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Filed by Board of Trade of the City of Chicago, Inc. (CBOT)
Subject Company -- Board of Trade of the City of Chicago, Inc.
Pursuant to Rule 425 under the Securities Act of 1933
File No. 132-01854
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The following communication was distributed to CBOT members and membership
interest holders on November 17, 2000 and is currently available on the CBOT's
intranet site, MemberNet.
November 17, 2000
NOTICE TO MEMBERS
In today's Federal Register, the Securities and Exchange Commission
requests comment from the public on the Chicago Board Options Exchange's
proposed rule change that would undercut, and possibly extinguish, the Exercise
Right. Copies of the SEC Federal Register notice are available in the General
Counsel's office. As described below, this proposed rule change threatens the
Exercise Right in three ways. One way involves our restructuring and the ability
of Full Members to sell their shares in the new for profit Board of Trade. The
other two ways concern electronic trading, not restructuring. CBOE asserts the
Exercise Right will terminate "immediately" if the Board of Trade expands
electronic trading to all non-members to trade our contracts or allows
Exercisers to trade on both the CBOE and the Board of Trade.
By law, CBOE's proposed rule change must receive SEC approval. We do not
believe the SEC should approve CBOE's proposed rule change. We will file a
comment letter with the SEC opposing CBOE's proposed rule change because it
violates
- the 1992 Agreement with CBOE;
- the rights guaranteed to Board of Trade members under Article
Fifth(b) of CBOE's Articles of Incorporation;
- and federal securities law.
The SEC will consider all comment letters filed with it and render its
decision sometime in the near future. Any SEC final action on the rule change --
either disapproval or approval -- would be subject to review in the U.S Court of
Appeals. You can help in the effort to oppose CBOE rule change by submitting a
comment letter to the SEC. Comment letters must be submitted to the SEC by
December 8, 2000. A sample comment letter is included at the end of this notice.
In deciding whether to submit a comment letter, you may consider the information
provided in this notice.
Please be assured we will make every effort to uphold the legal rights
of our membership. We continue to believe that CBOE's attempts to condition or
terminate the Exercise Right violate our 1992 Agreement. We will continue to
prosecute our state court breach of contract action against CBOE as the 1992
Agreement allows, independent of the SEC's consideration of CBOE's rule change.
We have moved for expedited treatment of that litigation by the state court
judge. In our view, even if the SEC rules against us, that contract action will
still stand. If we convince the state court that CBOE has breached its contract
with us, the court is empowered to hold CBOE accountable for any damages
sustained as a result of its unlawful acts.
Background
Since 1972, CBOE's Articles of Incorporation have guaranteed every
present and future member of the Board of Trade the right to become a CBOE
member at no cost, what is called the Exercise Right. No amendment may be made
to that legal right without the approval of 80% of
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all Exerciser Members of CBOE voting as a class and 80% of all other CBOE
members voting as a separate class. CBOE's charter further provides that any
Exerciser Member shall be vested with all rights, privileges and obligations of
CBOE membership.
CBOE also is contractually bound to interpret the Exercise Right and its
Charter "in accordance with the provisions of the" 1992 contract CBOE entered
into with the Board of Trade. That 1992 contract requires CBOE to preserve the
Exercise Right so long as either Board of Trade Full Members or their Delegates
possess the right and privilege "to trade as principal and broker for others in
all contracts traded on the CBOT, whether by open outcry, by electronic means,
or otherwise, during any segment of a trading day." The 1992 contract also
mandates that the Exerciser Right will continue if the Board of Trade
restructures, subject to three conditions. (The Board of Trade's planned
restructuring meets those three conditions.) Further, the 1992 contract requires
the Board of Trade to limit the number of potential CBOE Exercisers to 1402;
only the 1402 Full Members or their delegates could become CBOE Exercisers. The
1992 agreement provides that either CBOE or the Board of Trade could bring a
lawsuit to enforce the contract and to obtain damages should the other party
breach the contract.
CBOE's Efforts to Derail the Board of Trade's Restructuring
As you know, once the Board of Trade announced its restructuring plan
this year, CBOE issued a series of threatening misstatements claiming that
restructuring would extinguish the Exercise Right. First, on the eve of the vote
on Step One of our restructuring, CBOE claimed that the Board of Trade's
decision to become a not-for-profit Delaware Corporation ended the Exercise
Right. We brought a civil action against CBOE and forced them to retreat from
that position in open court. Then CBOE claimed, in written materials made
available to its members and our members, that if the Board of Trade became a
for-profit company, the Exercise Right would evaporate. Now CBOE has retreated
from that position in a public filing with the SEC. It now states that the
Exercise Right would not be extinguished "if the CBOT only takes this single
reorganizational step."
