CBOT Holdings, Inc., et al. v. Chicago Board Options Exchange, Inc., et al.

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EFiled: Aug 3 2007 6:01PM EDT Transaction ID 15830750 Case No. 2369-VCN IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE IN AND FOR NEW CASTLE COUNTY CBOT HOLDINGS, INC., a Delaware corporation; THE BOARD OF TRADE OF THE CITY OF CHICAGO, INC., a Delaware corporation; and MICHAEL FLOODSTRAND and THOMAS J. WARD and All Others Similarly Situated, : : : : : : Plaintiffs, : : v. : : CHICAGO BOARD OPTIONS EXCHANGE, : INC., a Delaware non-stock corporation, : WILLIAM J. BRODSKY, JOHN E. SMOLLEN, : ROBERT J. BIRNBAUM, JAMES R. BORIS, : MARK F. DUFFY, JONATHAN G. FLATOW, : JANET P. FROETSCHER, BRADLEY G. GRIFFITH, : STUART K. KIPNES, DUANE R. KULLBERG, : JAMES P. MacGILVRAY, R. EDEN MARTIN, : RODERICK PALMORE, THOMAS H. PATRICK, JR., : THOMAS A. PETRONE, SUSAN M. PHILLIPS, : WILLIAM R. POWER, SAMUEL K. SKINNER, : CAROLE E. STONE, HOWARD L. STONE, : and EUGENE S. SUNSHINE, : : Defendants. : MEMORANDUM OPINION Date Submitted: May 30, 2007 Date Decided: August 3, 2007 C.A. No. 2369-VCN Kenneth J. Nachbar, Esquire of Morris, Nichols, Arsht & Tunnell, LLP, Wilmington, Delaware, Hugh R. McCombs, Esquire, Michele L. Odorizzi, Esquire, Michael K. Forde, Esquire of Mayer, Brown, Rowe & Maw LLP, Chicago, Illinois, Peter B. Carey, Esquire of Law Offices of Peter B. Carey, Chicago, Illinois, and Kevin M. Forde, Esquire of Kevin M. Forde, Ltd., Chicago, Illinois, Attorneys for Plaintiffs CBOT Holdings, Inc. and The Board of Trade of the City of Chicago. Andre G. Bouchard, Esquire and John M. Seaman, Esquire of Bouchard, Margules & Friedlander, P.A., Wilmington, Delaware, Gordon B. Nash, Jr., Esquire and Scott C. Lascari, Esquire of Drinker Biddle Gardner Carton, Chicago, Illinois, Attorneys for Plaintiffs Michael Floodstrand and Thomas J. Ward. Samuel A. Nolen, Esquire, Daniel A. Dreisbach, Esquire, Ethan A. Shaner, Esquire, and Rudolf Koch, Esquire of Richards, Layton & Finger, P.A., Wilmington, Delaware, Paul E. Dengel, Esquire and Paul E. Greenwalt, III, Esquire of Schiff Hardin LLP, Chicago, Illinois, Attorneys for Defendants. NOBLE, Vice Chancellor I. INTRODUCTION This action arose out of the proposed demutualization of interests held by members of the Chicago Board Options Exchange, Inc. (the CBOE ), an entity formed in 1972 and initially funded by The Board of Trade of the City of Chicago, Inc., ( the Board of Trade or the CBOT ) and its membership.1 Since the CBOE s establishment more than thirty years ago, there have been two classes of membership: (i) CBOE Seat Owners, or Regular Members, who bought their seats on the CBOE outright, and (ii) Eligible CBOT Full Members (at times, CBOT Full Members ) who obtained a right (the Exercise Right ) under CBOE s Certificate of Incorporation (the Charter ), including those Exerciser Members who exercised that right, to become members of the CBOE without cost. With the acquisition of CBOT by Chicago Mercantile Exchange Holdings, Inc. ( CME ), the CBOE has taken the position that CBOT Full Members have lost that status and, more importantly, have lost the opportunity to share in the bounty to be harvested from CBOE s demutualization. Although much effort has been devoted here and elsewhere to consider the right to trade on a national exchange, the dispute in this Court is not so much about trading rights; instead, it is about a familiar topic: great wealth and the realization that those who do not share 1 Demutualization refers generally to the sale or reorganization of a mutual entity, by its members, into a non-mutual entity whose shares or interests can then be freely traded. A consequence of this process is that members ownership rights are either dissolved in exchange for cash consideration or replaced by ownership interests (and voting rights) in the surviving entity. 1 get more of it. The nature and value of Exercise Rights and the continued meaning of CBOT membership in tandem with the Exercise Right are the primary substantive questions before the Court. * * * The Exercise Right was conferred upon CBOT members more than thirty years ago in recognition of their special contribution to the development of the CBOE. Unlike Regular Members, however, the right to membership in the CBOE by CBOT Full Members came with a condition and a limitation: a CBOT Full Member would have to, at all times, be a full member of the CBOT and a CBOT Full Member lacked any right to transfer his or her membership on the CBOE. Efforts to limit or clarify the scope of the Exercise Right began as early as 1992 when the CBOE and the CBOT entered into an agreement (the 1992 Agreement ) to resolve a number of questions that had arisen since the CBOE s founding. Two decisions that came out of the 1992 Agreement take particular prominence in this action. First, the CBOE agreed to view all CBOT Exerciser Members as having the same rights and privileges of CBOE Regular Members. Under the 1992 Agreement, this principle would apply even where the CBOE made a cash or property distribution whether in dissolution, redemption, or otherwise to CBOE Regular Members, if the distribution would have a dilutive effect on the value of a CBOE membership overall (i.e., broadly defined to include 2 that of a membership arising under the Exercise Right). If such an event were to occur, the agreement made plain that any distribution would be made on the same terms and conditions to Exerciser Members. Second, the CBOE and the CBOT agreed to interpret the Charter provision that created the Exercise Right as inapplicable following any merger, consolidation, or acquisition of the CBOT by or with another entity. From 2001 to 2005, there would be further efforts to define the scope of the Exercise Right. These efforts were stimulated by the CBOT s own plan to demutualize and eventually restructure itself into CBOT Holdings, Inc. ( CBOT Holdings ), a Delaware for-profit corporation. Several restructuring agreements emerged between the CBOE and the CBOT (or CBOT Holdings). The CBOE agreed, albeit with some reluctance, that the restructuring of the CBOT into CBOT Holdings would not render the Exercise Right inapplicable, a circumstance that would have likely been the case if a provision under the parties agreement in 1992 had been interpreted strictly. By 2004, however, the CBOE had grown