UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. 1)
Filed by the Registrant
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Filed by a Party other than the Registrant
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Check the appropriate box:
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Preliminary Proxy Statement
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Confidential, for Use of the Commission Only (as permitted by Rule 14a-
6(e)(2)
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Definitive Proxy Statement
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Definitive Additional Materials
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Soliciting Material Pursuant to §240.14a-12
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PENN MILLERS HOLDING CORPORATION
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
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No fee required.
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Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
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(1)
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Title of each class of securities to which transaction applies:
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Aggregate number of securities to which transaction applies:
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Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule
0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):
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(4)
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Proposed maximum aggregate value of transaction:
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(5)
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Total fee paid:
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Fee paid previously with preliminary materials.
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Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and
identify the filing for which the offsetting fee was paid previously. Identify the previous filing
by registration statement number, or the Form or Schedule and the date of its filing.
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(1)
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Amount Previously Paid:
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(2)
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Form, Schedule or Registration Statement No.:
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Filing Party:
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Date Filed:
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Explanatory
Note
This
Amendment No. 1 to the Schedule 14A is being filed for the sole
purpose of including the Annexes to the proxy statement and form of
proxy, which were inadvertently omitted from the original
filing.
Dear Shareholder:
We cordially invite you to attend a special meeting of the
shareholders of Penn Millers Holding Corporation (the
Company), to be held
on ,
2011 at :00 .m. Eastern Time, at the
Companys headquarters at 72 North Franklin Street,
Wilkes-Barre, Pennsylvania
18701-1301.
Holders of record of the Companys common stock at the
close of business
on ,
2011 will be entitled to vote at the special meeting or any
adjournment or postponement thereof.
We have entered into an Agreement and Plan of Merger dated
September 7, 2011 (the Merger Agreement),
whereby Panther Acquisition Corp., a wholly owned subsidiary of
ACE American Insurance Company (ACE), will merge
with and into the Company, with the Company surviving as a
wholly owned subsidiary of ACE. At the special meeting, we will
ask you to adopt the Merger Agreement. If the merger
contemplated by the Merger Agreement (the Merger) is
completed, each outstanding share of Company common stock will
be canceled and you will be entitled to receive $20.50 in cash,
without interest and less any applicable withholding taxes, for
each share of common stock that you own (Merger
Consideration). We cannot complete the Merger unless all
of the conditions to closing are satisfied, including the
adoption of the Merger Agreement by an affirmative vote of at
least a majority of the votes cast by shareholders of the
Company entitled to vote on the proposal at the special meeting.
Our board of directors unanimously determined that the Merger,
the Merger Agreement, the Merger Consideration and the
transactions contemplated thereby are fair to and in the best
interests of the Company and our shareholders, and has adopted
the Merger Agreement and recommended that shareholders vote in
favor of the proposal to adopt the Merger Agreement. Our board
of directors, following a process in which it explored and
evaluated strategic alternatives, made its determination after
receipt of the recommendation of a special committee composed of
independent directors, consultation with its legal and financial
advisors and consideration of a number of other factors. Our
independent financial advisors, Willis Capital
Markets & Advisory, reviewed and considered the terms
and conditions of the Merger. Willis Capital Markets &
Advisory provided an opinion (subject to the assumptions,
qualifications and determinations set forth therein) to our
board of directors that the Merger Consideration to be received
by the holders of Company common stock is fair from a financial
point of view to our shareholders.
At the special meeting, if necessary or appropriate, we will
also be asking you to vote your shares to adjourn the special
meeting to permit further solicitation of proxies if there are
not sufficient votes at the time of the special meeting to adopt
the Merger Agreement.
THE BOARD
OF DIRECTORS RECOMMENDS THAT YOU VOTE:
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FOR THE ADOPTION OF THE MERGER AGREEMENT;
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FOR THE APPROVAL, ON A NON-BINDING, ADVISORY BASIS,
OF THE GOLDEN PARACHUTE COMPENSATION THAT MAY BE
PAYABLE TO THE COMPANYS NAMED EXECUTIVE OFFICERS IN
CONNECTION WITH THE MERGER; AND
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FOR THE ADJOURNMENT OF THE SPECIAL MEETING, IF
NECESSARY OR APPROPRIATE, FOR THE PURPOSE OF SOLICITING
ADDITIONAL PROXIES TO VOTE IN FAVOR OF ADOPTING THE MERGER
AGREEMENT.
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YOUR VOTE
IS VERY IMPORTANT
In the materials accompanying this letter, you will find a
Notice of Special Meeting of Shareholders, a proxy statement
relating to the actions to be taken by our shareholders at the
special meeting and a proxy card. The proxy statement includes
important information about the Merger Agreement, the Merger and
the
other matters to be considered at the special meeting. We
encourage you to carefully read the entire proxy statement,
including its annexes.
Please note that if your shares of Company common stock are held
in the name of a broker, it is important that you contact and
specifically instruct the broker how to vote the shares with
respect to the Merger Agreement. If you do not so instruct the
broker, your shares cannot be voted by the broker, and your
shares will have no effect on the adoption and approval of the
proposals at the special meeting.
All of our shareholders are cordially invited to attend the
special meeting in person. Whether or not you plan to attend the
special meeting, please complete, sign, date and return your
proxy card in the enclosed envelope or appoint a proxy over the
Internet or by telephone as instructed in these materials. It is
important that your shares be represented and voted at the
special meeting. If you attend the special meeting, you may vote
in person as you wish, even though you have previously returned
your proxy card or appointed a proxy over the Internet or by
telephone.
If your shares of Company common stock are held in your account
under the Penn Millers Holding Corporation Employee Stock
Ownership Plan, you will receive a separate voting card with
respect to such shares and you will be provided with
instructions on how to direct the trustee to vote those shares.
On behalf of our board of directors, I thank you for your
support and urge you to vote FOR the adoption of the
Merger Agreement, and FOR the other matters being
considered at the special meeting.
Sincerely,
F. Kenneth Ackerman, Jr.
Chairman of the Board of Directors
John M. Coleman
Chairman of the Special Committee of Independent Directors
Douglas A. Gaudet
President and Chief Executive Officer
This proxy statement is
dated ,
2011 and is first being mailed to our shareholders on or
about ,
2011.
NOTICE OF SPECIAL MEETING OF
SHAREHOLDERS
, ,
2011
To Our Shareholders:
You are cordially invited to attend a special meeting of the
shareholders of Penn Millers Holding Corporation (hereinafter
sometimes referred to as Penn Millers or the
Company) which will be held
at :00 .m., Eastern Time,
on , ,
2011, at the Companys headquarters, 72 North Franklin
Street, Wilkes-Barre, Pennsylvania
18701-1301,
for the following purposes:
(1) To consider and vote on a proposal to adopt the
Agreement and Plan of Merger dated as of September 7, 2011
(the Merger Agreement) between the Company, ACE
American Insurance Company (ACE), and Panther
Acquisition Corp. (Merger Sub), whereby Merger Sub
will merge with and into the Company, with the Company surviving
as a wholly owned subsidiary of ACE, and each outstanding share
of Penn Millers common stock will be canceled and converted into
the right to receive
$20.50 per share in cash
(the
Merger). A copy of the Merger Agreement is attached
as
Annex A
to the proxy statement
accompanying this notice, and a copy of the Companys
bylaws that will be in effect immediately following the Merger
will be furnished to shareholders, upon request and without
charge;
(2) To consider and vote, solely on a non-binding, advisory
basis, on a proposal to approve the golden parachute
compensation that may be payable to the Companys named
executive officers in connection with the Merger; and
(3) To consider and vote on a proposal to adjourn the
special meeting, if necessary or appropriate, for the purpose of
soliciting additional proxies to vote in favor of adopting the
Merger Agreement.
At the special meeting, you will be asked to vote on the
adoption of the Merger Agreement. If the Merger, as contemplated
by the Merger Agreement, is completed, you will be entitled to
receive $20.50 in cash, without interest and less any applicable
withholding taxes, for each share of common stock of Penn
Millers that you own. We cannot complete the Merger unless all
of the conditions to closing are satisfied, including the
adoption of the Merger Agreement by an affirmative vote of the
holders of at least a majority of the votes cast by shareholders
of the Company entitled to vote on the proposal.
The board of directors of the Company has fixed the close of
business on , , 2011 as the record date
for the determination of shareholders entitled to notice of, and
to vote at, the special meeting and any postponements or
adjournments of the special meeting. Only holders of common
stock of record at the close of business on that date will be
entitled to notice of, and to vote at, the special meeting or
any adjournment thereof. In the case of Company common stock
held in your account under the Penn Millers Holding Corporation
Employee Stock Ownership Plan, you may direct the trustee to
vote only those shares that are allocated to your account as of
the close of business on the record date. Your attention is
directed to the attached proxy statement.
The board of directors has unanimously determined that the
Merger and the Merger Agreement and the transactions
contemplated thereby are fair to and in the best interests of
the Company and our shareholders, adopted the Merger Agreement
and recommended that all Company shareholders vote in favor of
the proposal to adopt the Merger Agreement. The board of
directors, following a process in which it explored and
evaluated strategic alternatives, made its determination after
receipt of the recommendation of a special committee composed of
independent directors, consultation with its legal and financial
advisors and consideration of a number of other factors.
THE BOARD
OF DIRECTORS RECOMMENDS THAT YOU VOTE:
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FOR THE ADOPTION OF THE MERGER AGREEMENT;
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FOR THE APPROVAL, ON A NON-BINDING, ADVISORY
BASIS, OF THE GOLDEN PARACHUTE COMPENSATION THAT MAY
BE PAYABLE TO THE COMPANYS NAMED EXECUTIVE OFFICERS IN
CONNECTION WITH THE MERGER; AND
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FOR THE ADJOURNMENT OF THE SPECIAL MEETING, IF
NECESSARY OR APPROPRIATE, FOR THE PURPOSE OF SOLICITING
ADDITIONAL PROXIES TO VOTE IN FAVOR OF ADOPTING THE MERGER
AGREEMENT.
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YOUR VOTE
IS VERY IMPORTANT
In the materials accompanying this Notice of Special Meeting of
Shareholders, you will find a proxy statement relating to the
actions to be taken by our shareholders at the special meeting
and a proxy card. The proxy statement includes important
information about the Merger Agreement, the Merger and other
matters to be considered at the special meeting. We encourage
you to carefully read the entire proxy statement, including its
annexes.
All of the Companys shareholders are cordially invited to
attend the special meeting in person. Whether or not you plan to
attend the special meeting, we urge you to submit your proxy
over the Internet or by telephone. These are quick and cost
effective ways for you to submit your proxy. If you would prefer
to vote by mail, please sign, date and return the enclosed proxy
card in the postage-paid envelope provided. Please review the
instructions on the proxy card for each of the voting options.
If you prefer to vote by telephone, please call the toll-free
telephone number provided in the proxy statement
for ,
our proxy solicitation firm, to cast your vote. If you return an
executed proxy or cast your vote by telephone, and then attend
the special meeting, you may revoke your proxy and vote in
person. Attendance at the special meeting will not by itself
revoke a proxy.
If your shares of Company common stock are held in your account
under the Penn Millers Holding Corporation Employee Stock
Ownership Plan, you will receive a separate explanation of the
voting process with respect to such shares and you will be
provided with instructions on how to direct the trustee to vote
those shares. No person has been authorized to give any
information or to make any representations other than those set
forth in the proxy statement in connection with the solicitation
of proxies made hereby, and, if given or made, such information
must not be relied upon as having been authorized by the Company
or any other person.
By Order of the Board of Directors,
Michael O. Banks
Executive Vice President, Chief Financial
Officer & Corporate Secretary
,
2011
YOUR VOTE
IS IMPORTANT
BROKERS ARE NOT PERMITTED TO VOTE ON THE MERGER AGREEMENT
WITHOUT INSTRUCTIONS FROM THE BENEFICIAL OWNER. THEREFORE,
IF YOUR SHARES ARE HELD IN THE NAME OF YOUR BROKER OR BANK,
MAKING SURE YOUR VOTE IS CAST IS ESPECIALLY IMPORTANT.
ACCORDINGLY, WE ENCOURAGE YOU TO VOTE PROMPTLY BY MAIL OR THE
INTERNET, AS PROVIDED BY THE ENCLOSED PROXY CARD, OR BY
TELEPHONE EVEN IF YOU INTEND TO ATTEND THE SPECIAL MEETING. THE
GIVING OF THE PROXY WILL NOT AFFECT YOUR RIGHTS TO VOTE AT THE
MEETING IF THE PROXY IS REVOKED AS SET FORTH IN THE ACCOMPANYING
PROXY STATEMENT.
Table of
Contents
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A
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PENN
MILLERS HOLDING CORPORATION
72
North Franklin Street
Wilkes-Barre,
Pennsylvania
18701-1301
PROXY
STATEMENT
for
SPECIAL MEETING OF SHAREHOLDERS
to be held
on ,
2011
INTRODUCTION
This proxy statement is furnished by and on behalf of the board
of directors of Penn Millers Holding Corporation, a Pennsylvania
corporation (Penn Millers, the Company,
we, us, or our), in
connection with its solicitation of proxies to be voted at the
special meeting to be held
on ,
2011, beginning
at :00 .m., Eastern
Time, at the Companys headquarters, 72 North Franklin
Street, Wilkes-Barre, Pennsylvania
18701-1301
for the purposes set forth in the accompanying Notice of Special
Meeting of Shareholders. This proxy statement and enclosed proxy
card is first being mailed on or
about ,
2011 to the Companys shareholders of record as
of ,
2011 (the Record Date). As of the Record
Date, shares
of our common stock were outstanding and entitled to one vote
with respect to the proposals to be voted on at the special
meeting.
The
Summary
and the
Questions and
Answers about the Merger and Special Meeting
that
follow summarize the material information in this proxy
statement. We encourage you to carefully read this entire proxy
statement, and the other documents to which this proxy statement
refers you, for a more complete understanding of the matters
being considered at the special meeting. In addition, you may
obtain additional business and financial information about the
Company by following the instructions in
Other
Matters Where You Can Find More
Information
at page .
This proxy statement contains Forward-Looking
Statements within the meaning of the Private Securities
Litigation Reform Act, Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended (the Exchange Act).
All statements contained in this proxy statement that are not
clearly historical in nature are forward-looking, including
statements regarding whether and when the Merger is expected to
close, whether conditions to the Merger will be satisfied, the
effect of the Merger on our business and operating results, and
all other statements regarding our intent, plans, beliefs,
expectations or those of our directors or officers. Words such
as anticipate, believe,
belief, expect, estimate,
project, plan, intend,
continue, predict, may,
will, should, strategy,
will likely result, will likely
continue, and similar expressions are generally intended
to identify Forward-Looking Statements. However, not all
Forward-Looking Statements contain such identifying words.
Forward-Looking Statements are based on our current expectations
and are subject to a number of risks, uncertainties and
assumptions, including those pertaining to the Merger, which
could cause actual events and developments to differ materially
from those described in the Forward-Looking Statements. The
risks, uncertainties and assumptions that could cause actual
events and developments to differ from the Forward-Looking
Statements include the risks detailed elsewhere in this proxy
statement and in our most recent filings with the Securities and
Exchange Commission (SEC) on
Forms 10-K
and
10-Q.
See
Other Matters Where You Can Find More
Information
at page .
Forward-Looking Statements are only predictions, and we can give
no assurance that they will prove to be correct. You should not
place undue reliance on Forward-Looking Statements. In light of
the significant uncertainties inherent in the Forward-Looking
Statements included in this proxy statement, you should not
consider the inclusion of such information as a representation
by us or anyone else that we will achieve such results or
developments. The statements made in this proxy statement
represent our views as of the date of the proxy statement, and
it should not be assumed that these statements will remain
accurate as of any future date. We undertake no obligation to
update any Forward-Looking Statement, whether as a result of new
information, future events or otherwise.
1
SUMMARY
The following summary, together with the QUESTIONS AND
ANSWERS ABOUT THE MERGER AND SPECIAL MEETING immediately
following this summary, are intended only to highlight certain
information contained elsewhere in this proxy statement. This
summary and the following question and answer section may not
contain all the information that is important to you and the
other shareholders. To more fully understand the proposed Merger
and the terms of the Merger Agreement, you should carefully read
this entire proxy statement, all of its Annexes and the
documents referenced in this proxy statement before voting. For
instructions on obtaining more information, see the section
entitled OTHER MATTERS WHERE YOU CAN FIND MORE
INFORMATION. The Company has included page number
references in this summary to direct you to a more complete
description of the topics presented in this summary.
The
Parties to the Merger Agreement (See
Page )
Penn Millers Holding Corporation is a Pennsylvania corporation
headquartered in Wilkes-Barre, Pennsylvania. The Company was
originally organized in 1887 and is engaged in the provision of
commercial property and casualty insurance products. The
Companys headquarters are located at 72 North Franklin
Street, Wilkes-Barre, Pennsylvania
18701-1301;
telephone:
(800) 233-8347.
ACE American Insurance Company (ACE) is a
Pennsylvania domestic stock property and casualty insurance
company and a wholly-owned indirect subsidiary of ACE Limited, a
global insurance and reinsurance organization, providing a range
of insurance and reinsurance products. ACE American offers an
extensive array of property, casualty, risk-management, and
accident and health insurance products and services.
ACE American Insurance Company
436 Walnut Street
Philadelphia, Pennsylvania 19106
Telephone:
(215) 640-1000
Panther Acquisition Corp. (the Merger Sub) is a
Pennsylvania corporation that was formed by ACE solely for the
purpose of entering in the Merger Agreement and completing the
transactions contemplated by the Merger Agreement. Upon the
completion of the Merger, the Merger Sub will cease to exist and
the Company will continue as the surviving corporation of the
Merger, which we refer to as the surviving corporation.
Panther Acquisition Corp.
c/o ACE American Insurance Company
436 Walnut Street
Philadelphia, Pennsylvania 19106
Telephone:
(215) 640-1000
The
Merger (See Page )
At the special meeting, you will be asked to consider and vote
on the adoption of the Merger Agreement. Pursuant to the Merger
Agreement, at the effective time of the Merger, the Merger Sub
will merge with and into the Company. After the Merger, the
Company will continue as the surviving corporation and will be
wholly-owned by ACE.
Following and as a result of the Merger, Company shareholders
will no longer have any interest in, and will no longer be
shareholders of, the Company, and will not participate in any of
the Companys future earnings or growth. Shares of our
common stock will no longer be traded on the NASDAQ Global
Market, price quotations with respect to shares of our common
stock will no longer be available, and the registration of
shares of our common stock under the Securities Exchange Act of
1934, as amended, will be terminated.
2
Merger
Consideration
Company
Common Stock
At the effective time of the Merger, each share of Company
common stock issued and outstanding immediately prior to the
effective time of the Merger will automatically be canceled and
converted into the right to receive $20.50 per share in cash,
without interest and less applicable withholding taxes (the
Merger Consideration).
Company
Stock Options
At the effective time of the Merger, each outstanding stock
option, whether or not vested or exercisable, to acquire Company
common stock will become fully vested and thereafter will be
canceled and converted into the right to receive an amount in
cash, less applicable withholding taxes, equal to the product of
the number of shares of our common stock subject to each option
as of the effective time of the Merger, multiplied by the excess
of $20.50 over the per share exercise price of such option. None
of our outstanding options has an exercise price per share equal
to or in excess of $20.50.
Company
Restricted Stock
At the effective time of the Merger, each unvested share of
restricted stock will become fully vested and thereafter will be
canceled and converted into the right to receive the Merger
Consideration, without interest and less applicable withholding
taxes.
The
Special Meeting
The special meeting of the shareholders of the Penn Millers will
be held
on ,
2011, at : .m., Eastern Time, at the
Companys headquarters at 72 North Franklin Street,
Wilkes-Barre, Pennsylvania
18701-1301.
Shareholders are cordially invited to attend the special meeting
and are requested to vote on the Merger and other proposals
described in this proxy statement.
At the special meeting, you will be asked to consider and vote
on a proposal to adopt the Merger Agreement, to approve, on a
non-binding advisory basis, the golden parachute
compensation that may be payable to the Companys named
executive officers in connection with the Merger as reported on
the Golden Parachute Compensation table on
page , and to approve a proposal to adjourn the
special meeting, if necessary or appropriate, to solicit
additional proxies if there are insufficient votes at the time
of the special meeting to approve the proposal to adopt the
Merger Agreement.
Record
Date and Quorum
Shareholders are entitled to receive notice of, and to vote at,
the special meeting if they owned shares of Company common stock
as of the close of business
on ,
2011, which date the Company has set as the record date for the
special meeting. A quorum is necessary to adopt the Merger
Agreement and approve the non-binding advisory proposal
regarding golden parachute compensation at the
special meeting. The presence at the special meeting, in person
or by proxy, of holders of a majority of the outstanding shares
of Company common stock entitled to vote shall constitute a
quorum for the transaction of business.
Required
Vote (See Page )
The adoption of the Merger Agreement requires the affirmative
vote of the holders of not less than a majority of the votes
cast by shareholders of the Company entitled to vote on the
proposal at the special meeting. Each outstanding share of our
common stock on the record date entitles the holder to one vote
at the special meeting. Failure to vote your shares of our
common stock and abstentions will have no effect on the approval
of the proposal to adopt the Merger Agreement.
The approval of the proposals regarding golden
parachute compensation and the motion to adjourn the
special meeting, if necessary or appropriate, for the purpose of
soliciting additional proxies to vote in favor of
3
the adoption of the Merger Agreement requires the affirmative
vote of the holders of a majority of the votes properly cast and
entitled to vote thereon at the special meeting. Failure to vote
your shares of our common stock and abstentions will have no
effect on the approval of the proposals regarding golden
parachute compensation or to adjourn the special meeting.
Recommendation
of Our Board of Directors (See Page )
Our board of directors has unanimously determined that the
Merger Agreement and the transactions contemplated thereby are
fair to and in the best interests of the Company and our
shareholders, and recommends that our shareholders vote
FOR the adoption of the Merger Agreement,
FOR the approval, on a non-binding advisory basis,
of the golden parachute compensation that may be
payable to the Companys named executive officers in
connection with the Merger, and FOR the adjournment
of the special meeting, if necessary, to solicit additional
proxies to vote in favor of adoption of the Merger Agreement.
The board of directors, following a process in which it explored
and evaluated strategic alternatives, made its determination
after receipt of the recommendation of a special committee
composed of independent directors, consultation with its legal
and financial advisors, including the advice of its financial
adviser, Willis Capital Markets & Advisory, and
consideration of a number of other factors.
Opinion
of Willis Capital Markets & Advisory (See
Page )
The independent directors of our board of directors retained
Willis Securities, Inc., which we refer to as Willis
Capital Markets & Advisory, to provide it with
financial advisory services and a fairness opinion in connection
with the Merger. The independent directors selected Willis
Capital Markets & Advisory to act as financial advisor
based on Willis Capital Markets & Advisorys
qualifications, expertise and reputation and its knowledge of
the business and affairs of the Company.
