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Filed by Board of Trade of the City of Chicago (CBOT)
Subject Company - Board of Trade of the City of Chicago
Pursuant to Rule 425 under the Securities Act of 1933
File No. 132-01854
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The following is the transcript of a meeting conducted on May 25, 2000 that is
currently available to CBOT members and membership interest holders on
videotape.
CHICAGO BOARD OF TRADE
Transcript - Member Floor Meeting - May 25, 2000
Chairman Brennan: Good afternoon and welcome everybody, welcome to those who
are listening to this on Membernet. At the last floor
meeting we had more people listening on Membernet than we
actually had on the floor here, so the attendance is
probably pretty good.
I am excited to talk to you today about the proposed
restructuring plan and the implementation of the first step
of the restructuring process that was approved by the board
of directors last week. Before I begin, I would like to
thank the members of the restructuring task force, the
Implementation Committee, the allocation committee and the
management for bringing this plan before this membership.
By now you have all received the Restructuring Report as
well as a Q&A document on the restructuring. I hope that
you have found these useful as a first step in understanding
the steps that we are taking and the vote that will, be in
front of the membership shortly. The board of directors
overwhelmingly approved the ballot for the membership vote
and unanimously approved the Restructuring Report. The
purpose of today's meeting is to provide you with an
overview of the actions recently taken by the board and the
ballot on which you will be asked to vote. What I want to
address are the issues surrounding the first vote, which is
just step one of the restructuring process and is more
technical in nature. To assist me in this process I have
asked a number of the external advisors that have been
working with the board of trade to be with us today. I will
begin by giving you a high level overview of the
restructuring plan, some key industry trends and address
some of the issues in my opening remarks. Next I will ask
Justin Zubrod from AT Kearney to provide a brief summary of
the restructuring plan. Justin and a team from AT Kearney
have been working with us for several months to develop this
plan. After that Kirkland & Ellis will outline the specific
provisions of the ballot on which the members are being
asked to vote. The members are being asked to vote only on
step one of the restructuring and Kirkland will explain
exactly what that means. Finally after that, I would like
to ask the interim president, Dennis Dutterer, to share with
us his perspective. After you have heard from these groups,
we will have plenty of time for questions and answers. I do
ask that you hold your questions until then so that we can
get through all of the information in a timely manner.
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We entered this year with a bold plan for the future of the
Chicago Board of Trade. The industry is changing and our
competitors are not sitting still. Even since we initially
spoke regarding the restructuring plan in January, other
markets have continued to make progress. I see three
fundamental changes currently underway in our business;
number 1, our members are becoming our competitors; number
2, exchanges are reinventing themselves; and number 3, cash
and futures markets are converging. I would like to speak
briefly about each one of these trends. In terms of our
members becoming our competitors, it seems that not a day
passes when there isn't some news about our members and
their efforts to create competing markets. As you know,
BrokerTec was formed by seven of our largest member firms,
its efforts are moving fast and it is scheduled to launch
its platform for cash trading of government debt instruments
in the third quarter of this year. BrokerTec plans to have a
derivatives trading platform in the near future. A second
obvious example is Cantor Fitzgerald which has formed
eSpeed. eSpeed is a direct competitor for many of our
products and they recently signed a deal with eight on-line
brokers to offer e-trading of fixed income products for
retail customers. These are just but some of the few notable
examples of what our members are doing. However, there is
yet another set of initiatives that many of our competitors,
many of which are our members, are executing in regards to
Internet e-commerce in the agricultural and financial
industries. I will speak a little bit more about that later.
The next point I would like to make regarding the industry
is that competing exchanges are quickly reinventing
themselves. What do I mean by this? First, exchanges are
aggressively and quickly modifying their ownership
structures in light of changing market demands. The Chicago
Mercantile Exchange is scheduled to vote on demutualization
on June 6/th/. The New York Mercantile Exchange is scheduled
to vote on demutualization on June 20/th/. Second, as global
barriers decrease and exchanges become more electronic, the
industry is consolidating. The Paris, Amsterdam and Brussels
exchanges announced a merger to form EURONEXT. Archipelago,
an ECN, has acquired the Pacific Exchange. Deutsche Borse
and London Stock Exchange announced a merger to form iX.