increasingly frustrated with the Exercise Rights held by CBOT members. The rights were viewed as impediments to the flexibility that the CBOE believed it needed in responding to a changing options exchange industry. Demutualization was soon considered in earnest by the CBOE. 3 In April 2004, the CBOE sought to minimize the thorny issue of how to deal with the Exercise Rights in the context of a yet-to-be disclosed demutualization by initiating a modified Dutch auction to purchase 500 outstanding Exercise Right Privileges. Despite its offer to pay as much as $100,000, most of the Eligible CBOT Full Members balked. Still, even with only about five percent of Eligible CBOT Full Members having taken the CBOE up on its offer, the CBOE forged ahead. In September 2005, the CBOE Board announced its plan to demutualize and convert the CBOE into a for-profit corporation. The CBOE Board would eventually appoint a special committee (the Special Committee ) to have the sole authority to determine the manner in which membership interests held by Exerciser Members and Seat Owners would be converted under the demutualization. Despite the Special Committee s commitment to treat Exerciser Members fairly, certain statements by CBOE management led CBOT Exerciser Members to believe that, to the CBOE, fair did not necessarily mean equal. On August 23, 2006, CBOT Holdings, the CBOT, and representative CBOT Full Members (collectively, the Plaintiffs ) initiated this action against the CBOE and members of the CBOE Board (collectively, the Defendants ), seeking injunctive relief and a declaration that CBOT Full Members, including Exerciser Members, would share equally with the Seat Owners in any distribution of consideration made pursuant to a demutualization of the CBOE (i.e., the 4 valuation issue). The Defendants did not respond until October 2, 2006, when they filed a motion to dismiss on the ground that the Plaintiffs claims were unripe because both the CBOE Board had yet to approve a form of demutualization and the Special Committee had yet to voice its decision on what consideration, if any, the CBOT Full Members would receive in a demutualization. A far more dramatic development, however, occurred later that October, and one that, independent of any announced demutualization of the CBOE, would have likely brought the parties before this Court. On October 17, 2006, CBOT Holdings and CME announced a definitive merger agreement between the two entities whereby they would be combined into a company named CME Group Inc., a CME/Chicago Board of Trade Company. The proposed transaction would spark a shift in the CBOE s initial position that the Plaintiffs speculations of unfair treatment did not merit judicial intervention. On December 12, 2006, the CBOE submitted a rule filing with the United States Securities and Exchange Commission (the SEC or the Commission ). Under the proposed rule change, the SEC would view the CBOT-CME merger as having a terminating effect on the Charter-granted Exercise Right, with the rationale that such a transaction fundamentally changes what it means to be a member of the CBOT. The practical significance of this interpretation would be that no CBOT 5 member could become or remain an Exerciser Member under the Charter. Any CBOT member desiring membership on the CBOE would now have to pay for it. On the same day the CBOE submitted its rule filing with the SEC, its Board announced in a press release that it was proceeding with the planned demutualization and suspending the work of the Special Committee. CBOE s Board reasoned that there was no need for the Special Committee to value Exerciser Members interests when the proposed rule change would treat the CBOT-CME merger as eliminating those interests altogether. Soon after the CBOE submitted its rule filing with the SEC, the Plaintiffs amended their complaint to add new claims to prevent the SEC s adoption of the CBOE s proposed rule change as to the meaning of CBOT membership under the Exercise Right (i.e., the membership issue). The CBOE filed a Form S-4 Registration Statement with the SEC on February 9, 2007. The CBOE assumed two events by the time it demutualized: completion of CBOT-CME deal and approval by the SEC of the proposed rule change. CME demonstrated that it had successfully thwarted a competing acquisition offer by IntercontinentalExchange, Inc. ( ICE ) when, on July 9, 2007, CBOT shareholders approved the merger with CME. In anticipation of this vote, the CBOE had filed with the SEC on July 2, 2007, an interim proposed rule then 6 effective immediately unless and until the SEC takes action to the contrary that eliminates the Exercise Right, but grants Exerciser Members temporary CBOE membership status pending the SEC takes final action on CBOE s proposed rule change. Against this background, the Court concludes that, with the CBOT-CME merger completed, the valuation and membership issues implicated by the Second Amended Complaint (the Complaint ) are ripe for this Court s review. At bottom, these issues concern the economic or property rights that certain CBOT members have under the Exercise Right, as well as the membership or trading rights of CBOT members for purposes of the Exercise Right. The Court cannot, and shall not, ignore that this Exercise Right arose under and is governed by a contractual regime designed by sophisticated parties. Despite the CBOE s urgings to the contrary, the Court retains jurisdiction to determine whether the Defendants actions have the operative effect of divesting the Plaintiff-class of a vested economic and property interest in CBOE membership conferred through the Exercise Right. Although judicial resolution of the state law claims advanced by the Plaintiffs would not necessarily and unduly intrude on the SEC s exclusive authority to review and approve proposed interpretations of exchange rules, the Court determines that the interests of judicial efficiency militate in favor of staying this action pending the SEC s response to the CBOE s proposed rule change filing. 