CBOE's Proposed Rule Change - SEC File No. SR-CBOE-00-44
On August 30, 2000 CBOE filed a "Proposed Rule Change" with the SEC.
That filing was amended on October 10, 2000 by CBOE. It is this amended filing
on which the SEC now has requested public comment.
CBOE's proposed rule change is directed in part at the Board of Trade's
restructuring plans. According to CBOE, if the Board of Trade restructures as a
for-profit company, any Full Member that sells any stock in the for-profit
company would lose his Exercise Right, even if that Member holds the same
trading rights and privileges as today. In addition, CBOE claims the Exercise
Right will end "immediately" if the Board of Trade changes its trading rules and
procedures, whether or not as a result of restructuring,
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- to "extend the right to trade all CBOT products, electronically
or otherwise, to persons who are not CBOT Full Members or the
stockholder-equivalents of such members (or their delegates);"
or
- so that "CBOT Full Members or the stockholder equivalents of
such members (or their delegates) would be able to trade all
CBOT products directly on CBOT at the same time as they are
trading on the [CBOE] as exerciser-members."
For example, CBOE asserts that if the Board of Trade voted "to provide complete
electronic access to trade its agricultural contracts by allowing them to be
traded for the first time on CBOT's electronic trading facility," the Exercise
Right would end.
Why has CBOE filed this proposed rule change? In its own words, CBOE
claims that without this rule change "it is probable that all 1402 of the
present full members of CBOT, or their lessees, would exercise to trade on
CBOE." If each of the 1402 CBOT Full Members exercised their rights under CBOE's
Articles of Incorporation and the 1992 Agreement, CBOE asserts it would "inflict
serious harm" on its "ability to maintain a fair and orderly market" and would
"dilute the value of CBOE memberships substantially."
The SEC's has requested comment from the public on CBOE's proposed rule
change by December 8, 2000.
CBOE Proposed Rule Change Is Unlawful on Multiple Grounds
Based on just a preliminary review, CBOE's proposed rule change contains
multiple legal deficiencies. CBOE's proposed rule change
1. Fails to comply with CBOE's rules and the 80% class vote for
Exercisers requirement. (Before CBOE may amend the Exercise
Right it needs to obtain approval separately from 80% of its
Exerciser Members and 80% of the balance of its Members.)
2. Breaches CBOE's fiduciary duties to Exercisers by denying them
a class vote on any amendments to the Exerciser Right.
3. Violates the 1992 agreement.
4. Deviates from CBOE's past conduct and practice under the 1992
Agreement.
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5. Disregards federal securities law by imposing an unwarranted
burden on competition, contravening the public interest and
permitting unfair discrimination.
These and other arguments will be developed more fully in the comment letter we
will submit to the SEC.
For now, it is important that you consider CBOE's stated concern
underlying its Rule Change: CBOE fears that 1402 Full Members may exercise their
Exercise Rights. Those rights are exactly what CBOE's Charter and the 1992
agreement guarantee to Full Members. Thus CBOE's proposed rule change attempts
to rewrite unilaterally that charter and that contract on the astonishing ground
that CBOE now doesn't like the bargains it agreed to in the past. The law,
however, requires CBOE to live up to its commitments. It cannot just walk away
from its legal obligations - under the ruse of a proposed rule change -- simply
because it finds them to be burdensome today. That is called breach of contract,
breach of fiduciary duty or worse.
Let me assure you again, the Board of Trade will pursue all available
legal remedies to address and remedy CBOE's misconduct. For now, we are asking
you to take the time to send the SEC a comment letter expressing your views on
CBOE's proposed rule change. Thank you for your attention to this important
matter.
Sincerely,
/s/ David P. Brennan
David P. Brennan
The CBOT urges its members and membership interest holders to read the
Registration Statement on Form S-4, including the proxy statement/prospectus
contained within the Registration Statement, regarding the CBOT restructuring
referred to herein or in connection herewith, when it becomes available, as well
as the other documents that the CBOT has filed or will file with the Securities
and Exchange Commission, because they contain or will contain important
information. CBOT members and membership interest holders may obtain a free copy
of the proxy statement/prospectus, when it becomes available, and other
documents filed by the the CBOT at the Commission's web site at www.sec.gov, or
from the CBOT by directing such request in writing or by telephone to: Board of
Trade of the City of Chicago, Inc., 141 W. Jackson Boulevard, Chicago, IL 60604-
2994. Attention: Office of the Secretary, Telephone: (312) 435-3605, Facsimile:
(312) 347-3827. This communication shall not constitute an offer to sell or the
solicitation of an offer to buy, nor shall there be any sale of securities in
any state in which offer, solicitation or sale would be unlawful prior to
registration or qualification under the securities laws of any such state. No
offering of securities shall be made except by means of a prospectus meeting the
requirements of Section 10 of the Securities Act of 1933, as amended.
