Consequences of Merger Events - Equity Derivatives Provision

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2002 ISDA Equity Derivatives Definitions
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Resources About the Equity Derivatives Definitions | (full wikitext) | (nutshell wikitext)
Hot topics Synthetic Prime Brokerage Anatomy | The Triple Cocktail | Cancellation and Payment | Calculation Agent
TOC | 1 General Definitions | 2 Option Transactions | 3 Exercise of Options | 4 Forward Transactions | 5 Equity Swap Transactions | 6 Valuation | 7 Settlement | 8 Cash Settlement | 9 Physical Settlement | 10 Dividends | 11 Adjustments and Modifications | 12 Extraordinary Events · 12.8 Cancellation Amount · 12.9 Additional Disruption Events · 12.9 List of ADEs · 12.9(b) Consequences of ADEs | 13 Miscellaneous

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Section 12.2 in a Nutshell
Use at your own risk, campers!

12.2. Consequences of Merger Events.
For any Merger Event if, under “Consequences of Merger Events” for “Share-for-Share”, “Share-for-Other” or “Share-for-Combined”, the specified consequence is:

12.2(a)Alternative Obligation”, then except for Reverse Mergers, following the Merger Date:
(i) the relevant New Shares or Other Consideration (as modified by any relevant terms and including any proceeds of any redemption) will be deemed to be the “Shares
(ii) if relevant, the new issuer will be deemed to be the “Issuer”;
(iii) those New Shares or Other Consideration to which an existing shareholder would be entitled upon completion of the Merger Event will be deemed the relevant “Number of Shares”; and
(iv) the Calculation Agent will make other adjustments to the terms, as necessary (but will not adjust to account solely for changes in volatility, expected dividends, stock loan rate or liquidity).
12.2(b)Cancellation and Payment”, the Transaction will be cancelled as of the Merger Date and:
(i) Option Transactions: Seller will pay Buyer the Section 12.7(b) amount, and
(ii) Forward Transactions and Equity Swap Transactions: one party will pay the other a 12.7(c) amount;
12.2(c)Options Exchange Adjustment”, then the Calculation Agent will adjust the Transaction per Options Exchange Adjustment in Section 11.2(b) (but ignoring the words “diluting or concentrative”);
12.2(d)Calculation Agent Adjustment”, the Calculation Agent must either:
(i) adjust the Transaction to account for the economic effect of the Merger Event (excluding changes in volatility, expected dividends, stock loan rate or liquidity of the Shares or the Transaction), or
(ii) if it considers that that could not produce a commercially reasonable result, notify the parties that the Transaction will be terminated, in which case Cancellation and Payment will apply and any necessary payments will be calculated under Section 12.7 (and for Option Transactions, the Calculation Agent must determine the payment as if “Calculation Agent Determination” applied);
12.2(e) If “Modified Calculation Agent Adjustment” is specified then, after the Merger Date, the Calculation Agent will either
(i) adjust the Transaction to account for the economic effect of the Merger Date in its determination, or
(ii) if that would not produce a commercially reasonable result, terminate the Transaction, at “Cancellation and Payment” (or, for an Option Transaction, “Calculation Agent Determination”) under Section 12.7.
12.3(e)Partial Cancellation and Payment”, then the portion of a Share Basket Transaction represented by Affected Shares will be cancelled as of the Merger Date, the amount calculated under Section 12.7 for such Affected Shares will be paid by one party to the other, the Share Basket Transaction will continue with the Basket comprising the remaining Shares, and the Calculation Agent will adjust any terms if necessary to preserve as nearly as practicable the economic terms of the Transaction for the remaining Shares; or
12.2(g)Component Adjustment”, then, where a Merger Event is “Share-for-Combined”, the option chosen for “Share-for-Share” will apply to the New Shares component and the option chosen for “Share-for-Other” will apply to the Other Consideration component (as the Calculation Agent determines).

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Full text of Section 12.2

Section 12.2. Consequences of Merger Events. In respect of any Merger Event if, under “Consequences of Merger Events” in relation to “Share-for-Share”, “Share-for-Other” or “Share-for-Combined”, the consequence specified in the related Confirmation is:

