Reading and Math Comprehension: Knight Capital Convert Edition

I returned from my soccer game last night, surprised to find some confusion about the details of the mandatory convert that Knight Capital Group ($KCG – no positions) issued.   I am not a lawyer, but I do speak English, and although I hate reading legal documents, I think that sometimes they are quite clear in their meaning.   Case in point, Knight’s 8-k with the details of the convert.   The relevant passage is this:

The outstanding Series A-1 Shares and the Series A-2 Shares will mandatorily convert into Common Stock on the third trading day following the date on which the closing price of the Common Stock exceeds 200% of the then-applicable Conversion Price (as defined below) for 60 consecutive trading days…”

Pop quiz, dear readers:   What is the price which the common stock must exceed for 60 days in order to trigger the mandatory conversion?

Now, the first thing we need to agree on is the “Conversion Price,” which I think everyone agrees is $1.50.   There shouldn’t be much debate about this.  The 8-k tells us:

The “Conversion Price” is equal to 1,000 divided by the Conversion Rate in effect at such time, for an initial Conversion Price of $1.50 per share of Common Stock.

Which leaves only simple math and basic reading comprehension.

What is 200% of $1.50?  Answer: $3.00.

Some people seem confused, wanting to translate “200% of the conversion price” to trader thinking along the lines of “200% gain from $1.50” and then arrive at an answer of $4.50.   Again, I’m not a lawyer, but that is positively NOT what this document says.

If you’re still confused, ask yourself this:  what is 100% of $1.50?   Not a trick question, right?  100% of $1.50 is $1.50.  and 200% of $1.50 is $3.00.

So if you want to tell me that the relevant threshold is $4.50, you have to do better than misinterpreting plain English and screwing up basic math.  If there’s something else I missed in skimming over the 8-k filing that makes you think $4.50 is the number, then let me know – but the passage I excerpted above is clear.



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