In connection with the Merger, the board of directors received
an opinion, dated September 7, 2011, from the financial
advisor to the independent directors, Willis Capital
Markets & Advisory, as to the fairness, from a
financial point of view and as of such date, of the $20.50 per
share cash consideration to be received in the merger by holders
of Company common stock. The full text of Willis Capital
Markets & Advisorys written opinion, which sets
forth, among other things, the assumptions made, factors
considered and qualifications and limitations upon the review
undertaken by Willis Capital Markets & Advisory in
rendering its opinion, is attached as Annex B and is
incorporated by reference in its entirety into this proxy
statement.
Willis Capital Markets & Advisorys
opinion was provided for the information of the Companys
board of directors (in its capacity as such) in its evaluation
of the Merger Consideration from a financial point of view and
did not address any other aspect of the Merger. Other than
advising the special committee and the board of directors in the
review of strategic alternatives, Willis Capital
Markets & Advisory expressed no view as to, and its
opinion did not address, the relative merits of the Merger as
compared to alternative business or financial strategies that
might be available to the Company, the effect of any other
transaction in which the Company might engage or the
Companys underlying business decision to engage in the
Merger. The opinion does not constitute a recommendation to any
holders of Company common stock as to how such holder should act
or vote in connection with the Merger or otherwise. Willis
Capital Markets & Advisory and its affiliates in the
past provided, currently are providing and in the future may
provide investment banking and financial advisory services to
ACE and its affiliates unrelated to the Merger and would expect
to receive compensation for such services.
Interests
of our Executive Officers and Directors in the Merger (See
Page )
In considering the recommendation of our board of directors with
respect to the Merger Agreement, you should be aware that the
Companys executive officers have interests in the Merger
that may be different from, or in addition to, the interests of
our shareholders generally upon completion of the Merger as a
result of the Companys executive compensation programs.
These interests include, among others:
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accelerated vesting of stock options and restricted stock;
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cash payments payable to executive officers of the Company
pursuant to change of control severance arrangements between the
Company and such executive officers if such executive officers
incur a qualifying termination following the Merger as provided
in such arrangements;
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accelerated vesting of the accounts of such executive officers,
as participants in the Penn Millers Holding Corporation Employee
Stock Ownership Plan (the ESOP) and allocation of
ESOP earnings after repayment of the ESOP loan;
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accelerated vesting of the entire amount credited to each
participant in the Companys deferred compensation
plan; and
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continued indemnification and directors and officers
liability insurance applicable to the period prior to completion
of the merger.
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Our independent directors represent the shareholders and are
themselves shareholders who purchased their shares with their
own funds. The independent directors also received grants of
stock options from the Company in all cases such
options represent fewer shares than each such director
purchased as a portion of the compensation for their
services. In connection with the Merger, the independent
directors stock options will be accelerated, and such
directors will also receive continued indemnification and
directors liability insurance applicable to the period
prior to the completion of the Merger.
Our board of directors was aware of these interests and
considered them, among other matters, prior to making their
determination to recommend the adoption of the Merger Agreement
to our shareholders.
Approval
of Golden Parachute Compensation
(Page )
In accordance with Section 14A of the Exchange Act and
Rule 14a-21(c)
under the Exchange Act, we are providing shareholders with the
opportunity to cast a non-binding advisory vote with respect to
certain payments that may be made to the Companys
executive officers in connection with the Merger, or
golden parachute compensation, as reported on the
Golden Parachute Compensation table on page .
The board of directors recommends that you vote FOR
approval of the non-binding advisory proposal regarding
golden parachute compensation.
Approval of the non-binding advisory proposal regarding
golden parachute compensation requires the approval
of a majority of the votes properly cast upon this proposal.
Approval of this proposal is not a condition to completion of
the Merger. The vote with respect to golden
parachute compensation is an advisory vote and will not be
binding on the Company. Therefore, regardless of whether
shareholders approve the golden parachute
compensation, if the Merger is approved by the shareholders and
completed, the golden parachute compensation will
still be paid to the Companys executive officers to the
extent payable in accordance with the terms of such compensation.
Tax
Consequences (See Page )
The exchange of shares of Company common stock for cash in the
Merger will generally be a taxable transaction to
U.S. holders for U.S. federal income tax purposes. In
general, a U.S. holder whose shares of Company common stock
are converted into the right to receive cash in the Merger will
recognize a gain or loss for U.S. federal income tax
purposes in an amount equal to the difference, if any, between
the cash you receive as Merger Consideration (determined before
deduction of any applicable withholding taxes) and your adjusted
tax basis in such shares. If you are a
non-U.S. holder
of our common stock, the Merger will generally not be a taxable
transaction to you under U.S. federal income tax laws
unless you have certain connections to the United States. The
Merger may be a taxable transaction to such
non-U.S. holders
under foreign tax laws. Backup withholding may also apply with
respect to cash you receive in the Merger, unless you comply
with the applicable requirements of the backup withholding
rules. With respect to shares of Company common stock held under
the ESOP, the exchange of shares of Company common stock for
cash in the Merger will generally not be a taxable transaction
to any ESOP participant or beneficiary. ESOP participants and
beneficiaries will generally not be taxed on amounts held in the
ESOP until such amounts are distributed from
5
the ESOP in accordance with the terms of the ESOP or following
the termination of the ESOP as described below.
You should consult your own tax advisor for a full understanding
of how the Merger will affect your taxes.
Regulatory
Approvals (See Page )
Under the terms of the Merger Agreement, the Merger cannot be
consummated until the waiting period applicable to the
consummation of the Merger under the
Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the HSR
Act), has expired or been terminated. Under the HSR Act
and the rules promulgated thereunder by the Federal Trade
Commission (FTC), the Merger cannot be consummated
until each of the Company and ACE files a notification and
report form with the FTC and the Antitrust Division of the
Department of Justice under the HSR Act and the applicable
waiting period has expired or been terminated. Under the terms
of the Merger Agreement, each of the Company and ACE will file
such a notification and report form by September 27, 2011.
There can be no assurance as to the outcome of the review.
Insurance laws in Pennsylvania require an acquiring person to
obtain approval from the Insurance Commissioner of Pennsylvania
before acquiring control of an insurance company domiciled in
Pennsylvania. Under the terms of the Merger Agreement, ACE will
file an application for such approval with the Insurance
Commissioner of Pennsylvania by September 27, 2011. There
can be no assurance as to the outcome of such application for
approval.
Under the insurance laws of certain states in which the
Companys two insurance company subsidiaries are licensed,
an acquiring person is required to make a pre-acquisition
Form E filing regarding the potential
competitive impact of the acquisition before acquiring control
of an insurance company licensed in those states if the combined
market share as an immediate result of the acquisition would
exceed certain statutorily-specified levels. The Merger cannot
be consummated until the expiration or termination of the
applicable waiting periods under relevant state insurance laws.
Under the terms of the Merger Agreement, ACE will make such
filings by September 27, 2011. There can be no assurance as
to the outcome of the filings.
Conditions
to the Merger (See Page )
The obligations of the parties to consummate the Merger are
subject to the satisfaction or waiver, to the extent applicable,
of customary conditions including the following conditions:
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the adoption of the Merger Agreement by the affirmative vote of
a majority of the votes cast by shareholders of the Company
entitled to vote thereon;
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the expiration or termination of the waiting period applicable
to the Merger under the HSR Act and the receipt of all other
regulatory authorizations and approvals of any governmental
authority necessary for the consummation of the transactions
contemplated by the Merger Agreement;
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no governmental authority will have enacted, issued,
promulgated, enforced or entered any law that has the effect of
making the acquisition of shares of Company common stock by ACE
or Merger Sub or any affiliate of either of them illegal or
otherwise preventing or prohibiting consummation of the Merger,
and there will not have been instituted or pending any action by
any governmental authority relating to the Merger Agreement;
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each partys representations and warranties in the Merger
Agreement being true and correct as of the date of the Merger
Agreement and the closing date of the Merger; and
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each partys having performed in all material respects its
obligations required to be performed under the Merger Agreement
on or prior to the closing date of the Merger;
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and, with respect to ACE and Merger Sub, the following
additional conditions:
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none of the regulatory approvals obtained will contain and no
law shall have been enacted or in effect that contains any
limitation, requirement or condition that would, individually or
in the aggregate, be reasonably expected to (i) materially
impair or interfere with the ability of the Company and its
subsidiaries to conduct their businesses after the effective
time of the Merger substantially in the manner as such
businesses are conducted as of the date of the Merger Agreement,
(ii) result in the sale, lease, license or disposal by ACE
of any capital stock of the surviving corporation after the
effective time of the Merger or by the Company or its
subsidiaries of any of their material assets, rights product
lines, licenses business or other operations or
(iii) materially and adversely affect the benefits, taken
as a whole, that ACE would otherwise receive from the
transactions contemplated by the Merger Agreement; and
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the absence of a Material Adverse Effect (as defined
below in
The Merger Agreement
Representations and Warranties
) since the date of the
Merger Agreement.
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Termination
(See Page )
The Company and ACE may mutually agree to terminate the Merger
Agreement at any time prior to the effective time of the Merger.
Subject to certain exceptions, the Merger Agreement may also be
terminated and the Merger may be abandoned at any time prior to
the effective time of the Merger as a result of any of the
following:
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by the Company or ACE, if:
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the Merger has not been consummated by December 31, 2011,
unless such date, which we refer to as the outside
date, is extended in accordance with the Merger Agreement
in order to obtain any necessary insurance regulatory consents
or approvals (provided, that in no event will the Merger
Agreement be extended beyond March 31, 2012), except that
this termination right will not be available to any party whose
failure to fulfill any obligation under the Merger Agreement has
been a principal cause of or resulted in the failure of the
Merger to occur on or before such date;
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a governmental authority of competent jurisdiction has issued a
nonappealable final injunction, order, decree or ruling, which
has the effect of preventing, prohibiting or making illegal the
consummation of the Merger, except that this termination right
will not be available to any party whose failure to fulfill any
obligation under the Merger Agreement has been a principal cause
of or resulted in such injunction, order, decree or
ruling; or
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our shareholders do not vote to adopt the Merger Agreement at
the special meeting.
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our board of directors fails to recommend that the
Companys shareholders vote to adopt the Merger Agreement
in the proxy statement, there occurs an adverse
recommendation change (as defined below in
The
Merger Agreement No Solicitation of
Transactions
), our board of directors approves,
endorses or recommends an alternative transaction proposal, the
Company fails to include the Companys recommendation to
shareholders to adopt the Merger Agreement in the proxy
statement, the Company, or any of its subsidiaries or any
representative of the Company or any of its subsidiaries,
breaches the obligations related to the shareholders
meeting, the proxy statement or no solicitation of
alternative transactions or our board of directors or one of its
committees resolves or proposes to take any of the foregoing
actions; or
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we breach any of our representations, warranties, covenants or
agreements in the Merger Agreement and such breach would cause
the conditions to the obligations of ACE and Merger Sub to
consummate the Merger with respect to the accuracy of
representations and warranties of the Company and performance of
covenants and obligations of the Company not to be satisfied and
such breach cannot be cured or is not cured within 30 days
of notice of such breach (or the outside date, if earlier) and
such breach is not waived by ACE;
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ACE or Merger Sub breach any of their representations,
warranties, covenants or agreements in the Merger Agreement and
such breach would cause the conditions to the obligations of the
Company to consummate the Merger with respect to the accuracy of
representations and warranties of ACE and Merger Sub and
performance of covenants and obligations of ACE and Merger Sub
not to be satisfied and such breach cannot be cured or is not
cured within 30 days of notice of such breach (or the
outside date, if earlier) and such breach is not waived by the
Company; or
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our board of directors pursuant to and in compliance with our
non-solicitation obligations under the Merger Agreement enters
into an alternative acquisition agreement for a superior
proposal and prior to or simultaneously with such termination we
pay to ACE in cash a $3.75 million termination fee.
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Termination
Fees and Expenses (See Page )
The Merger Agreement provides, in general, that each party will
pay its own expenses if the Merger is not consummated. If the
Merger Agreement is terminated, depending upon the circumstances
under which such termination occurs, we may be obligated to pay
ACE a termination fee of $3.75 million.
No
Solicitation of Transactions (See
Page )
Subject to the exceptions discussed in the section entitled
The Merger Agreement No Solicitation of
Transactions
the Company has agreed that it will not:
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solicit, initiate, or knowingly encourage any inquiries or the
making of any proposals or offers that constitute or could
reasonably be expected to lead to any acquisition proposal;
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furnish any non-public information regarding the Company to any
person in connection with or in response to any inquiry or
indication of interest that could reasonably be expected to lead
to any acquisition proposal;
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engage in discussions or negotiations with any person with
respect to an alternative acquisition proposal;
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approve, endorse or recommend any alternative acquisition
proposal; or
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enter into any letter of intent or similar agreement providing
for any alternative acquisition proposal.
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We have agreed to promptly (and in any event within
24 hours) advise ACE of our receipt of any written
acquisition proposal and the material terms and conditions of
any such acquisition proposal.
Market
Price of Our Common Stock (See Page )
Penn Millers common stock is listed on the NASDAQ Global Market
under the ticker symbol PMIC. Its closing price on
September 7, 2011, the last full trading day prior to the
announcement of the Merger Agreement, was $16.30 per share.
No
Dissenters Rights (See Pages )
Under the Pennsylvania Business Corporation Law, holders of
Company common stock do not have appraisal or dissenters
rights with respect to the Merger or the other transactions
described in this proxy statement.
Delisting
and Deregistration of Company Common Stock (See
Page )
If the Merger is consummated, the Company common stock will be
delisted from the NASDAQ Global Market and deregistered under
the Exchange Act. Accordingly, following the consummation of the
Merger, we would no longer file periodic reports with the SEC on
account of the Company common stock.
8
QUESTIONS
AND ANSWERS ABOUT THE MERGER AND SPECIAL MEETING
The following questions and answers are intended to address
briefly some commonly asked questions regarding the Merger, the
Merger Agreement and the special meeting. These questions and
answers may not address all questions that may be important to
you as a Company shareholder. Please refer to the
Summary and the more detailed information contained
elsewhere in this proxy statement, the annexes to this proxy
statement and the documents referred to in this proxy statement,
which you should read carefully and in their entirety. You may
obtain the information incorporated by reference in this proxy
statement without charge by following the instructions under
Other Matters Where You Can Find More
Information beginning on page .
Why have
I received these materials?
This proxy statement and the accompanying proxy are being mailed
to shareholders of record
on ,
2011. The proxy is being solicited by the board of directors of
the Company in connection with our special meeting of
shareholders that will take place
on , ,
2011, at :00 .m., Eastern Time, at the
Companys headquarters, 72 North Franklin Street,
Wilkes-Barre, Pennsylvania
18701-1301,
and at any adjournment thereof. You are cordially invited to
attend the special meeting and are requested to vote on the
Merger and acquisition proposal described in this proxy
statement.
The Companys proxy statement for the special meeting was
mailed to you. Copies of this proxy statement for the special
meeting can also be viewed on the Companys website at
http://www.pennmillers.com/pmic/investors.
If you are a participant or beneficiary under the ESOP with an
account to which shares of Company common stock were allocated
as of the close of business on the record date, an explanation
from the trustee on how to vote shares allocated to your account
that supplements this proxy statement was also mailed to you.
What is
the proposed transaction and what effects will it have on the
Company?
The proposed transaction is the acquisition of the Company by
ACE pursuant to the Merger Agreement. If the proposal to adopt
the Merger Agreement is approved by our shareholders and the
other closing conditions under the Merger Agreement are
satisfied or waived, Merger Sub will merge with and into the
Company, with the Company being the surviving corporation. As a
result of the Merger, the Company will become a subsidiary of
ACE and will no longer be a publicly held corporation, and you
will no longer have any interest in our future earnings or
growth. In addition, the Company common stock will be delisted
from NASDAQ and deregistered under the Exchange Act, and the
Company will no longer file periodic reports with the SEC on
account of the Company common stock.
Will the
Merger be taxable to me?
The exchange of shares of Company common stock for cash pursuant
to the Merger Agreement will generally be a taxable transaction
to U.S. holders for U.S. federal income tax purposes.
If you are a U.S. holder and your shares of Company common
stock are converted into the right to receive cash in the
Merger, you will generally recognize gain or loss for
U.S. federal income tax purposes in an amount equal to the
difference, if any, between the amount of cash received with
respect to such shares (determined before deduction of any
applicable withholding taxes) and your adjusted tax basis in
your shares of Company common stock. If you are a
non-U.S. holder,
the Merger will generally not be a taxable transaction to you
under U.S. federal income tax laws unless you have certain
connections to the United States, but may be a taxable
transaction to you under foreign tax laws, and you are
encouraged to seek tax advice regarding such matters. Backup
withholding may also apply to the cash payments made pursuant to
the Merger unless the holder or other payee complies with the
backup withholding rules. For a discussion of tax-related
implications, see
The Merger Material
U.S. Federal Income Tax Consequences of the
Merger
beginning on page .
With respect to shares of Company common stock held under the
ESOP, the exchange of shares of Company common stock for cash in
the Merger will generally not be a taxable transaction to any
ESOP participant or beneficiary. ESOP participants and
beneficiaries will generally not be taxed on amounts held in
9
the ESOP until such amounts are distributed from the ESOP in
accordance with the terms of the ESOP or following the
termination of the ESOP as described below.
This proxy statement (and, if applicable to you, the separate
explanation from the ESOP trustee on how to vote shares
allocated to your ESOP account) is not intended to provide
shareholders with tax advice, and the Company makes no
representation as to the tax consequences of a cancellation of
Company common stock in the Merger. Shareholders are encouraged
to consult with their own tax advisor prior to the effective
time of the Merger to determine the particular tax consequences
to them of the Merger.
What am I
being asked to vote on at the special meeting?
You are being asked to consider and vote on a proposal to adopt
the Merger Agreement that provides for the acquisition of the
Company by ACE, to approve, on a non-binding advisory basis, the
golden parachute compensation that may be payable to
the Companys named executive officers in connection with
the Merger as reported on the Golden Parachute Compensation
table on page , and to approve a proposal to
adjourn the special meeting, if necessary or appropriate, to
solicit additional proxies if there are insufficient votes at
the time of the special meeting to approve the proposal to adopt
the Merger Agreement.
Who is
entitled to vote at the special meeting?
Holders of shares of Company common stock, including ESOP
participants and beneficiaries with shares allocated to their
respective ESOP accounts, as of the close of business
on , ,
2011, the record date for the special meeting, will be entitled
to receive notice of and to vote at the special meeting. As of
the record
date, shares
of our common stock were outstanding, each of which is entitled
to one vote with respect to each matter to be voted on at the
special meeting.
What
constitutes a quorum for purposes of the special
meeting?
The presence at the special meeting, in person or by proxy, of
holders of a majority of the outstanding shares of Company
common stock entitled to vote shall constitute a quorum for the
transaction of business. Proxies marked as
withholding or containing broker
non-votes on any matter to be acted upon by shareholders
will be treated as present at the meeting for purposes of
determining a quorum. As noted above, a broker
non-vote occurs when a registered broker holding a
customers shares in the name of the broker has not
received voting instructions on a matter from the customer and
is therefore barred from voting on behalf of the customer on
that matter.
How do I
vote my shares at the special meeting?
If you are a record shareholder of common stock
(that is, if you hold common stock in your own name in the
Companys stock records maintained by our transfer agent,
Registrar and Transfer Company), you may complete and sign the
accompanying proxy card and return it to the Company or deliver
it in person or you may attend the special meeting and vote in
person. Shareholders of record may also vote via the Internet or
over the phone through the Companys proxy
solicitor,
( ).
Internet and telephone voting information is provided on the
proxy card. If you vote via the Internet or telephone, please do
not return a signed proxy card. If you desire to vote by phone
or if you have any questions, or require assistance in voting
your proxy, please call the toll-free telephone number specified
on your proxy card.
If your shares are held in street name (for example,
if your shares of common stock are held by a brokerage firm),
your brokerage firm, as the record holder of your shares, is
required to vote your shares according to your instructions. In
order to vote your shares, you will need to follow the
directions your brokerage firm provides you. Your bank,
brokerage firm or other nominee will only be permitted to vote
your shares of Company common stock if you instruct your bank,
brokerage firm or other nominee how to vote your shares. If you
do not instruct your bank, brokerage firm or other nominee to
vote your shares of Company common stock, your shares of Company
common stock will not be voted and will not have an effect on
the adoption of the Merger Agreement, the non-binding advisory
proposal regarding golden parachute
10
compensation or the proposal to adjourn the special meeting, if
necessary or appropriate, to solicit additional proxies.
If your shares are held in street name and you wish to attend
the special meeting in person, you must bring an account
statement or letter from your brokerage firm showing that you
are the beneficial owner of the shares as of the record date in
order to be admitted to the special meeting
on ,
2011. To be able to vote your shares held in street name at the
special meeting, you will need to obtain a proxy card from the
holder of record (e.g. your brokerage firm) for your shares.
If a
shareholder gives a proxy, how will its shares of Company common
stock be voted?
Regardless of the method you choose to submit your proxy, the
individuals named on the enclosed proxy card, as your proxies,
will vote your shares of Company common stock in the way that
you indicate. When completing the internet or telephone proxy
processes or the enclosed proxy card, you may specify whether
your shares of Company common stock should be voted for or
against or to abstain from voting on all, some or none of the
specific items of business to come before the special meeting.
If you properly sign your proxy card but do not mark the boxes
showing how your shares of Company common stock should be voted
on a matter, the shares represented by your properly signed
proxy will be voted
FOR
the proposal to adopt
the Merger Agreement,
FOR
approval of the
non-binding advisory proposal regarding golden
parachute compensation and
FOR
the
proposal to adjourn the special meeting, if necessary or
appropriate, to solicit additional proxies.
Can I
change my vote or revoke my proxy after I return my proxy
card?
For record shareholders of common stock, yes. After
you have submitted a proxy online or by mail, you may revoke
your proxy or change your vote at any time before the proxy is
exercised by submitting a notice of revocation or a duly
executed proxy bearing a later date prior to the date of the
special meeting, by voting again prior to the time at which our
voting facilities close, or by attending the special meeting and
voting in person. In any event, the latest submitted vote will
be recorded and the earlier vote(s) revoked.
For street name shareholders of common stock, you
will need to review the instructions on the proxy form provided
to you by the institution that holds your shares to determine
whether you may change your vote after you have submitted a
proxy. If you are permitted to change your vote after you have
submitted a proxy, follow the instructions for revocation on
such form to do so.
How do I
vote shares allocated to my account under the ESOP?
You are permitted to direct the ESOP trustee in the voting of
shares allocated to your ESOP account only in accordance with
instructions provided by the trustee. The ESOP trustee will not
disclose the confidential voting directions of any individual
participant or beneficiary to the Company. You must also follow
instructions to revoke your proxy or change your vote after you
have submitted a proxy card in accordance with such
instructions. If you do not vote the shares allocated to your
account, the ESOP trustee will vote those shares in its sole
discretion.
What vote
is required to adopt the Merger Agreement at the special
meeting?