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SAMPLE LETTER
Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609
RE: File No. SR-CBOE-00-44
Dear SEC Secretary:
As a member of the Chicago Board of Trade, I am opposed to the Proposed
Rule Change filed with the Commission by the Chicago Board Options Exchange,
File No. SR-CBOE-00-44. CBOE's Proposed Rule Change was adopted without
following the special class voting procedures designed to protect the rights of
Exerciser-Members under Article Fifth (b) of CBOE Charter. It also violates the
1992 CBOE-CBOT Agreement concerning the Exercise Right.
Under the Proposed Rule Change, we would lose our Exercise Right if we
trade on both CBOE and CBOT or expand electronic trading on the Board of Trade.
We have always been allowed to trade on both exchanges. It promotes liquid
markets and open competition. So does expanded electronic trading. CBOE offers
no reason to restrict competition in this manner.
The Exercise Right has been a fact of life since CBOE was created. So
long as Article Fifth(b) and the 1992 Agreement remain in effect, the Exercise
Right is guaranteed by law and CBOE must respect that legal right. I urge you to
disapprove CBOE's Proposed Rule Change.
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The following letter was distributed to CBOT members and membership interest
holders on November 20, 2000 and is currently available on the CBOT's intranet
site, TradeTalk.
David P. Brennan
141 West Jackson Blvd.
Chicago, IL 60604
November 20, 2000
Dear Fellow Member,
The CBOT has a magnificent history that all of us treasure. But far more
important than our history, our exchange provides the current means of our
livelihoods--whether we are brokers, locals, FCMs or lessors. As a membership,
we are the source of the enormous strengths of this exchange. Considering the
business environment in our industry, the question we now face is how to change
ourselves so that we adapt to the challenges facing us, yet still maintain the
value of our investment in our memberships and the opportunity to pursue our own
business interests within the CBOT content.
I believe the way to accomplish this fundamental and necessary change is to
restructure into a for-profit, business-focused, shareholder-owned company.
With our vote in June, we overwhelmingly ratified the first step of this
restructuring process. Since that time, despite obstacles, I have been working
constantly with staff and legal advisers to prepare the registration statement
to be filed with the SEC in December, so you can then evaluate and vote on the
second and final step early next year, hopefully in the first quarter.
By now, most of us are well aware of past shortcomings in the way we have run
our business. As the fundamentals of our industry have changed, the fast pace of
that change, and technology challenges in particular, overwhelmed our ability to
respond effectively. We simply can no longer operate the CBOT within the
limitations of a mutual association.
The new structure will bring about a change in the way we make decisions; all
questions will become business questions, not political questions. The
management team will be led by a permanent CEO, carrying the title and authority
of Chairman, who I believe should own a stake in the business. A new and smaller
Board will be able to move quickly and decisively. Fiscal discipline and tough
performance expectations will supplement the loose standards under which we
previously operated.
Most importantly, we, the members, will be the beneficiaries of the new
structure. Our trading rights as members will remain intact. While all of us
will still be free to excel in the pursuit of our individual business plans
(trading, brokering, leasing, operating a firm), collectively we also will
become shareholders of a large enterprise with a strong product line and
multiple streams of revenue, whose mission is delivering maximum volume,
maximum revenue and maximum value to shareholders.
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I believe, and I think you will agree, that the political heavy lifting here is
done. We are ready for a change. We want the results that embracing a dynamic
business leadership will bring. The enormous value of the CBOT franchise can be
realized through the restructuring process; our international brand name; our
benchmark contracts (with related quote revenue); our links to customer order
flow through our powerful FCM network; our pool of talented member market
makers; our real estate; and our ties to CBOE.
The CBOT is a powerful business platform with terrific potential as a
restructured company. It is not accurate to equate restructuring with the close
of our trading floors. The CBOT will remain a marketplace where trading volume,
electronic and open outcry, determines the framework of our business.
Restructuring will allow the CBOT to remain competitive with other exchanges,
regardless of the venue preferred by customers. Our glass is half full - not
half empty.
I have strong views on other issues besides restructuring. For a brief summary
of those, please see the attached page.
However, I will tell you plainly and directly; the centerpiece of my candidacy
and my business plan is restructuring CBOT into a for-profit company, with Board
and management focused on delivering value to shareholders. I believe that doing
this is the only way to realize the true value of our exchange as an equity
investment, unlocking residual value never available to us as seat owners in a
mutual association.
I ask for your support in this election, not because of the honor of serving,
not based on popularity, personality, or communication skills. I ask for your
vote for one reason only; to finalize our restructuring, transforming us into
the competitive force that we should be.
