fit to account for the diluting or concentrative effect of any event that, would have led to an adjustment under the Options Exchange’s rules had options in the Shares in question been traded on it.
- 11.2(c) If “Calculation Agent Adjustment” is the Method of Adjustment for a Share Transaction or Share Basket Transaction (or if none is specified) then following the Issuer’s declaration of an Potential Adjustment Event, the Calculation Agent will determine whether the Potential Adjustment Event will concentrate or dilute the value of the Shares. If it will, the Calculation Agent may:
- (i) adjust any relevant variable under that Transaction it considers necessary to account for that dilution or concentration (without adjusting just for changes in volatility, expected dividends, stock loan rate or liquidity) and
- (ii) determine the effective dates of any adjustments.
- The Calculation Agent may refer to adjustments an Options Exchange makes to corresponding options when doing so.
- 11.2(d) “Options Exchange” will be specified in the Confirmation and includes any successor or substitute exchange or quotation system on which options contracts on the Shares have relocated (on which the Calculation Agent is satisfied there is comparable liquidity). If one is not specified, it will be the Related Exchange the Calculation Agent determines is the primary market for listed options contracts relating to the relevant Share.
- 11.2(e) “Potential Adjustment Event” means any of:
- (i) a subdivision or reclassification of Shares (not counting a Merger Event) or a free bonus distribution of any such Shares to existing holders;
- (ii) a distribution to existing holders of the relevant Shares of:
- (A) such Shares; or
- (B) securities granting the right to dividends or the proceeds of liquidation of the Issuer proportionately to holders of those Shares; or
- (C) securities of an entity owned by the Issuer as a result of a spin-off; or
- (D) any other securities, rights or assets for consideration of less than their prevailing market price as determined by the Calculation Agent;
- (iii) an Extraordinary Dividend;
- (iv) an Issuer call over partially-paid Shares;
- (v) a repurchase by the Issuer or any of its subsidiaries of relevant Shares;
- (vi) any shareholder’s rights being distributed or separated from the Issuer’s shares under a shareholder rights arrangement that provides for distribution of preferred stock, warrants, debt or rights below their prevailing market value, as determined by the Calculation Agent, provided that any adjustment effected following such an event must be readjusted if those rights are redeemed; or
- (vii) any other event that may dilute or concentrate the relevant Shares.
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Full text of Section 11.2
Section 11.2. Adjustments to Share Transactions and Share Basket Transactions.
- 11.2(a) “Method of Adjustment” means a method for determining the appropriate adjustment to make to the terms of a Share Transaction or Share Basket Transaction upon the occurrence of an event having, in the determination of the Calculation Agent, a diluting or concentrative effect on the theoretical value of the relevant Shares.
- 11.2(b) If “Options Exchange Adjustment” is specified as the Method of Adjustment in the related Confirmation of a Share Transaction or Share Basket Transaction, then following each adjustment to the exercise, settlement, payment or other terms of options on any relevant Shares traded on any Options Exchange, the Calculation Agent will make the corresponding adjustments, if any, to any one or more of:
- (i) in respect of a Share Option Transaction or a Share Basket Option Transaction, the Strike Price, the Number of Options, the Option Entitlement, the Knock-in Price, the Knock-out, and the relevant Number of Shares;
- (ii) in respect of a Share Forward Transaction or a Share Basket Forward Transaction, the Forward Price, the Forward Floor Price, the Forward Cap Price, the Knock-in Price, the Knock-out Price, and the relevant Number of Shares;
- (iii) in respect of a Share Swap Transaction or a Share Basket Swap Transaction, the Initial Price, the Equity Notional Amount, the Knock-in Price, the Knock-out Price, and the relevant Number of Shares;
- and, in any case, any other variable relevant to the exercise, settlement, payment or other terms of that Transaction, as determined by the Calculation Agent, which adjustment will be effective as of the date determined by the Calculation Agent to be the effective date of the corresponding adjustment made by the Options Exchange. If options on the relevant Shares are not traded on the Options Exchange, the Calculation Agent will make such adjustment, if any, to any one or more of the relevant variables referred to above or any other variable relevant to the exercise, settlement, payment or other terms of the Transaction as the Calculation Agent determines appropriate, with reference to the rules of and precedents (if any) set by the Options Exchange, to account for the diluting or concentrative effect of any event that, in the determination of the Calculation Agent, would have given rise to an adjustment by the Options Exchange if such options were so traded.
