CME Chairman Scott Gordon said, “The resounding endorsement of demutualization by the members of the Chicago Mercantile Exchange brings the CME to the most significant turning point in more than 100 years of history and culminates two years of deliberative strategic analysis, planning and execution. The decision to go for-profit affirms the innovative spirit and visionary decision making that are the hallmarks of this exchange.”
CME President and Chief Executive Officer Jim McNulty said, “We have already begun the process of changing the mindset and culture of the organization to operate as a for-profit corporation. As we move ahead, business decisions of the Chicago Mercantile Exchange Inc. will reflect an intense client focus and commitment to shareholder value, positioning us to have a significant role in new markets and new spheres of financial risk management.”
The transaction was also subject to the approval by the P-M-T Limited Partnership, which operates the exchange’s GLOBEX®2 electronic trading system, to have the exchange purchase the assets of the partnership. More than 84 percent of the eligible P-M-T Limited Partnership units voted in favor of the plan. Upon consummation of the transaction and purchase of the assets by the exchange, the P-M-T Limited Partnership will be dissolved.
Approval of the proxy vote enables the CME to pursue the goals first announced in late 1999 when the CME Board of Directors unanimously approved a demutualization plan: create a for-profit company with an improved governance and management structure, improve financial decision making to emphasize shareholder value, unbundle members’ equity values, and provide a currency for working with strategic partners.
Two classes of shares in the new “Chicago Mercantile Exchange Inc.” will be issued: Class A shares representing equity rights, and several series of Class B shares giving current full CME members, International Monetary Market (IMM) members, Index and Option Market (IOM) members and Growth and Emerging Market (GEM) members equity and their respective trading rights in the new entity. The CME will convert into a for-profit corporation in several steps. The current Illinois not-for-profit corporation will be merged, first, into a new Delaware non-stock corporation and immediately thereafter into a stockholder-owned, for-profit Delaware corporation. A final step involves a recapitalization in which the Class A and Class B shares will be issued.
The CME demutualization transaction is contingent on a favorable ruling by the Internal Revenue Service (IRS) regarding the tax consequences of the action. In addition, the U.S. Commodity Futures Trading Commission (CFTC), which regulates futures exchanges, will need to approve certain minor rule changes which are essentially technical in nature. The CME has already submitted the proposed rule changes to the CFTC. The demutualization is expected to take place expeditiously once the CME receives a favorable tax ruling from the IRS and the CFTC approval. All that will remain is the final preparation and filing of various corporate documents.
Holders of Class B shares of Chicago Mercantile Exchange Inc. will be able to sell, lease, transfer or bequeath their trading rights on the exchange similar to the way they can now with memberships. Anyone will be able to own a Class B share. Those who exercise trading privileges will need to submit to the CME’s membership approval process. The exchange will serve as the transfer agent for Class B shares; it will name a transfer agent for Class A shares. Immediately upon demutualization, certain restrictions on the transfer of Class A shares, representing pure equity in the exchange, will apply, but the restrictions will be lifted gradually over the following 15 months. For example, six months after the demutualization transaction, shareholders could begin to sell up to 25 percent of their initially allocated shares.
As many as 25,876,600 Class A shares will be issued to members, allocated to CME, IMM and IOM members on a 3-2-1 basis. During the initial period in which the transfer restrictions are in place, exchange management will undertake extensive marketing, educational and promotional efforts with analysts and investors to communicate the value of the Class A shares.
The proxy vote and issuance of equity shares is not an “initial public offering” (IPO) of the Chicago Mercantile Exchange. The proxy statement on which the members voted today neither addresses nor rules out a future decision by the Chicago Mercantile Exchange Inc. regarding an IPO.
The Chicago Mercantile Exchange Inc. will be governed by a Board of Directors to be reduced in size from its current 39 members to 19 members over a two-year period, beginning with the Board elections this December. Day-to-day operations will be in the hands of the President and Chief Executive Officer. The company will be a publicly registered corporation, subject to the periodic reporting requirements of the Securities Act of 1934.
The CME was the first major U.S. exchange to announce a plan to demutualize—the result of a year-long strategic planning initiative and a vote of its Board of Directors in October 1999. The exchange first filed a registration statement with the U.S. Securities and Exchange Commission (SEC) on Jan. 28, and the SEC declaration of the effectiveness of that statement, as amended, on April 25 paved the way for today’s vote. Voting by CME, IMM, IOM and GEM division members was on on a 6-2-1-1/6 weighted basis, with a two-thirds majority of those present and voting required for passage.
