Monday, July 9, 2007
Both the Chicago Board of Trade and Chicago Mercantile Exchange put their business combination to a shareholder vote today. The vote comes on the heels of Friday's announced increase in the merger exchange ratio from 0.350 to 0.375 shares of CME Holdings common stock for each share of CBOT Holdings common stock valuing CBOT at $11.9 billion up from an initial October valuation by the parties of $8 billion. All other terms of the merger remain the same. In connection with the increase, Caledonia Investments PYT. Ltd, CBOT's largest shareholder with 7% of the company, announced that it will support the transaction. Over the weekend, rival bidder IntercontinentalExchange Inc. decided that it would not raise its mostly stock offer for CBOT, which is now valued at a roughly equivalent amount as CME's.
The transaction looks likely to now go to CME and CBOT. It also highlights the quirks in Delaware law: how Delaware law permits transaction participants to characterize their stock-for-stock merger as a business combination rather than an acquisition to avoid "Revlon duties" and favor one bidder over another. Here, because the CBOT/CME transaction was mostly stock it was likely not considered to be a change of control transaction under Revlon (which would require the board to obtain the highest price reasonably available), but rather a simple business combination along the lines of Paramount Communications, Inc. v. Time Inc., 571 A.2d 1140 (Del. 1990). There and here, post-transaction control was fluid and there was no change in control that would trigger "Revlon duties". Accordingly, Revlon was not applicable and the CBOT board's decision to combine with CME (and arguably favor it over ICE in the process) reviewable under the business judgment rule. Moreover, while shareholder pressure here did work to increase the consideration, CME's final raise likely knocked ICE out even if ICE had been willing to measurably increase the bid. The arbitrageurs who own CBOT stock earned a significant return with the CME raise and are therefore likely to favor its certainty over a higher ICE bid despite the will of many longer-term shareholders. A similar happening to that in the recent OSI Restaurant Partners going-private. And, it is also likely to win approval of the CME-CBOT transaction today.
For shareholder who wish to attend the meetings today (and get some free food, etc.) here are the addresses: The CME Holdings special meeting is at 3:00 p.m. on July 9, 2007 at UBS Tower—The Conference Center, One North Wacker Drive. The CBOT Holdings special meeting is at 3:00 p.m. on July 9, 2007 and the CBOT special meeting of members will be held at 2:30 p.m. on July 9, 2007, each at Union League Club of Chicago, 65 West Jackson Boulevard.