- Implementation of Transfer Restrictions. In connection with our review, it has come to our attention that the recent charter amendment extending the transfer restrictions on Class A shares to all shareholders is not valid under Delaware law. Consequently, the original transfer restrictions put in place in connection with our November 13 demutualization are in effect. This means that 25 percent of your Class A shares can be transferred separately from the related Series B share.
Our financial advisors have counseled us that the extended transfer restrictions contained in the recent charter amendment are critical to the success of an initial public offering. The formation of a holding company will enable us to address this issue. It is the only practical way to implement the extended transfer restrictions for all shareholders. Subject to shareholder approval, we will establish the holding company through the merger of CME into a newly formed subsidiary. In doing so, we will effectively implement the extended transfer restrictions that we asked you to support at the April 18 annual shareholders' meeting. Following the merger, these restrictions will bind all CME shareholders. We continue to believe that CME and its shareholders will benefit from effectively implementing the extended transfer restrictions.
- Strategic and Business Flexibility. Other public companies, including exchanges, have reorganized as holding companies to prepare for public offerings. A holding company will provide us with greater strategic flexibility and business opportunities, allowing us to separate our regulated derivatives exchange business from other businesses that we may pursue. The Boards of the holding company and CME will be the same. In the merger, the shareholders of CME will receive equivalent equity in the new holding company, with trading privileges remaining at the Exchange subsidiary. The "core rights" of Class B shareholders, including the right to elect a specified number of directors, will be maintained.
- Separate the Value of the "Class A Share Equivalents." At the time of demutualization, we adopted a capital structure consisting of Class A common stock, representing "pure" equity in Chicago Mercantile Exchange Inc. We also exchanged CME, IMM, IOM and GEM memberships and fractions for different series of Class B shares, representing trading privileges and membership rights, as well as allocations of equity rights in the form of "Class A share equivalents," which were embedded in the Class B shares. The decision to embed equity in the Class B shares was made in order to help ensure a tax-free transaction for our shareholders. Since the completion of our demutualization transaction, many shareholders have inquired about whether an opportunity exists for them to achieve the direct benefit of the Class A share equity component of their Class B shares. One important advantage of the formation of the holding company is that we will extract the Class A equity component of each series of Class B shares by issuing to each Class B shareholder additional Class A shares equal to that equity component. On the basis of both the tax ruling we received and the advice of our tax counsel, we believe that this separation can be done on a tax-free basis. We are seeking a supplemental ruling from the Internal Revenue Service to that end. The Board believes that shareholders will benefit from the ability to realize the existing equity value of their Class B shares, if they so choose, by selling the newly issued Class A shares when permitted.
Note that we will hold informational meetings at 2:15 and 3:30 p.m. on Tuesday, July 17, in the Auditorium to address shareholder questions. In the interim, questions regarding the foregoing should be directed to: Ms. Ann Cresce, Director and Corporate Secretary, at +1 312 930-3488, or Mr. Jim Falvey, Director and Associate General Counsel, at +1 312 930-3046.