7 II. BACKGROUND A. Chicago s Options Exchanges Established in 1848, the CBOT is the oldest futures and options exchange in the world. Today, it is also one of the largest, providing a trading forum for both agricultural (e.g., wheat, soybeans, corn) and financial contracts (e.g., United States Treasury bonds). In 1972, CBOT s membership founded and initially funded the CBOE.2 The CBOE, a non-stock membership corporation, is regulated under the Securities Exchange Act of 1934 (the Exchange Act ),3 which requires the CBOE to establish rules, subject to SEC review, defining and governing its membership. B. An Exercise Right is Born When the CBOE was formed in 1972, members of the CBOT provided seed capital in the form of direct cash expenditures, loan guarantees, and grants of certain intellectual property.4 Noting the special contribution of CBOT s members, the CBOE s Charter created what has become known by the parties, both before and during this litigation, as the Exercise Right. Article Fifth(b) of the Charter provided: 2 Regulatory roadblocks thwarted the CBOT s desire to create a market in listed securities put and call options. CBOT accepted that a separate exchange was necessary and, thus, its members acted to create what is now known as the CBOE. See Perce Aff. ¶ 3, Ex. B ( CBOE Proposed Rule Change ) at 6. 3 15 U.S.C. § 78a, et seq. 4 See CBOE Proposed Rule Change at 5. 8 In recognition of the special contribution made to the organization and development of the [CBOE] by the members of the [CBOT] . . . every present and future member of the [CBOT] who applies for membership in the [CBOE] and who otherwise qualifies shall, so long as he remains a member of [the CBOT], be entitled to be a member of the [CBOE] notwithstanding any such limitation on the number of members and without the necessity of acquiring such membership for consideration or value from the [CBOE], its members or elsewhere. Members of the [CBOE] admitted pursuant to this paragraph (b) . . . shall otherwise be vested with all rights and privileges and subject to all obligations of membership . . . . The right was unequivocal. So long as a CBOT member remained a member of the CBOT, he or she could become a member, or Exerciser Member, of the CBOE without having to pay for that privilege as Seat Owners, or Regular Members, had done. Interestingly, Article Fifth(b) did not define what constituted CBOT membership. That omission would have consequences. C. The 1992 Agreement Between CBOT and CBOE Besides the Charter, the seminal document governing the Exercise Right is the 1992 Agreement. In the 1992 Agreement, the CBOT and the CBOE resolved several dilemmas definitional and otherwise that sprung from the language of Article Fifth(b). First, by clarifying the meaning of certain terms, the parties agreed to limit eligibility under the Exercise Right. Second, the 1992 Agreement reflected the parties understanding as to how Seat Owners and Exerciser Members would be treated in relation to one another. Third, it acknowledged how a merger, consolidation, or acquisition involving the CBOT would affect the Exercise Right. 9 1. Limiting the Exercise Right Article Fifth(b) of the Charter broadly entitled every present and future member of [the CBOT] to become a member of the CBOE pursuant to the Exercise Right. Twenty years later, the CBOE sought to limit this permissive grant and, in the 1992 Agreement, the CBOT agreed to define a CBOT member within the meaning of Article Fifth(b) as an individual who was an Eligible CBOT Full Member (or his or her Delegate, or lessee, as defined).5 This term carries a specific meaning: Eligible CBOT Full Member means an individual who at the time is the holder of one of the One Thousand Four Hundred Two (1,402) existing CBOT full memberships . . . and who is in possession of all trading rights and privileges appurtenant to such CBOT Full Membership . . . .6 Thus, the defined term reflects the CBOT s agreement to, among other things, functionally remove the every . . . future member language from Article Fifth(b). 2. Treatment of Seat Owners and Exerciser Members of CBOE a. Distributions to CBOE s Membership An important feature of the 1992 Agreement was the CBOE s commitment to treat Seat Owners and Exerciser Members generally alike in terms of what it meant to be a member of the CBOE: 5 6 Second Am. Compl., Ex. 2 ( 1992 Agmt. ), § 2(a) (emphasis added). Id., § 1(a). 10 The CBOE acknowledges and agrees, in its own capacity and on behalf of its members, that all Exerciser Members . . . have the same rights and privileges of CBOE regular membership as other CBOE Regular Members, including the rights and privileges with respect to the trading of all CBOE products . . . .7 Accordingly, even in the event of a distribution, Exerciser Members would not be treated differently: In the event the CBOE makes a cash or property distribution, whether in dissolution, redemption or otherwise, to other CBOE Regular Members as a class, which has the effect of diluting the value of a CBOE Membership, including that of a CBOE membership under Article Fifth(b), such distribution shall be made on the same terms and conditions to Exerciser Members.8 The 1992 Agreement, however, is silent as to what constitutes a distribution. b. Transferability of CBOE Membership The 1992 Agreement s general tenor of equality between Seat Owners and Exerciser Members did not extend to at least one key area. Section 3(b) made clear that CBOE membership pursuant to the Exercise Right was not, in contrast to the membership of a Seat Owner, transferable.9 7 Id., § 3(a) (emphasis added). Id.; see also id., § 3(e) ( The CBOE agrees that a significant purpose of the Agreement is to ensure that CBOE will not make any offer, distribution or redemption to CBOE Regular Members as a class which would have the effect of diluting the rights under Article Fifth(b) of Eligible CBOT Full Members . . . . ). 9 See also CBOE Constitution, § 2.5 ( Memberships acquired pursuant to paragraph (b) of Article FIFTH of the Certificate of Incorporation shall not be transferable. ). 8 11 c. Obligations of CBOE Members The 1992 Agreement did nothing to alter Article Fifth(b) s language that Exerciser Members would be subject to all obligations of membership, including the payment of fees, dues, assessments and other like charges. 10 For illustration, the Plaintiffs point to Plaintiff Michael Floodstrand, an Exerciser Member since 1990, as having paid hundreds of thousands of dollars in fees and dues to the CBOE since becoming a member. 