12.2(a)Alternative Obligation”, then except in respect of a Reverse Merger, on or after the relevant Merger Date, the New Shares and/or the amount of Other Consideration, if applicable (as subsequently modified in accordance with any relevant terms and including the proceeds of any redemption, if applicable), and their issuer (if any) will be deemed the “Shares” and the “Issuer”, respectively, the number of New Shares and/or the amount of Other Consideration, if applicable, (as subsequently modified in accordance with any relevant terms and including the proceeds of any redemption, if applicable) to which a holder of the relevant Number of Shares immediately prior to the occurrence of the Merger Event would be entitled upon consummation of the Merger Event will be deemed the relevant “Number of Shares” and, if necessary, the Calculation Agent will adjust any relevant terms, provided, however, that no adjustments will be made to account solely for changes in volatility, expected dividends, stock loan rate or liquidity relevant to the Shares or the Transaction;
12.2(b)Cancellation and Payment”, then
(i) in the case of an Option Transaction, the Option Transaction will be cancelled as of the Merger Date and Seller will pay to Buyer the amount calculated in accordance with Section 12.7(b), and
(ii) in the case of a Forward Transaction or an Equity Swap Transaction, the Forward Transaction or the Equity Swap Transaction will be cancelled as of the Merger Date and an amount calculated in accordance with 12.7(c) will be paid by one party to the other;
12.2(c)Options Exchange Adjustment”, then following each adjustment to the settlement terms of options on any relevant Shares traded on any Options Exchange, the Calculation Agent will make one or more adjustments as provided in Section 11.2(b) (without regard to the words “diluting or concentrative” in the second sentence);
12.2(d)Calculation Agent Adjustment”, then, on or after the relevant Merger Date, the Calculation Agent shall either
(i)
(A) make such adjustment to the exercise, settlement, payment or any other terms of the Transaction as the Calculation Agent determines appropriate to account for the economic effect on the Transaction of such Merger Event (provided that no adjustments will be made to account solely for changes in volatility, expected dividends, stock loan rate or liquidity relevant to the Shares or to the Transaction), which may, but need not, be determined by reference to the adjustment(s) made in respect of such Merger Event by an options exchange to options on the relevant Shares traded on such options exchange and
(B) determine the effective date of that adjustment, or
(ii) if the Calculation Agent determines that no adjustment that it could make under (i) will produce a commercially reasonable result, notify the parties that the relevant consequence shall be the termination of the Transaction, in which case “Cancellation and Payment” will be deemed to apply and any payment to be made by one party to the other shall be calculated in accordance with Section 12.7, and in respect of an Option Transaction, the Calculation Agent shall determine the amount of such payment as if “Calculation Agent Determination” applied to the Option Transaction;
12.2(e)Modified Calculation Agent Adjustment”, then, on or after the relevant Merger Date, the Calculation Agent shall either
(i)
(A) make such adjustment to the exercise, settlement, payment or any other terms of the Transaction (including, without limitation, the spread) as the Calculation Agent determines appropriate to account for the economic effect on the Transaction of such Merger Event (including adjustments to account for changes in volatility, expected dividends, stock loan rate or liquidity relevant to the Shares or to the Transaction), which may, but need not, be determined by reference to the adjustments(s) made in respect of such Merger Event by an options exchange to options on the relevant Shares traded on such options exchange and
(B) determine the effective date of that adjustment, or
(ii) if the Calculation Agent determines that no adjustment that it could make under (i) will produce a commercially reasonable result, notify the parties that the relevant consequence shall be the termination of the Transaction, in which case “Cancellation and Payment” will be deemed to apply and any payment to be made by one party to the other shall be calculated in accordance with Section 12.7, and in respect of an Option Transaction, the Calculation Agent shall determine the amount of such payment as if “Calculation Agent Determination” applied to the Option Transaction;
12.2(f)Partial Cancellation and Payment”, then, in respect of a Share Basket Transaction, that portion of the Share Basket Transaction represented by Affected Shares will be cancelled as of the Merger Date, the amount calculated in accordance with Section 12.7 in respect of such Affected Shares will be paid by one party to the other, the remainder of the Share Basket Transaction will continue with the Basket comprising Shares that are not Affected Shares, and the Calculation Agent will adjust any relevant terms if necessary to preserve as nearly as practicable the economic terms of the Transaction for the remaining Shares; or
12.2(g)Component Adjustment”, then, in respect of a Share-for-Combined Merger Event, the consequence specified opposite “Share-for-Share” shall apply to that portion of the consideration that consists of New Shares (as determined by the Calculation Agent) and the consequence specified opposite “Share-for-Other” shall apply to that portion of the consideration that consists of Other Consideration (as determined by the Calculation Agent).

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Content and comparisons

Section 12.2. Consequences of Merger Events

12.2(a). “Alternative Obligation (Merger Events)
12.2(b). “Cancellation and Payment (Merger Events)
12.2(c). “Options Exchange Adjustment (Merger Events)
12.2(d). “Calculation Agent Adjustment (Merger Events)
12.2(e). “Modified Calculation Agent Adjustment (Merger Events)
12.2(f). “Partial Cancellation and Payment (Merger Events)
12.2(g). “Component Adjustment (Merger Events)

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Summary

A comparison reveals that the consequences for Merger Events under Section 12.2 and Tender Offers under Section 12.3 are, but for the section about alternative Obligations, effectively the same, belying unnecessary semantic complication in the structure of this document, if you are interested in that kind of thing. (Most legal eagles aren’t, we tend to find.)

There: that saved you a bit of bafflement.

That being the case you might wonder why ISDA’s crack drafting squad™ saw fit to write them out separately, eschewing the option for a cheeky “as the case may be” — but their chosen architecture, treating Merger Events and Tender Offers separately, forces them into this leaden exposition. We have some tedious thoughts on the unwisdom of this in our drafting principles section, if you are interested.
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See also

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References