The adoption of the Merger Agreement requires the affirmative
vote of a majority of the votes properly cast by shareholders of
the Company entitled to vote on the proposal at the special
meeting.
Because the affirmative vote required to approve the proposal to
adopt the Merger Agreement is based upon the total number of
votes cast, if you fail to submit a proxy or to vote in person
at the special meeting, or if you vote ABSTAIN, or
if you do not provide your bank, brokerage firm or other nominee
with voting instructions, it will have no effect on the approval
of the proposal.
11
What vote
is required for the Companys shareholders to approve the
proposal regarding golden parachute compensation and
the proposal to adjourn the special meeting, if necessary or
appropriate?
Approval of the proposals regarding golden parachute
compensation and adjournment of the special meeting, if
necessary or appropriate, requires the approval of a majority of
the votes properly cast upon each of these proposals.
If you vote ABSTAIN on the proposal regarding
golden parachute compensation or the proposal to
adjourn the special meeting, if necessary or appropriate, to
solicit additional proxies, this will have no effect on these
proposals. If you fail to submit a proxy or to vote in person at
the special meeting, or if you do not provide your bank,
brokerage firm or other nominee with voting instructions, your
shares of Company common stock will not be voted on these
proposals, and this will have no effect on these proposals.
Why am I
being asked to cast a non-binding advisory vote to approve
golden parachute compensation that the
Companys named executive officers will receive in
connection with the Merger?
The SECs recently adopted new rules require us to seek a
non-binding advisory vote with respect to certain payments that
may be made to the Companys named executive officers in
connection with the Merger, or golden parachute
compensation.
What will
happen if shareholders do not approve the golden
parachute compensation at the special meeting?
Approval of golden parachute compensation payable
under existing agreements that the Companys named
executive officers may receive in connection with the Merger is
not a condition to completion of the Merger. The vote with
respect to golden parachute compensation is an
advisory vote and will not be binding on the Company. Therefore,
regardless of whether shareholders approve the golden
parachute compensation, if the Merger Agreement is adopted
by the shareholders and the Merger is completed, the
golden parachute compensation will still be paid to
the Companys named executive officers to the extent
payable in accordance with the terms of such compensation.
What will
happen to the Company as a result of the Merger?
Upon completion of the Merger, the Company will cease to be a
publicly-traded company and will become wholly-owned by ACE.
Following completion of the Merger, the registration of our
common stock and our reporting obligations with respect to our
common stock under the Exchange Act will be terminated. In
addition, upon completion of the Merger, shares of our common
stock will no longer be listed on any stock exchange, including
the NASDAQ Global Market or quotation system.
What will
I receive if the Merger is consummated?
Upon completion of the Merger, each outstanding share of Company
common stock, other than shares held by ACE or the Merger Sub,
will automatically be canceled and will be converted into a
right to receive the Merger Consideration of $20.50 per share in
cash, less any applicable withholding taxes. Any Merger
Consideration relating to shares allocated to your account under
the ESOP will be paid to the ESOP and allocated to your account
under the ESOP.
Will I
own any shares of Company common stock after the
Merger?
No. At the effective time of the Merger, your shares of Company
common stock will be canceled and you will have the right to be
paid cash for your shares. Our shareholders will not have the
option to receive shares of the Merger Sub or the surviving
corporation in exchange for their shares instead of cash.
What
happens to Company stock options in the Merger?
Upon the consummation of the Merger, all outstanding stock
options to acquire Company common stock will become fully vested
and thereafter will be canceled and converted into the right to
receive an amount in
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cash equal to the number of shares of Company common stock
underlying the option multiplied by the amount (if any) by which
$20.50 exceeds the exercise price for each share of Company
common stock underlying the option, without interest and less
any applicable withholding taxes.
When do
you expect the Merger to be completed?
We are working toward completing the Merger as quickly as
possible, but we cannot predict the exact timing of when the
Merger will be completed. Assuming timely satisfaction of
necessary closing conditions, including the approval by our
shareholders of the proposal to adopt the Merger Agreement, we
currently anticipate that the Merger will be consummated no
later than the first quarter of 2012.
What
happens if the Merger is not consummated?
If the Merger Agreement is not adopted by the shareholders of
the Company or if the Merger is not consummated for any other
reason, the shareholders of the Company would not receive any
payment for their shares of Company common stock in connection
with the Merger. Instead, the Company will remain an independent
public company, and the Company common stock would continue to
be listed on the NASDAQ Global Market. Under specific
circumstances, the Company may be required to pay to ACE, a fee
with respect to the termination of the Merger Agreement, as
described under
The Merger Agreement
Termination Fees
beginning on page .
When will
I receive the Merger Consideration for my shares of Company
common stock?
Shortly after the completion of the Merger, the shareholders of
record will receive written instructions, including a letter of
transmittal (the Letter of Transmittal), which will
explain how to exchange their shares for the Merger
Consideration of $20.50 in cash, less any applicable withholding
taxes, for each share of Company common stock that they own.
When such shareholders properly complete and return the required
documentation described in the written instructions to the
Letter of Transmittal, they will promptly receive from the
paying agent a payment of the Merger Consideration for their
shares. If your shares are held in a brokerage account or by a
bank or other nominee, your account will be automatically
credited with the Merger Consideration in exchange for your
shares, and it will not be necessary for you to submit any
documentation. Any consideration relating to shares allocated to
your account under the ESOP will be paid to the ESOP and
allocated to your account under the ESOP.
Should I
send in my stock certificates now?
No. The Letter of Transmittal described in this proxy statement
will provide instructions to you about when and where to send
your stock certificates. If your shares of Company common stock
are held under the ESOP, you do not have to take any of the
actions described in the Letter of Transmittal with respect to
shares allocated to your account under the ESOP as the ESOP
trustee will be responsible for taking those actions.
Am I
entitled to dissenters rights?
No. Under the Pennsylvania Business Corporation Law, holders of
Company common stock do not have appraisal or dissenters
rights with respect to the Merger or the other transactions
described in this proxy statement.
What
happens if I sell my shares of Company common stock before the
special meeting or the effective time of the Merger?
The record date for shareholders entitled to vote on the
adoption of the Merger Agreement is earlier than the date of the
special meeting and the expected effective time of the Merger.
If you transfer your shares of Company common stock after the
record date but before the special meeting or the effective time
of the Merger, you will, unless special arrangements are made,
retain your right to vote at the special meeting but you no
longer will have the right to receive the Merger Consideration.
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What do I
do if I receive more than one proxy or set of voting
instructions?
If you hold shares of Company common stock in more than one
account, you may receive more than one proxy or set of voting
instructions relating to the special meeting. These should each
be voted or returned separately in accordance with the
instructions provided in this proxy statement in order to ensure
that all of your shares of Company common stock are voted.
Who will
solicit and pay the cost of soliciting proxies?
The Company has
engaged
to assist in the solicitation of proxies for the special
meeting. The Company estimates that it will
pay
a fee of approximately $ plus
reasonable
out-of-pocket
expenses relating to the solicitation. The Company will
reimburse
for reasonable
out-of-pocket
expenses and will
indemnify
and its affiliates against certain claims, liabilities, losses,
damages and expenses. The Company may also reimburse brokers,
banks and other custodians, nominees and fiduciaries
representing beneficial owners of shares of Company common stock
for their expenses in forwarding soliciting materials to
beneficial owners of Company common stock and in obtaining
voting instructions from those owners. Our directors, officers
and employees may also solicit proxies by telephone, by
facsimile, by mail, on the internet or in person. They will not
be paid any additional amounts for soliciting proxies.
How does
the Board of Directors recommend that I vote my
shares?
The board of directors recommends that you vote
FOR
the approval of the proposal to adopt the
Merger Agreement,
FOR
approval of the
non-binding advisory proposal regarding golden
parachute compensation and
FOR
approval
of the proposal to adjourn the special meeting, if necessary or
appropriate, to solicit additional proxies.
How will
documents be delivered to me if I share an address with other
shareholders?
Some brokers and other nominees may participate in the practice
of householding proxy statements and annual reports
to shareholders. This means that only one copy of our proxy
statement may have been sent to multiple shareholders in your
household. The Company will promptly deliver a separate copy of
either document to you if you contact us at the following
address: Attention Investor Relations, Penn Millers Holding
Corporation, 72 North Franklin Street, Wilkes-Barre,
Pennsylvania
18701-1301;
or telephone number:
(800) 233-8347.
Who can
answer my questions?
If you have additional questions about the Merger, need
assistance in submitting your proxy or voting your shares of
Company common stock, or need additional copies of this proxy
statement or the enclosed proxy card, please
call ,
our proxy solicitor, toll-free
at .
If you are a participant or beneficiary under the ESOP and have
questions about voting the shares that are allocated to your
account under the ESOP, please contact the trustee at the phone
number provided in the ESOP voting instructions.
14
THE
SPECIAL MEETING
We are furnishing this proxy statement to you, as a
shareholder of Penn Millers as part of the solicitation of
proxies by our board of directors for use at the special meeting
of shareholders.
Date,
Time and Place of the Special Meeting
The special meeting will be held at our corporate headquarters
at 72 North Franklin Street, Wilkes-Barre, Pennsylvania
18701-1301,
on ,
2011,
at :00 a.m.,
local time.
Purpose
of the Special Meeting
At the special meeting, you will be asked to consider and vote
on the following proposals:
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to adopt the Merger Agreement, a copy of which is attached as
Annex A
to this proxy statement;
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to approve, on a non-binding advisory basis, the golden
parachute compensation that may be payable to the
Companys named executive officers in connection with the
Merger; and
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to approve one or more adjournments of the special meeting, if
necessary or appropriate, to permit further solicitation of
proxies if there are not sufficient votes at the time of the
special meeting, or at any adjournment of that meeting, to adopt
the Merger Agreement.
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Record
Date and Voting Power
The Company has fixed the close of business
on ,
2011 as the record date for the determination of shareholders
entitled to notice of, and to vote at, the special meeting. At
the close of business on the record
date, shares
of our common stock were outstanding and entitled to receive
notice of, and vote at, the special meeting. On the record date,
there
were
holders of record of the Companys outstanding common
stock. Common stock is our only outstanding class of stock.
Shareholders of record on the record date will be entitled to
one vote per share of our common stock on any matter that
properly comes before the special meeting and any adjournment or
postponement of that meeting.
Quorum
Our charter and bylaws and Pennsylvania law require the
presence, in person or by duly executed proxy, of the holders of
a majority of the voting power of shares of our common stock
outstanding and entitled to vote at the special meeting to
constitute a quorum. Withheld votes, abstentions and broker
non-votes are counted as present for the purpose of determining
whether a quorum is present. If a quorum is not present and if
the adjournment proposal has the necessary majority, we expect
to adjourn the special meeting to solicit additional proxies and
intend to vote any proxies we have received at the time of the
special meeting in favor of an adjournment.
Vote
Required
Approval of the proposals regarding adoption of the Merger
Agreement, golden parachute compensation and
adjournment of the special meeting, if necessary or appropriate,
requires the approval of a majority of the votes properly cast
upon each of these proposals. For the proposal to adopt the
Merger Agreement, the non-binding advisory proposal regarding
golden parachute compensation and the proposal to
adjourn the special meeting, if necessary or appropriate, you
may vote
FOR, AGAINST
or
ABSTAIN
. For purposes of these proposals, if
you fail to submit a proxy or to vote in person at the special
meeting, or if you have given a proxy and vote
ABSTAIN
, the shares of Company common stock
will not be counted in respect of, and will not have an effect
on, the proposals.
Abstentions
and Broker Non-Votes
For purposes only of determining the presence or absence of a
quorum for the transaction of business at the special meeting,
broker non-votes will be counted as present at the
special meeting. Broker non-votes are shares held by
brokers or nominees as to which (1) voting instructions
have not been received from the beneficial owners or the persons
entitled to vote those shares, and (2) the broker or
nominee does not have discretionary voting power. The proposal
to adopt the Merger Agreement, the proposal to approve the
non-binding advisory proposal regarding golden
parachute compensation, and the proposal to adjourn the
special
15
meeting, if necessary or appropriate, to solicit additional
proxies are not matters on which brokerage firms may vote in
their discretion on behalf of their clients. As a result, absent
specific instructions from the beneficial owner of such shares
of Company common stock, banks, brokerage firms or other
nominees are not empowered to vote those shares of Company
common stock on non-routine matters.
We urge you to return
the enclosed proxy card marked to indicate your vote, to vote
your shares through the Internet or by telephone or to give your
broker proper voting instructions.
To adopt the Merger
Agreement, the adjournment proposal and the proposal regarding
golden parachute compensation, a majority of the
outstanding shares of our common stock present or represented at
the special meeting and properly cast on each proposal must vote
in favor of each proposal. Broker non-votes and
abstentions will have no effect on the outcome of these
proposals.
Proxies
and Voting
Shareholders may vote their shares by attending the special
meeting and voting their shares in person or by completing,
signing and dating the enclosed proxy card and promptly
returning it to us as soon as possible. If you prefer, you can
vote by telephone or via the Internet by following the relevant
instructions described on the enclosed proxy card or voting
instruction form received from any broker, bank or other nominee
that may hold shares of our common stock on your behalf. If you
sign and send in your proxy card and do not mark it to show how
you want to vote, or if you submit a proxy by telephone or via
the Internet without providing instructions, we will count your
proxy as a vote in favor of the adoption of the Merger Agreement
and in favor of any proposal to adjourn the special meeting to
solicit additional proxies.
Shareholders who have questions or requests for assistance in
completing and submitting proxy cards should
contact ,
our proxy solicitor,
at
or by phone
at .
Shareholders who hold their shares of Company common stock in
street name, meaning in the name of a bank, broker
or other person who is the record holder, must either direct the
record holder of their shares of our common stock how to vote
their shares or obtain a proxy from the record holder to vote
their shares at the special meeting.
Some banks, brokers and other nominee record holders may be
participating in the practice of householding proxy
statements and annual reports. This means that if a household
participates in the householding program, it will receive an
envelope containing one set of proxy materials and a separate
proxy card for each shareholder account in the household. Please
vote all proxy cards enclosed in such a package. The Company
will promptly deliver a separate copy of the proxy statement or
proxy card to you if you contact it at the following address or
telephone number: Investor Relations, Penn Millers Holding
Corporation, 72 North Franklin Street, Wilkes-Barre,
Pennsylvania
18701-1301;
telephone:
(800) 233-8347.
If you want to receive separate copies of proxy statements in
the future, or if you are receiving multiple copies and would
like to receive only one copy per household, you should contact
your bank, broker, or other nominee record holder, or you may
contact the Company at the address or telephone number above.
If your shares of Company common stock are held under the ESOP,
the voting card with instructions from the ESOP trustee that was
mailed to you explains how to vote the shares allocated to your
account.
Participation in householding will not affect or apply to any of
your other shareholder mailings such as dividend checks,
Forms 1099, or account statements. Householding saves money
by reducing printing and postage costs and it is environmentally
friendly. It also creates less paper for participating
shareholders to manage. If you are a beneficial holder, you can
request information about householding from your broker, bank or
other nominee.
Revocability
of Proxies
If you have not submitted a proxy through your broker or other
nominee, you may revoke your proxy at any time before it is
voted at the special meeting by:
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delivering to our Secretary at the address listed below a
written notice of revocation bearing a later date than the proxy;
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duly completing, signing, dating and delivering to our Secretary
at the address listed below, a new proxy card, dated later than
the first proxy card, which will automatically replace any
earlier dated proxy card that you returned;
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properly casting a new vote through the Internet or by telephone
at any time before the closure of the Internet voting facilities
and the telephone voting facilities; or
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attending the special meeting and voting in person.
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Attendance at the special meeting will not, in and of itself,
constitute revocation of a proxy.
If your shares are held in street name, you should
follow the voting instruction form provided by your broker or
other nominee regarding revocation of proxies. If the holder of
record of your shares is your broker, bank or other nominee and
you wish to vote at the special meeting, you must bring a legal
proxy from your broker, bank or other nominee authorizing you to
vote those shares.
You should send any notice of revocation of your proxy card to:
Penn Millers Holding Corporation, 72 North Franklin Street,
Wilkes-Barre, Pennsylvania
18701-1301
Attention: Michael O. Banks, Secretary.
If your shares of Company common stock are held under the ESOP,
the voting card with instructions from the ESOP trustee that was
mailed to you explains how to revoke your direction to the
trustee about voting the shares allocated to your account.
Solicitation
of Proxies and Expenses
In addition to solicitation by mail, our directors, officers and
employees may solicit proxies by telephone, other electronic
means or in person. These people will not receive any additional
compensation for their services, but we will reimburse them for
their
out-of-pocket
expenses. We will reimburse banks, brokers, nominees, custodians
and fiduciaries for their reasonable expenses in forwarding
copies of this proxy statement to the beneficial owners of
shares of our common stock and in obtaining voting instructions
from those owners. We will pay all expenses of filing, printing
and mailing this proxy statement.
We have
retained , ,
telephone ,
to assist in the solicitation of proxies by mail, telephone or
other electronic means, or in person, for a fee of approximately
$ plus reasonable
out-of-pocket
expenses relating to the solicitation. All costs of soliciting
proxies will be borne by the Company.
Adjournments
and Recesses
Although it is not currently expected, the special meeting may
be adjourned or recessed, including for the purpose of
soliciting additional proxies, if there are insufficient votes
at the time of the special meeting to approve the proposal to
adopt the Merger Agreement or if a quorum is not present at the
special meeting. Other than an announcement to be made at the
special meeting of the time, date and place of an adjourned
meeting, an adjournment generally may be made without notice.
Any adjournment or recess of the special meeting for the purpose
of soliciting additional proxies will allow the Companys
shareholders who have already sent in their proxies to revoke
them at any time prior to their use at the special meeting as
adjourned or recessed.
Other
Business
We are not currently aware of any business to be acted upon at
the special meeting other than the matters discussed in this
proxy statement. If other matters do properly come before the
special meeting, or at any adjournment of the special meeting,
we intend that shares of our common stock represented by
properly submitted proxies will be voted by and at the
discretion of the persons named as proxies on the proxy card.
The grant of a proxy will confer discretionary authority on the
persons named as proxies on the proxy card to vote in accordance
with their best judgment on other matters that are properly
presented at the special meeting.
17
Questions
and Additional Information
If you have more questions about the Merger or how to submit
your proxy, or if you need additional copies of this proxy
statement or the enclosed proxy card or voting instructions,
please
call ,
our proxy solicitor, toll-free
at .
18
THE
MERGER
The following is a description of the material aspects of the
background and history behind the Merger. This description may
not contain all of the information that is important to you. You
are encouraged to carefully read this entire proxy statement,
including the Merger Agreement attached hereto as Annex A,
for a more complete understanding of the Merger.
The
Parties to the Merger
Penn Millers Holding Corporation (Penn Millers or
the Company) is a Pennsylvania corporation
headquartered in Wilkes-Barre, Pennsylvania. The Company was
originally organized in 1887 and is engaged in the provision of
commercial property and casualty insurance products. The
Companys headquarters are located at 72 North Franklin
Street, Wilkes-Barre, Pennsylvania
18701-1301
and telephone:
(800) 233-8347.
ACE American Insurance Company (ACE) is a
Pennsylvania domestic stock property and casualty insurance
company and a wholly-owned indirect subsidiary of ACE Limited, a
global insurance and reinsurance organization, providing a range
of insurance and reinsurance products. ACE American offers an
extensive array of property, casualty, risk-management, and
accident and health insurance products and services.
ACE American Insurance Company
436 Walnut Street
Philadelphia, Pennsylvania 19106
Telephone:
(215) 640-1000
Panther Acquisition Corp. (the Merger Sub) is a
Pennsylvania corporation that was formed by ACE solely for the
purpose of entering in the Merger Agreement and completing the
transactions contemplated by the Merger Agreement. Upon the
completion of the Merger, the Merger Sub will cease to exist and
the Company will continue as the surviving corporation of the
Merger, which we refer to as the surviving corporation.
Panther Acquisition Corp.
c/o ACE
American Insurance Company
436 Walnut Street
Philadelphia, Pennsylvania 19106
Telephone:
(215) 640-1000
Background
of the Merger
The Companys board of directors and senior management
regularly review and consider business alternatives to protect
and/or
enhance shareholder value, including strategic alternatives and
opportunities for organic growth. The Company considers
strategic options in light of the totality of the circumstances,
including current and anticipated business trends, regulatory
conditions, and the rating environment expected to impact it and
the insurance industry.
In 2008, the Companys management did not achieve the goals
that had been set for it in the annual operating plan. In 2009,
the goals were substantially achieved. In 2010, the goals were
not achieved.
At the regularly scheduled meeting of the board of directors on
January 26, 2011, management presented the proposed annual
business plan for 2011. Management told the board that
management did not view the Solutions product of the
Commercial Business unit as a good long-term strategic fit for
the Company since the product has been unprofitable and the
sophistication of automation and predictive modeling favors
large companies. The independent members of the Companys
board of directors expressed concern about the projected
performance numbers. The independent directors centered their
strategy discussion on the challenges resulting from the
Companys relative lack of scale, the
difficulties of the prolonged soft market, which
inhibits price increases for the Companys products, and
the disproportionate expense of being a small public
19
company. It was recognized that there should be a sense of
urgency regarding the strategic challenges facing the Company.
Management continued this discussion over the next few months.
At its regularly scheduled meeting on March 23, 2011, the
board met with members of senior management, including the
Companys Chief Executive Officer, Chief Financial Officer,
and Senior Vice President. At that meeting, the Companys
Chief Executive Officer and Chief Financial Officer led a
discussion regarding whether, and to what extent, the Company
might undertake mergers and acquisitions. The discussion
centered primarily on the Companys $20 million in
excess capital above what it is expected to use for organic
growth at such time. Management suggested that the Company
consider either returning capital to its shareholders or making
a strategic acquisition, further informing the board that it had
already contacted two potential acquisition targets. The board
reviewed long-range projections for the Companys business
performance. Independent directors expressed concern about the
adequacy of the projected performance and its implications for
shareholder value and, in addition, questioned whether in light
of that projected performance, it truly made sense for the
Company to remain independent. The board authorized management
to proceed with its plan to continue exploring strategic merger
and acquisition opportunities and began reviewing additional
specific strategic alternatives to deliver shareholder value.
The board asked management to prepare an overview of certain
strategic opportunities for the boards review. The board
specifically directed management to evaluate, from a shareholder
perspective, the alternative of the Companys remaining
independent in comparison with the alternative of linking up
with a strategic partner. The meeting concluded with an
executive session from which management was excluded.
On April 21, 2011, the Companys Chief Executive
Officer and Chief Financial Officer attended their regular
annual meeting with the analysts who were principally
responsible for dealing with the Company on behalf of
A.M. Best Company. The analysts informed the Companys
management that they believed it was most likely that the A-
rating of Penn Millers Insurance Company (PMIC), the
Companys principal insurance subsidiary, be affirmed but
that a negative outlook would be assigned. The
analysts made it clear that their concerns rested with the
Companys historical profitability relative to a peer group
comprised of many larger insurance companies. They agreed that
many of the challenges were due to the small size of the Company.
