CBOE Members Hail Legal Settlement, Eye Member Vote

Members of the Chicago Board Options Exchange on Tuesday hailed a legal settlement that ended a long-running legal dispute over the exchange's ownership, clearing the way for a merger or an initial public offering.

The CBOE, the largest options market by volume and among the last major exchanges still held by members, said late Monday that it would pay $4.2 million to settle appeals in a nearly four-year case over ownership rights to the exchange.

The exchange is expected to move forward immediately with a long-shelved plan to convert to a shareholder-owned entity, a process called demutualization that will see seatholders convert their memberships to shares in the CBOE.

"I'm quite happy with the decision," said Chuck Sorsby, a Chicago-based CBOE member who owns five seats on the exchange.

The CBOE has been progressing toward demutualization since early 2006, and the dispute over its ownership has seen it miss the rise and subsequent slide in exchange valuations.

Members and stakeholders of the Chicago Board of Trade, which created the CBOE in 1973, claimed they were entitled to equity in a demutualized CBOE, an argument the CBOE rejected until agreeing in 2008 to a settlement that would give the CBOT members an 18% equity stake and $300 million in cash.

That settlement was challenged earlier this year by parties who disagreed over the division of cash and equity in a demutualized CBOE. Following the settlement, CBOE officials said late Monday that it expected the Delaware Supreme Court to grant dismissal of all appeals within two weeks.

In the meantime the CBOE will consult with regulators as to what financial information is necessary to move forward with demutualization, and a seatholder meeting will be scheduled to vote on demutualization.

Sorsby said that he plans to vote in favor of the conversion, as will Urbana Corp., a unit of Toronto-based Caldwell Investment Management that invests in exchange operators and holds 23 CBOE seats.

Thomas Caldwell, chairman and chief executive of the firm, said that he prefers letting the public market set a price for the CBOE via an initial public offering or a listing of shares; CBOE Chief Executive William Brodsky has in the past indicated that he prefers the IPO route.

But ending the four-year legal battle means that the CBOE is likely to field offers from other exchange operators. Chicago-based derivatives giant CME Group Inc. (CME) has been seen as a likely bidder, along with transatlantic exchange operator NYSE Euronext (NYX), which already operates two options markets.

Sorsby highlighted Atlanta-based IntercontinentalExchange Inc. (ICE) as a strong suitor, noting its success breaking into the credit default swap clearing business and its strong performance through the financial crisis.

He also noted that ICE, which sought to acquire the Chicago Board of Trade ahead of that exchange's merger with CME in 2007, formed a relationship with Brodsky and the CBOE during that period, and that ICE has relocated some operations to Chicago.

Less likely candidates are Frankfurt's Deutsche Boerse AG (DB1.XE), which already owns the second-largest U.S. options platform in the International Securities Exchange, and Nasdaq OMX Group Inc. (NDAQ), which saw Moody's Investors Service upgrade its credit rating to Baa3 from junk status earlier this month.

Prior to Tuesday morning's halt in seat transactions, the most recent CBOE seat sold for $2.75 million on Nov. 5, roughly setting the CBOE's value at about $2.6 billion.

-By Jacob Bunge, Dow Jones Newswires; 312-750-4117; [e-mail]