These are just but a few of the examples of consolidation, a
trend that we expect will continue. Third, existing futures
exchanges are investing heavily in their electronic trading
businesses and are using e-commerce to extend their
businesses. NYMEX has formed eNYMEX to focus on the
over-the-counter energy market. Life has formed life.com to
sell its life connect technology. The Chicago Mercantile
Exchange has
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allocated top staff and substantial capital to form
business-to-business Internet based commodity markets. It is
clear not only that our competitors are adapting, but they
are adapting quickly.
The final point I would like to make with respect to the
industry, is that the cash and futures markets are
converging. Within the agricultural, financial and energy
industries, companies are making aggressive plays to create
Internet based cash markets. This has attracted substantial
investor capital and many competing companies have joined
forces. It won't be long before almost all of the cash
markets for our products are traded on the Internet. We
believe that customers will also want future contracts on
the same sites.
In the financial markets, investment banks' proprietary web
sites as well as third party web sites, such as Tradeweb and
Euro MTS have made significant inroads in creating Internet
based markets for global debt instruments. Its only a matter
of time before the likes of rooster.com, started by one of
our member firms, ice.com and farms.com, begin to make the
same in-roads in the agricultural markets. The big question
is whether we can go after that same business before they
come after ours. Our restructuring plan positions us to
aggressively compete for that business and potentially
dominate it. Our current structure guarantees that we won't
even be a contender. So where do we currently stand?
First, in my opinion, we have under invested in e-commerce.
It is true that we have invested a substantial amount of
money in the Eurex technology, but we haven't been able to
seek out opportunities in the rapidly evolving B-to-B market
places due to our governing structure and constrained fiscal
position. Frankly, I don't think that it is possible to make
the type of investment that is required, while continuing to
simultaneously operate an open outcry exchange. Therefore,
as described in the restructuring plan, we have proposed
establishing the electronic trading company as a separate
entity after step two of the restructuring is complete.
Second, regarding the current CBOT governance, we have an
antiquated corporate structure. For the past 150 years, we
have been a special Illinois charter member organization and
have been well-served by this structure. Although it is
well, worked well in the past, it is time that we move on
and adopted a structure that provides us greater flexibility
in these fast changing times. A move to Delaware will
provide us that flexibility that we require and that is what
we are asking for in the first membership vote.
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Before we move on, let me address some key issues. Many of
us are concerned with our trading privileges and ownership.
I would like to address three issues up front. Number 1,
fungibility of our products; number 2, preferential member
pricing; and number 3, allocation. The first issue is
fungibility. The recommendations of the Implementation
Committee as adopted by the board of directors contemplates
a $55 million dollar payment from the electronic trading
company to the open outcry company upon the separation of
the two. The electronic trading company will pay its share
of the common operating costs. Additionally, the electronic
trading company will pay its share of the liabilities,
primarily incurred in connection with the development of the
Board of Trade Eurex alliance. Under the recommended
restructuring plan, the membership shall receive all of the
shares of the electronic trading company other than any
portion that could possibly sell to a third parties'
investors, an opportunity to participate in such capital
raising in order to preserve ownership interest. Again, this
allows you, the members, the reap the full value created in
the new electronic company. We also believe the fungibility
of products following the separation will be beneficial to
both companies. This will allow the open outcry company to
leverage its strength to compete effectively for order flow.
It will also allow the market participants to offset open
interest across the platforms as well as the cross margining
benefits. An ongoing payment will have an adverse impact on
the ability of the electronic trading company to raise
capital in the private and public markets. That capital is
needed to fund operations and create value for the
membership.
Many of you are aware of the relationship between Cantor
Fitzgerald and Eastbead. I believe that there has been some
misplaced comparison between Cantor Fitzgerald's formation
of eSpeed and the Board of Trade's proposed formation of the
electronic trading company. eSpeed's fundamentals are, it is
the majority owned subsidiary of Cantor and houses the
electronic platform used by the Cantor exchange. It shares
its trading platform so all revenues are shared between
Cantor and eSpeed. Cantor raised money through the sale of a
portion of its share in eSpeed at the time of eSpeed's IPO.
