NYSE/Archipelago Deal

Posted by Bill Sjostrom

The New York Stock Exchange, Inc. and Archipelago Holdings, Inc. jointly announced on Thursday that their proposed merger will be put to a vote of the NYSE members and Archipelago stockholders on Dec. 6, 2005.   Approval of the deal requires an affirmative vote of two-thirds of the votes cast by a quorum of NYSE members and a majority of the outstanding shares of Archipelago common stock.  Click here for the Joint Proxy Statement/Prospectus.

The deal is truly unique.  It achieves three distinct objectives for the NYSE:  (1) the NYSE is converted from a not-for-profit to a for-profit; (2) the NYSE becomes a publicly-traded company, and (3) the NYSE acquires Archipelago, the operator of ArcaEx, an open, all electron stock market for trading NYSE, Nasdaq, AMEX and other equity securities.

These objectives are achieved through a series of mergers that results in (1) the conversion of the NYSE from a New York Type A not-for-profit to a New York limited liability company, and (2) both the NYSE and Archipelago becoming wholly-owned subsidiaries of NYSE Group, Inc., a newly-formed holding company incorporated in Delaware.  The former NYSE members will own 70% of the outstanding stock of the holding company (each NYSE member also receives $300,000 in cash per membership as part of the deal), and the former Archipelago stockholders will own the remaining 30%.  The issuance of the holding company’s stock will be registered with the SEC and hence will be freely tradable, although shares held by former NYSE members will be subject to transfer restrictions under the holding company’s certificate of incorporation.  The stock will be listed for trading on the NYSE.

For some thoughts on the deal by Dale, click here for a posting he made when the deal was originally announced last May.

A group of dissident NYSE members has sued in New York state court to block the deal.  The suit alleges that the NYSE board breached its fiduciary duties of candor, care, loyalty, and good faith, among other things.  The crux of the complaint seems to be that the NYSE board should have sought a higher percentage of equity in the post-merger holding company for the NYSE members, i.e., the 70/30 ratio should be more like 75/25 or 80/20.  A hearing on a motion for a preliminary injunction is expected the week of November 14. 

The fact that the NYSE is currently a non-profit corporation makes this case more interesting.  Plaintiffs can argue that the business judgment rule does not apply to non-profit corporations.  Some courts have held this to be the case, others have held the opposite, although I do not believe that a New York court has ruled on this issue.  One of the primary justifications of the business judgment rule is the recognition that building a successful business entails taking risks.  Because potential profits often corresponds to potential risk, the law should not discourage corporate risk taking.  Therefore, the business judgment rule takes out of the equation director concerns about personal liability for a risky decision turning out poorly, absent bad faith, failure to be adequately informed or self-dealing.  This rationale obviously does not apply with the same force for a non-profit, although other BJR rationales may (encouraging competent individuals to serve as directors, courts ill equipped to second guess business decisions, etc.).