Opinion ID: 1560325
Heading Depth: 2
Heading Rank: 1

Heading: The Demutualization and The Strategic Investor Transactions

Text: The PHLX is the nation's oldest continuously operating securities exchange. In January 2004, the Exchange converted from a non-profit Delaware corporation that was owned by its 505 seat owners, to a for-profit Delaware corporation that was owned by its shareholders. In that conversion (the Demutualization), each seat owner was issued 100 shares of Class A common stock in exchange for their seat. [4] In conjunction with the Demutualization, the PHLX adopted a restated Certificate of Incorporation, Article IV of which provides that no one person or related persons may own more than 20% of the Exchange's outstanding shares. Related persons are defined as any two or more Persons that have any agreement, arrangement or understanding (whether or not in writing) to act together for the purpose of acquiring, holding, voting or disposing of shares of Common Stock. The purpose of this provision was to prevent a large stockholder from obtaining control of the Exchange. After the Demutualization, in late 2004 and in 2005 the PHLX commenced discussions with different parties about a sale of either the Exchange or of some of the Exchange's assets. In 2005, Archipelago Holdings, LLC (Archipelago) offered $50 million dollars to acquire all of the PHLX stock. That offer translated to $990 of Archipelago stock for each share of PHLX. In April 2005, the PHLX Board of Governors, on the recommendation of a special committee, rejected Archipelago's offer as inferior to other alternatives available to the PHLX and as not in the best long-term interests of PHLX's shareholders. The Board then proceeded to explore other strategic alternatives, all aimed at diversifying the base of PHLX's investors, which would also become long term business partners with incentives to deliver options revenue and unlock potential value in PHLX's other lines of business. That exploration led to the Strategic Investor Transactions in the summer of 2005. In those transactions, the Exchange sold 45% of the equity of the PHLX to the six Strategic Investors, who also received warrants entitling them to an additional 44.4% of the PHLX's equity in 2006 if certain performance criteria were fulfilled. All of the Strategic Investors exercised those warrants in 2006. These transactions increased the Strategic Investors' ownership interest in the Exchange to 89.4%, and diluted the Class A shareholders' ownership interest to 10.6%. All told, the Strategic Transactions yielded approximately $40 million of new investment in the Exchange, but allowed the former seat owners to retain their 50,500 Class A shares. Using the proceeds from the Strategic Investor Transactions, the Exchange made a self-tender, in September 2005, for 16,700 of the 50,500 outstanding Class A shares at $900 per share. The disclosure accompanying the self-tender described the Strategic Investment Transactions and indicated that as a result of those transactions, the book value of PHLX was reduced from $949.18 to $172.64 per share; and that if the tender offer were successful, the book value would be further diminished to $147.22 per share. The tender offer closed in October 2005, and 3,600 shares of Class A stock were tendered.