The key differences between our plan and the eSpeed plan
are, Cantor did not receive any one-time payment from eSpeed
as is contemplated in our plan, and in our restructuring
there are two separate companies with no parent subsidiary
relationships. Based on this, we believe that the open
outcry company and the membership are receiving significant
and full value.
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The second issue is member preferential pricing. The
restructuring plan currently provides that members at the
open outcry company will receive the best pricing at the
electronic trading company for three years, which is the
duration of the contemplated non-compete agreement between
the two entities. This right would travel with the members
seat whether transferred by lease or sale. This will allow
smaller members to compete with the larger members and
larger traders and firms who have the higher trading volumes
throughout the term of the non-compete. We have been advised
that granting of a perpetual right in preferential pricing
may have a significant and negative impact on the financial
results and operating flexibility of the electronic trading
company. This adverse impact should not be offset by any
benefit to seek values at the open outcry company. Further,
such a right may adversely affect the ability of the
electronic trading company to effectively raise capital in
the private and public markets, capital which is needed to
fund operations and create ongoing value to the membership.
The management of the electronic trading company could
decide to extend the preferential pricing policy beyond the
three year or non-compete, however, its decisions will be
driven by business judgment and actions to ensure liquidity
and shareholder value at the electronic exchange. Finally,
at the end of the three year non-compete, the open outcry
company has the option to establish or align itself with an
electronic trading platform. It may mean direct competition
with the electronic company. The preferential pricing rights
and the fungibility reflects the Implementation Committee's
and the board of director's best judgment in light of the
plan as a whole and the benefits to be derived by all the
members in the restructuring.
Brian Sterling, a managing director of Merrill Lynch and
Company is here with us, he will be able to answer more
specific questions in the Q&A on fungibility or questions
about eSpeed and preferential member pricing, if there are
any questions.
The third issue is allocation. In January, the board of
directors established an independent allocation committee
comprised solely of the public or our outside public
directors. The mission of this committee was to determine
and recommend a fair allocation of shares in the For-Profit
CBOT and the electronic trading company. The independent
allocation committee engaged an independent financial
advisor, William Blair & Company and special counsel to
assist in developing its recommendations. After considering
various methodologies for allocation, the independent
allocation committee concluded that an allocation
methodology that takes into account a combination of
factors, rather than a single factor, is appropriate and
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that the factors should include, relative liquidation
rights; relative voting rights; the Ceres allocation; and
the market prices of memberships and membership interests;
and the contract volumes. The committee did not believe it
was appropriate to assign specific weight to any particular
factor but concluded that relatively greater importance
should be given to liquidation rights, voting rights, and a
Ceres allocation. Based on these conclusions, the allocation
committee unanimously recommended an allocation of shares in
each of the for-profits, CBOT and the electronic trading
company in the following ratios: a full 5, AM1, GIM.5,
COM.07, and IDEMS .06. At our last board meeting the full
board considered and approved the recommendation. We have
gone to great lengths to ensure that this was a fair and
impartial process.
Restructuring the Board of Trade is about fundamental
change. This means focusing on the future. The board of
directors, the restructuring task force, the Implementation
Committee, and all of our advisors have been focused on
putting together a forward looking plan. I know many of you
share this same spirit, we really need to go forward and we
need to do it now! As I have mentioned many times before,
the objective of restructuring is very simple. Position this
membership of this exchange to own the future. To do this,
we need to create the best possible open outcry and the best
possible electronic trading business for the Chicago Board
of Trade and its members. Status quo or deferral of this
decision, is not an option. Folks, there is no Plan B. Yes,
there have been many things to explore, I believe we spent
more than adequate time on the analysis, its time to move
ahead. We need to move ahead and we need to do it now! We
have an opportunity to dominate the future, I believe in the
institution, its history is a market leader and the wisdom
of this membership to see the opportunities and grab it. We
have a bright future, every one of us. Our plan is solid,
and I look forward to everybody embracing the change and to
your approval.