Sincerely,
/s/ David P. Brennan
David P. Brennan
The CBOT urges it members and membership interest holders to read the
Registration Statement on Form S-4, including the proxy statement/prospectus
contained within the Registration Statement, regarding the CBOT restructuring
referred to herein or in connection herewith, when it becomes available, as well
as the other documents that the CBOT has filed or will file with the Securities
and Exchange Commission, because they contain or will contain important
information. CBOT members and membership interest holders may obtain a free copy
of the proxy statement/prospectus, when it becomes available, and other
documents filed by the CBOT at the Commission's web site at www.sec.gov, or from
the CBOT by directing such request in writing or by telephone to: Board of Trade
of the City of Chicago, Inc., 141 W. Jackson Blvd., Chicago, Illinois 60604-
2994. Attention: Office of the Secretary, Telephone: (312) 435-3605, Facsimile:
(312) 347-3827. This communication shall not constitute an offer to sell or the
solicitation of an offer to buy, nor shall there be any sale of securities in
any state in which offer, solicitation or sale would be unlawful prior to
registration or qualification under the securities laws of any such state. No
offering of securities shall be made except by means of a prospectus meeting the
requirements of Section 10 of the Securities Act of 1933, as amended.
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David P. Brennen
141 West Jackson Blvd.
Chicago, IL 60604
Where I stand on other issues besides restructuring:
Closing the Floors
. There is no reason to consider closing the floor when 85% of the business
is transacted on the floor. We cannot let emotion or individual opinion
drive our business. We must act on facts alone in a prudent and
businesslike manner. The fact is that liquidity will drive that decision,
if it is even necessary to consider. The market will tell us, the market
will drive our business model.
CEO Search
. We are actively engaged in a search for a permanent CEO. We have been
planning the search since our first restructuring vote after the members
affirmed their intent to proceed with restructuring. We have been
interviewing candidates during the past month and are continuing to
interview. My objective is to retain someone who knows our business and who
understands how to build shareholder value.
CBOE
. I strongly favor a business combination with the CBOE. Unfortunately, after
6 months of effort, my counterparts from the CBOE decided that merger was
not a path they wanted to pursue. That being said, we are in litigation
with the CBOE on the exercise right. I would rather be discussing how we
jointly grow our businesses. My position on this has not changed: I prefer
a merger but if CBOE does not want to merge, I believe that the exercise
right is a permanent right of CBOT members that we will not allow to be
taken away.
Business operating model
. We must revise the way we currently operate our exchange as a business.
Having the exchange expend its resources in an attempt to satisfy all the
divergent needs, demands and expectations of 3500 members has not worked. I
believe that the exchange must be focused on bringing maximum commerce to
our business platform, thus providing the opportunity for each member and
member firm to apply an individualized business model to take advantage of
order flow. Exchange management must be charged with the responsibility of
bringing maximum business to the exchange, and have the authority to do so.
This focused approach guarantees the success of the CBOT as a business, and
simultaneously protects the livelihoods and opportunities of our
membership.
Finances
. We have incurred a number of extraordinary expenses in the past few years,
even as our volume dropped below this year's budget expectations. We have
reduced base operating expenses this year, and with management and Board
cooperation, we are close to completing next year's budget. We face
difficult but necessary decisions, which I will consider based on business,
not political, realities. I imposed dues, which might not have been popular
but was necessary to right the ship. My approach will continue to be to
examine every expense and nurture every source of revenue to put the
exchange in a positive cash position.
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The CBOT urges its members and membership interest holders to read the
Registration Statement on Form S-4, including the proxy statement/prospectus
contained within the Registration Statement, regarding the CBOT restructuring
referred to herein or in connection herewith, when it becomes available, as well
as the other documents that the CBOT has filed or will file with the Securities
and Exchange Commission, because they contain or will contain important
information. CBOT members and membership interest holders may obtain a free copy
of the proxy statement/prospectus, when it becomes available, and other
documents filed by the CBOT at the Commission's web site at www.sec.gov, or from
the CBOT by directing such request in writing or by telephone to: Board of Trade
of the City of Chicago, Inc., 141 W. Jackson Blvd., Chicago, Illinois 60604-
2994, Attention: Office of the Secretary, Telephone: (312) 435-3605, Facsimile:
(312) 347-3827. This communication shall not constitute an offer to sell or the
solicitation of an offer to buy, nor shall there be any sale of securities in
any state in which offer, solicitation or sale would be unlawful prior to
registration or qualification under the securities laws of any such state. No
offering of securities shall be made except by means of a prospectus meeting the
requirements of Section 10 of the Securities Act of 1933, as amended.
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