Corporate actions - GMSLA Provision

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2010 Global Master Securities Lending Agreement
A Jolly Contrarian owner’s manual

Clause 6.7 in a Nutshell
Use at your own risk, campers!

6.7 Corporate actions
Where a holder is entitled to exercise any “corporate rights” under any Loaned Securities or any Collateral (“assets”) before the receiver can return equivalent ones to the provider, then the provider can, within a reasonable time before the relevant deadline, notify the receiver that it wishes to receive the assets as if the corporate rights been exercised.

Corporate rights” include any:

  • conversion, sub-division, consolidation or pre-emption rights;
  • rights arising under a takeover offer;
  • rights to receive securities now or in the future; or
  • other rights, including ones that require the holder to make an election.

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Clause 6.7 in full

6.7 Corporate actions
Where, in respect of any Loaned Securities or any Collateral, any rights relating to conversion, sub division, consolidation, pre emption, rights arising under a takeover offer, rights to receive securities or a certificate which may at a future date be exchanged for securities or other rights, including those requiring election by the holder for the time being of such Securities or Collateral, become exercisable prior to the delivery of Equivalent Securities or Equivalent Collateral, then Lender or Borrower, as the case may be, may, within a reasonable time before the latest time for the exercise of the right or option give written notice to the other Party that on delivery of Equivalent Securities or Equivalent Collateral, as the case may be, it wishes to receive Equivalent Securities or Equivalent Collateral in such form as will arise if the right is exercised or, in the case of a right which may be exercised in more than one manner, is exercised as is specified in such written notice.
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Related agreements and comparisons

Related agreements: Click here for the same clause in the 2018 Pledge GMSLA
Comparison: Click to compare the 2010 GMSLA and 2018 Pledge GMSLA versions of this clause.

Resources and navigation

2010 GMSLA: Full wikitext · Nutshell wikitext | GMLSA legal code
Pledge GMSLA: Hard copy (ISLA) · Full wikitext · Nutshell wikitext |
1995 OSLA: Full wikitext · Nutshell wikitext | GMSLA Netting
Let me Google that for you: Guide to equity finance | ISLA’s guide to securities lending for regulators and policy makers
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Content and comparisons

This, in a 2010 GMSLA is the thing you need to switch off if you want to do a “take no action” borrow.
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Summary

Compare Paragraph 6.4 of the 2000 GMSLA, which (ahem ~spoiler alert~) is materially the same

There is a tension between 6.6 and 6.7: while under 6.6 a Borrower is not obliged to vote in a certain way, for a corporate action — even one involving a lender option — the Lender may requests the Equivalent securities be returned with the rights taken up.

Best illustrated by way of example:

Under Italian Law a shareholder on the Record Date who does not vote in favour of a proposed merger acquires a “withdrawal right” if the merger is approved. The withdrawal right allows a shareholder who abstained or voted against the merger to be cashed out of the equity at a pre-defined price equal to the average closing price published by Borsa Italiana for the six months prior to the notification date for the merger. It is therefore possible that the withdrawal right as a call option over the stock. It is only exercisable if the shareholder does not vote.

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In this case the Lender who has lent out over the record date could not (without prior agreement) oblige the Borrower to vote against the merger, but if the Borrower has done so, the Lender can, by request under 6.7, require the Borrower to deliver the proceeds of the withdrawal in lieu of Equivalent Securities.
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General discussion

What is a “reasonable time”?

There’s no amplification on what counts as a “reasonable time”. You will find scant authority in the law reports about it. Even the FT’s Mastering Securities Lending Documentation is mute on the subject.

So let the Jolly Contrarian, having girded itself with all appropriate disclaimers, hazard a guess.

The tension here is that the exercise date – the latest possible time for exercise – will be after the record date — the date on which you had to actually own the Securities. And your ability to exercise at all is dependent on having held the Securities on the record date.

The case against

If the Lender gives notice after the record date but before the exercise date, is that a reasonable time? I think you could construct a fairly good argument that it is not, at least if the Borrower happens to be short the stock:

  • The 2010 GMSLA is a title transfer document designed for short selling.
    • The parties’ expectations must be that the Borrower will not hold the stock in inventory during the loan.
    • A “reasonable time” would therefore need to be enough time to get the stock back in to vote it to meet the Lender’s instructions
  • A 2010 GMSLA Borrower is not meant to be writing a call option.
    • Once the record date has passed the Borrower cannot exercise the option itself, so would be making a payment it will not itself receive.
    • The manufactured dividend process is designed to pass on actual economics of the security, not the best of economics. Therefore the Borrower must be able to effectively exercise the rights. That includes having time to get the securities in inventory if they’re not already there.
  • The 2010 GMSLA’s voting rights clause is clear a Lender can’t vote on securities.
    • If it wants to, it must recall the Loan in time for the record date.
    • Even if the Borrower fails to return, under the Buy In terms (Para 9.3), it wouldn’t be liable for consequential loss (which we surmise would include the lost opportunity to exercise the option).
    • By extension, if a Lender wants (effectively) to exercise a vote, it must signal its intention in enough time for the Lender to recall securities, and that is what the “reasonable time” is designed to capture.
  • If the Borrower was obliged manufacture the payment whether or not it held it in long inventory, then there’s no real reason to have a deadline on the underlier at all.
    • Why exercise the notice before the exercise time?
    • It wouldn’t make any difference from the Borrower’s perspective.

The case for

Pal, it’s my stock, you borrowed it, you take the risk of all economic performance in the mean time. Your safest way of doing that it by holding it. If you can hold it, you can put in your notice and exercise, no problem.

What do you mean you shorted the security? Who knew? More to the point, who cares? By doing so you took a view on it: this risk is express something you bet against happening.
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See also

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References