With that, I would like to now introduce, have Justin Zubrod
from AT Kearney review with you the recommendations of the
Implementation Committee. I support, and the Implementation
Committee supports, the Restructuring Report that you will
hear about today. I encourage you to ask questions at the
conclusion of this prepared remarks to understand its
merits. I'm convinced that this is our best option for going
forward. Although this report has been accepted by the
board, with the exception of step one which is going to the
members for a vote shortly, the board continues to have the
opportunity to revise the recommendations, given the changes
and the underlying facts on which the recommendations are
based or changes in the CBOT
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strategy. Members will have an opportunity to approve the
subsequent steps of the restructuring in future member
votes. Despite the fact that you are now being asked to
consider all of the recommendations in this report, I felt
that it was important for you to understand the full
restructuring strategy as contemplated by this board, giving
context to your consideration of step one in the process.
With that, I would like to turn it over to Justin.
Mr. Zubrod: Thank you David and good afternoon. Its been 3 or 4 months
since we have been with you to talk about this subject. As
David indicated, a lot of work has been done since then
which we would like to review with you today. And
essentially do a reset so that everybody is on the same page
in terms of what the restructuring plan calls for. I have
been asked to present to you today the Plan that we
presented the board of directors word for word and then
handle questions as well.
First, a recap of what the board approved in January.
Starting in the middle they approved a strategic direction
that sets up two fully demutualized companies going forward.
One with members and stockholders for the open outcry
company on a demutualized for profit basis, the other with
stockholders and electronic trading company called eBOT,
eCBOT, NEWCO under various names, both demutualized and for
profit. The open outcry strategic objectives are clear,
create a superior open outcry trading platform, reduce costs
and streamline the organization to unlock profitability in
the rapidly changing environment, and preserve and enhance
liquidity. For electronic trading or eBOT, the goals and
objectives were to leverage the strong [Inaudible] and the
current capabilities that reside in the organization today
electronically. But further to grow electronic trading and
provide a superior electronic trading platform on a world
scale, leveraging the Eurex and other strategic alliances
and potential acquisitions. This is Plan A, as David said,
there is no Plan B. This strategy, this approach, has been
endorsed inside and out repeatedly. Remember this has been a
plan that has put excitement in the eyes of your potential
partners and fear in the eyes of your competitors. That is
why there is only one Plan A.
The Implementation Committee, in terms of what they have
done since we met with you last. Their focus has been clear,
develop an overall implementation plan and process that has
full transparency and visibility. Define the required
interfaces, identify a process for selecting directors in
the ongoing governance of the two enterprises, develop the
ballot materials which you are going to hear about later,
and manage the restructuring communications. Thus far they
have developed the cooperative agreements including the
financial
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arrangements which I want to go over today. They have
developed a 30-day communications plan, because I think when
David and all the others were up here last time, they
indicated our goal is to communicate as much with you as we
roll through the ballot and is practical. And they have
developed the ballot materials for step one of the
restructuring. Let me editorialize for a moment. We work
with a lot of boards of directors and board committees and
management. This group has been thorough, persistent and
very focused on creating opportunity for the future, next
152 years. Its extraordinary the amount of time that they
have put into both open outcry and electronic trading in
terms of making them competitive. Now let me highlight the
plan.
First, I want to discuss the operating agreement between
CBOT and eCBOT. In terms of ownership and trading rights,
the CBOT members will initially own all eCBOT shares. For-
profit CBOT members would have the ability to sell or lease
their seats and trading privileges going forth. There would
a 3-year non-compete agreement between CBOT and eCBOT and
CBOT could employ a small order execution system
electronically. This 3-year period, while some may say its
not long enough, in corporate terms is quite a lengthy
period. You all saw the announcement between United and US
Air for example yesterday, their period goes out 2 years
maximum on the provisions for their restructuring. In terms
of new products, For-Profit CBOT could independently offer
new products subject to the Eurex agreement and eCBOT would
be required to offer all new CBOT products on its platform
during the 5-year Eurex agreement. Remember in January when
we spoke to you, we discussed how important it is to grow
the pie. The reason this restructuring is being undertaken
is to increase the market share of the combined enterprises
in the markets going forward through new products, new
customers and new channels of distribution. So this
provisions is key. In terms of market data services, its a
two step, the first 18 months the market data function will
be operated within the For-Profit CBOT. For fungible
products and all market data revenue will accrue to the For-
Profit CBOT. For the next 18 months, the market data would
continue to be shared, a shared function with shared
revenue. In terms of governance, clearly the board size will
be reduced and the director selection process will be
streamlined. From a regulatory stand point the plan is that
regulatory functions would be operated as a consolidated
function with CBOT until the separation of eCBOT. In the
interim there would be one rulebook with separate sections
and rules for both eCBOT and CBOT. Many of the terms of this
operating agreement strengthen the viability of open outcry
going forward. Again, the restructuring committee, the
restructuring task
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force, the Implementation Committee and the board are
committed to keeping open outcry competitive, going forward.