On April 29, 2011, the Lion Fund, L.P., Biglari Capital
Corp., Biglari Holdings, Inc. and Sardar Biglari (collectively,
the Biglari interests) filed a Schedule 13D
with the Securities and Exchange Commission disclosing the
purchase of 416,598 shares of Company common stock,
representing approximately an 8% ownership position. The
Schedule 13D indicated that the Biglari interests intended
to evaluate their investment and might communicate with
management and the board regarding the Companys business
and future plans as well as acquire or dispose of additional
shares. Management reviewed publicly available information about
the Biglari interests and observed a track record that had
included making at least one hostile offer for corporate control
of a company at a price only marginally above market. In the
first week of May 2011, the board held a telephone conference to
discuss this investment and its implications to the Company and
its consideration of strategic alternatives. The board took note
of the fact that no representative of the Biglari interests had
made any effort to contact the Company. In the totality of the
circumstances, the judgment of the board was that the actual and
potential activities of the Biglari interests, in themselves,
represented a serious threat to the best interests of other
shareholders, and therefore added urgency to the internal
evaluation of strategic alternatives.
On May 6, 2011, the Companys board held a telephonic
meeting, attended by a representative of the law firm Ballard
Spahr LLP (Ballard). With particular concern about
the position taken by A.M. Best, and also taking into
account the actions of the Biglari interests, the board of
directors discussed whether or not to engage Ballard as special
counsel to the Companys independent directors to assist
and advise with respect to the assessment of the Companys
strategic alternatives.
On May 9, 2011, the board held a special telephonic
meeting, attended by the Companys Chief Financial Officer
and a representative of Ballard. During that meeting, the
independent directors asked for details about Ballards
expertise and experience in advising boards of directors on
strategic alternative reviews and posed questions calling for
legal advice and discussion of legal issues. Following the
initial portion of the meeting,
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management provided a presentation to the board on strategic
planning, the industrys environment and financial
projections under alternative business scenarios. The board of
directors also decided to retain Ballard as special counsel to
the independent directors and to begin seeking a financial
advisor. Ballard represents and counsels ACE in certain
financial guarantee bond litigation, none of which is related to
the Merger, for which Ballard receives customary fees and
appropriate conflict waivers were obtained. None of the lawyers
who provide such services to ACE were involved in representing
the board of directors and the special committee in connection
with the Merger. The independent directors considered a number
of financial advisors and decided to interview two firms in
person as candidates.
On May 10, 2011, the board held a meeting at the
Companys headquarters in Wilkes-Barre, Pennsylvania,
attended by the Companys Chief Financial Officer and a
representative of Ballard. During that meeting, the board
interviewed a financial advisor candidate. The board also
discussed, among other matters, Biglaris stock ownership
position in the Company, the Companys A.M. Best
rating and long-range strategic alternatives. The meeting
concluded with an executive session from which management was
excluded.
The following day, on May 11, 2011, the board reconvened at
the Companys headquarters with the Companys Chief
Financial Officer and representatives of Ballard. The board also
interviewed Willis Capital Markets & Advisory to act
as financial advisor. At this meeting, the board also authorized
the formation of a Special Committee, consisting entirely of
independent directors, to oversee the consideration of strategic
alternatives.
By mid-May 2011, the board of directors had completed
interviewing financial advisors for the independent directors on
the review of strategic alternatives, and the independent
directors retained Willis Capital Markets & Advisory
in addition to Ballard. The board also appointed a special
committee of independent directors (the Special
Committee), consisting of Heather M. Acker, F. Kenneth
Ackerman, Jr., Dorrance Belin, John M. Coleman and Donald
A. Pizer, chaired by Mr. Coleman, to work with the
advisors. The meeting concluded with an executive session from
which management was excluded.
On May 19, 2011, the Special Committee held its first
meeting, attended by the Companys Chief Executive Officer
and representatives of both Ballard and Willis Capital
Markets & Advisory. The Special Committee discussed
the A.M. Best analysts indication that they believed
that PMICs A- rating would most likely be assigned a
negative outlook, the impact that would result from a negative
outlook, and the risk and likely consequences of a downgrade,
including destruction of shareholder value.
On May 21, 2011, the Special Committee held another
telephonic meeting, attended by the Companys Chief
Executive Officer and a representative of Ballard. The
Companys Chief Executive Officer described
managements recent contacts with A.M. Best. He also
reported to the Special Committee on Willis Capital
Markets & Advisorys progress in considering
strategic alternatives and developing a list of potential
buyers; 27 companies were on an initial list.
On May 23, 2011, the board held a telephonic meeting,
attended by representatives of Ballard, to discuss the Special
Committees recent activities and the charter of the
Special Committee, which contained the duties and
responsibilities of the Special Committee. The board discussed
the initial list of potential buyers that could be contacted in
the event the board determined to commence a third-party
solicitation process. The board authorized management to
disclose to A.M. Best, under assurances of confidentiality,
the nature and status of the ongoing strategic review.
On May 23, 2011, management provided representatives of
A.M. Best with additional confidential information on the
Companys business plan, price increases obtained in the
commercial book of business year to date and updated financial
projections through 2013. Management also disclosed, in
confidence, the strategic alternative review process and the
likelihood that the Company would be sold to a larger
organization with an interest in our specialty expertise in
agribusiness. On the basis of that information, management
requested that A.M. Best affirm the Companys A-
rating with a stable outlook.
On May 27, 2011, the Special Committee held a telephonic
meeting, attended by the Companys Chief Executive Officer
and representatives of Ballard and Willis Capital
Markets & Advisory. The Companys Chief Executive
Officer reported that A.M. Bests committee intended
to consider PMICs rating on either June 2 or
21
June 3. The Special Committee again reviewed the decision
to pursue strategic alternatives. The board also reviewed with
management and Willis Capital Markets & Advisory a
list of 30 potential buyers that could be contacted in
connection with the Companys third-party solicitation
process.
On May 27, 2011, the board also held a meeting where it
learned that, with knowledge of the ongoing review of strategic
alternatives and serious consideration of a sale of the Company,
A.M. Best affirmed the A- rating with a stable
outlook for PMIC. While the Company has a very strong
capital position to support the A- rating, in the judgment of
the board the fact that A.M. Best had been informed of the
pending review of strategic alternatives and that there was a
substantial likelihood that the Company would be sold to a
financially stronger buyer had been material in
A.M. Bests decision to maintain the stable outlook.
In light of that, the board again discussed with management and
Willis Capital Markets & Advisory the process for
compiling a list of potential parties to contact, which included
30 potential buyers. The board suggested some additional
candidates for consideration and also discussed the timeline for
a potential sale process.
Also in May 2011, the board received a monthly report indicating
that the Companys revenues were estimated to be below
managements business plan. In addition, the Company
experienced heavy catastrophic losses in that month.
On June 2, 2011, the Special Committee held a telephonic
meeting, attended by the Companys Chief Executive Officer
and representatives of Ballard and Willis Capital
Markets & Advisory. The Companys Chief Executive
Officer reported on A.M. Bests May 31, 2011
press release, which reaffirmed PMICs A- rating with a
stable outlook. The Special Committee discussed the continuing
risk of a negative outlook or downgrade, concluding
that the risk was substantial, and also further discussed
strategic alternatives.
On June 3, 2011, the board held a telephonic meeting,
attended by representatives of Ballard and Willis Capital
Markets & Advisory, to discuss A.M. Bests
rating action and the ongoing review of strategic alternatives.
On June 8, 2011, the board held a meeting at the
Companys headquarters, attended by the Companys
Chief Financial Officer and representatives of Ballard and
Willis Capital Markets & Advisory. Willis Capital
Markets & Advisory discussed with the board certain
strategic alternatives available to the Company. The board
discussed and evaluated (i) the status quo
alternative of remaining independent and its impact on
shareholder value, (ii) options other than remaining
independent or selling the Company, such as restructuring the
Company or selling a minority interest in the Company,
(iii) what price levels would make it attractive to sell
the Company; and (iv) whether to authorize Willis Capital
Markets & Advisory to begin contacting potential
buyers to determine what value might be realized for the
Companys shareholders in a potential strategic
transaction. Management and Willis Capital Markets &
Advisory suggested that the board consider pursuing a sale of
the Company, assuming an acceptable price per share could be
realized. The boards Compensation Committee also met to
discuss the financial impact resulting from a possible change of
control on compensation of officers, employees and directors.
After discussion, the board authorized Willis Capital
Markets & Advisory to contact third parties to gauge
their interest in an acquisition of the Company. The meeting
concluded with an executive session from which management was
excluded.
On June 17, 2011, the Special Committee held a telephonic
meeting, attended by the Companys Chief Executive Officer
and representatives of Ballard and Willis Capital
Markets & Advisory. Willis Capital Markets &
Advisory informed the Special Committee that, in accordance with
the directives of the board, 49 potential buyers had been
contacted, five nondisclosure agreements (NDAs) had
been signed, five other companies were negotiating NDAs and it
was waiting to hear from 22 of the potential buyers. In
accordance with the directives of the board, Willis Capital
Markets & Advisory planned to distribute a
confidential information memoranda on behalf of the Company
describing the Companys business and prospects to the
potential buyers that had signed NDAs. Willis Capital
Markets & Advisory advised the board that the list of
potential buyers consisted of both strategic and financial
buyers.
On June 28, 2011, the Special Committee held a telephonic
meeting, attended by the Companys Chief Executive Officer
and representatives of Ballard and Willis Capital
Markets & Advisory. Willis Capital Markets &
Advisory informed the Special Committee that 19 NDAs had been
signed by potential buyers.
22
Willis Capital Markets & Advisory also reviewed with
the Special Committee a draft of the bid instruction letter for
the potentially interested parties. The bid letter included a
request that initial indications of interest be submitted by
July 19, 2011, after which the board would decide which
potential buyers to invite to participate in the second round.
On July 1, 2011, the Special Committee held a telephonic
meeting, attended by the Companys Chief Executive Officer
and representatives of Ballard and Willis Capital
Markets & Advisory. Willis Capital Markets &
Advisory reviewed with the Special Committee the potential
buyers that had been contacted and the Special Committee
discussed each of the potential partners, which included
strategic and financial buyers.
On July 21, 2011, the Special Committee held a telephonic
meeting, attended by the Companys Chief Executive Office
and representatives of Ballard and Willis Capital
Markets & Advisory. Willis Capital Markets &
Advisory informed the Special Committee that the list of
potential partners had been expanded to 56, of which 27 received
a Confidential Information Memorandum. On behalf of the Company,
Willis Capital Markets & Advisory received six initial
indications of interest by the July 19, 2011 deadline, with
valuations ranging from $15.95 to $22 per share. The Special
Committee discussed these valuations and reviewed significant
geopolitical and industry developments since May 11, 2011,
when the Special Committee and Willis Capital
Markets & Advisory had initially discussed a possible
sale, and also reviewed certain of the challenges that the
Company faced before Biglari began acquiring its stake in the
Company, such as the risk of a negative outlook
and/or
downgrade in the Companys A.M. Best rating, the lack
of fundamental improvement in the market faced by the industry
and that the Companys second quarter catastrophic losses
have been significant. This discussion reaffirmed the Special
Committees conclusion that pursuing a sale appeared to be
the best alternative to prevent destruction of shareholder value
and serve the best interests of the Company and its
shareholders. The Special Committee also reviewed each of the
six potential buyers who had progressed to this stage and their
respective indications of interest, and decided, after
consultation with Willis Capital Markets & Advisory,
to invite five bidders to participate in the second round. In
addition, Willis Capital Markets & Advisory informed
the Special Committee that another potential buyer had indicated
an interest in acquiring the Company and signed the necessary
agreement to obtain a Confidential Information Memorandum. The
meeting concluded with an executive session from which
management was excluded.
On July 25, 2011, the board held a meeting at the
Companys headquarters in Wilkes-Barre, Pennsylvania,
attended by the Companys Chief Financial Officer and
representatives of Ballard and Willis Capital
Markets & Advisory. Willis Capital Markets &
Advisory presented an outline of the sale process and the six
preliminary indications of interest that had been received by
the July 19, 2011 deadline. The board extensively discussed
each of the six potential buyers who had provided formal
preliminary indications of interest as well as the additional
company that had indicated an interest in acquiring the Company.
The board also discussed a potential third- party solicitation
process timeline, which included sending a draft of the merger
agreement to five of the potential buyers the following week and
management meetings with parties invited to the second round.
The meeting concluded with an executive session from which
management was excluded.
On July 30, 2011, the Special Committee held a telephonic
meeting, attended by the Companys Chief Executive Officer
and representatives of both Willis Capital Markets &
Advisory and Ballard. The purpose of the meeting was to discuss
managements meetings with the potential buyers and to
discuss managements presentations to potential buyers,
which were scheduled to occur between August 2, 2011 and
August 11, 2011.
On August 5, 2011, the Special Committee held a telephonic
meeting, attended by the Companys Chief Executive Officer
and representatives of Willis Capital Markets &
Advisory and Ballard. At that meeting, the Special Committee
discussed managements presentations to potential buyers to
date and also set August 25, 2011 as the final bid
deadline. In addition, the Special Committee authorized
circulation of a draft merger agreement to all potential buyers.
The meeting concluded with an executive session from which
management was excluded.
On August 10, 2011, the Special Committee met by telephone.
The meeting was also, attended by the Companys Chief
Executive officer as well as representatives of both Willis
Capital Markets & Advisory and Ballard. Among other
topics, the Special Committee discussed the remaining potential
buyers. Willis Capital
23
Markets & Advisory suggested that the Company consider
issuing a public statement, in light of recent geopolitical
events and associated extreme volatility in the securities
markets and taking into account that although a public
announcement would be likely to generate uncertainty among
employees and other constituents, by this advanced point in the
process it appeared reasonably likely that the Company would be
able to minimize those disruptions. Management added that
although there did not appear to have been any leaks so far, the
increasing frequency of meetings by management with prospective
buyers might increase speculation and rumors in the community
and it would be desirable to take steps to prevent the
possibility of speculative trading in the Companys stock
based upon information not equally available to all
shareholders. A press release at this point would also alert any
third party that might have an interest in the Company and could
thereby serve as yet another cross-check on the completeness of
the process of shopping the Company. The Special Committee
approved recommending to the board of directors the text of a
proposed public statement disclosing the process of reviewing
potential strategic opportunities.
On August 10, 2011, the board held a telephonic meeting
with representatives of Ballard and Willis Capital
Markets & Advisory. Among other things, the board
approved a public statement disclosing the process of reviewing
potential strategic opportunities. The meeting concluded with an
executive session from which management was excluded.
On August 12, 2011, the Company reported its second quarter
results ended June 30, 2011. The Company was adversely
impacted by unprecedented catastrophe losses in the second
quarter of 2011 that accounted for approximately 40 loss ratio
points of its 101.1% second quarter loss ratio. For the three
months ended June 30, 2011, PMIC reported a net loss of
$4.4 million. For the six months ended June 30, 2011,
PMIC reported a net loss of $2.5 million.
On August 15, 2011, a press release describing the
strategic alternatives review was released.
On August 17, 2011, the Special Committee held a telephonic
meeting, attended by the Companys Chief Executive Officer
and representatives of Ballard and Willis Capital
Markets & Advisory. The Special Committee discussed
Willis Capital Markets & Advisorys contacts with
the remaining four potential buyers and received updates on each
of those candidates (prior to this meeting, two potential buyers
indicated that they were no longer interested in acquiring the
Company). Management also reported on contacts with
A.M. Best and the Pennsylvania Department of Insurance,
which preceded the August 15, 2011 press release. The
meeting concluded with an executive session from which
management was excluded.
On August 19, 2011, the Special Committee held a telephonic
meeting, attended by the Companys Chief Executive Officer
and representatives of Willis Capital Markets &
Advisory and Ballard. The Companys Chief Executive Officer
and Willis Capital Markets & Advisory informed the
Special Committee that management presentations for all four of
the current potential buyers had been completed and some of the
potential buyers were conducting a due diligence review of the
Company. The meeting concluded with an executive session from
which management was excluded.
On August 20, 2011, the Special Committee held a telephonic
meeting with the Companys Chief Executive Officer and
representatives of both Willis Capital Markets &
Advisory and Ballard to discuss the current potential buyers as
well as to consider again whether the Company should remain
independent. Management presented a plan for remaining
independent, which called for significant restructuring and
expense reductions with significant staff reductions. After
discussing managements presentation, the Special Committee
concluded that the proposed plan would not provide significant
meaningful value and, on the contrary, could put shareholder
value materially at risk. The meeting concluded with an
executive session from which management was excluded.
On August 24, 2011, the Special Committee held a telephonic
meeting with the Companys Chief Executive Officer and
representatives of Ballard and Willis Capital
Markets & Advisory. The Special Committee discussed
each of the potential buyers. The Special Committee also
discussed the Companys exposure to the then-approaching
Hurricane Irene, which could negatively affect third quarter
earnings and, potentially, the value of the bids. The Special
Committee also discussed alternatives to a strategic
transaction, which would involve remaining independent with
significant restructuring and expense and employee
24
reductions if a satisfactory strategic transaction opportunity
did not occur. The meeting concluded with an executive session
from which management was excluded.
On August 25, 2011, ACE provided a cash offer of $20.00 per
share. The next day, on August 26, 2011, Bidder B
provided a cash offer in the range of $18.50-$19.00 per share,
subject to completion of the bidders review of the
Companys reserves. On August 26, 2011, the Special
Committee met by telephone to discuss the current bids and the
advantages and disadvantages of pursuing a strategic opportunity
with ACE or Bidder B. The Special Committee also discussed
the possibility of a substantial change to the Companys
book value as a result of recent storm activity. The meeting
concluded with an executive session from which management was
excluded.
On August 26, 2011, Bidder C provided a cash offer of
$20.75 per share, subject to an additional
30-day
due
diligence period. The next day, on August 27, 2011, the
Special Committee held a telephonic meeting with the
Companys Chief Executive Officer and representatives of
Willis Capital Markets & Advisory and Ballard to
discuss the bids that had been delivered by ACE, Bidder B
and Bidder C. Willis Capital Markets & Advisory
advised the Special Committee that the total package of the
offer presented by ACE could be superior to the other two offers
if ACE could be persuaded to move above its $20.00 offer. The
offer by Bidder B was significantly lower than the ACE
offer and Willis Capital Markets & Advisory explained
to the Special Committee why it was judged unlikely that
Bidder B would revise its bid to offer more value to our
shareholders than ACEs bid. Those reasons included the
fact that Bidder Bs current proposal to acquire the
Company would have provided less value to shareholders than its
initial indication of interest and statements made by the
leadership of Bidder B to management and Willis Capital
Markets & Advisory in meetings and telephone calls
during the Companys review of strategic alternatives. In
those statements, Bidder Bs chief executive officer
and the chief of Bidder Bs relevant business unit
emphasized Bidder Bs unwillingness to pay more than
book value for the Company. Willis Capital Markets &
Advisory advised the Special Committee that while the offer from
Bidder C was the highest from a financial point of view,
Bidder C had not completed due diligence regarding
underwriting, claims, finance and human resources; the bid
itself was conditioned upon a much longer period of additional
due diligence than would be required for ACE; and the proposal
by Bidder C carried with it additional uncertainties and
risks, including the fact that Bidder C has only an A-
rating from A.M. Best (in contrast with a strong A+ rating
of ACE); Bidder Cs relatively high debt leverage and
its need to borrow funds externally to consummate a transaction
with the Company (in contrast to ACEs ability to fund the
transaction); and the relatively high likelihood that the
financial performance of the Company in the third quarter could
result in a reduction in the offer price. In totality, these
uncertainties and risks presented a risk of a reduction in the
offer price and/or failed execution that the Special Committee
judged to be materially greater than those associated with the
ACE bid. The meeting concluded with an executive session from
which management was excluded.
On August 29, 2011, the board met along with
representatives of both the Companys management, Ballard
and Willis Capital Markets & Advisory, to discuss the
Companys strategic challenges and alternatives, such as
remaining independent or a potential sale, as well as the
advantages and disadvantages of each of the bids that had been
offered by ACE and Bidders B and C. The board also discussed
Hurricane Irenes impact on the Company and the number of
claims that had been made so far. Willis Capital
Markets & Advisory presented a report that discussed
all potentially interested buyers to the board. The meeting
concluded with an executive session from which management was
excluded.
Based on the range of the bids received, Willis Capital
Markets & Advisory suggested that ACE increase its
offer to $21.00 per share and ACE agreed to do so, which
represented a 30% premium to the current price of the
Companys common stock. Willis Capital Markets &
Advisory then recommended that the board negotiate with ACE in
order to determine if a deal could be consummated on terms
agreeable to both parties. Willis Capital Markets &
Advisory reported that ACE had a compelling rationale for
pursuing a strategic relationship with the Company, ACE had
completed far more due diligence than either Bidder B or
Bidder C and remained enthusiastic and committed to the
potential transaction, ACE had a large market capitalization,
and ACE did not need any external financing to complete the
transaction. In addition, ACEs agribusiness was
complementary to the Companys operations and vice versa
and a partnership with ACE could potentially grow the
Companys franchises. Moreover, ACE anticipated maintaining
the Companys Wilkes-Barre location. As part of its bid,
ACE requested that the Company negotiate with ACE on an
exclusive basis for four weeks.
25
Willis Capital Markets & Advisory recommended sharply
curtailing that period and the Company indicated that it would
consider entering into an exclusivity agreement with ACE through
September 6, 2011. The board also instructed Ballard to
discuss and attempt to negotiate the exclusivity agreement and
the Agreement with ACEs counsel and instructed all
advisors and management to continue communicating with ACE
regarding due diligence matters. ACE subsequently agreed to
increase its proposed purchase price to $21.00 per share, which
represented a 30% premium to the current price of the
Companys common stock. On August 29, 2011, the
Company entered into an exclusivity agreement with ACE, which
expired on September 6, 2011. During the period from
August 29, 2011 through September 6, 2011, ACE
continued to conduct due diligence on the Company and the
Company provided ACE with certain due diligence materials
requested by ACE, including updated financial projections for
the Companys 2011 fiscal year.
On September 1, 2011, the board held a meeting at the
Companys headquarters in Wilkes-Barre, Pennsylvania.
Representatives of Willis Capital Markets & Advisory
and Ballard were in attendance. Among other things, the board
discussed the recent interactions with Bidders B and C. The
board was informed that Bidder B had contacted Willis
Capital Markets & Advisory and expressed
disappointment, but that Bidder B did not provide a higher
offer. The board also was informed that Bidder C still
required additional time to complete its review of the Company,
and the board again discussed the execution risks associated
with Bidder Cs proposal. Willis Capital
Markets & Advisory also informed the board that ACE
had indicated that it remained enthusiastic about pursuing a
strategic opportunity with the Company and the board further
discussed the benefits of a partnership with ACE. The board also
discussed the timeline for announcing a transaction. In
addition, the board discussed the second quarter financial
results, including the Companys losses as a result of
storm activity, including those relating to Hurricane Irene. The
meeting concluded with an executive session from which
management was excluded.
