2002 ISDA Equity Derivatives Definitions
A Jolly Contrarian owner’s manual™
12.1 in a Nutshell™
The JC’s Nutshell™ summaries are moving to the subscription-only ninja tier. For the cost of ½ a weekly 🍺 you can get them here. Sign up at Substack.
12.1 in all its glory
. General Provisions Relating to Extraordinary Events
- 12.1(a) “Extraordinary Event” means a Merger Event, Tender Offer, Index Adjustment Event, Nationalization, Insolvency, Delisting or any applicable Additional Disruption Event, as the case may be.
- 12.1(b) “Merger Event” means, in respect of any relevant Shares, any
- (i) reclassification or change of such Shares that results in a transfer of or an irrevocable commitment to transfer all of such Shares outstanding to another entity or person,
- (ii) consolidation, amalgamation, merger or binding share exchange of the Issuer with or into another entity or person (other than a consolidation, amalgamation, merger or binding share exchange in which such Issuer is the continuing entity and which does not result in a reclassification or change of all of such Shares outstanding),
- (iii) takeover offer, tender offer, exchange offer, solicitation, proposal or other event by any entity or person to purchase or otherwise obtain 100% of the outstanding Shares of the Issuer that results in a transfer of or an irrevocable commitment to transfer all such Shares (other than such Shares owned or controlled by such other entity or person), or
- (iv) consolidation, amalgamation, merger or binding share exchange of the Issuer or its subsidiaries with or into another entity in which the Issuer is the continuing entity and which does not result in a reclassification or change of all such Shares outstanding but results in the outstanding Shares (other than Shares owned or controlled by such other entity) immediately prior to such event collectively representing less than 50% of the outstanding Shares immediately following such event (a “Reverse Merger”),
- in each case if the Merger Date is on or before,
- (A) in the case of a Physically-settled Option Transaction the later to occur of the Expiration Date or the final Settlement Date,
- (B) in the case of a Physically-settled Forward Transaction or a Physically-settled Equity Swap Transaction, the relevant Settlement Date or,
- (C) in any other case, the final Valuation Date.
- 12.1(c) “Merger Date” means the closing date of a Merger Event or, where a closing date cannot be determined under the local law applicable to such Merger Event, such other date as determined by the Calculation Agent.
- 12.1(d) “Tender Offer” means a takeover offer, tender offer, exchange offer, solicitation, proposal or other event by any entity or person that results in such entity or person purchasing, or otherwise obtaining or having the right to obtain, by conversion or other means, greater than 10% and less than 100% of the outstanding voting shares of the Issuer, as determined by the Calculation Agent, based upon the making of filings with governmental or self-regulatory agencies or such other information as the Calculation Agent deems relevant.
- 12.1(e) “Tender Offer Date” means, in respect of a Tender Offer, the date on which voting shares in the amount of the applicable percentage threshold are actually purchased or otherwise obtained (as determined by the Calculation Agent).
- 12.1(f) “Share-for-Share” means (i) in respect of a Merger Event or Tender Offer, that the consideration for the relevant Shares consists (or, at the option of the holder of such Shares, will consist) solely of New Shares, and (ii) a Reverse Merger.
- 12.1(g) “Share-for-Other” means, in respect of a Merger Event or Tender Offer, that the consideration for the relevant Shares consists solely of Other Consideration.
- 12.1(h) “Share-for-Combined” means, in respect of a Merger Event or Tender Offer, that the consideration for the relevant Shares consists of Combined Consideration.
- 12.1(i) “New Shares” means ordinary or common shares, whether of the entity or person (other than the Issuer) involved in the Merger Event or the making of the Tender Offer or a third party, that are, or that as of the Merger Date or Tender Offer Date are promptly scheduled to be,
- (i) publicly quoted, traded or listed on an exchange or quotation system located in the same country as the Exchange (or, where the Exchange is within the European Union, in any member state of the European Union) and
- (ii) not subject to any currency exchange controls, trading restrictions or other trading limitations.
- 12.1(j) “Other Consideration” means any cash or securities (other than New Shares) or assets (whether of the entity or person (other than the Issuer) involved in the Merger Event or the making of the Tender Offer or a third party).
- 12.1(k) “Combined Consideration” means New Shares in combination with Other Consideration.