Let me turn to address the financial arrangements between
CBOT and eCBOT, which I recall was a big concern of yours
back when we spoke at the beginning of the year. In terms of
the eCBOT, CBOT payment, eCBOT and CBOT will share liability
for the development of the CBOT Eurex alliance,
approximately $55 million dollars anticipated. For-Profit
CBOT will receive a payment of cash and/or securities in the
amount of such liabilities once it is spun off. The cash or
securities is designed to give you flexibility depending
upon the market conditions at that point in time as opposed
to be rigid. As David talked about in terms of preferential
member pricing, eCBOT will establish fees for CBOT members
that are no higher than those charged to anyone else for the
duration of the 3-year non-compete. The MFN right will
remain attached to the seat whether transferred by sale or
lease. And finally in terms of payment for fungibility,
there will be no payments between eCBOT and CBOT for product
licensing going forward. In terms of payment for common
operating expenses, its anticipated that eCBOT will pay For-
Profit CBOT for its fair share of common operating expenses.
CBOT's restructuring liabilities, we anticipate that CBOT
would attempt to restructure its liabilities in order to
strengthen its financial position upon completing this
transaction. And eCBOT will be able to raise capital and
will seek to raise capital to fund operations as a start up
which can be extensive after the first member vote and
before the potential IPO. That's the plan, that's what we
have told the board, that's what the board has approved.
Now let me talk about the process. Implementing the
restructuring plan fully requires a multiple step process.
We have outlined a two step here. The first is to create a
Delaware not-for-profit CBOT and a for profit eCBOT as a
subsidiary. The second step is to create two fully
demutualized companies as distinct enterprises competing in
the same market place. What's the impact of all of these?
Clearly, the restructuring will be considered in two phases
as we indicated. The impact of step one is reincorporation
of CBOT as a Delaware non stock, not-for-profit corporation.
eCBOT will be formed as a wholly owned subsidiary of that
enterprise. That's anticipated in late June of this year,
assuming a successful vote by the membership. The impact of
step two is a conversion of the Delaware not-for-profit CBOT
into a for profit Delaware corporation. Two classes of stock
for For-Profit CBOT, one class associated with trading
rights and the other representing equity only. Allocation of
the stock of the electronic trading company to the members
and execution of the non-compete
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and cooperative agreement that I just went through. That's
anticipated later in 2000, but as we will talk about next,
that's dependent upon a number of factors. In terms of
schedule, and all of the dates on this chart are tentative.
Sometime, we've had the meeting and the board and the vote
on May 16/th/. The plan is within the upcoming weeks to
distribute the ballot and execute as we indicated a 30-day,
very interactive, very open, communications plan, to the
membership. The first membership vote would be 30 days
hence, sometime in June once we set the date. Upon
successful vote, it you approve it, they will establish
eCBOT as a subsidiary and at this point you begin to send a
very strong message to the marketplace to customers,
competitors, and partners that you are serious about
pursuing this approach. The great unknown is obtaining the
IRS, SEC and CFTC approvals. Some people estimate 3 months
in other cases its gone longer, that's a reasonable
expectation, but something you really don't control. Then
there will be the second board vote, the second vote,
sometime after that, probably later in the year. A second
membership vote and at that point, later in 2000, or early
2001 or mid-2001, see the reorganization of eCBOT and the
creation of the eCBOT IPO.