3. Application of Article Fifth(b) Following Certain CBOT Transactions Another important aspect of the 1992 Agreement was that it addressed whether the Exercise Right would survive following certain extraordinary transactions involving the CBOT. At Section 3(d), the CBOE agreed that in the event the CBOT mergers or consolidates with or is acquired by or acquires another entity . . . and (i) the survivor of such merger, consolidation or acquisition ( survivor ) is an exchange which provides or maintains a market in commodity futures contracts or options, securities, or other financial instruments, and (ii) the 1,402 holders of the CBOT Full Memberships are granted in such [transaction] membership in the survivor ( Survivor . . . , and (iii) such Survivor Membership entitles the holder thereof to have full trading rights and privileges in all products then or thereafter traded on the survivor . . ., then the Exercise Right of Article Fifth(b) shall continue to apply and [the 1992 Agreement] shall continue in force and effect (with the words CBOT Full Membership being interpreted to mean Survivor 11 Membership ). 10 11 See also Second Am. Compl. ( Am. Compl. ) ¶ 51. 1992 Agmt., § 3(d) (emphasis added). 12 Conversely, if the CBOT were party to a merger, consolidation, or acquisition where these three requirements were not satisfied (i.e., where the surviving entity was not an exchange, where CBOT Full Members were granted no membership in the surviving entity, or where CBOT Full Members lacked full trading rights and privileges), then the Exercise Right would not survive.12 D. The CBOT s Demutualization and Subsequent Restructuring Agreements By 2000, Article Fifth(b) and the 1992 Agreement would come to a test. The CBOT proposed a demutualization plan to restructure itself by creating CBOT Holdings, a Delaware stock corporation, and then distributing shares of it to CBOT members.13 The CBOE s initial response was that such a transaction would result in the Exercise Right being extinguished because the very concept of CBOT membership, as it had existed under Article Fifth(b), would be no more.14 Advancing this interpretation, the CBOE made a proposed rule change filing with the SEC. The CBOT then brought suit in Illinois state court. That lawsuit was dismissed, however, on the ground that the SEC had exclusive jurisdiction over matters pertaining to membership on an exchange.15 The CBOT appealed, but while both its appeal and CBOE s proposed rule change filing were pending, a deal 12 See id. See Am. Compl. ¶ 46. 14 See CBOE Proposed Rule Change at 7. 15 See Bd. of Trade of the City of Chicago v. Chicago Options Exch., No. 00-CH-1500 (Cir. Ct. of Cook County, Ill., Chancery Div., Jan. 19, 2001). 13 13 was struck between the CBOT and the CBOE. The deal, embodied in the 2001 Agreement, was that Article Fifth(b) would be interpreted as applying to those CBOT members who not only held the trading rights of a full member of the CBOT but also held at least as many shares of stock in CBOT Holdings as had been issued originally to CBOT members in the restructuring.16 More of these restructuring agreements (the 2001-2005 Restructuring Agreements ) would follow. Leading up to one of them, Defendant Mark F. Duffy, CBOE s Vice Chairman and Executive Committee Chairman at the time, even acknowledged to CBOE members that the CBOE [does] not have the authority to do away with the Exercise [R]ight, because [i]t was granted to CBOT members in [the Charter] and absent a vote to do away with it or a court determination to do away with it, it will always exist. 17 The final restructuring agreement came in 2005. In the 2005 Agreement, the CBOT, the CBOE, and CBOT Holdings agreed that after the CBOT s restructuring (i.e., CBOT Holdings initial public offering), the Exercise Right would continue to apply to CBOT Full Members provided they owned or possessed: (1) at least the same number of shares of Class A Common Stock of CBOT Holdings that they received in the demutualization transaction (27,338 shares); (2) one Series B-1 16 17 See CBOE Proposed Rule Change at 7. Perce Aff., Ex. H, at 2. 14 CBOT membership; and (3) one Exercise Right Privilege, or ERP, newly-issued by the CBOT.18 E. The CBOE Ponders Demutualization and Later Forms a Special Committee In 2004, the CBOE was looking ahead to its own possible demutualization, reorganizing itself into a for-profit stock corporation. The interests of Exerciser Members, however, proved a headache for the CBOE. To help alleviate the problem, the CBOE announced its intent to purchase 500 outstanding ERPs through a modified Dutch auction process. The high end of its offer was $100,000 for each ERP, but there were few takers. Only 69, or five percent, of the 1,402 Eligible CBOT Full Members agreed to sell their ERPs.19 On September 14, 2005, the CBOE formally announced that its Board had approved a demutualization plan and acknowledged that the transition to a stock corporation would implicate decisions on what to do with the Exercise Rights held by CBOT Full Members.20 Almost a year later, on September 25, 2006, the CBOE announced that its Board had delegated this task to a Special Committee of independent directors not having any CBOE membership interest. According to the CBOE Board, one of the functions of the Special Committee was to ensure 18 See, e.g., Am. Compl. ¶¶ 47-48; Carey Aff. ¶ 10; CBOE Proposed Rule Change at 8. Two more ERPs were bought by the CBOE in 2006 and 2007, but for consideration greater than what was offered in the auction. See Carey Aff. ¶ 12; Perce Aff., Ex. M. 20 Perce Aff., Ex. N. 19 15 that all CBOE members, including CBOT exercisers, are treated fairly in the CBOE s proposed demutualization. 21 Thus, the Special Committee was given the sole authority to determine the manner in which the two classes of CBOE membership should be converted to consideration under the demutualization.22 F. The Plaintiffs Challenge CBOE s Demutualization Plan Shortly before the CBOE announced that a Special Committee had been formed to evaluate converting the interests of the CBOE membership classes in a demutualization, the Plaintiffs filed their original complaint, alleging that the proposed demutualization (i.e., that CBOT Full Members would not receive the same consideration as CBOE Regular Members) would, among other things, breach the 1992 Agreement and the fidicuiary duties owed by the CBOE Board to CBOT Full Members. In short, the Plaintiffs sought a declaration that they would be able to participate in any demutualization on equal footing with the CBOE Regular Members. G. The CBOT and CME Strike a Deal The CBOE s proposed demutualization was not the only development that would call into question what it meant to be an Eligible CBOT Full Member under Article Fifth(b). On October 17, 2006, CBOT Holdings and CME announced an 21 22 Perce Aff., Ex. O ( CBOE Information Circular IC06-132 ), at 1. Id. at 4-5. 