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December 01, 2009 12:00 AM

CBOE settlement could clear way for IPO or merger

Ann Saphir
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    The Chicago Board Options Exchange agreed to settle the appeals in a long-running dispute with members of the rival Chicago Board of Trade, setting the stage for CBOE's conversion to a shares-based company and, potentially, an IPO or merger.

    Under the terms of the deal, seven Chicago Board of Trade members will get a total of $4.2 million to dismiss their appeals. The payment will be split evenly between CBOE and CME Group Inc., which has owned the CBOT since 2007.

    The settlement is an important victory for William Brodsky, CBOE chief executive officer, who has tried for years to turn his exchange from a member-owned club into a share-based company like its biggest rivals. Now he's free to do so, pending members' approval.

    Ever since its founding in 1973 by CBOT members, CBOE struggled with questions over who had the right to use its products and, later, who actually owned it. In 2006, the Board of Trade sued CBOE, claiming that its members' trading privileges at the market translated into partial equity ownership. CBOE disagreed, and the two fought a pitched battle in Delaware court until last year, when they agreed to settle. CBOE was to pay Board of Trade members $300 million in cash and hand over an 18% stake in the options market when CBOE converted memberships to shares.

    But some Board of Trade members were unhappy, and earlier this year they appealed the settlement. Before the Nov. 30 agreement, CBOE had projected the appeals process wouldn't be complete until May.

    CBOE first approached the appellants about a potential settlement about a month ago, said Edward Weil, a partner with Chicago law firm Dykema Gossett, who represents several of the appellants in the settlement negotiations.

    “Their goal was to put this litigation behind them once and for all,” Mr. Weil said. The final result, he said, was a “very satisfactory result for all involved.”

    The settlement has been submitted for approval by the Delaware Supreme Court, and must be approved by Dec. 14 to be valid, Mr. Weil said.

    Ann Saphir is a senior reporter at Crain's Chicago Business, a sister publication of Pensions & Investments.

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