So where are we? The Implementation Committee, the board,
the outside advisors have all approved this direction and
strongly endorsed taking this path. Let me talk about why
and why now. First there is the benefit of restructuring. It
provides both open outcry and electronic trading the best
chance to succeed. Positions open outcry for continued
success and creates a leading edge electronic trading
capability. Second, it unlocks the value for members by
capitalizing on the high market values for electronic and
technology trading companies. And third, it provides a
business focus for decision making. This gives you the
modern flexible changes you need to remain competitive. What
are the benefits of going now? Clearly it increases you
flexibility from a corporate standpoint. It modernizes
certain aspects of your governance as a corporation. It
could elect to become for profit going forward and improves
the ability to structure alliances with potential strategic
partners. It demonstrates a desire to adapt to the new
business environment and believe me this vote is being very
closely watched outside of this room. Let me make a few
comments from an outsiders perspective because we have been
working with you for many months.
We have assisted numerous companies in restructuring across
a broad range of industries, financial, transportation,
retail, insurance, you name it. In fact, that's what we do
as consultants. Making the first step is always the hardest,
one it's complex, legally and from a
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business standpoint. You always want more information, but
then again, you're overloaded with facts. You'd rather have
somebody else go first and let's face it, we're all entering
into the unknown from something we're quite comfortable
with. It's scary, it's difficult, in fact, my firm, AT
Kearney has been through this kind of restructuring before
and I know what a path you're going on now. But you, like
many others, cannot hold off the forces of change going on
in this room and outside. In fact, if you try to resist, you
lose and accede the first mover advantage and the leadership
position to someone else with whom you're ultimately going
to have to compete and play catch up. Soon you will look
back on this first vote and wonder what all the angst was
about, although certainly it is understandable now. But only
if you approve it, if you don't, it's a far different
matter. A lot of work has been done, benchmarked and
checked, and debated extensively. A lot more has to be done.
This is just the first step. The clock is ticking and your
competition is not waiting for you to decide. In fact, they
prosper if you don't, believe me. Thank you again, I wish
you well. David.
Chairman Brennan: Thanks, Justin. Well, as Justin explained, you are now only
being asked to vote on step one of the restructuring, and
not on the overall Restructuring Report or even the
allocation recommendations. To explain exactly what that
means and what it means to move from being a special
Illinois charter membership organization to a Delaware non
stock, non-for-profit company, I would like to call on Joe
Gromacki from Kirkland & Ellis, who is going to walk us
through the legalities. Joe,
Mr. Gromacki: Thank you Chairman Brennan. What I would like to do today is
to give you an overview of exactly what step one of the
restructuring consists of from a legal perspective. First,
to overview today, the CBOT is an Illinois special charter
not-for-profit corporation. What this means is that back in
1859 the Illinois legislature incorporated this organization
by an act of legislature. The CBOT generally has the status
of a not-for-profit corporation. As a result of the actions
that will be taken as part of step one of the restructuring
the CBOT will become a Delaware non stock, not-for-profit
corporation, subject to a new body of law the Delaware
general corporation law. Its important for you to keep in
mind that step one is a significant and important move for
the CBOT. Delaware law is going to create significant
flexibility for you as you move forward and will give you
the flexibility that you need in order to implement further
steps of your restructuring plan. Its also important for you
to keep in mind that step one involves the repeal of your
special charter, that is an aspect of step one which is
likely irreversible. There are three legal
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actions as part of step one of the restructuring which
require approval by the membership. The first is the
election to accept and be governed by the Illinois Not-for-
profit Corporation Act. This is the act that currently
governs the Chicago Mercantile Exchange. The second is a
technical amendment to the CBOT's charter which will, which
is intended to allow it to comply with specific requirements
under the Illinois NFP Act. The third is the reincorporation
merger which will have the effect of reincorporating the
CBOT as a Delaware non stock, not-for-profit corporation.
While each of these is a distinct and independent legal
action, the CBOT is seeking membership approval of all three
actions in a single vote. This is because the CBOT would not
take these actions individually but only together.