16 agreement to merge into CME Group Inc., a CME/Chicago Board of Trade Company.23 Under the terms to the deal, the CBOT would survive the transaction as a subsidiary and CBOT Holdings stockholders would receive 0.3006 shares of CME Class A common stock per share of CBOT Class A common stock or, instead, they could opt for cash.24 H. The CBOE s Take: Say Goodbye to the Exercise Right After some silence on the implications of the CBOT-CME deal on Eligible CBOT Full Members Exercise Right, the CBOE made its view known in a proposed rule change filing with the SEC on December 12, 2006. The crux of the CBOE s proposed interpretation is that consummation of the CBOT-CME deal results in a fundamental and material change to what it means to be a member of the CBOT under Article Fifth(b) and, thus, the Exercise Right does not survive the transaction.25 Primarily, the CBOE s position is that the requirements set forth by Section 3(d) of the 1992 Agreement26 would not be satisfied under the merger because, among other reasons, CME is not an exchange. The CBOE also advanced an interpretation that the terms of the 2001-2005 Restructuring Agreements would no longer apply because the transaction would be a material change[] to the 23 Perce Aff., Ex. P. Id. 25 CBOE Proposed Rule Change at 3, 9, 13. 26 See supra Part II.C.3 (noting that the surviving entity must be an exchange, the holders of the CBOT Full Membership must be granted membership in the surviving entity, and members of the surviving entity must be entitled to full trading rights and privileges). 24 17 structure or ownership of the CBOT . . . not contemplated in the CBOT [r]estructuring. 27 When the CBOE filed this proposed rule change with the SEC, it also announced separately that the Board s Special Committee had suspended its work. Members of the Special Committee, who were recused from the Board s discussion on the impact of a CBOT-CME deal on the Exercise Right, came to this conclusion with the rationale that it was unnecessary to ascribe a value to the interests of CBOE memberships under the Exercise Right when the transaction with CME would eliminate those interests (i.e., the transaction would result in the CBOT no longer having members, as contemplated by Article Fifth(b)).28 I. The Plaintiffs Amend Their Complaint and the CBOE Formalizes its Demutualization Plan On January 4, 2007, the Plaintiffs amended their complaint to add new claims based on the CBOE s proposed rule change. Specifically, they challenge the process in which the CBOE Board determined that the CME transaction would terminate the Exercise Right and, additionally, seek injunctive and declaratory 27 CBOE Proposed Rule Change at 8-10; see also Perce Aff. Ex. D, at D-1-1 D-1-2 ( Eligible CBOT Full Member has the meaning set forth in the definition of that term in the 1992 Agreement, provided that upon consummation of the CBOT Restructuring Transactions and in the absence of any other material changes to the structure or ownership of the CBOT or to the trading rights and privileges appurtenant to a CBOT Full Membership not contemplated in the CBOT Restructuring Transactions . . . . ). 28 See Perce Aff., Ex. W. See also id., Ex. R ( CBOE Form S-4 Registration Statement ), at 35. 18 relief to the effect that the Exercise Right would survive and entitle them to equal treatment in the CBOE s demutualization. In late January 2007, the CBOE Board approved CBOE s demutualization plan and, on February 9, 2007, the CBOE filed a Form S-4 Registration Statement (the Form S-4 ) with the SEC outlining its plan to be reorganized as CBOE Holdings, Inc. ( CBOE Holdings ), a for-profit Delaware stock corporation. The Form S-4 assumes that both completion of the CBOT-CME merger and approval of the CBOE s proposed rule filing will have occurred by the time CBOE is demutualized. As expected, the Form S-4 specifies that CBOT members holding membership interests in the CBOE pursuant to the Exercise Right will receive no stock in the CBOE restructuring. J. A Bidding War for the CBOT Begins, and Ends Shortly after the CBOE s Form S-4 filing, a rival suitor for the CBOT emerged. On March 15, 2007, ICE made an unsolicited bid to merge with CBOT Holdings.29 By July 9, 2007, however, the bidding war came to an end. CBOT Holdings shareholders approved an $11.3 billion merger agreement with CME,30 agreeing to receive 0.375 shares of CME Class A common stock per share of 29 See Dengel Aff., Ex. D. CBOT Holdings shareholders agreed to receive 0.375 shares of CME Class A common stock per share of CBOT Class A common stock, an increase from the 0.3006 of a share in CME that was first offered by CME in October 2006. 30 19 CBOT Class A common stock. On July 12, 2007, the CBOT-CME transaction closed. III. CONTENTIONS The claims lodged by the Plaintiffs against the CBOE and members of the CBOE Board center primarily on three themes. First, they contend that both the Charter and the 1992 Agreement unambiguously require equal treatment among CBOE Regular Members and Eligible CBOT Full Members in any distribution or, more precisely, in a CBOE demutualization. Second, the CBOT and the Plaintiffclass challenge efforts by the CBOT to extinguish the Charter-granted Exercise Right, arguing that the CBOE proposed rule change filing is a thinly veiled effort to expropriate unilaterally these rights and to contravene contractual obligations to treat Eligible Full CBOT Members equally. Contrary to the CBOE s proposed interpretation filing with the SEC, the Plaintiffs maintain that the CBOT-CME merger does not result in the termination of the Exercise Right because all three requirements set forth in the 1992 Agreement (i.e., the CBOT will continue as an exchange, even though it is indirectly being acquired through a merger of CBOT Holdings and CME; all of the Eligible CBOT Full Members will continue to hold membership in the CBOT following the merger; and the Eligible CBOT Full Members will still have all trading rights and privileges products traded on the CBOT) are