Background
The New York Stock Exchange and Nasdaq announced today that Thursday, January 9, 2025 will be an exchange holiday as a day of mourning in recognition of President Jimmy Carter’s passing.
The occurrence of an unscheduled exchange holiday has consequences for outstanding equity derivatives for which January 9, 2025 is an averaging or valuation date. For example, for outstanding accelerated share repurchases (ASRs), it will generally result in the bank making an adjustment to the terms of the ASR to account for the missing day from the averaging period. This last happened on December 5, 2018 with President George H.W. Bush’s passing.
Adjustments made by the banks for a market closure have to follow what is allowed (or required) by the contract and must be commercially reasonable. In 2018, we saw many proposed adjustments that were objectively not fair. The changes proposed (even as seemingly innocuous as extending the ASR maximum maturity by one day) resulted in value to the banks in excess of the cost of losing a trading day. Adjustments should be value neutral, and include a transfer of value back to the company (if warranted). In one such scenario, we were able to help a client achieve a higher discount to VWAP due to the bank’s adjustment of the maturity date.
The impact of an unscheduled holiday on the value of an on-going ASR is difficult for most companies to quantify, if not impossible. It is similarly difficult to assess whether a bank’s proposed adjustment is fair without additional analysis.
Contractual Considerations
In most ASR documents, an unscheduled market closure is a “Valuation Disruption” that allows the bank to postpone the maximum maturity. This change usually results in an increase in the ASR value to the bank due to extending the duration of the embedded optionality in the program.
In some documents, the postponement triggers a Potential Adjustment Event, which states that the bank must change other terms to preserve the prior economics of the transaction. For example, the minimum maturity should be extended and / or the discount increased to offset the change in value due to the postponement in excess of the loss suffered by the bank from the holiday.
Documents vary with respect to this point. Some documents say the bank “shall” make other changes to preserve value, some say “may,” and still others are silent.
Under any documentation structure, even the scenario that the bank must make a change to preserve fair value, the issuer needs to be aware of the dollars at stake in order to advocate for a fair result.
What Should You Do In Light of this Market Closure?
Contact Matthews South.
For an outstanding ASR or other equity derivative, we are able to estimate the change in value to the bank from the closure and the value of any proposed adjustment. To the extent that the adjustment value is in excess of what is reasonable, we will make you aware, work with your counsel to develop a strategy under the relevant documentation, and can negotiate with the bank to achieve a fair outcome for all parties.
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