Post by Sapphire Capital on Aug 7, 2008 23:00:19 GMT 4
US banks should change their CFD terms
Source: Nicholas Pettifer, IFLR
Derivative poison pills may face questions of validity in court, but US banks should change the terms of their contracts for difference (CFD) anyway.
Since CSX v TCI Management found that CFD purchasers hold beneficial ownership of the underlying shares, there have been reports that US companies are editing the thresholds of their poison pill arrangements to include derivative positions.
However, poison pills would dilute the shares their owner, not the CFD purchaser, and it would be difficult for companies to prove this a reasonable reaction if the owner of the shares was unaware of their usage.
"Not all derivative-triggered poison pills will be invalid, it will depend on the facts," said a senior M&A partner in New York. "Obviously, the more the bank is acting together with the hedge fund [or other investor], the more likely it is that a court would find a poison pill reasonable. And vice versa."
So to make sure banks are not punished for the activities of their CFD holders, they need to ask for more disclosure.
If an aggressive investor is looking to build a stake, it may buy derivatives from several financial institutions. So it would be sensible for CFD and swap providers to ask for covenants requiring clients not to break poison-pill thresholds.
"There is no question about it, the counterparty on the swap would want to get a sense of what was going on," said a corporate partner at a US firm. "For example, they may want to be the exclusive swap party so that they have more control."
Source: Nicholas Pettifer, IFLR
Derivative poison pills may face questions of validity in court, but US banks should change the terms of their contracts for difference (CFD) anyway.
Since CSX v TCI Management found that CFD purchasers hold beneficial ownership of the underlying shares, there have been reports that US companies are editing the thresholds of their poison pill arrangements to include derivative positions.
However, poison pills would dilute the shares their owner, not the CFD purchaser, and it would be difficult for companies to prove this a reasonable reaction if the owner of the shares was unaware of their usage.
"Not all derivative-triggered poison pills will be invalid, it will depend on the facts," said a senior M&A partner in New York. "Obviously, the more the bank is acting together with the hedge fund [or other investor], the more likely it is that a court would find a poison pill reasonable. And vice versa."
So to make sure banks are not punished for the activities of their CFD holders, they need to ask for more disclosure.
If an aggressive investor is looking to build a stake, it may buy derivatives from several financial institutions. So it would be sensible for CFD and swap providers to ask for covenants requiring clients not to break poison-pill thresholds.
"There is no question about it, the counterparty on the swap would want to get a sense of what was going on," said a corporate partner at a US firm. "For example, they may want to be the exclusive swap party so that they have more control."