The CME is printing the proxy statement and will mail it shortly to exchange members asking them to vote on the plan to transform the member-owned institution into a for-profit, shareholder-owned corporation. The CME Board of Directors has unanimously recommended a "yes" vote on the plan.
Approval of the plan requires a two-thirds majority vote of those members casting votes by proxy or in person on the day of the members' meeting. The demutualization plan would be the first step in a process that will turn members of the Chicago Mercantile Exchange into shareholders with an equity stake in the company.
CME Chairman Scott Gordon said, "Our board and management team have demonstrated tremendous leadership and vision in developing this demutualization plan. The future of the CME is now in the hands of our members, and we urge them to support the most significant transformation in the CME's history."
CME President and Chief Executive Officer Jim McNulty said, "If demutualization is approved, we will be able to accelerate the process of establishing the CME as the premier global marketplace of the 21st century. The opportunities for the CME will expand as we streamline our decision-making process and obtain access to global capital markets."
Approval of demutualization would enable the CME to pursue the five goals announced by its Board of Directors in November 1999 when it approved a demutualization plan: create a for-profit company with an improved governance and managerial structure, create an improved financial decision-making model to emphasize shareholder value, create a catalyst for aggressively pursuing new business strategies, unlock members' equity values, and provide a signal and a currency for working with strategic partners.
Two classes of shares in the new "Chicago Mercantile Exchange Inc." would be issued: Class A shares representing equity rights, and several series of Class B shares giving trading rights and equity to current full CME members, International Monetary Market (IMM) members, Index and Option Market (IOM) members and Growth and Emerging Market (GEM) members.
Under the proposal, holders of series B shares would be able to sell, lease, transfer or bequeath their trading rights on the exchange similar to the way they can now with memberships. 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, would apply, but the restrictions would be lifted gradually over the following 15 months. For instance, 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 would be issued to members, allocated to CME, IMM and IOM members on a 3-2-1 basis. During the six-month 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 CME, now an Illinois not-for-profit corporation, would 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 would be issued.
The CME has made the transaction contingent on a favorable ruling by the Internal Revenue Service (IRS) regarding the tax consequences of the action. Such a ruling would ensure that the exchange of membership interests for shares of stock in the new company would be accomplished on a tax-free basis.
In addition, the U.S. Commodity Futures Trading Commission (CFTC), which regulates futures exchanges, will need to approve certain minor rule changes related to the governance of the new for-profit company. The CME has already submitted the proposed rule changes to the Commission.
The transaction is also subject to the approval by the PMT Limited Partnership, which operates the exchange's GLOBEX®2 electronic trading system, to have the exchange purchase the assets and operations of the partnership.
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. Day-to-day operations will be in the hands of the President and Chief Executive Officer. The company will be a publicly registered corporation.
The proxy vote and issuance of equity shares is not an "initial public offering" (IPO) of the Chicago Mercantile Exchange. The registration statement neither addresses nor rules out a future decision by the Chicago Mercantile Exchange Inc. regarding an IPO. Voting by CME, IMM, IOM and GEM division members will be on a 6-2-1- 1/6 weighted basis, with a two-thirds majority of those present and voting required for passage.
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.