On September 4, 2011, the Special Committee held a
telephonic meeting with representatives of Ballard and Willis
Capital Markets & Advisory to discuss the status of
negotiations with ACE and due diligence efforts, among other
issues.
On September 4 and 5, 2011, Willis Capital Markets &
Advisory had several conversations with representatives of ACE
during which ACEs representatives reported that ACE
intended to reduce the value of its $21.00 offer because of
losses incurred from Hurricane Irene, unaccrued costs associated
with settling the Companys pension obligation, and
additional Company expenses incurred as a result of the proposed
transaction.
On September 5, 2011, the board held a telephonic meeting,
attended by representatives of Willis Capital
Markets & Advisory and Ballard. Willis Capital
Markets & Advisory updated the board on the ACE price
developments. The board asked Willis Capital Markets &
Advisory to respond to ACEs recent request to reduce the
price and to indicate that the request is unacceptable to the
board. The meeting concluded with an executive session from
which management was excluded. Following such meeting,
representatives of Willis Capital Markets & Advisory
contacted representatives of ACE to express the boards
views.
On September 6, 2011, a representative of ACE contacted
Willis Capital Markets & Advisory, indicating that ACE
would deliver a revised offer letter to Willis Capital
Markets & Advisory on behalf of the Company later in
the day. Later that day, the board held a meeting with
representatives of Willis Capital Markets & Advisory
and Ballard to discuss updates and strategies regarding
negotiations with ACE. During such meeting, Willis Capital
Markets & Advisory received a letter from ACE
proposing an offer of $20.45 per share, expiring the next day.
The meeting concluded with an executive session from which
management was excluded. The Special Committee met later that
day to further discuss ACEs revised offer. Following the
meeting, the Special Committee requested that Willis Capital
Markets & Advisory advise ACE that the board would be
prepared to enter into a definitive agreement with ACE at $20.75
per share. In accordance with the Special Committees
directives, Willis Capital Markets & Advisory relayed
the information to ACE.
Later on September 6, 2011, the board held another
telephone meeting with representatives of Willis Capital
Markets & Advisory and Ballard. It was communicated to
the board that representatives of Willis Capital
Markets & Advisory would indicate to ACE that the
board would be prepared to enter into a definitive
26
agreement with ACE at $20.75 per share, which Willis Capital
Markets & Advisory conveyed following such meeting.
The meeting concluded with an executive session from which
management was excluded.
On September 7, 2011, a representative of ACE contacted
representatives of Willis Capital Markets & Advisory
with ACEs last and final offer of $20.50 per share with
expiration the same day.
Later on September 7, 2011, the Special Committee met to
discuss ACEs final offer of $20.50 per share. The Special
Committee consulted Willis Capital Markets & Advisory
and Ballard and discussed the possibility of rejecting the final
offer and reopening negotiations with other bidders. The Special
Committee determined that the likelihood of obtaining a better
offer from another bidder was insufficient to justify subjecting
shareholders and other constituents to the risks attendant to
rejecting ACEs proposal and unanimously decided to
recommend accepting ACEs final offer.
Later the same day, the board held a meeting, attended by
representatives of management, Ballard and Willis Capital
Markets & Advisory. At this meeting, Ballard reviewed
with the board the terms of the merger agreement as well as the
fiduciary obligations of the board in connection with a
potential sale of the Company. The board also reviewed the
third-party solicitation process conducted by the Company in
which a total of 56 potential buyers were contacted, 27 NDAs
were signed and seven initial indications of interest and three
final proposals were received. Also at this meeting, Willis
Capital Markets & Advisory reviewed with the board of
directors its financial analysis of $20.50 per share cash
consideration and rendered to the board of directors its oral
opinion, confirmed by delivery of a written opinion dated
September 7, 2011, to the effect that, as of that date and
based upon and subject to the factors, qualifications,
limitations and assumptions stated in the written opinion, the
$20.50 per share cash consideration to be received in the merger
by holders of the Companys common stock was fair, from a
financial point of view, to such holders. Willis Capital
Markets & Advisory explained in detail the reasons for
its opinion. After discussion, the board determined that
accepting ACEs offer and pursuing the proposed transaction
with ACE was in the best interests of the Company and the
Companys shareholders. The meeting concluded with an
executive session from which management was excluded.
On the evening of September 7, 2011, the Company, ACE and
Merger Sub executed the merger agreement and, on
September 8, 2011, the Company announced that it had
entered into a merger agreement with ACE. The following day, on
September 9, 2011, A.M. Best announced that it had
placed under review with positive implications the financial
strength rating of A- and issuer credit ratings of
A− of Penn Millers Insurance Group, which
includes Penn Millers.
Reasons
for the Merger and Recommendation of Penn Millers Board of
Directors
The
Companys Reasons for the Merger
In a meeting held on September 7, 2011, the Companys
board of directors considered the terms of the Merger Agreement
and the transactions contemplated and determined them to be in
the best interests of the Company and its shareholders. Having
considered, among other things, the professional advice of its
expert independent advisors, the board of directors believes
that the Merger will maximize value and minimize risks for the
Companys shareholders, that it is in the best interests of
the Company and its shareholders, and that it is a more
attractive option for the Companys shareholders than any
other reasonably available option, including continuing to
operate the Company on an independent, stand-alone basis. In
evaluating the Merger, the Companys board of directors
consulted with management, as well as independent legal and
financial advisors, regularly met with the independent
directors advisors in sessions that excluded all members
of management, and considered the totality of the circumstances,
including the following:
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The Companys Business and Prospects.
The
board of directors considered, on a historical and prospective
basis, the Companys business, financial condition, results
of operations and book value, including trends in the insurance
industry, underwriting performance, and return on equity. The
board of directors also considered the market price, trading
float, and volatility of the Companys common
stock. The board of directors considered all of these factors in
light of what it judged to be a high likelihood of destruction
of shareholder value if A.M. Best were to downgrade or
impose a negative
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outlook on the Company because of its small size, an event
as to which the board believed there was substantial near-term
risk.
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The Challenges Facing the Company in Achieving the Goals of
its Business Plans.
The board of directors
considered the fact that management had not achieved the goals
it had set for itself in its business plans for two of the
preceding three years. The board acknowledged that portions of
those shortfalls had been the results of factors beyond
managements control including the extended
recession in the United States, aggressive pricing by
competitors, and elevated catastrophic losses but
decided, based on the totality of managements track
record, that it was important to discount managements
projections for execution risk.
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The Challenges Facing the Company as a Smaller Independent
Company.
The board of directors also considered
the risks and benefits associated with the Companys
efforts and plans to conduct its business as an independent,
stand-alone company as compared to the risks and benefits
associated with the Merger. The board considered that in
operating as a relatively small, stand-alone public company, the
Company faces high cost ratios (including, for example,
relatively high costs of reinsurance and the costs of operating
as a public company), impaired net profits, and continuing, and
sometimes conflicting, pressures from customers, agents,
competitors, regulatory agencies, financial analysts and
independent rating agencies. The Companys market
capitalization is among the lowest of its peer group and in the
judgment of the board of directors, but for the possibility that
the Company is sold in the near term, its stock would return to
trading at a substantial discount to peer companies. The
Companys lack of scale and relatively high cost structure
limit the Companys ability to weather market downturns or
to grow significantly without engaging in a merger or
acquisition transaction. The Company expects that this merger
will enable its shareholders not only to realize a significant
premium that is not likely to be achieved within a reasonable
period of time as a stand-alone company, but also to avoid
considerable near-term risks of destruction of shareholder value.
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The Impact of Difficult Economic
Conditions.
The independent directors considered
the Companys prospects as an independent public company in
light of current difficult economic conditions in the United
States. The board of directors considered that economic
conditions, among other factors, have resulted in declines and
losses in the insurance industry and that the longstanding
so-called soft market may continue, which would
impede the Companys growth. The board of directors
concluded that there were significant risks associated with
deferring the decision to sell the Company, particularly in
light of the current outlook for the economy and its impact on
the market price of the Companys common stock if the
possibility of prompt sale of the Company were taken off the
table. In particular, the board considered the current volatile
state of the economy and general uncertainty surrounding
forecasted economic conditions, in the short-term and in the
long-term, both globally and within the insurance industry.
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The Thorough, Disciplined Process Followed in Evaluating
Strategic Alternatives and Shopping the Company and the Low
Likelihood that a Third Party Would Propose an Acquisition at a
Higher Price.
The board of directors oversaw a
meticulously designed process of reviewing strategic
alternatives advised by individuals from Willis Capital
Markets & Advisory and Ballard each of whom was a
highly experienced and respected specialist in mergers and
acquisitions, including transactions in the insurance industry,
and a management team with considerable experience and expertise
in the industry. The board of directors considered the
third-party solicitation process conducted by the Company with
the assistance of management and advisors, which included
contacting more than 50 potential buyers over a period of months
and publicly announcing the existence of the process weeks
before it was brought to a conclusion. The board of directors,
which itself includes individuals with pertinent knowledge and
experience, repeatedly took time to discuss which third parties
would most likely be both interested in acquiring the Company
and qualified to do so from a financial, strategic, and
knowledge standpoint, including parties that had made
non-binding acquisition proposals to the Company, and ultimately
concluded that the likelihood that any of those third parties
would make an all-cash offer on better terms than those offered
and agreed to by ACE and with lower execution risk than the ACE
proposal was remote. The board took into account that although a
significant number of prospective financial
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buyers (i.e., private equity firms and other entities that
currently have no insurance assets that would offer synergies to
increase available value) were contacted and some received the
Companys confidential information memoranda, no financial
buyers were invited to the second round of the process given
their less competitive bids. The board also took into account
that no credible partner candidate emerged over the period of
more than three weeks that elapsed between the public
announcement of the process and the boards consideration
of the transaction with ACE. Nor has any such candidate
materialized to date. The board frequently solicited the advice
of both Willis Capital Markets & Advisory and Ballard
on the fairness and adequacy of the process being followed. The
board was advised by both Willis Capital Markets &
Advisory and Ballard at every stage, including during
consideration of ACEs final offer, that the process that
the board had followed had been thorough and disciplined.
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The Ability of the Board of Directors to Change its
Recommendation and Terminate the Merger Agreement and that the
Break-Up
Fee and Other Deal Protection Measures Were Not
Preclusive.
The board of directors considered the
fact that the merger agreement allows the Company to respond to
unsolicited takeover proposals, to change or withdraw its
recommendation to the Companys shareholders with respect
to the adoption of the Merger Agreement and to terminate the
Merger Agreement to enter into an alternative agreement relating
to a superior proposal, subject, in certain situations, to the
payment to ACE of a 3.5% ($3.75 million)
break-up
termination fee. The board considered the provisions in the
Merger Agreement, including the non-solicitation provision, and
determined in its reasonable judgment that such provisions would
not preclude other interested third parties from submitting a
competing offer for the Company. In particular, the board of
directors considered the size of the
break-up
fee and determined that, at 3.5% of the aggregate value of the
transaction, it was reasonable in light of the benefits of the
Merger and would not, in the boards reasonable judgment,
preclude other interested third parties from making a competing
offer for the Company.
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The High Likelihood that the Transaction with ACE will be
Completed.
The board of directors considered
ACEs particularly strong financial condition, the
extensive amount of due diligence performed by ACE and the
relatively limited conditions to the closing of the Merger,
including the facts that the Merger Agreement does not contain
any financing contingency and that the ACE proposal will be
funded with internally generated cash, and determined that, in
its judgment and assuming adoption of the Merger Agreement by
the Companys shareholders, there is a high likelihood that
the proposed transaction with ACE will be completed.
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Shareholder Approval.
The board of directors
considered the fact that the merger is subject to the approval
of the Companys shareholders, who therefore have the
option to reject the merger by voting against the proposal to
adopt the Merger Agreement, as further described in this proxy
statement. The board also took into account that a large
majority of the Companys stock is owned by institutional
and other highly sophisticated investors, many of whom acquired
their shares in the initial public offering.
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The Reputation and Business Practices of
ACE.
The board of directors recognized that
relative to other potential purchasers of the Company, ACE has a
corporate culture and business practices highly compatible with
those of the Company, which will make a successful merger and
business transaction more likely. Moreover, the board of
directors recognized that ACEs existing agribusiness
insurance operation is complementary to the Companys
operations, and vice versa, and a partnership with ACE could
potentially grow the Companys franchises.
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ACEs Intentions for the Operations of the
Company.
Prior to approving the Merger Agreement,
ACE communicated its intention to keep the Companys
Wilkes-Barre business location operational.
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The Terms of the Merger Agreement.
The board
of directors considered all of the terms and conditions of the
Merger Agreement, including, among other things, the
representations, warranties, covenants and agreements of the
parties, the conditions to closing, the form of the Merger
Consideration and the structure of the termination rights, and
the fact that the Merger Agreement was negotiated between two
parties in an arms-length negotiation.
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29
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The Opinion and Professional Advice of Willis Capital
Markets & Advisory.
The board of
directors considered the opinion, dated September 7, 2011,
of Willis Capital Markets & Advisory, contained in
Annex B
to this proxy statement, to the
Companys board of directors, as well as the advice given
to the board by Willis Capital Markets & Advisory
throughout the process and in the September 7 meeting.
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The Professional Advice of Both Ballard and Willis Capital
Markets & Advisory Regarding the Design and Execution
of the Process.
The board of directors considered
the advice given to the board by Ballard and Willis Capital
Markets & Advisory at every stage of the process
regarding the design and execution of the process of review of
strategic alternatives. Those firms repeatedly advised the board
that the process followed had been thorough and rigorous.
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The board of directors also considered a variety of risks and
other potentially negative factors concerning the Merger and the
Merger Agreement, including the following:
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The risks and costs to the Company if the Merger does not close,
including the diversion of management and employee attention and
the effect on business and customer relationships;
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The fact that certain of the Companys officers and
directors may have interests in the Merger that are different
from, or in addition to, the interests of the Companys
shareholders, weighed against the facts that each of the
Companys independent directors beneficially owns
significantly more shares resulting from the investment of his
or her own funds than from awards by the Company, and that all
independent directors cease to receive director compensation or
benefits of any kind upon closing of the Merger;
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The amount of time it could take to complete the Merger,
including the fact that the consummation of the Merger is
subject to shareholder, governmental and regulatory approvals
and the lack of assurance that such approvals will be received
prior to December 31, 2011 (as such date may be extended)
or at all;
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That an all-cash transaction will be taxable to the
Companys shareholders that are U.S. persons for
U.S. federal income tax purposes; and
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The fact that a termination fee is payable to ACE under
specified circumstances, including in the event that the board
of directors decides to terminate the Merger Agreement to accept
a superior proposal.
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Recommendation
of Penn Millers Board of Directors
The board of directors unanimously recommends that you vote
FOR the adoption of the Merger Agreement,
FOR the approval of the nonbinding advisory proposal
regarding golden parachute compensation and
FOR approval of the proposal to adjourn the Special
Meeting, if necessary or appropriate, to solicit additional
proxies.
In considering the board of directors recommendation with
respect to the Merger Agreement, the holders of our common stock
should note that our executive officers may have interests in
the Merger that may differ from or be in addition to those of
our shareholders, and that members of the board of directors
received fees for their services in attending special board and
committee meetings to periodically review and oversee the
progress of the negotiations of the Merger Agreement by
management. Our independent directors also received grants of
stock options as a portion of the compensation for their service
on the board of directors. The board of directors was aware of
these potential interests as they considered the Merger and the
Merger Agreement. For more information, see
The
Merger Interests of Our Executive Officers and
Directors in the Merger
beginning on
page .
Opinion
of the Financial Advisor to the Independent Directors
The Company engaged Willis Capital Markets & Advisory
to act as the special committees financial advisor in
connection with a possible sale transaction. At a meeting of the
Companys board of directors held on September 7, 2011
to evaluate the Merger, Willis Capital Markets &
Advisory rendered its oral opinion, confirmed by a written
opinion dated September 7, 2011, to the Companys
board of directors to the effect
30
that, as of such date and based upon and subject to the factors,
qualifications, limitations and assumptions stated in its
opinion, the $20.50 per share cash consideration to be received
in the Merger by holders of Company common stock was fair, from
a financial point of view, to such holders. The full text of
Willis Capital Markets & Advisorys written
opinion, which sets forth, among other things, the assumptions
made, factors considered and qualifications and limitations upon
the review undertaken by Willis Capital Markets &
Advisory in rendering its opinion, is attached as Annex B
and is incorporated by reference in its entirety into this proxy
statement. This summary is qualified in its entirety by
reference to the full text of such opinion.
Willis Capital
Markets & Advisorys opinion was provided for the
information of the Companys board of directors (in its
capacity as such) in its evaluation of the Merger Consideration
from a financial point of view and did not address any other
aspect of the Merger. Other than advising the Special Committee
and the board in the review of strategic alternatives, Willis
Capital Markets & Advisory expressed no view as to,
and its opinion did not address, the relative merits of the
Merger as compared to alternative business or financial
strategies that might be available to the Company, the effect of
any other transaction in which the Company might engage or the
Companys underlying business decision to engage in the
Merger. The opinion does not constitute a recommendation to any
holders of Company common stock as to how such holder should act
or vote in connection with the Merger or otherwise.
The terms of the Merger were determined through negotiations
between ACE and the Company and the decision by the Company to
enter into the Merger was solely that of the Companys
board of directors. Willis Capital Markets &
Advisorys opinion and financial analyses were only one of
the many factors considered by the board of directors in its
evaluation of the Merger and should not be viewed as
determinative of the views of the Companys board of
directors or management with respect to the Merger or the
consideration payable in the Merger. Willis Capital
Markets & Advisory did not recommend any specific form
or amount of consideration to the Company or that any specific
form or amount of consideration constituted the only appropriate
consideration for the Merger.
In connection with rendering its opinion, Willis Capital
Markets & Advisory reviewed, among other things:
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the Merger Agreement;
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certain publicly available financial statements and other
information of the Company, including the Companys annual
reports to shareholders and annual reports on
Form 10-K
for the fiscal years ended December 31, 2009 and 2010 and
quarterly reports on
Form 10-Q
for the periods ended March 31, 2011 and June 30, 2011;
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certain non-public financial and operating information relating
to the Company furnished to Willis Capital Markets &
Advisory by the Companys management, including certain
financial projections relating to the Company that were prepared
by the Companys management;
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the stock price trading history of Company common stock;
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a comparison of certain financial information of the Company
with similar information for other companies that Willis Capital
Markets & Advisory deemed relevant;
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a comparison of the financial terms of the Merger to the
financial terms, to the extent publicly available, of certain
other transactions that Willis Capital Markets &
Advisory deemed relevant; and
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the results of the Companys efforts, with Willis Capital
Markets & Advisorys assistance, to solicit
indications of interest from third parties with respect to a
possible acquisition of the Company.
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In addition, Willis Capital Markets & Advisory had
discussions regarding certain aspects of the Merger, as well as
past and current operations, financial projections, current
financial condition and prospects of the Company, including
strategic alternatives available to the Company, with certain
members of the Companys senior management and board and
performed such analyses and examinations and considered such
other factors that Willis Capital Markets & Advisory
deemed appropriate. In rendering its opinion, Willis Capital
Markets & Advisory assumed and relied upon, without
independent verification, the accuracy and completeness of all
financial and other information publicly available or provided
to or otherwise reviewed by or
31
discussed with Willis Capital Markets & Advisory and
further relied upon the assurances of the Companys
management that it was not aware of any facts or circumstances
that would make such information inaccurate or misleading. With
respect to the financial projections of the Company utilized in
its financial analyses, Willis Capital Markets &
Advisory assumed, upon the Companys advice, that such
projections were reasonably prepared on bases reflecting the
best currently available estimates and good faith judgments of
the future operating and financial performance of the Company.
Willis Capital Markets & Advisory expressed no view as
to any such financial projections or the assumptions on which
they were based.
In arriving at its opinion, Willis Capital Markets &
Advisory also assumed, upon the Companys advice, that the
representations and warranties of each party contained in the
Merger Agreement would be true and correct, that each party
would perform all of the covenants and agreements required to be
performed by it under the Merger Agreement and that all
conditions to the consummation of the Merger would be satisfied
without waiver or modification. Willis Capital
Markets & Advisory further assumed, upon the
Companys advice, that all governmental, regulatory or
other consents, approvals or releases necessary for the
consummation of the Merger would be obtained without any delay,
limitation, restriction or condition that would have an adverse
effect on the Company or the Merger.
Willis Capital Markets & Advisory is not an actuary
and its services did not include any actuarial determination or
evaluation or any attempt to evaluate actuarial assumptions,
allowances for losses or premium rates for liability insurance
and, accordingly, Willis Capital Markets & Advisory
made no analysis of, and expressed no opinion as to, the
adequacy of the Companys reserves for losses and loss
adjustment expenses, such premiums or other matters. Willis
Capital Markets & Advisory did not conduct a physical
inspection of the properties and facilities of the Company and
did not make, or assume any responsibility for making, any
independent valuation or appraisal of the assets or liabilities,
contingent or otherwise, of the Company or any of its
subsidiaries, nor was Willis Capital Markets &
Advisory furnished with any such appraisals, nor did Willis
Capital Markets & Advisory evaluate the solvency or
fair value of the Company or any of its subsidiaries under any
state or federal laws relating to bankruptcy, insolvency or
similar matters. Willis Capital Markets &
Advisorys opinion did not address any terms (other than
the per share Merger Consideration to the extent expressly
specified in its opinion) or other aspects or implications of
the Merger, including, without limitation, the form or structure
of the Merger or any other agreement, arrangement or
understanding to be entered into in connection with or
contemplated by the Merger or otherwise. Willis Capital
Markets & Advisory expressed no view as to, and its
opinion did not address, the fairness, financial or otherwise,
of the amount or nature or any other aspect of any compensation
to any officers, directors, or employees of any party to the
Merger, or any class of such persons, relative to the per share
Merger Consideration or otherwise. Willis Capital
Markets & Advisory also expressed no view or opinion
as to the prices at which Company common stock would trade at
any time.
Willis Capital Markets & Advisorys opinion is
necessarily based on economic, market and other conditions as in
effect on, and the information made available to Willis Capital
Markets & Advisory as of, the date of its opinion.
Subsequent developments may affect its opinion, and Willis
Capital Markets & Advisory does not have any
obligation to update, revise or reaffirm its opinion. As the
board of directors was aware, the credit, financial and stock
markets have been experiencing unusual volatility and Willis
Capital Markets & Advisory expressed no view or
opinion as to any potential effects of such volatility on the
Company or the Merger. Willis Capital Markets &
Advisory is not a legal, regulatory, accounting or tax expert
and assumed the accuracy and completeness of assessments by the
Company and its advisors with respect to legal, regulatory,
accounting and tax matters. Except as described in this summary,
the board of directors imposed no other instructions or
limitations with respect to the investigations made or the
procedures followed by Willis Capital Markets &
Advisory in rendering its opinion.
