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A VPF Contract is a
tax-deferred forward sale of a block of eligible shares. It is a
contractual arrangement, generally between the concentrated
shareholder and an institutional investor,
that involves a cash advance to the shareholder, a pledge of shares,
and the shareholder's promise of the future delivery of a variable number of the
shares.
The cash advance may be higher than
would be permitted in a margin account and generally ranges from 65% to 90%
of the value of the shares involved. The shareholder may employ the cash
advance to diversify his investments or for any other
purpose. No interest is paid during the term of the VPF Contract; however, at
the time of settlement of the contract, the shareholder must deliver an agreed minimum value of shares,
plus additional shares representing a share of value above an agreed
discounted base figure. Tax recognition occurs at settlement.
Contract terms are generally
for three
years or less, though terms of up to five years may be available. The
minimum dollar amount is typically $1 million in stock value and may
exceed $3 million.
For regulatory
purposes, the VPF Contract represents a sale of securities, although
the shareholder can continue to collect dividends and vote in
company affairs until settlement. Typically, the shareholder may also opt to
settle the contract with cash, rather than deliver the shares.
Because it is backed by an
institutional investor, the VPF Contract provides a robust form of risk
management for the concentrated shareholder. Indeed, the agreed minimum value has already been
prepaid by the institutional investor. The economics of this
strategy are similar to a
Protective Put option transaction in that the lower the floor value
(or the lower the cash advance), and the shorter the term, the less
risk is involved on the part of the counterparty and the less
costly the transaction should be for the shareholder.
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In assessing the economics of a
particular VPF Contract proposal, consider the transaction to be a loan
combined with a put option and a call option. Each
of these components may be valued separately in relation to the
current market.
The value and cost of put and call
options embedded in a contemplated VPF Contract may be estimated.
Note, however, that the same counterparty is highly unlikely to be
the best bidder on both legs of a transaction, and pricing by
different investors may vary widely.
Competent structuring, bidding and
negotiation of terms of a VPF contract are significant factors in
its overall utility for a concentrated shareholder.
Request
a "Single-Stock Strategies Report."
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