satisfied. Finally, the Plaintiffs argue that CBOE Board members 20 breached their fiduciary duties by limiting the work of the Special Committee and permitting interested directors to dominate the process by which the CBOE Board determined the CBOT-CME transaction would result in the Exercise Right s demise. The Plaintiffs seek partial summary judgment on these three major claims and argue that the Court s consideration of these state law claims is not precluded by pending SEC review of the CBOE s proposed rule interpretation. Not surprisingly, the Defendants have a different take on all of this. Primarily, they urge dismissal of this action or, more appropriately, a stay in favor of the SEC s consideration of the CBOE s filing, noting that the Exchange Act preempts judicial resolution of the membership issues. Responding more substantively to the claims asserted, they raise three major points. First, they dispute a reading of the governing agreements as providing equal treatment in the CBOE s demutualization. They argue that the Charter itself recognizes that Exerciser Members and Regular Members, although entitled to equal treatment in certain circumstances, are not created equally because the memberships acquired under the Exercise Right are nontransferable. The Defendants also contend that, because the CBOE s planned demutualization will occur through a merger, the transaction form of this demutualization does not trigger the 1992 Agreement s equality provisions with respect to certain offers, distributions, or redemptions by the CBOE. Second, the Defendants maintain that the Exercise 21 Right does not survive the CBOT-CME transaction because it is a material change to the CBOT s ownership and structure and one that is not contemplated under the 2001-2005 Restructuring Agreements. Moreover, even if the 1992 Agreement were to somehow have created an independent right to CBOE membership, the Defendants argue that the CBOT-CME transaction fails to satisfy the three requirements for the Exercise Right to continue to apply following a merger or consolidation involving the CBOT. Finally, the Defendants insist the CBOE Board did not improperly limit the Special Committee s role in determining the consideration that Exerciser Members would receive in the demutualization and also note that the Special Committee was recused from deliberations on Exercise Right eligibility following the CME transaction in order to preserve their independence on valuation decisions.31 IV. ANALYSIS A. The SEC s Exclusive Jurisdiction to Approve and Interpret Exchange Rules As noted, following CBOT Holdings announcement that it and CME had agreed to merge, the CBOE filed a proposed rule change with the SEC concerning 31 Aside from these three major points, the Defendants have also argued, more generally, that the Plaintiffs valuation and membership claims have not ripened to merit judicial intervention because, first, the CBOE s demutualization is premised on a pending exchange rule change interpretation and it is uncertain if the CBOE will demutualize in an alternative scenario, and second, the CBOT-CME deal has not yet been consummated. The Court is satisfied, however, not least of all because the CBOT-CME transaction has, in fact, been completed, that these issues are now ripe for consideration. 22 the interpretation of Article Fifth(b) of the Charter. In its filing, the CBOE urged an interpretation that the CBOT-CME transaction would result in there not being members of the CBOT, as that term has come to be interpreted for purposes of Exercise Right eligibility. To the Plaintiffs, the motivation for CBOE s proposed rule change has less to do with membership (or trading rights) in the CBOT and more to do with the CBOE s desire to strip Exerciser Members of property rights (i.e., economic rights based on duties prescribed by contract and imposed by state law on fiduciaries) linked to CBOE membership based on the Charter and the 1992 Agreement. That may be the case, but the SEC s exclusive jurisdiction over membership in a national securities exchange cannot be ignored. By the Exchange Act, Congress has established a plenary and pervasive role for the SEC in determining issues relating to exchange membership and, in particular, approving proposed rule changes of such self-regulatory organizations. To illustrate, Section 6 imposes upon the SEC the duty to oversee such matters as to whom an exchange may deny membership;32 under what circumstances an exchange may deny, suspend, or otherwise limit or condition membership;33 and the specific procedures an exchange must follow in carrying out such actions.34 Importantly, the SEC also plays an exclusive role in reviewing, approving, and 32 See 15 U.S.C. § 78f(c)(1). See 15 U.S.C. § 78f(c)(2)-(4). 34 See 15 U.S.C. § 78f(d). 33 23 interpreting an exchange s internal rules.35 To this end, Section 19(b)(2) of the Exchange Act provides that [n]o proposed rule change shall take effect unless approved by the Commission, 36 with proposed rule change defined generally to include interpretations of an existing exchange rule.37 With these provisions of the Exchange Act in mind, the Court turns to the experience of other courts in grappling with the SEC s authority over matters concerning exchange membership. In general, courts have been leery of attempting to resolve disputes relating to exchange membership,38 and, in particular, they have declined invitations to interpret Article Fifth(b), and to decide how a specific event or transaction might, or might not, affect an interpretation of that provision.39 35 By definition, an exchange s rules include the provisions of its articles of incorporation, or charter. See 15 U.S.C. § 78c(a)(27). 36 15 U.S.C. § 78s(b)(1). 37 See Exchange Act Rule 19b-4(c), 17 C.F.R. 240.19b-4(c); see also Exchange Act Rule 19b4(d), 17 C.F.R. 240.19b-4(d). 38 See, e.g., Buckley v. Chicago Bd. of Options Exch., 440 N.E.2d 914, 919 (Ill. App. Ct. 1982) ( [W]e believe that the breadth of the Commission s statutory authority to review exchange decisions relative to membership suggests a Congressional intent to limit judicial interference . . . . ); id. at 471-72 ( In light of the importance Congress placed on the concept of membership in the regulatory scheme it established in the 1975 amendments [to the Exchange Act], as well as the possible conflict with that scheme which might arise as a result of a state court membership determination, we conclude that preemption of the Board of Trade s action for specific performance is required here. ); Bond v .Chicago Bd. of Options Exch., No. 01-CH-14427 (Cir. Ct. of Cook County, Ill., Chancery Div., Sept. 17, 2001) (Transcript), at 56-57 (noting interpretative questions bearing on who or who is not a member under Article Fifth(b) are exclusively within the province of the Securities and Exchange Commission ). 