In connection with rendering its opinion to the board of
directors, Willis Capital Markets & Advisory performed
a variety of financial and comparative analyses which are
summarized below. The following summary is not a complete
description of all analyses performed and factors considered by
Willis Capital Markets & Advisory in connection with
its opinion. The preparation of a Willis Capital
Markets & Advisory opinion is a complex process
involving subjective judgments and is not necessarily
susceptible to partial analysis or summary description. With
respect to the selected public companies and selected precedent
32
transactions analyses summarized below, no company or
transaction used as a comparison was identical to the Company or
the Merger. These analyses necessarily involve complex
considerations and judgments concerning financial and operating
characteristics and other factors that could affect the public
trading or acquisition values of the companies concerned.
Willis Capital Markets & Advisory believes that its
analyses and the summary below must be considered as a whole and
that selecting portions of its analyses and factors or focusing
on information presented in tabular format, without considering
all analyses and factors or the narrative description of the
analyses, could create a misleading or incomplete view of the
processes underlying Willis Capital Markets &
Advisorys analyses and opinion. Willis Capital
Markets & Advisory did not draw, in isolation,
conclusions from or with regard to any one factor or method of
analysis for purposes of its opinion, but rather arrived at its
ultimate opinion based on the results of all analyses undertaken
by it and assessed as a whole.
The estimates of the future performance of the Company in or
underlying Willis Capital Markets & Advisorys
analyses are not necessarily indicative of future results or
values, which may be significantly more or less favorable than
those estimates. In performing its analyses, Willis Capital
Markets & Advisory considered industry performance,
general business and economic conditions and other matters, many
of which were beyond the control of the Company. Estimates of
the financial value of companies do not purport to be appraisals
or necessarily reflect the prices at which companies or
securities actually may be sold or acquired.
The following is a brief summary of the material financial
analyses performed by Willis Capital Markets &
Advisory and reviewed with the board of directors on
September 7, 2011.
The financial analyses summarized
below include information presented in tabular format. In order
to fully understand Willis Capital Markets &
Advisorys financial analyses, the tables must be read
together with the text of each summary. The tables alone do not
constitute a complete description of the financial analyses.
Considering the data below without considering the full
narrative description of the financial analyses, including the
methodologies and assumptions underlying the analyses, could
create a misleading or incomplete view of Willis Capital
Markets & Advisorys financial analyses.
Selected Public Companies Analysis.
Willis
Capital Markets & Advisory reviewed selected financial
and stock market data of the Company and the following 15
selected publicly traded regional property and casualty
insurance companies:
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AMERISAFE, Inc.
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Eastern Insurance Holdings, Inc.
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EMC Insurance Group Inc.
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Employers Holdings, Inc.
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Donegal Group, Inc.
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Hallmark Financial Services, Inc.
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Hanover Insurance Group, Inc.
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Harleysville Group Inc.
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Meadowbrook Insurance Group, Inc.
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SeaBright Holdings, Inc.
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Selective Insurance Group, Inc.
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State Auto Financial Corporation
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Tower Group, Inc.
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Unico American Corporation
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United Fire & Casualty Company
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33
Willis Capital Markets & Advisory reviewed, among
other things, equity market values, based on closing stock
prices of the selected companies on September 6, 2011, as a
multiple of fully diluted tangible book value per share as of
June 30, 2011 and calendar year 2012 estimated operating
earnings per share, referred to as EPS. Willis Capital
Markets & Advisory then applied selected ranges of
fully diluted tangible book value per share multiples of 0.75x
to 0.90x and EPS multiples of 8.0x to 14.0x derived from the
selected companies to corresponding data of the Company.
Financial data of the selected companies were based on publicly
available research analysts estimates, public filings and
other publicly available information. Financial data of the
Company were based on the Companys public filings and
internal estimates of the Companys management. This
analysis indicated the following approximate implied per share
equity value reference ranges for the Company, as compared to
the per share Merger Consideration:
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Implied Per Share Equity Value
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Reference Ranges for Penn Millers Based on
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Tangible Book Value Per
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Per Share
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Share
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EPS
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Merger Consideration
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$14.00 $17.00
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$
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6.00 $10.00
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$
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20.50
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Discounted Cash Flow Analysis.
Willis Capital
Markets & Advisory performed a discounted cash flow
analysis of the Company to calculate the estimated present value
of the dividend cash flows that the Company was forecasted to
generate to maintain a 1.0 ratio of net premiums written to
total equity during the Companys fiscal years ending
December 31, 2011 through 2015 based on internal estimates
of the Companys management. Willis Capital
Markets & Advisory calculated terminal values for the
Company by applying terminal value multiples of 0.75x to 0.90x
to the Companys 2015 estimated tangible book value. The
present values of the dividend cash flows and terminal values
were then calculated using discount rates ranging from 11.0% to
13.0%. This analysis indicated the following approximate implied
per share equity value reference range for the Company, as
compared to the per share Merger Consideration:
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Implied Per Share Equity Value
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Per Share
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Reference Range for Penn Millers
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Merger Consideration
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$13.00 $16.00
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$
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20.50
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34
Selected Precedent Transactions
Analysis.
Willis Capital Markets &
Advisory reviewed publicly available financial information for
the following 13 selected transactions announced between
January 1, 2009 and September 6, 2011 involving
regional property and casualty insurance companies:
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Announcement Date
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Acquiror
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Target
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5/23/2011
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Doctors Company
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FPIC Insurance Group, Inc.
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4/21/2011
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CNA Financial Corporation
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CNA Surety Corporation
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4/15/2011
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Auto Club Insurance Association
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Fremont Michigan InsuraCorp., Inc.
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11/30/2010
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United Fire & Casualty Company
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Mercer Insurance Group, Inc.
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11/18/2010
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QBE Insurance Group Limited
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RenaissanceRe Holdings Ltd. (U.S. operations)
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10/28/2010
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Fairfax Financial Holdings Limited
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First Mercury Financial Corporation
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8/31/2010
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ProAssurance Corporation
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American Physicians Service Group, Inc.
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7/15/2010
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ProSight Specialty Insurance Holdings, Inc.
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NYMAGIC, INC.
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7/7/2010
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Doctors Company
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American Physicians Capital, Inc.
|
7/1/2010
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First Mercury Financial Group
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Valiant Insurance Company
|
6/9/2010
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Old Republic International Corporation
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PMA Capital Corporation
|
4/26/2010
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National Interstate Corporation
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Vanliner Insurance Company
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6/21/2009
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Tower Group, Inc.
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Specialty Underwriters Alliance, Inc.
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Willis Capital Markets & Advisory reviewed, among
other things, purchase prices paid in the selected transactions
as a multiple of tangible book value per share as of the most
recent completed quarter prior to announcement of the relevant
transaction and estimated next 12 months EPS. Willis
Capital Markets & Advisory then applied selected
ranges of tangible book value per share multiples of 1.00x to
1.20x and estimated EPS multiples of 12.0x to 17.0x derived from
the selected transactions to the Companys fully diluted
tangible book value per share as of June 30, 2011 and
calendar year 2012 estimated EPS. Financial data of the selected
transactions were based on publicly available information at the
time of announcement of the relevant transaction. Financial data
of the Company was based on the Companys public filings
and internal estimates of the Companys management. This
analysis indicated the following approximate implied per share
equity value reference ranges for the Company, as compared to
the per share Merger Consideration:
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|
Implied Per Share Equity Value
|
|
|
|
|
Reference Ranges for Penn Millers Based on
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Per Share
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Tangible Book Value Per Share
|
|
EPS
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|
Merger Consideration
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$19.00 $23.00
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$
|
9.00 - $12.00
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$
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20.50
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Premiums Paid Analysis.
Willis Capital
Markets & Advisory reviewed publicly available
financial information for the following 15 selected transactions
announced between January 1, 2008 and September 6,
35
2011 involving publicly traded property and casualty insurance
companies with transaction values of between $50 million
and $550 million:
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Announcement Date
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Acquiror
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Target
|
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5/23/2011
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Doctors Company
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FPIC Insurance Group, Inc.
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4/15/2011
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Auto Club Insurance Association
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Fremont Michigan InsuraCorp., Inc.
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11/30/2010
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United Fire & Casualty Company
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Mercer Insurance Group, Inc.
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10/28/2010
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Fairfax Financial Holdings Limited
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First Mercury Financial Corporation
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8/31/2010
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ProAssurance Corporation
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American Physicians Service Group, Inc.
|
7/15/2010
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ProSight Specialty Insurance Holdings, Inc.
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NYMAGIC, INC.
|
7/7/2010
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Doctors Company
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American Physicians Capital, Inc.
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6/9/2010
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Old Republic International Corporation
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PMA Capital Corporation
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6/21/2009
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Tower Group, Inc.
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Specialty Underwriters Alliance, Inc.
|
8/4/2008
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Tower Group, Inc.
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CastlePoint Holdings, Ltd.
|
6/27/2008
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Allied World Assurance Company Holdings, Ltd.
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Darwin Professional Underwriters, Inc.
|
3/13/2008
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Palisades Safety and Insurance Association
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National Atlantic Holdings Corporation
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2/20/2008
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Meadowbrook Insurance Group, Inc.
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ProCentury Corporation
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1/10/2008
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Employers Holdings, Inc.
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AmCOMP Incorporated
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1/3/2008
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QBE Insurance Group Limited
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North Pointe Holdings Corporation
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Willis Capital Markets & Advisory reviewed the implied
premiums paid in the selected transactions relative to the
closing stock price of the target company as reported one day,
one month and three months before the approximate date on which
the public became aware of the possibility of such transactions.
Willis Capital Markets & Advisory then applied a
selected range of premia of 25% to 40% derived from the selected
transactions to the Companys closing share price prior to
the Companys announcement of its review of strategic
alternatives on August 15, 2011 and
30-day
average closing share price as of September 6, 2011. This
analysis indicated the following approximate implied per share
equity value reference range for the Company, as compared to the
per share Merger Consideration:
|
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|
|
Implied Per Share Equity Value
|
|
Per Share
|
|
Reference Range for Penn Millers
|
|
Merger Consideration
|
|
|
$18.00 $22.00
|
|
$
|
20.50
|
|
Miscellaneous
Willis Capital Markets & Advisory is acting as
exclusive financial advisor to the independent directors in
connection with the Merger, for which the Company has agreed to
pay Willis Capital Markets & Advisory an aggregate fee
currently estimated to be approximately $858,000, $250,000 of
which was payable in connection with the delivery of its opinion
and the remainder of which is contingent upon consummation of
the Merger. The Company also has agreed to reimburse Willis
Capital Markets & Advisorys expenses, including
the fees and disbursements of counsel, and to indemnify Willis
Capital Markets & Advisory and certain related persons
against certain liabilities, including liabilities arising under
the federal securities laws, arising out of Willis
36
Capital Markets & Advisorys engagement. In
addition, Willis Capital Markets & Advisory and its
affiliates in the past provided, currently are providing and in
the future may provide investment banking and financial advisory
services to ACE and its affiliates unrelated to the Merger and
would expect to receive compensation for such services.
Specifically, in the past two years, Willis Capital
Markets & Advisory acted as financial advisor to ACE
in connection with certain potential acquisition and financing
transactions. In addition, certain affiliates of Willis Capital
Markets & Advisory have business relationships with
ACE and its affiliates and have provided insurance-related
services to ACE and its affiliates during the past two years,
for which such affiliates received customary compensation.
The special committee selected Willis Capital
Markets & Advisory as its exclusive financial advisor
in connection with the Merger because of its substantial
experience in similar transactions and the property and casualty
insurance industry. Willis Capital Markets & Advisory
is regularly engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions.
Projections
and Information
The Company does not, as a matter of course, publicly disclose
projections of future revenues, earnings or other results.
However, in connection with the evaluation of a possible
transaction, we provided projections to our directors and their
advisors, as well as to ACE and other potential buyers in
connection with their due diligence review of the Company, which
contained certain non-public financial forecasts that were
prepared by our management. In addition, ACE was provided
updated projections reflecting the actual results of the
Companys second quarter as well as preliminary results for
July and August 2011, including the impact of Hurricane Irene.
A summary of the financial forecasts included in the projections
has been included below. This summary is not being included in
this document to influence your decision whether to vote for or
against the proposal to adopt the Merger Agreement, but is being
included because these financial forecasts were made available
to our directors and their advisors, as well as to prospective
bidders. This summary reflects the updated projections for 2011
that were provided to ACE. The inclusion of this information
should not be regarded as an indication that our directors or
their advisors, or any other person, considered, or now
considers, such financial forecasts to be material or to be
necessarily predictive of actual future results, and these
forecasts should not be relied upon as such. Our
managements internal financial forecasts, upon which the
summary financial forecasts included below were based, are
subjective in many respects. There can be no assurance that
these financial forecasts will be realized or that actual
results will not be significantly higher or lower than
forecasted. In two of the past three years managements
projections have not been achieved.
In addition, the financial forecasts were not prepared with a
view toward public disclosure or toward complying with generally
accepted accounting principles, which we refer to as GAAP, the
published guidelines of the SEC regarding projections or the use
of non-GAAP financial measures or the guidelines established by
the American Institute of Certified Public Accountants for
preparation and presentation of prospective financial
information. Neither our independent registered public
accounting firm, nor any other independent accountants, have
audited, compiled, examined or performed any procedures with
respect to the financial forecasts contained herein, nor have
they expressed any opinion or any other form of assurance on
such information or its achievability.
These financial forecasts were based on numerous variables and
assumptions that are inherently uncertain and may be beyond our
control. We believe the assumptions that our management used as
a basis for this projected financial information were reasonable
at the time our management prepared these financial forecasts,
given the information our management had at the time. Important
factors that may affect actual results and cause these financial
forecasts not to be achieved include, but are not limited to,
risks and uncertainties relating to our business (including its
ability to achieve strategic goals, objectives and targets over
the applicable periods), premium rate levels, loss cost trends,
the frequency and severity of weather related catastrophic
events, reinsurance costs, investment yields, capital adequacy,
industry performance, general business and economic conditions,
the regulatory environment and other factors described in or
referenced under Cautionary Statement Concerning
Forward-Looking Information beginning on
page of this proxy statement and also
described in the Risk Factors sections of our annual
report on
Form 10-K
for the year
37
ended December 31, 2010 and the quarterly reports on
Form 10-Q
thereafter. No one has made or makes any representation to any
shareholder regarding the information included in the financial
forecasts set forth below. We have made no representation to ACE
or Merger Sub in the Merger Agreement concerning these financial
forecasts.
Readers are cautioned not to rely on the forecasted financial
information. We have not updated and do not intend to update or
otherwise revise the financial forecasts to reflect
circumstances existing after the date when made or to reflect
the occurrence of future events, even in the event that any or
all of the assumptions on which such forecasts were based are
shown to be in error.
The following is a summary of the financial forecasts for the
Company prepared by our management and provided to our directors
and their advisors, as well as to ACE. For reference, the
following summary also includes our historical performance for
fiscal years 2008, 2009 and 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010-2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compounded
|
|
|
|
Historical
|
|
|
Projected
|
|
|
Annual
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
Growth Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
Net Premium Earned
|
|
$
|
78.7
|
|
|
$
|
75.4
|
|
|
$
|
68.1
|
|
|
$
|
69.4
|
|
|
$
|
77.8
|
|
|
$
|
87.3
|
|
|
$
|
103.1
|
|
|
$
|
122.5
|
|
|
|
12.5
|
%
|
(Loss) income from continuing operations
|
|
$
|
(4.5
|
)
|
|
$
|
3.4
|
|
|
$
|
(3.5
|
)
|
|
$
|
(2.4
|
)
|
|
$
|
8.3
|
|
|
$
|
5.0
|
|
|
$
|
7.5
|
|
|
$
|
11.4
|
|
|
|
NM
|
|
Shareholders Equity
|
|
$
|
50.8
|
|
|
$
|
100.0
|
|
|
$
|
93.0
|
|
|
$
|
93.3
|
|
|
$
|
103.0
|
|
|
$
|
109.5
|
|
|
$
|
118.6
|
|
|
$
|
131.8
|
|
|
|
7.2
|
%
|
Loss and loss adjustment expense ratio
|
|
|
72.9
|
%
|
|
|
70.0
|
%
|
|
|
78.8
|
%
|
|
|
78.5
|
%
|
|
|
65.8
|
%
|
|
|
65.8
|
%
|
|
|
64.7
|
%
|
|
|
62.7
|
%
|
|
|
|
|
Underwriting expense ratio
|
|
|
33.7
|
%
|
|
|
33.7
|
%
|
|
|
35.0
|
%
|
|
|
35.9
|
%
|
|
|
34.9
|
%
|
|
|
33.7
|
%
|
|
|
32.1
|
%
|
|
|
30.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio
|
|
|
106.6
|
%
|
|
|
103.7
|
%
|
|
|
113.8
|
%
|
|
|
114.4
|
%
|
|
|
100.7
|
%
|
|
|
99.5
|
%
|
|
|
96.8
|
%
|
|
|
93.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys business strategies are described in the
Our Business Strategies section of our annual report
on
Form 10-K
for the year ended December 31, 2010 and the quarterly
reports on
form 10-Q
thereafter. The financial projections provided above incorporate
those strategies and the following key assumptions:
|
|
|
|
|
Direct premiums written increase 93% from 2010 to 2015 from
growth in the state expansion plans in agribusiness segment, the
development of profitable niche offerings with the Commercial
business segments Penn Edge product and some premium price
increases.
|
|
|
|
The loss ratio improves from 78.8% in 2010 to 62.7% in 2015 from:
|
|
|
|
|
|
Significant improvement in the Commercial Business
segments Solutions loss ratio through underwriting actions
that will reduce the loss experience,
|
|
|
|
The development of profitable niches in the commercial business
segments Penn Edge product,
|
|
|
|
Catastrophic losses returning to the more recent historical
level that had been experienced over the last 5 years,
|
|
|
|
Modest annual premium price increases for 2011 to 2015, and
|
|
|
|
Loss ratio projections and loss reserves continue to be
adequately established.
|
|
|
|
|
|
The Companys support departments and functions
information technology, accounting and finance, human resources,
and management are able to support the increased
revenue growth without increasing their costs significantly,
improving the economies of scale and lowering the underwriting
expense ratio from 35.0% in 2010 to 30.8% in 2015.
|
The board recognized the risks associated with these strategies,
the financial projections and the assumptions provided above,
including:
|
|
|
|
|
the fact that management had not achieved the goals it had set
for itself in its business plans for two of the preceding three
years. The board concluded that portions of those shortfalls had
been the results of
|
38
|
|
|
|
|
factors beyond managements control including
the extended recession in the United States, aggressive pricing
by competitors, and elevated catastrophic losses but
decided, based on the totality of the track record, that it was
important to discount managements projections for
execution risk;
|
|
|
|
|
|
the soft underwriting market may not improve or it could
deteriorate further;
|
|
|
|
the significant organic growth plans for agribusiness may not be
achieved;
|
|
|
|
the Company may not be successful in developing additional
profitable niche markets with the Penn Edge product;
|
|
|
|
the profitability of Solutions may not improve;
|
|
|
|
catastrophic losses could continue to be unusually high;
|
|
|
|
the current low interest rate environment may persist or even
decline more, further reducing investment income; and
|
|
|
|
after five years, the share price could continue to trade in its
historical range of between 70% to 80% of book value per share.
Based upon the financial projections provided above, in 2015 the
book value per share is projected to be $26.37. If the share
price trades in a range of 70% to 80% of the projected 2015 book
value per share, the share price range at that point in time
would be between $18.46 and $21.10.
|
The board also considered that Willis Capital
Markets & Advisory had calculated that the implied per
share valuation of these financial projections was a range of
$13.00 to $16.00, based upon their discounted cash flow analysis
of the projections, subject to the conditions and assumptions
described under the caption
The Merger-Opinion of the
Financial Advisor to the Independent Directors
.
Delisting
and Deregistration of Penn Millers Common Stock
If the Merger is completed, our common stock will be delisted
from the NASDAQ Global Market and deregistered under the
Exchange Act. Therefore, the provisions of the Exchange Act
would no longer apply to the Company, including the requirement
that we furnish a proxy or information statement to our
shareholders in connection with meetings of our shareholders. We
will also no longer be required to file periodic reports with
the SEC.
Effects
on Penn Millers if the Merger is not Completed
If Company shareholders do not adopt the Merger Agreement, or if
the Merger is not completed for any other reason, our
shareholders will not receive any payment for their shares in
connection with the Merger. Instead, we will remain an
independent public company and our common stock will continue to
be listed and traded on the NASDAQ Global Market. In addition,
if the Merger is not completed, we expect that management will
make significant changes in the business including expense and
workforce reduction and that our shareholders will continue to
be subject to the same or greater risks and opportunities as
they currently are, including, among other things, the nature of
the general insurance industry, economic, regulatory and market
conditions. Accordingly, if the Merger is not consummated, there
can be no assurance as to the effect of these risks and
opportunities on the future value of your shares. From time to
time, our board of directors will evaluate and review, among
other things, the business operations, properties and
capitalization of the Company and make such changes as are
deemed appropriate and continue to seek to identify strategic
alternatives to enhance shareholder value. If our shareholders
do not adopt the Merger Agreement, or if the Merger is not
consummated for any other reason, there can be no assurance that
any other transaction acceptable to the Company will be offered,
or that our business, prospects or results of operations will
not be adversely impacted. In addition, if the Merger Agreement
is terminated, depending upon the circumstances under which such
termination occurs, we may be obligated to pay ACE a termination
fee as described in
The Merger Agreement
Termination Fees and Expenses
.
39
Interests
of Our Executive Officers and Directors in the Merger
In considering the recommendation of our board of directors with
respect to the Merger Agreement, you should be aware that the
Companys executive officers have interests in the Merger
that may be different from, or in addition to, the interests of
our shareholders generally, as more fully described below. These
interests include, among others: (i) accelerated vesting of
stock options and restricted stock; (ii) cash payments
payable to executive officers of the Company pursuant to change
of control severance arrangements between the Company and such
executive officers; (iii) accelerated vesting of plan
accounts under the ESOP and allocation of ESOP earnings after
repayment of the ESOP loan; (iv) accelerated vesting of the
entire amount credited to each participant in the Companys
deferred compensation plan; and (v) continued
indemnification and directors and officers liability
insurance applicable to the period prior to completion of the
Merger.
In addition, our independent directors represent the
shareholders and are themselves shareholders who purchased their
shares with their own funds. The independent directors also
received grants of stock options from the Company in
all cases such options represent fewer shares than each such
director purchased as a portion of the compensation
for their services. In connection with the Merger, the
independent directors stock options will be accelerated,
and such directors will also receive continued indemnification
and directors liability insurance applicable to the period
prior to the completion of the Merger. Our board of directors
and the special committee were aware of these interests and
considered them, among other matters, in reaching the
determination that the terms and conditions of the Merger and
the Merger Agreement were fair to and in the best interests of
the Company and its shareholders and in making their
recommendations regarding approval and adoption of the Merger
and the Merger Agreement as described in
The
Merger Reasons for the Merger; Recommendation of the
Penn Millers Board of Directors
beginning on
page .
For the purposes of all the agreements and plans to which the
Company is a party described below that contain a change of
control provision, the completion of the transactions
contemplated by the Merger Agreement will constitute a change of
control. Please see the section of this proxy statement titled
The Merger Golden Parachute
Compensation
beginning on page for
additional information with respect to the compensation that our
named executive officers may receive in connection with the
Merger.