What is the impact on the CBOT? Your current special
charter and rules and regulations will be replaced by a new
charter, bylaws which will incorporate substantial portions
of your current rulebook and regulations. As a result of
step one, each member and membership interest holder will
continue to have the same class of membership interests
after the reincorporation. Full members of the CBOT will
become full members of the Delaware not-for-profit CBOT and
so on with AM's, GIMs, IDEMs, and COMs. Your special
charter will no longer exist. Many of your current rules
will be moved to the charter and the bylaws. Some of your
rules and regulations will be either restated, or modified,
and in some cases, eliminated.
What is the impact on members? The rights and obligations
of members and membership interest holders after the
reincorporation, will be substantially similar in all
material respects to your rights and obligations today. It
is true that there will be some changes, as a result of the
reincorporation of Delaware, most of these changes result
from a desire to modernize the organization in certain
respects and the application of a new body of law. However,
it is important for your to know that the objective of step
one has been to substantially replicate to the largest
extent possible, all of your current rights and obligations.
So that very few things will change. In this regard, your
key rights will be preserved, your voting rights, the
differential voting rights that fulls and AM's have today
will be preserved in all respects. The liquidation and
dissolution rights will also be preserved. Trading rights
and privileges will be carried over, all of the terms and
conditions of membership will also be replicated in
Delaware. Your governance structure will remain the same.
You will have the same board of directors and the same
officers and they will continue with their current terms. I
mentioned that there will be some differences, the most
important difference for your to
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understand is that unlike the Illinois law which is
currently applicable to the CBOT, Delaware law will provide
this organization with the ability after further membership
approval, to elect for profit status. Why is this important?
Without for profit status, you don't, the organization does
not have the ability to distribute stock to the members.
Other differences include the fact that Delaware law does
not recognize the special ballot process that you have today
for voting. Instead, your special ballot will become what is
called a proxy ballot. So some of the mechanical aspects of
the special ballot process will be changed and might be
called different things, but in all material respects, it
should operate the same way. You will have an alternative to
the petition process which will consist of special meetings
called to vote on bylaw amendments and I mentioned earlier
that your bylaws will incorporate substantial portions of
the current rules coupled with proxy voting so that you can
continue to vote by mail as you do today. Certain aspects of
your current rulebook will be placed into your new charter.
The charter amendment will require both board and member
approval.
I would like to walk through what the approval process is.
On May 16/th/ your board of directors approved the legal
actions that are required to implement step one of the
restructuring and directed that these matters be submitted
to a vote of the membership. Your membership approval will
be solicited, as I said before, under a single voting
process even though there are three separate actions that
you will be voting on. In order to do that, there will be
an integrated ballot and proxy vote in order to accommodate
certain legal requirements under the Illinois Not-For-Profit
Act. The vote that is required in order to approve these
actions is 2/3 of the votes cast by members voting and
entitled to vote. This is a summary of what will be
presented to you in the ballot materials in connection with
step one of the restructuring. Thank you. I would like to
now ask my partner, John Stassen to come up and address some
issues related to the CBOT exercise right.
Mr. Stassen: Thank you, Joe. As I believe almost everyone here is aware,
in 1992 the Board of Trade and the Chicago Board Options
Exchange entered into an agreement concerning the meaning
and application of the exercise right that is enshrined in
the CBOE Certificate of Incorporation. In Kirkland & Ellis'
view, step one as just described by Joe Gromacki, step one
does not raise any issues under the 1992 agreement with
CBOE. Unless step one should not impact the exercise right.
In step one, the Board of Trade is changing its state of
incorporation from Illinois to Delaware. It will remain,
unless and until changed by a vote of the membership, a not-
for-profit
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membership corporation. A Delaware CBOT full membership will
be exactly the same as a current Illinois CBOT full
membership with regard to trading rights and privileges,
equity ownership, and voting rights. Kirkland & Ellis also
believes that the overall plan of restructuring described by
AT Kearney complies with the 1992 agreement. But as you
know, CBOE has communicated that it disagrees and that it
will contest trading access through the exercise right
subsequent to any implementation of the restructuring plan.