39 See Bd. of Trade of the City of Chicago v. Chicago Options Exch., No. 00-CH-1500 (Cir. Ct. of Cook County, Ill., Chancery Div., Jan. 19, 2001) (Transcript), at 58 (declining to hear CBOT s declaratory judgment claim that a proposed transaction would not affect Exercise Right eligibility because, [i]n light of the comprehensive federal statutory scheme regarding exchange 24 Together, the Exchange Act s provisions and rules, as well other courts reluctance to infringe on the regulatory scheme that Congress has established, lead the Court to be sensitive as to how the CBOE s proposed rule change might involve matters reserved exclusively for the SEC s jurisdiction, especially matters going to the heart of the SEC s function to foster stability in the national market system for securities.40 Accordingly, at this time, it is prudent for the Court to refrain from opining, or appearing to opine, on what effect the CBOT-CME merger may have an the continuation of the Exercise Right. The Court s hesitancy to delve into the Plaintiffs claims relating to membership issues does not, however, extend automatically to those matters that traditionally fall within the purview of this Court, namely the interpretation and enforcement of contractual provisions. B. The SEC s Jurisdiction Does Not Extend to Resolution of State Law Contractual and Fiduciary Duty Claims After the creation of the Exercise Right in 1972, disputes arose as to the meaning of certain terms used in that provision. To address these problems, the CBOT and the CBOE, in 1992, sought to clarify the nature and scope of the entitlement . . . of a CBOT member to be a CBOE member. 41 The CBOT, for membership regulation, as well as the possible conflict which might arise as a result of this Court s potential declaratory judgment determination, the Court is persuaded that the preemption of the Board of Trade s action for declaratory judgment is required here ). 40 See 15 U.S.C. § 78b. 41 1992 Agmt., at First Whereas Clause. 25 example, agreed to limit Exercise Right eligibility to only those 1,402 then-existing CBOT Full Members. For its part, the CBOE agreed that Exerciser Members would have all the rights and privileges of CBOE Regular Members, except the right to transfer, and that Exerciser Members would enjoy the benefits of any distribution to Regular Members on the same terms and conditions. The CBOE also agreed that the Exercise Right would survive a merger, acquisition, or consolidation of the CBOT so long as certain conditions were satisfied. All of these commitments and all of these obligations have one thing in common: they are grounded in, and are governed by, contract, specifically the 1992 Agreement. Whether the Plaintiffs are entitled to equal treatment in a demutualization of the CBOE is an issue that is touched upon by the 1992 Agreement and is one that can be resolved judicially. The parties, however, dispute sharply the precise effect of the 1992 Agreement and its current applicability. Briefly put, the CBOT argues that this agreement obligates the CBOE to treat CBOT members equally in a demutualization, an obligation that cannot be unilaterally removed; the CBOE argues, however, that the 1992 Agreement did not create an independent right to equal treatment, but is merely an interpretation of the Exercise Right embodied in the Charter and an interpretation that can be changed through the rule interpretation process with the SEC. At one time, the CBOT shared at least part of the CBOE s premise. In 2001, in the Bond case, the CBOT acknowledged that the 26 1992 Agreement was simply an interpretation, a new interpretation [of Article Fifth(b)], and not an amendment [of the Charter]. 42 Since 2001, however, there have been several reaffirmations of the 1992 Agreement and its commitment to provide equal treatment to Exerciser Members, reaffirmations evidenced by the 2001-2005 Restructuring Agreements. These agreements, taken together, may leave doubt as to the intended consequences following certain transactions, but they do not suggest that the parties did anything to reduce the possibility of a judicial determination of the meaning of certain terms or of a judicial resolution of certain disputes. The CBOE s pending rule change, even if viewed fairly as concerning matters of membership, does nothing to challenge the capacity of a judicial forum to interpret such contractual terms. Finally, it is worth noting that the parties themselves acknowledged in the 1992 Agreement that judicial intervention could be sought by either party to enforce the Agreement s terms,43 a task not unfamiliar to the judicial system. No authority has been presented to the Court to suggest that the SEC has been imbued with enhanced jurisdiction or some special mission to resolve matters of private economic rights or the allocation of the fruits of those rights among competing private claimants. Indeed, the general presumption against the federal preemption of claims arising out of state law e.g., contract claims, fiduciary duty claims 42 43 See Bond, supra note 38 at 14, 54-55. 1992 Agmt., § 6(c). 27 further guides this Court in concluding that it may properly consider at least the economic rights claims grounded in state law and raised by the Complaint.44 C. Efficiency Considerations Militate in Favor of Staying the Consideration of Plaintiffs Claims The CBOE s proposed rule change is now before the SEC. This Court is not absolutely precluded from proceeding concurrently with that process; whether the governing documents afford the Plaintiffs equal (or some lesser) treatment in the CBOE s demutualization is not, after all, the precise issue before the SEC. Such recognition of this Court s authority to proceed, however, does not eliminate the Court s sensitivity to matters of judicial efficiency and case management, as well as an appropriate degree of deference to the SEC. These concerns are, of course, within this Court s discretion.45 44 See, e.g., California v. ARC Am. Corp., 490 U.S. 93, 101 (1989); cf. Barbara v. N.Y. Stock Exch., 99 F.3d 49, 55 (2d Cir. 1996) (stating that claims created by state law are not necessarily swallowed by a pervasive federal scheme). It should also be observed that, although Buckley was cited for the general proposition that courts are reluctant to interfere in matters of membership issues, there is an important difference between the facts of Buckley and the facts here. In Buckley, the court concluded that an award of specific performance relating to a claim arising out of state law would have the operative effect of removing one member in the CBOE and installing another, something which might very well conflict with SEC oversight. 