Treatment
of Stock Options
In connection with the Merger and in accordance with the terms
of the Companys stock incentive plans, each option to
purchase shares of Company common stock outstanding at the
effective time of the Merger will become fully vested, to the
extent not already fully vested, and canceled at the effective
time of the Merger and will represent solely the right to
receive from ACE in consideration of each such option, at the
effective time of the Merger or as soon as practicable
thereafter (but in any event not later than three business days
following the effective time of the Merger), a cash payment
equal to the product of (i) the number of shares of Company
common stock subject to such option immediately prior to the
effective time of the Merger, multiplied by (ii) the
excess, if any, of the Merger Consideration of $20.50 per share
of the Company common stock over the exercise price per share of
the Company common stock subject to such option, without
interest and less any applicable withholding taxes.
The following table sets forth, as of September 15, 2011,
for each person who has served as a director or executive
officer of the Company since the beginning of our last fiscal
year and who currently holds stock options: (a) the
aggregate number of shares of Company common stock subject to
vested stock options and the value of such vested stock options,
on a pre-tax basis, at the per share Merger Consideration;
(b) the aggregate number of unvested stock options that
will vest in connection with the Merger, assuming the director
or executive officer remains employed by, or continues serving
as a director of, the Company through the effective time of the
Merger, and the value of those unvested stock options, on a
pre-tax basis (i.e., before application of any required
withholding taxes), at the per share Merger Consideration;
(c) the aggregate number of shares of Company common stock
subject to vested and unvested stock options for each
individual, assuming the director or executive officer remains
employed by, or continues serving as a director of, the
40
Company at the effective time of the Merger; and (d) the
aggregate pre-tax amount of consideration that we expect to pay
to all such individuals with respect to their stock options in
connection with the Merger:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested Stock
|
|
|
|
|
|
|
Options
|
|
Unvested Stock Options
|
|
Aggregate Stock Options
|
|
|
Shares
|
|
Value ($)
|
|
Shares
|
|
Value ($)
|
|
Shares
|
|
Value ($)
|
|
Executive Officers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Douglas A. Gaudet
|
|
|
6,068
|
|
|
|
34,406
|
|
|
|
24,268
|
|
|
|
137,600
|
|
|
|
30,336
|
|
|
|
172,006
|
|
Michael O. Banks
|
|
|
2,598
|
|
|
|
14,731
|
|
|
|
10,391
|
|
|
|
58,917
|
|
|
|
12,989
|
|
|
|
73,648
|
|
Keith A. Fry
|
|
|
1,533
|
|
|
|
8,692
|
|
|
|
6,130
|
|
|
|
34,757
|
|
|
|
7,663
|
|
|
|
43,449
|
|
Kevin D. Higgins
|
|
|
1,464
|
|
|
|
8,301
|
|
|
|
5,854
|
|
|
|
33,192
|
|
|
|
7,318
|
|
|
|
41,493
|
|
Harold W. Roberts
|
|
|
1,680
|
|
|
|
9,526
|
|
|
|
6,720
|
|
|
|
38,102
|
|
|
|
8,400
|
|
|
|
47,628
|
|
Jonathan C. Couch
|
|
|
967
|
|
|
|
5,483
|
|
|
|
3,864
|
|
|
|
21,909
|
|
|
|
4,831
|
|
|
|
27,392
|
|
Joseph J. Survilla
|
|
|
984
|
|
|
|
5,579
|
|
|
|
3,936
|
|
|
|
22,317
|
|
|
|
4,920
|
|
|
|
27,896
|
|
Non-Employee Directors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Heather M. Acker
|
|
|
300
|
|
|
|
1,701
|
|
|
|
2,700
|
|
|
|
11,304
|
|
|
|
3,000
|
|
|
|
13,005
|
|
F. Kenneth Ackerman, Jr.
|
|
|
300
|
|
|
|
1,701
|
|
|
|
2,700
|
|
|
|
11,304
|
|
|
|
3,000
|
|
|
|
13,005
|
|
E. Lee Beard
|
|
|
0
|
|
|
|
0
|
|
|
|
2,000
|
|
|
|
6,000
|
|
|
|
2,000
|
|
|
|
6,000
|
|
Dorrance R. Belin
|
|
|
300
|
|
|
|
1,701
|
|
|
|
2,700
|
|
|
|
11,304
|
|
|
|
3,000
|
|
|
|
13,005
|
|
John L. Churnetski
|
|
|
300
|
|
|
|
1,701
|
|
|
|
2,700
|
|
|
|
11,304
|
|
|
|
3,000
|
|
|
|
13,005
|
|
John M. Coleman
|
|
|
300
|
|
|
|
1,701
|
|
|
|
2,700
|
|
|
|
11,304
|
|
|
|
3,000
|
|
|
|
13,005
|
|
Kim E. Michelstein
|
|
|
300
|
|
|
|
1,701
|
|
|
|
2,700
|
|
|
|
11,304
|
|
|
|
3,000
|
|
|
|
13,005
|
|
Robert A. Nearing, Jr.
|
|
|
300
|
|
|
|
1,701
|
|
|
|
2,700
|
|
|
|
11,304
|
|
|
|
3,000
|
|
|
|
13,005
|
|
Donald A. Pizer
|
|
|
300
|
|
|
|
1,701
|
|
|
|
2,700
|
|
|
|
11,304
|
|
|
|
3,000
|
|
|
|
13,005
|
|
James M. Revie(1)
|
|
|
1,500
|
|
|
|
8,505
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1,500
|
|
|
|
8,505
|
|
All Executive Officers and Directors as a Group
|
|
|
19,194
|
|
|
|
108,831
|
|
|
|
84,763
|
|
|
|
443,226
|
|
|
|
103,957
|
|
|
|
552,057
|
|
|
|
|
(1)
|
|
Mr. Revie retired from the Companys board of
directors effective April 4, 2011.
|
Treatment
of Restricted Shares
In connection with the Merger and in accordance with the
restricted share agreements granted under the Companys
stock incentive plans, each share of restricted stock granted
subject to time-based, performance or other vesting or lapse
restrictions that is outstanding and subject to such
restrictions immediately prior to the effective time of the
Merger will automatically vest, and the Companys
reacquisition right with respect thereto shall lapse, and the
holder thereof will, subject to compliance with the applicable
exchange procedures, be entitled to receive the Merger
Consideration of $20.50 with respect to each such share, without
interest and less any applicable withholding taxes.
The following table sets forth, as of September 15, 2011,
for each person who has served as an executive officer of the
Company since the beginning of our last fiscal year and who
currently holds restricted shares.
41
None of our directors currently hold any restricted shares. In
addition, none of our executive officers or directors currently
hold any restricted stock units.
|
|
|
|
|
|
|
|
|
|
|
Aggregate Number of
|
|
|
|
|
Restricted Shares
|
|
Value of
|
|
|
Subject to Continued
|
|
Restricted
|
|
|
Service
|
|
Shares ($)
|
|
Douglas A. Gaudet
|
|
|
52,473
|
|
|
|
1,075,697
|
|
Michael O. Banks
|
|
|
19,050
|
|
|
|
390,525
|
|
Keith A. Fry
|
|
|
1,264
|
|
|
|
25,912
|
|
Kevin D. Higgins
|
|
|
16,044
|
|
|
|
328,902
|
|
Harold W. Roberts
|
|
|
14,479
|
|
|
|
296,820
|
|
Jonathan C. Couch
|
|
|
1,264
|
|
|
|
25,912
|
|
Joseph J. Survilla
|
|
|
1,264
|
|
|
|
25,912
|
|
All Executive Officers as a Group
|
|
|
105,838
|
|
|
|
2,169,680
|
|
Severance
and Change of Control Benefits
We have entered into employment agreements with all of our
executive officers, which in the case of our named executive
officers, Messrs. Gaudet, Banks and Roberts, provide that
in the event of both a change of control of the Company (such as
the completion of the Merger) and a termination of the named
executive officers employment by the Company without
cause or resignation for good reason,
each as defined in his applicable agreement, such named
executive officer would receive a lump sum severance payment
equal to his current annual base salary and the continuation of
his base salary for a period of one year, and in the case of
Messrs. Gaudet and Banks, a lump sum cash payment equal to two
times his target annual bonus. Each such named executive officer
will also be entitled to employer-provided health care benefits
for two years following his termination date. The remaining
executive officers, Messrs. Higgins, Fry, Couch and
Survilla, would receive a lump sum severance payment equal to
six months or one year of their current annual base salary and
the continuation of their base salary for a period of six months
or one year (in each case, depending on the terms of the
executive officers employment agreement) in the event of
both a change of control of the Company (such as the completion
of the Merger) and a termination of the executive officers
employment by the Company without cause or
resignation for good reason. Each such executive
officer will also be entitled to employer-provided health care
benefits for a period of one or two years (depending on the
applicable employment agreement) following his termination date.
In addition, the executive officers will be entitled to pro-rata
payment under the Companys Success Sharing Program based
on actual performance, and immediate and full vesting of all
outstanding equity awards (with performance-based awards paid at
target levels), and Messrs. Gaudet, Banks, Roberts, Higgins
and Fry will be entitled to receive a lump sum payment equal to
two times their annual stipend. Executive officers may also be
entitled to pro-rata cash payment under the Companys Open
Market Share Purchase Incentive Plan paid at target levels
pursuant to the terms of the Open Market Share Purchase
Incentive Plan. Each of the executive officers will also be
entitled to receive outplacement services up to a cost of
$10,000, or $25,000 in the case of Mr. Gaudet. In the event that
the excise tax imposed by Section 4999 of the Code applies
to any payment otherwise required to be made to the executives
pursuant to the terms of their employment agreements, then the
total amount paid to such executives will be reduced to the
extent necessary so that no portion of the amount is subject to
the excise tax imposed by Section 4999 of the Code, unless
the executive would receive an aggregate greater amount on an
after tax basis if such amount was not so reduced.
42
With respect to a Merger, the aggregate amount that could become
payable to our executive officers under these severance
agreements would be approximately $8.3 million. Details
regarding the severance amounts as of September 15, 2011
for each of our executive officers are shown below.
|
|
|
|
|
|
|
Change in Control
|
|
|
Followed by
|
|
|
Termination
|
|
|
Without Cause or
|
|
|
Resignation for
|
|
|
Good Reason(1)
|
Name
|
|
($)
|
|
Douglas A. Gaudet
|
|
|
2,934,960
|
|
Michael O. Banks
|
|
|
1,581,069
|
|
Harold W. Roberts
|
|
|
1,242,805
|
|
Keith A. Fry
|
|
|
533,798
|
|
Kevin D. Higgins
|
|
|
1,103,685
|
|
Jonathan C. Couch
|
|
|
381,277
|
|
Joseph J. Survilla
|
|
|
482,198
|
|
Total
|
|
|
8,259,792
|
|
|
|
|
(1)
|
|
The terms Cause, Good Reason and
Change in Control are defined in each
executives employment agreement. The amounts listed above
for each executive officer also include (i) the value of
shares allocated to the executive officers account under
the ESOP that will vest upon the ESOPs termination, which
will be triggered by the consummation of the Merger; and
(ii) the estimated amount of the Suspense Account
Allocation (as defined below) to be allocated to each executive
officers account under the ESOP.
|
Indemnification
of Directors and Officers; Insurance
If the proposed Merger is consummated, each of our
Companys pre-Merger directors and officers will be
indemnified and held harmless following the effective time of
the Merger to the full extent permitted by law from any claims
arising by virtue of his or her service as a director or
officer, including in connection with the negotiation, execution
and performance of the Merger Agreement. Each of these
indemnified persons will be entitled to the advancement of
expenses in defense of any claim, provided that such expenses
shall be repaid if a court should determine in a final and
non-appealable order that indemnification was prohibited by law.
ACE will be required to obtain directors and officers liability
insurance providing coverage for such 6-year period, provided
the annual premium for such coverage does not exceed 250% of the
last annual premium paid before the effective time of the Merger.
Employee
Stock Ownership Plan
The Company sponsors the ESOP, in which executive officers are
eligible to participate. Effective as of the effective time of
the Merger, each share of our common stock held by the ESOP
trustee immediately prior to the effective time will be
converted into the right to receive $20.50 per share in cash,
without interest, in the same manner as shares of our common
stock that are not held by the ESOP trustee. Payments received
by the ESOP trustee for the allocated shares held under the ESOP
will be allocated to participants ESOP accounts based on
the number of shares allocated to their respective ESOP accounts
immediately prior to the effective time.
In connection with the formation of the ESOP, the Company made a
loan to the ESOP, the proceeds of which were used to purchase
shares of the Companys common stock. Shares owned by the
ESOP that have not been allocated to the accounts of ESOP
participants are pledged as collateral for the ESOP loan.
Pursuant to the terms of the ESOP, the ESOP will terminate
automatically upon the consummation of the Merger. The Company
will file with the Internal Revenue Service (IRS) an
application for a determination that the ESOP is qualified upon
termination. Upon the termination of the ESOP, any unvested
benefits thereunder shall immediately vest. Upon the receipt of
a favorable determination letter for termination of the ESOP
from the IRS, the account balances in the ESOP will be
distributed to participants and beneficiaries in accordance
with
43
applicable law and the ESOP. In connection with the termination
of the ESOP, and prior to any final distribution to
participants, the ESOP trustee will utilize funds in the ESOP
suspense account resulting from the exchange of unallocated
shares for the Merger Consideration to repay the outstanding
loan to the ESOP, and any remaining amounts in the ESOP suspense
account will be allocated to the accounts of ESOP participants
and beneficiaries in accordance with applicable law and the
ESOP. As of September 15, 2011, the ESOP held approximately
476,999 unallocated shares of common stock in the suspense
account as collateral for the ESOP loan and the outstanding
principal balance of the loan to the ESOP was approximately
$4,874,034. The total amount to be allocated to the accounts of
the eligible ESOP participants and beneficiaries as earnings
after repayment of the ESOP loan is estimated to be
approximately $4,454,706 with such amount calculated using the
following assumptions: (i) the Merger had been consummated
on September 15, 2011, (ii) the ESOP had terminated
immediately upon such consummation, (iii) a Company
contribution to the ESOP and a principal and interest payment on
the ESOP loan of $470,930 had been made for the period
January 1, 2011 through September 15, 2011, (iv)
38,100 shares were allocated to participant accounts by reason
of the Company contribution, and (v) shares forfeited by
terminated unvested participants were allocated to remaining
participants accounts in accordance with the terms of the
ESOP. Such total estimated amount shall be referred to herein as
the Suspense Account Allocation. The actual amount
to be allocated to the accounts of eligible ESOP participants
and beneficiaries will depend on the actual effective time of
the Merger, which automatically causes the ESOP to terminate
pursuant to its own terms on such date, and certain other
factors, including the amount of any Company contribution for
the period from January 1, 2011, through the effective time
of the Merger (or, if the closing occurs after December 31,
2011, the December 31 annual Company contribution plus an
additional Company contribution for the period from
January 1, 2012 through the effective time of the Merger)
and the amount of the outstanding principal balance on the ESOP
loan and accrued interest thereon as of the effective time of
the Merger.
Intent to
Vote in Favor of the Merger
As of the record date, the directors and executive officers of
the Company beneficially owned and were entitled to vote, in the
aggregate, shares
of Company common stock,
representing % of the outstanding
shares of Company common stock on the record date. The directors
and executive officers have informed the Company that they
currently intend to vote all of their shares of Company common
stock
FOR
the proposal to adopt the Merger
Agreement,
FOR
approval of the non-binding
advisory proposal regarding golden parachute
compensation and
FOR
the proposal to adjourn
the special meeting, if necessary or appropriate, to solicit
additional proxies.
Golden
Parachute Compensation
Golden
Parachute Compensation Table
The following table sets forth the information required by
Item 402(t) of
Regulation S-K
regarding the compensation for each of our named executive
officers that is based on or otherwise relates to the Merger,
assuming the following:
|
|
|
|
|
the price per share of common stock of the Company is $20.50;
|
|
|
|
the Merger closed on September 15, 2011, which is the
latest practicable date prior to the filing of this proxy
statement;
|
|
|
|
the named executive officers of the Company were terminated
without cause immediately following a change in control on
September 15, 2011, which is the latest practicable date
prior to the filing of this proxy statement;
|
|
|
|
a Company contribution to the ESOP and a principal and interest
payment on the ESOP loan of $470,930 had been made for the
period January 1, 2011 through September 15, 2011;
|
|
|
|
38,100 shares were allocated to participant accounts as a result
of such Company contribution, of which a number of such shares
would be allocated to the named executive officers
accounts in the ESOP in accordance with the terms of the ESOP;
|
44
|
|
|
|
|
shares forfeited by terminated unvested participants were
allocated to remaining participants accounts, including
the accounts of the named executive officers, in accordance with
the terms of the ESOP; and
|
|
|
|
the named executive officers would receive full payment of their
parachute compensation without application of any reduction
described above under
The Merger Interests
of Our Executive Officers and Directors in the
Merger Severance and Change of Control
Benefits
.
|
Golden
Parachute Compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension/
|
|
Perquisites/
|
|
Tax
|
|
|
|
|
|
|
Cash
|
|
Equity
|
|
NQDC
|
|
Benefits
|
|
Reimbursement
|
|
Other
|
|
Total
|
Name
|
|
($)(1)
|
|
($)(2)
|
|
($)(3)
|
|
($)(4)
|
|
($)
|
|
($)(5)
|
|
($)
|
|
Douglas A. Gaudet(6)
|
|
|
1,318,799
|
|
|
|
1,247,703
|
|
|
|
41,271
|
|
|
|
45,040
|
|
|
|
0
|
|
|
|
282,147
|
|
|
|
2,934,960
|
|
Michael O. Banks(7)
|
|
|
811,967
|
|
|
|
464,173
|
|
|
|
24,137
|
|
|
|
30,040
|
|
|
|
0
|
|
|
|
250,752
|
|
|
|
1,581,069
|
|
Harold W. Roberts(8)
|
|
|
476,215
|
|
|
|
344,448
|
|
|
|
20,327
|
|
|
|
30,040
|
|
|
|
0
|
|
|
|
371,775
|
|
|
|
1,242,805
|
|
|
|
|
(1)
|
|
Consists of the aggregate cash severance payments that will be
made to each named executive officer after a termination without
cause or for good reason within 24 months of a change in
control.
|
|
(2)
|
|
Consists of the aggregate payments to be made in respect of
unvested options and unvested restricted stock that will vest at
the effective time of the Merger and the cancellation of vested
options at the effective time of the Merger. The amounts
included in this column are single-trigger
arrangements, that is, eligibility to receive this payment is
conditioned solely on the occurrence of a change in control.
|
|
(3)
|
|
Consists of the accelerated vesting of unvested balances in the
Companys Nonqualified Deferred Compensation Plan that will
occur upon a change in control. The amounts included in this
column are single-trigger arrangements, that is,
eligibility to receive this payment is conditioned solely on the
occurrence of a change in control.
|
|
(4)
|
|
Consists of the aggregate payments that will be made for
(i) continuation of employer provided healthcare benefits
for two years and (ii) outplacement services. Such benefits
are payable only after a termination without cause or for good
reason within 24 months after a change in control.
|
|
(5)
|
|
Consists of the following: (i) the value of shares
allocated to the named executive officers account under
the ESOP that will vest upon the ESOPs termination, which
will be triggered by the consummation of the Merger; and
(ii) the estimated amount of the Suspense Account
Allocation (as defined above) to be allocated to each named
executive officers account under the ESOP. The amounts
included in this column are single-trigger
arrangements, that is, eligibility to receive this payment is
conditioned solely on the occurrence of a change in control.
|
|
(6)
|
|
For Mr. Gaudet, the cash column consists of (i) a cash
severance amount equal to $703,788, (ii) a target incentive
award of $316,704, which is equal to two times his target annual
bonus, (iii) a prorated target incentive award of $262,307,
under the Companys Open Market Share Purchase Incentive
Plan and (iv) a payment relating to his annual stipend in
an amount equal to $36,000. The equity column consists of
payments to be made with regard to (a) unvested options in
an amount equal to $137,600, (b) unvested restricted stock
in an amount equal to $1,075,697, and (c) the cancellation
of already vested options in an amount equal to $34,406. The
perquisites and benefits column consists of outplacement
services of $25,000 and the continuation of employer provided
healthcare benefits approximately valued at $20,400.
|
|
(7)
|
|
For Mr. Banks, the cash column consists of (i) a cash
severance amount equal to $484,374, (ii) a target incentive
award of $184,920, which is equal to two times his target annual
bonus, (iii) a prorated target incentive award of $112,673,
under the Companys Open Market Share Purchase Incentive
Plan and (iv) a payment relating to his annual stipend in
an amount equal to $30,000. The equity column consists of
payments to be made with regard to (a) unvested options in
an amount equal to $58,917, (b) unvested restricted stock
in an amount equal to $390,525, and (c) the cancellation of
already vested options in an amount equal to $14,371. The
perquisites and benefits column consists of outplacement
services of $10,000 and the continuation of employer provided
healthcare benefits approximately valued at $20,400.
|
45
|
|
|
(8)
|
|
For Mr. Roberts, the cash column consists of (i) a
cash severance amount equal to $383,560, (ii) a prorated
target incentive award of $72,655, under the Companys Open
Market Share Purchase Incentive Plan and (iii) a payment
relating to his annual stipend in an amount equal to $20,000.
The equity column consists of payments to be made with regard to
(a) unvested options in an amount equal to $38,102,
(b) unvested restricted stock in an amount equal to
$296,819, and (c) the cancellation of already vested
options in an amount equal to $9,526. The perquisites and
benefits column consists of outplacement services of $10,000 and
the continuation of employer provided healthcare benefits
approximately valued at $20,400.
|
Any changes in the assumptions or estimates above would affect
the amounts shown in the table. In addition, a portion of the
amounts shown in the Other column is expected to become vested
in the ordinary course prior to the actual date the Merger would
be completed, and the pro rata target bonuses for 2011 included
in the Cash column are expected to be higher based on the actual
date that the Merger is closed.
Narrative
to Golden Parachute Compensation Table
The payment of severance benefits, and the continuation of
employee benefits, is made pursuant to the arrangements
discussed in the section of this proxy statement titled
The Merger Interests of Our Executive
Officers and Directors in the Merger Severance and
Change of Control Severance Benefits
.
As described in
The Merger Interests of Our
Executive Officers and Directors in the Merger
Treatment of Stock Options
,
The
Merger Interests of Our Executive Officers and
Directors in the Merger Treatment of Restricted
Shares
, in connection with the Merger, the vesting of
all outstanding stock options and restricted stock awards will
accelerate in full so that such stock options and awards will
become fully vested, to the extent not already fully vested,
immediately prior to the completion of the Merger. Once vested,
each stock option outstanding at the effective time of the
Merger will be canceled and converted into the right to receive
a cash payment equal to the product of (i) the number of
shares of our common stock subject to such option immediately
prior to the effective time of the Merger, multiplied by
(ii) the excess, if any, of the Merger Consideration of
$20.50 per share of our common stock over the exercise price per
share of our common stock subject to such option, without
interest and less any applicable withholding taxes. Once vested,
each outstanding share of restricted stock will be canceled and
converted into the right to receive the Merger Consideration of
$20.50 with respect to each such share, without interest and
less any applicable withholding taxes.