The legal basis for CBOE's objection has not been stated,
however, we can only divine and surmise what it might be.
But I tell you, upon a careful review, that the 1992
agreement and the related materials, Kirkland & Ellis
believes and continues to believe, that the board, CBOE's
position is wrong. But again, I don't believe that issue is
before us in step one. The more complex questions arising
out of demutualization and the creation of a separate
electronic trading company, those are matters that will
become before you in step two. Now, notwithstanding that
there are talks currently under way between CBOT and CBOE
about a possible merger, or other combination, there is or
course no guarantee that CBOE might not try in some manner
to defeat, stall or postpone the step one proposal by making
further pronouncements, pronouncements about the exercise
right. Those pronouncements in our view, would be without
legal foundation. Thank you.
Chairman Brennan: Thanks John and Joe. I would like to bring up Dennis
Dutterer to give us his perspective in the short time here
on the restructuring plan. Dennis,
Mr. Dutterer: Thank you David. As you know, I have been the interim
president and CEO of the Board of Trade for approximately 6
weeks. However, I come to this responsibility having been
able to work with and observe the Board of Trade for over 14
years, most recently as president and CEO of the Clearing
Corporation. Additionally, I have had the opportunity to see
and work with other exchanges and clearing houses and I have
had the opportunity to sit in on a number of Implementation
Committee meetings, work with the board's professional
advisors on restructuring and of course, review the
restructuring plan. First, I would like to commend Chairman
Brennan, the board of directors and all of the members of
the restructuring task force, the Implementation Committee
and the allocation committee for their work throughout this
process. It was long, hard and difficult work. I commend
them for a job well done. I believe the plan is well
conceived, and that it is the right plan for the Chicago
Board of Trade. Over the course of the next month, David and
the Implementation Committee will be working with the board
of directors and key staff to ensure that you
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have the information you need regarding the restructuring
plan and the ballot vote. Today is but one of the first
steps in that process. A considerable amount of time has
been allocated at the end of the meeting to address your
questions.
But before the questions, I would like to use this
opportunity to address the membership on another but related
matter. And that is the financial challenges facing the
Board of Trade. First, while our restructuring initiative
is a significant event in the history of the Exchange, we
still have a business to run and we must go forward with our
other strategic projects. We are continuing to run two
markets, an open outcry market; and an electronic market
that operates nearly 24 hours a day. We continue to enhance
our open outcry markets with initiatives such as order
routing. And we continue to develop, test and implement our
alliance with Eurex. These significant activities along with
the significant financial obligations in the first quarter
of 2001, relating to the new trading facility, present
significant financial challenges to the Board of Trade.
Therefore I plan to present shortly to the finance committee
and with their approval to the board of directors,
recommendations on how we can enhance our revenue strength.
I have not made any decisions at this time and there will of
course be full debate in the finance committee and the board
meetings before a decision is made. In addition to
reviewing revenue enhancements, we have and we will continue
to review and implement reductions in our expenses wherever
possible. In this regard I note that $6 million dollars in
program and staff reductions have occurred over what was
approved by the finance committee for this year. Our
staffing reductions, our staffing levels today are
approximately 10% below our budgeted levels for this year
due to program cuts and attrition. We have examined and we
will continue to examine outsourcing, but with a view that
we cannot permit a reduction in the quality of service or
increase our costs simply by this process. In the end it
requires significant staff to provide the operational
aspects of running the Exchange. That is, opening the doors
and turning on the lights of both our open outcry and
electronic markets. But in reviewing the financial picture
during the last 6 weeks, I believe that enhancing our
revenues along with a diligent review of expenses is the
path that we must follow to meet our financial challenges.
And now as we turn to the question period, let me make one
final comment. Having recently gone through the learning
process relating to restructuring, I say without
reservation, that it is the right path for the Board of
Trade. This is the first step in positioning the Board of
Trade for the future. Thank you.
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Chairman Brennan: Thank you Dennis. Well, that concludes the prepared
remarks for this afternoon.
The CBOT urges its members and membership interest holders to read the
Registration Statements on Form S-4, including the proxy statement/prospectus
contained within the Registration Statements, 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, 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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