- 11.2(c) If “Calculation Agent Adjustment” is specified as the Method of Adjustment in the related Confirmation of a Share Transaction or Share Basket Transaction (or if no Method of Adjustment is specified in the related Confirmation for such Transaction), then following the declaration by the Issuer of the terms of any Potential Adjustment Event, the Calculation Agent will determine whether such Potential Adjustment Event has a diluting or concentrative effect on the theoretical value of the relevant Shares and, if so, will
- (i) make the corresponding adjustment(s), if any, to any one or more of:
- (A) in respect of a Share Option Transaction or a Share Basket Option Transaction, the Strike Price, the Number of Options, the Option Entitlement, the Knock-in Price, the Knockout Price, and the relevant Number of Shares;
- (B) in respect of a Share Forward Transaction or a Share Basket Forward Transaction, the Forward Price, the Forward Floor Price, the Forward Cap Price, the Knock-in Price, the Knock-out Price, and the relevant Number of Shares;
- (C) in respect of a Share Swap Transaction or a Share Basket Swap Transaction, the Initial Price, the Equity Notional Amount, the Knock-in Price, the Knock-out Price, and the relevant Number of Shares;
- and, in any case, any other variable relevant to the exercise, settlement, payment or other terms of that Transaction as the Calculation Agent determines appropriate to account for that diluting or concentrative effect (provided that no adjustments will be made to account solely for changes in volatility, expected dividends, stock loan rate or liquidity relative to the relevant Share) and
- (ii) determine the effective date(s) of the adjustment(s).
- The Calculation Agent may (but need not) determine the appropriate adjustment(s) by reference to the adjustment(s) in respect of such Potential Adjustment Event made by an options exchange to options on the relevant Shares traded on such options exchange.
- 11.2(d) “Options Exchange” means the exchange or quotation system specified as such in the related Confirmation, any successor to such exchange or quotation system or any substitute exchange or quotation system to which trading in options contracts relating to the relevant Share has temporarily relocated (provided that the Calculation Agent has determined that there is comparable liquidity relative to such options contracts on such temporary substitute exchange or quotation system as on the original Options Exchange) or, if no such exchange or quotation system is specified in the related Confirmation, the Related Exchange (if such Related Exchange trades options contracts relating to the relevant Share) or, if more than one such Related Exchange is specified in the related Confirmation, the Related Exchange selected by the Calculation Agent as the primary market for listed options contracts relating to the relevant Share.
- 11.2(e) “Potential Adjustment Event” means any of the following:
- (i) a subdivision, consolidation or reclassification of relevant Shares (unless resulting in a Merger Event), or a free distribution or dividend of any such Shares to existing holders by way of bonus, capitalization or similar issue;
- (ii) a distribution, issue or dividend to existing holders of the relevant Shares of (A) such Shares, or (B) other share capital or securities granting the right to payment of dividends and/or the proceeds of liquidation of the Issuer equally or proportionately with such payments to holders of such Shares, or (C) share capital or other securities of another issuer acquired or owned (directly or indirectly) by the Issuer as a result of a spin-off or other similar transaction, or (D) any other type of securities, rights or warrants or other assets, in any case for payment (cash or other consideration) at less than the prevailing market price as determined by the Calculation Agent;
- (iii) an Extraordinary Dividend;
- (iv) a call by the Issuer in respect of relevant Shares that are not fully paid;
- (v) a repurchase by the Issuer or any of its subsidiaries of relevant Shares whether out of profits or capital and whether the consideration for such repurchase is cash, securities or otherwise;
- (vi) in respect of the Issuer, an event that results in any shareholder rights being distributed or becoming separated from shares of common stock or other shares of the capital stock of the Issuer pursuant to a shareholder rights plan or arrangement directed against hostile takeovers that provides upon the occurrence of certain events for a distribution of preferred stock, warrants, debt instruments or stock rights at a price below their market value, as determined by the Calculation Agent, provided that any adjustment effected as a result of such an event shall be readjusted upon any redemption of such rights; or
- (vii) any other event that may have a diluting or concentrative effect on the theoretical value of the relevant Shares.
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