440 N.E.2d at 919. Nothing so drastic would occur here. A determination by this Court on the issue of economic rights is different and arguably distinct from questions of trading rights. Both the Court and the SEC cannot arrive at their own respective determinations and, thereby, discharge their separate functions, without unduly frustrating the mission of either. Whether other concerns are at play, including the conservation of judicial resources, is a different question. 45 See, e.g., Parfi Holding AB v. Mirror Image Internet, Inc., --- A.2d ---, 2007 WL 1451506, at *3 (Del. May 17, 2007) (acknowledging a trial court s inherent authority to control its docket ); Taylor v. LSI Logic Corp., 689 A.2d 1196, 1201 (Del. 1997) (noting the inherent power of a trial court to control its own docket, manage its affairs, achieve the orderly disposition of its business and promote the efficient administration of justice ). 28 The Court is satisfied that resolution of the Plaintiffs economic rights claims is best stayed pending completion of the SEC s review of the CBOE s filing. A stay would serve a multitude of interests, including the economy of judicial effort and the prevention (or minimization) of potential conflict, or perceived conflict, between the administrative powers and the judicial process.46 Significantly, a stay would enable the Court to assess more accurately how, and if, the SEC s decision on the proposed rule change affects the Court s calculus on the economic rights claims.47 V. CONCLUSION For the foregoing reasons, the Court will stay this action. A stay is appropriate pending the SEC s determination as to whether the CBOT-CME transaction affects the meaning of Eligible Full CBOT Member under Article Fifth(b), as addressed in the 1992 Agreement and as interpreted in the 2001 Agreement and subsequent Restructuring Agreements, in such a manner that the rights of certain CBOT members to become or remain CBOE Exerciser Members have been terminated. In ordering this stay, the Court emphasizes that it has jurisdiction to consider the economic rights issues raised by the Complaint because those claims emerge from and are governed by state contract or fiduciary 46 Cf., e.g., DeBari v. Nortec, LLC, 2000 WL 33108393, at *1 (Del. Super. Nov. 8, 2000). Cf. Parfi Holding AB v. Mirror Image Internet, Inc., 842 A.2d 1245, 1263 (Del. Ch. 2004), aff d, --- A.2d ---, 2007 WL 1451506 (Del. May 17, 2007) (recognizing that a stay permitted later judicial assessment of potential collateral effects arising from another proceeding). 47 29 duty law.48 The decision is rooted less in deference to the SEC s exclusive jurisdiction to review and approve proposed rule changes under the Exchange Act and more in recognition of the practical concerns of conserving judicial resources and avoiding unnecessary speculation about the outcome of the administrative process until such time as the SEC provides its resolution of the question of how, for purposes of its statutory responsibility, the CBOT-CME merger affects the eligibility of CBOT members to qualify for purposes of the Exercise Right. An implementing order will be entered. 48 CBOT membership in the CBOE is unique because it has encompassed both traditional exchange trading rights and contractual or economic rights. The notion that the CBOE Board may unilaterally defeat contractual rights protected not only by state contract (or corporation) law, but also by state fiduciary duty law to the exclusive benefit of its Seat Members merely by filing with the SEC is troubling. The SEC is properly and necessarily concerned with the efficient and proper operation of national securities markets and who may trade on those markets is an important aspect of the task. It is not so apparent that the SEC would be concerned about how the rights and obligations between the real parties in this feud CBOT Full Members and CBOE Seat Members would matter so much. CBOT members already trade on the CBOE and their continuation of that effort might actually benefit (and would not necessarily be adverse to) the operation of that market by, for example, providing greater liquidity. In short, there may well be an option available to the SEC that would allow it to retain the final say as to who can trade on the CBOE but, at the same time, would allow the state law contractual rights of CBOT members to be resolved in the forum where such rights are routinely resolved the courts. Moreover, even if it turns out that the SEC s mandate requires that CBOT Full Members be excluded from trading on the CBOE a point about which the Court expresses no formal view it does not ineluctably follow that, in these unique circumstances, they are also divested of whatever economic (or contractual) rights they hold as the result of that status. In addition, if the CBOE Board owed fiduciary duties to the Exerciser Members (and arguably others), those duties may well protect the interests of these CBOT members because those decisions which caused the claimed harm to them were made by the CBOE Board while, under any interpretation of the various documents, at least many of the CBOT members were Exerciser Members of the CBOE. In sum, it is not immediately and conclusively obvious why a regulatory act voluntarily (and not necessarily) taken by the CBOE Board can be isolated from the reach of fiduciary duty law, especially when the consequences (great benefits to the Seat Members and great detriment to the CBOT Full Members) were so apparent at the time when the CBOE Board decided to act. 30

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