- 12.1(l) “Announcement Date” means, in respect of an Extraordinary Event,
- (i) in the case of a Merger Event, the date of the first public announcement of a firm intention to engage in a transaction (whether or not subsequently amended) that leads to the Merger Event,
- (ii) in the case of a Tender Offer, the date of the first public announcement of a firm intention to purchase or otherwise obtain the requisite number of voting shares (whether or not subsequently amended) that leads to the Tender Offer,
- (iii) in the case of an Index Disruption or Index Cancellation, the date of the first public announcement by the Index Sponsor of any adjustment or cancellation as described in Section 11.1(b) that leads to the Index Disruption or Index Cancellation and in the case of an Index Modification, the Exchange Business Day immediately prior to the effective date of the Index Modification,
- (iv) in the case of a Nationalization, the date of the first public announcement to nationalize (whether or not subsequently amended) that leads to the Nationalization,
- (v) in the case of an Insolvency, the date of the first public announcement of the institution of a proceeding or presentation of a petition or passing of a resolution (or other analogous procedure in any jurisdiction) that leads to the Insolvency and
- (vi) in the case of a Delisting, the date of the first public announcement by the Exchange that the Shares will cease to be listed, traded or publicly quoted in the manner described in Section 12.6(a)(iii).
- In respect of any Extraordinary Event other than an Index Disruption, if the announcement of such Extraordinary Event is made after the actual closing time for the regular trading session on the relevant Exchange, without regard to any after hours or any other trading outside of such regular trading session hours, the Announcement Date shall be deemed to be the next following Scheduled Trading Day.
- 12.1(m) “Implied Volatility” means for any Exchange Business Day, the mid-market implied volatility of the relevant Shares, as determined by the Calculation Agent by interpolating or extrapolating from the most comparable listed put or call option (which shall be of the same Option Type as the Option Transaction being cancelled) on the relevant Shares as determined by the Calculation Agent taking into account the nearest strike price, maturity and “in-the-money” or “out-of-the-money” amount, as the case may be, and such other factors that the Calculation Agent deems appropriate. To the extent that such a listed option does not exist or the Calculation Agent determines that the market for such listed option is not sufficiently liquid for the purpose of the relevant calculation, the Implied Volatility will be determined by the Calculation Agent by whatsoever means it deems appropriate.
- 12.1(n) “Affected Shares” means Shares affected by a Merger Event or a Tender Offer, as the case may be.
Resources and Navigation
Section 12.1. General Provisions Relating to Extraordinary Events
- 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”
Note that where an Extraordinary Event occurs, the Determining Party, rather than the Calculation Agent, may be the person called on to calculate a Cancellation Amount. (This is relevant especially where the Calculation Agent is not the Hedging Party, as the Hedging Party will have definite ideas about how to value cancellation vis a vis its own hedge).
Break these “Extraordinary Events” into four categories:
Corporate events on Issuers: Corporate Events are generally benign 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;
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 Modification: Changes in the calculation methodology for the Index
- Index Cancellation: Where Indexes are discontinued with replacement;
- Index Disruption: disruption in the calculation and publication of Index values;
Negative events affecting Issuers: Nationalizations, Insolvency, Delisting of underlying Issuers;
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:
- The Triple Cocktail: The Triple Cocktail of Change in Law, Hedging Disruption and Increased Cost of Hedging;
- Stock borrow events: Specific issues relating to short-selling (Loss of Stock Borrow and Increased Cost of Stock Borrow); and
- 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.
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.
Note that, by contrast, the “Tender Offer” Extraordinary Event is triggered by greater than 10% but less than 100% of the outstanding voting shares of the Issuer. So the two do not in fact overlap.
Relevant for the valuation of your Cancellation Amount: the date determined under local law that the merger takes place or, if for some reason that isn’t clear, by the Calculation Agent. Strong work from ISDA’s crack drafting squad™ here.
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 to rather 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.
Sleep assured that, however conceptually difficult — logically difficult — such a feat might be, if someone does manage it then ISDA’s crack drafting squad™ has your — or her — back.
Actually, come to think of it, they don’t, because an acquisition of more than 100% would not count as a Tender Offer at all.
Eheu. I suppose we had all better hope and that normal rules of Euclidean geometry continue to apply for the time being.
Also, is not clear what is meant to happen if the Tender Offer relates to exactly 100 per cent of the outstanding Shares.
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.
Template:M summ Equity Derivatives 12.1(k)
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.
Template:M summ Equity Derivatives 12.1(m)
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.
Here the free bit runs out. Subscribers click 👉 here
. New readers sign up 👉 here
and, for ½ a weekly 🍺 go full ninja about all these juicy topics
Template:M sa Equity Derivatives 12.1
- ↑ “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.
- ↑ especially since there is already an “Insolvency” event covering most of this).