All payments that are made to the named executive officers
pursuant to their employment agreements following a termination
of employment are subject to the signing of an effective release
of claims against the Company and to continued compliance with
applicable restrictive covenants, including non-competition and
non-solicitation covenants for a period of twenty-four months
and a covenant not to disclose confidential information. In the
event the named executive officer violates a restrictive
covenant, the named executive officer must repay the Company the
amount of the payments that he received pursuant to the
employment agreement following termination. Additionally, as
discussed above, in the event that the excise tax imposed by
Section 4999 of the Code applies to any payment otherwise
required to be made to the named executive officers pursuant to
the terms of their employment agreements, then the total amount
paid to such named executive officers will be reduced to the
extent necessary so that no portion of the amount is subject to
the excise tax imposed by Section 4999 of the Code, unless
the named executive officer would receive an aggregate greater
amount on an after tax basis if such amount was not so reduced.
Other
Considerations
If the proposed Merger is consummated, we expect that none of
the Companys current directors will become directors of
the surviving corporation after the Merger is completed. Neither
the Company nor ACE has made any loans to our current directors
and executive officers.
46
No
Dissenters Rights
Under the Pennsylvania Business Corporation Law, holders of
Company common stock do not have appraisal or dissenters
rights with respect to the Merger or the other transactions
described in this proxy statement. If the Merger Agreement is
adopted by the Companys shareholders and the Merger is
completed, shareholders who voted against the adoption of the
Merger will be treated the same as shareholders who voted for
adoption of the Merger, and their shares will canceled and
automatically converted into the right to receive the Merger
Consideration.
Material
U.S. Federal Income Tax Consequences of the Merger
The following summary is a general discussion of the material
U.S. federal income tax consequences to our shareholders,
other than ACE, whose common stock is converted into cash in the
Merger. This summary is based on the current provisions of the
Code, applicable Treasury Regulations, judicial authority and
administrative rulings, all of which are subject to change,
possibly with retroactive fact or different interpretations. Any
such change could alter the tax consequences to our shareholders
as described herein. As a result, we cannot assure you that the
tax consequences described herein will not be challenged by the
IRS, or will be sustained by a court if challenged by the IRS.
No ruling from the IRS has been or will be sought with respect
to any aspect of the transactions described herein. This summary
is for the general information of our shareholders, other than
ACE, only, does not address the tax consequences for the holders
of options on our common stock and does not purport to be a
complete analysis of all potential tax effects of the Merger.
For example, it does not consider the effect of any applicable
state, local, foreign, estate or gift tax laws, or of any
non-income tax laws. In addition, this discussion does not
address the tax consequences of transactions effectuated prior
to or after the Merger (whether or not such transactions occur
in connection with the Merger), including, without limitation,
any exercise of a stock option or the acquisition or disposition
of Company shares other than pursuant to the Merger. In
addition, it does not address all aspects of U.S. federal
income taxation that may affect shareholders in light of their
particular circumstances, including: (i) shareholders that
are insurance companies; (ii) shareholders that are
tax-exempt organizations; (iii) shareholders that are
financial institutions (such as banks, thrifts or insurance
companies), regulated investment companies, real estate
investment trusts, brokers or dealers in securities or traders
in securities electing
mark-to-market
treatment; (iv) shareholders that hold their common stock
as part of a hedge, straddle or conversion transaction;
(v) shareholders that are liable for the U.S. federal
alternative minimum tax; (vi) shareholders that are
partnerships or any other entity classified as a partnership for
U.S. federal income tax purposes; (vii) shareholders
that are subchapter S corporations, controlled foreign
corporations or passive foreign investment companies for
U.S. federal income tax purposes, (viii) shareholders
that are retirement plans or other tax-exempt entities, or that
hold our common stock in tax-deferred or tax-advantaged
accounts; (ix) shareholders that acquired our common stock
pursuant to the exercise of a stock option or otherwise as
compensation; and (x) shareholders that do not use the
U.S. dollar as their functional currency for
U.S. federal income tax purposes.
The following summary assumes that shareholders hold their
common stock as a capital asset under
Section 1221 of the Code (generally, property held for
investment). For purposes of this discussion, a U.S. person
is defined as a beneficial owner of Company common stock that is:
|
|
|
|
|
a natural person that is a citizen or resident of the United
States for U.S. federal income tax purposes;
|
|
|
|
a corporation, including any entity treated as a corporation for
U.S. federal income tax purposes, created or organized in
or under the laws of the United States, any state thereof or the
District of Columbia;
|
|
|
|
an estate the income of which is subject to U.S. federal
income taxation regardless of its source;
|
|
|
|
a trust, if its administration is subject to the primary
supervision of a U.S. court and one or more
U.S. persons have the authority to control all substantial
decisions of the trust; or
|
47
|
|
|
|
|
a trust that was in existence on August 20, 1996 and was
treated as a domestic trust on August 19, 1996 and that has
made a valid election under applicable Treasury Regulations to
be treated as a U.S. person.
|
For purposes of this discussion, a
non-U.S. person
is a beneficial owner of Company common stock that is not a
U.S. person or a partnership (or an entity treated as a
partnership for U.S. federal income tax purposes). As noted
above, this discussion does not address the tax consequences of
the Merger to partnerships or other pass-through entities
holding our common stock, and such persons should consult their
own tax advisors.
ALL COMPANY SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX
ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE
MERGER, INCLUDING THE APPLICABLE U.S. FEDERAL, STATE, LOCAL
AND FOREIGN TAX CONSEQUENCES, AND AS TO ANY TAX REPORTING
REQUIREMENTS OF THE MERGER AND RELATED TRANSACTIONS IN LIGHT OF
THEIR RESPECTIVE TAX SITUATIONS.
Treatment
of Holders of Common Stock
The conversion of shares of Company common stock into cash
pursuant to the Merger will be a taxable transaction for
U.S. federal income tax purposes except with respect to
shares that are held under the ESOP. A U.S. holder
generally will recognize gain or loss for U.S. federal
income tax purposes equal to the difference, if any, between the
amount of cash received pursuant to the Merger (determined
before the deduction of any applicable withholding taxes) and
such U.S. holders adjusted tax basis in the shares
converted into cash pursuant to the Merger. A
U.S. holders adjusted tax basis will generally equal
the price the U.S. holder paid for such shares. Such gain
or loss generally will be capital gain or loss, and will be
long-term capital gain or loss if the holders holding
period for such shares exceeds one year as of the date of the
Merger. Long-term capital gains for certain non-corporate
U.S. holders, including individuals, are generally eligible
for a reduced rate of federal income taxation. The deductibility
of capital losses is subject to limitations. If a
U.S. holder acquired different blocks of Company common
stock at different times or different prices, such
U.S. holder generally must determine its tax basis, holding
period, and gain or loss separately with respect to each block
of Company common stock.
A U.S. holder may, under certain circumstances, be subject
to information reporting and backup withholding at the
applicable rate (currently, 28%) with respect to the cash
received pursuant to the Merger, unless such holder properly
establishes an exemption or provides its correct tax
identification number and otherwise complies with the applicable
requirements of the backup withholding rules. Backup withholding
is not an additional tax. Any amounts withheld under the backup
withholding rules can be refunded or credited against a
payees U.S. federal income tax liability, if any,
provided that such U.S. holder furnishes the required
information to the IRS in a timely manner. All U.S. holders
surrendering shares of Company common stock pursuant to the
Merger should complete and sign, under penalty of perjury, the
IRS
Form W-9
included as part of the Letter of Transmittal and return it to
the exchange agent to provide the information, including such
holders taxpayer identification number, and certifications
necessary to avoid backup withholding (unless an applicable
exemption exists and is proved in a manner satisfactory to us
and the exchange agent). Corporations are not subject to backup
withholding.
Non-U.S.
Holders
Any gain recognized by a
non-U.S. person
that is a shareholder upon the receipt of cash in the Merger or
pursuant to the exercise of dissenters rights generally
will not be subject to U.S. federal income tax unless:
(1) the gain is effectively connected with a trade or
business of the
non-U.S. person
in the United States (and, if required by an applicable income
tax treaty, is attributable to a U.S. permanent
establishment of the
non-U.S. person);
(2) the
non-U.S. person
is an individual who is present in the United States for
183 days or more in the taxable year of the Merger, and
certain other conditions are met; or (3) the Company is or
has been a United States real property holding
corporation for U.S. federal income tax purposes at
any time during the five-year period preceding the Merger or (if
shorter) the period in which the
non-U.S. person
has
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held our common stock and the
non-U.S. person
owned (actually or constructively) more than 5% of Company
common stock at any time during the five-year period preceding
the Merger. The Company does not believe that it is currently a
United States real property holding corporation and does not
believe that it has been a United States real property holding
corporation at any time during the past five years.
An individual
non-U.S. person
whose gain is effectively connected with the conduct of a trade
or business in the United States (as described above in clause
(1)) or whose gain is subject to tax under clause (3) above
will generally be subject to tax on such gain in the same manner
as a U.S. person, as described above. In addition, a
non-U.S. person
that is a corporation may be subject to a
U.S. corporate-level tax of 35%, as well as a branch
profits tax equal to 30% (or lesser rate under an applicable
income tax treaty) on such effectively connected gain. An
individual
non-U.S. person
described in clause (2) above generally will be subject to
a flat 30% tax on any gain, which may be offset by
U.S.-source
capital losses.
A
non-U.S. holder
will be subject to information reporting and, in certain
circumstances, backup withholding (currently, at a rate of 28%)
with respect to the cash received by such holder pursuant to the
Merger, unless such
non-U.S. holder
certifies under penalties of perjury that it is not a United
States person (and the payor does not have actual knowledge or
reason to know that the holder is a United States person as
defined under the Code) or such holder otherwise establishes an
exemption from backup withholding. Backup withholding is not an
additional tax and any amounts withheld under the backup
withholding rules may be refunded or credited against a
non-U.S. holders
U.S. federal income tax liability, if any. In order to
avoid backup withholding, a
non-U.S. holder
should complete and sign an appropriate
Form W-8
which may be obtained from the exchange agent or at
www.irs.gov
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ESOP
Participants
In general, receipt of cash in exchange for the common stock
held in the participants and beneficiaries ESOP
accounts as part of the Merger will not be a taxable transaction
for federal income tax purposes for participants and
beneficiaries in the ESOP. ESOP participants and beneficiaries
will generally not be taxed on amounts held in the ESOP until
such amounts are distributed from the ESOP in accordance with
the terms of the ESOP or following the termination of the ESOP
as described below. Subject to terms of the applicable plans and
the requirements of the Code, ESOP participants may choose to
roll such distributable amounts over to an individual retirement
account (IRA) or another eligible retirement plan. Distributions
that are rolled over are generally not subject to federal
taxation at the time of their distribution from the ESOP. ESOP
participants and beneficiaries will receive additional
information regarding distribution options available from the
ESOP, including information regarding how to roll such amounts
over to an IRA or another eligible retirement plan and
additional information regarding the federal tax consequences of
each distribution option, prior to receiving a distribution from
the ESOP.
THE FOREGOING DISCUSSION OF THE U.S. FEDERAL INCOME TAX
CONSEQUENCES OF THE MERGER IS FOR OUR SHAREHOLDERS GENERAL
INFORMATION ONLY. ACCORDINGLY, OUR SHAREHOLDERS SHOULD CONSULT
THEIR OWN TAX ADVISORS WITH RESPECT TO THE PARTICULAR TAX
CONSEQUENCES TO THEM OF THE MERGER, INCLUDING THE APPLICABLE
U.S. FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES.
Regulatory
Matters
Under the terms of the Merger Agreement, the Merger cannot be
consummated until the waiting period applicable to the
consummation of the Merger under the HSR Act has expired or been
terminated.
Under the HSR Act and the rules promulgated thereunder by the
FTC, the Merger cannot be consummated until each of the Company
and ACE files a notification and report form with the FTC and
the Antitrust Division of the DOJ under the HSR Act and the
applicable waiting period has expired or been terminated. Under
the terms of the Merger Agreement, each of the Company and ACE
will file such a notification and report form by
September 27, 2011 and each requested early termination of
the waiting period. There can be no assurance as to the outcome
of the review.
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At any time before or after consummation of the Merger, and
irrespective of the expiration or termination of the waiting
period under the HSR Act, the Antitrust Division of the DOJ, the
FTC, or a state attorney general could take such action under
the antitrust laws as it deems necessary or desirable in the
public interest, including seeking to enjoin the completion of
the merger or seeking divestiture of substantial assets of the
Company or ACE. Private parties may also bring legal action
under the antitrust laws under certain circumstances.
There can be no assurance that a challenge to the Merger on
antitrust grounds will not be made and, if such a challenge is
made, there can be no assurance as to its result.
The Company has two insurance company subsidiaries domiciled in
the Commonwealth of Pennsylvania. Insurance laws in Pennsylvania
require an acquiring person to obtain approval from the
Insurance Commissioner of Pennsylvania before acquiring control
of an insurance company domiciled in Pennsylvania. Under the
terms of the Merger Agreement, ACE will file an application for
such approval with the Insurance Commissioner of Pennsylvania by
September 27, 2011. There can be no assurance as to the
outcome of such application for approval.
Under the insurance laws of certain states in which the
Companys two insurance company subsidiaries are licensed,
an acquiring person is required to make a pre-acquisition
Form E filing regarding the potential
competitive impact of the acquisition before acquiring control
of an insurance company licensed in those states if the combined
market share as an immediate result of the acquisition would
exceed certain statutorily-specified levels. The Merger cannot
be consummated until the expiration or termination of the
applicable waiting periods under relevant state insurance laws.
Under the terms of the Merger Agreement, ACE will make such
filings by September 27, 2011. There can be no assurance as
to the outcome of the filings.
THE
MERGER AGREEMENT
The following summarizes material provisions of the Merger
Agreement, a copy of which is attached to this proxy statement
as
Annex A
. This summary does not purport to
be complete and may not contain all of the information about the
Merger Agreement that is important to you. We encourage you to
read carefully the Merger Agreement in its entirety because the
rights and obligations of the parties are governed by the
express terms of the Merger Agreement and not by this summary or
any other information contained in this proxy statement.
The description of the Merger Agreement in this proxy statement
has been included to provide you with information regarding its
terms. The Merger Agreement contains representations and
warranties made by and to the Company and ACE as of specific
dates. The statements embodied in those representations and
warranties were made for purposes of the Merger Agreement
between the parties and are subject to qualifications and
limitations agreed by the parties in connection with negotiating
the terms of the Merger Agreement, including qualifications set
forth on the disclosure schedules to the Merger Agreement. In
addition, certain representations and warranties were made as of
a specified date, may be subject to contractual standards of
materiality different from those generally applicable to
shareholders, or may have been used for the purpose of
allocating risk between the parties rather than establishing
matters as facts. Any specific material facts of which we are
currently aware that materially qualify or contradict the
representations and warranties in the Merger Agreement have been
disclosed in this proxy statement or the Companys Annual
Report on
Form 10-K,
which are available on the Companys web site.
Effective
Time of the Merger
The closing of the Merger will take place on the last business
day of the month during which the satisfaction or waiver of all
conditions to completion of the Merger occurs. As part of the
closing, ACE will file articles of merger with the Secretary of
State of the Commonwealth of Pennsylvania, and the effective
time of the Merger will occur at such time as the articles of
merger are so filed (or such later time as provided in the
articles of merger).
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Structure
of the Merger
At the effective time of the Merger, the Merger Sub will merge
with and into the Company. The Company will survive the Merger,
as the surviving corporation, and continue to exist
after the Merger as a wholly-owned subsidiary of ACE. At the
effective time of the Merger, the Companys articles of
incorporation will be amended and restated in their entirety to
be identical to the articles of incorporation of the Merger Sub
as in effect immediately prior to the effective time of the
Merger, except that the name of the Company, as reflected in the
articles of incorporation, will be Penn Millers Holding
Corporation, until thereafter further amended. At the
effective time of the Merger, the bylaws of the Merger Sub as in
effect immediately prior to the effective time of the Merger
shall be the bylaws of the surviving corporation, until
thereafter amended. The directors of the Merger Sub immediately
prior to the effective time of the Merger shall be the initial
directors of the surviving corporation, each to hold office in
accordance with the articles of incorporation and by-laws of the
surviving corporation, and the officers of the Company
immediately prior to the effective time of the Merger shall be
the initial officers of the surviving corporation, in each case
until their respective successors are duly elected or appointed
and qualified or until the earlier of their death, resignation
or removal.
Effect of
the Merger on Capital Stock
Company
Common Stock
At the effective time of the Merger, each share of capital stock
of the Merger Sub issued and outstanding immediately prior to
the effective time of the Merger will be converted into and
become one validly issued, fully paid and non-assessable share
of common stock, par value $0.01 per share, of the surviving
corporation and will constitute the only shares of capital stock
of the surviving corporation. Any shares of Company common stock
that are owned by the Company as treasury stock or by any
Company subsidiary, and any Company common stock owned by ACE or
Merger Sub, will be automatically canceled and will cease to
exist and no consideration will be delivered in exchange
therefor. Each other share of Company common stock issued and
outstanding immediately prior to the effective time of the
Merger will be canceled and converted into the right to receive
Merger Consideration excluding withholding tax and will no
longer be outstanding and will automatically be canceled and
will cease to exist. Each holder of a certificate or uncertified
book-entry shares, which immediately prior to the effective time
of the Merger represented any Company common stock will cease to
have any rights with respect thereto, except the right to
receive Merger Consideration, without interest, upon surrender
of such certificate or book-entry shares.
Company
Stock Options, Restricted Stock and Restricted Stock
Units
At the effective time of the Merger, each outstanding option to
acquire our common stock, whether or not vested or exercisable,
will become fully vested. Any portion of any option unexercised
by the holder thereof prior to the effective time of the Merger
will be canceled and converted into a right to receive a cash
amount equal to the option consideration. Option consideration
is an amount equal to the excess of Merger Consideration over
the exercise price payable in respect of such share of Company
common stock subject to such Company option and any required
withholding tax. Any Company option for which the exercise price
equals or exceeds the Merger Consideration, shall be canceled
and terminated without the receipt of any option consideration.
Option consideration is subject to any required withholdings and
any amount owed pursuant to the exercise thereof. As of the
effective time of the Merger, each restricted share of Company
common stock granted under the Company Stock Incentive Plan that
is then outstanding will become fully vested without
restrictions and will be treated as a share of Company common
stock. As of the effective time of the Merger, each restricted
stock unit granted under the Company Stock Incentive Plan that
represents the right to receive a share of Company common stock
that is outstanding prior to the effective time of the Merger,
will become fully vested without restrictions and will be
converted into the right to receive the Merger Consideration,
less any required withholding taxes. Option consideration and
the Merger Consideration with respect to the restricted stock
units will be paid in no event later than ten (10) days
after the closing date.
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Employee
Stock Ownership Plan
Merger Consideration with respect to shares of Company common
stock held under the ESOP will be paid to the trustee of the
ESOP.
Company
Stock Incentive Plan
Effective at the effective time of the Merger, the Company Stock
Incentive Plan and all awards thereunder will terminate subject
to the payments described above for options and shares of
restricted stock granted pursuant to the Company Stock Incentive
Plan. All other rights under any provision of any other plan,
program or arrangement for the issuance of any other interest
with respect to the capital stock or other equity interests of
the Company or any Company subsidiary will be canceled without
any liability on the Company or any Company subsidiary.
Exchange
and Payment Procedures
Prior to the effective time of the Merger, the Company will
designate a bank or trust company (reasonably acceptable to ACE)
to act as agent (paying agent) for holders of shares
of Company common stock to receive the funds to which such
holders will become entitled. At or prior to the effective time
of the Merger, ACE will deposit with or cause to be deposited
with the paying agent, cash in an amount sufficient to pay the
aggregate Merger Consideration required to be paid in accordance
with the Merger Agreement. Promptly, and in any event no later
than ten days after the effective time of the Merger, ACE and
the surviving corporation will cause the paying agent to mail to
each holder of record of Company common stock converted into the
right to receive Merger Consideration, a letter of transmittal,
in customary form with customary provisions, containing
instructions specifying that the delivery of the Merger
Consideration will be effected, and risk of loss and title shall
pass, only upon proper delivery of the certificates, or
book-entry transfer of the book-entry shares, to the paying
agent for use in effecting the surrender of the certificates and
book-entry shares in exchange for the Merger Consideration.
Registered shareholders will not be entitled to receive the
Merger Consideration until they surrender or transfer their
stock certificates or book-entry shares, as applicable, to the
paying agent, together with a duly completed and executed letter
of transmittal and any other documents as may be required by the
letter of transmittal. The Merger Consideration may be paid to a
person other than the person in whose name the corresponding
certificate or book-entry shares were registered if the
certificate is properly endorsed or is otherwise in the proper
form for transfer or if such book-entry share may be properly
transferred. In addition, the person requesting such issuance
must have paid any transfer and other taxes required by reason
of the issuance and payment of such consideration to a person
other than the registered holder of such certificate or book
entry shares surrendered or must have established to the
reasonable satisfaction of the paying agent and the surviving
corporation that such tax either has been paid or is not
applicable.
No interest will be paid or will accrue on the cash payable upon
surrender of the certificates or book-entry shares. ACE and the
surviving corporation will be entitled to deduct and withhold
from any amounts otherwise payable pursuant to the Merger
Agreement in respect of shares of Company common stock, an
amount as it is required to deduct and withhold with respect to
the making of such payment under the Code or any law. Any sum
that is withheld will be treated as having been paid to the
holder of the shares of Company common stock in respect of which
such deduction and withholding was made.
At the close of business on the day of the effective time of the
Merger, our stock transfer books will be closed, and thereafter
there will be no further registration of transfers of
outstanding shares of our common stock. From and after the
effective time of the Merger, the holders of shares of Company
common stock outstanding immediately prior to the effective time
of the Merger shall cease to have any rights with respect to
such shares of Company common stock except as otherwise provided
in the Merger Agreement or by applicable law.
Neither the paying agent nor the surviving corporation will be
liable to any holder of Company common stock for any Merger
Consideration delivered to a public official pursuant to any
abandoned property, escheat
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or other similar law. At any time following the twelve
(12) month anniversary of the effective time of the Merger,
the surviving corporation will be entitled to require the paying
agent to deliver to it any funds which had been made available
to the paying agent and not disbursed to holders of shares of
Company common stock and thereafter the holders will be entitled
to look at the surviving corporation only as general creditors
thereof with respect to any Merger Consideration that may be
payable upon due surrender of their certificates.
If you have lost a certificate, or if it has been stolen or
destroyed, upon making an affidavit of fact and, if required by
the surviving corporation, and upon posting of a bond in a
reasonable amount as the surviving corporation may direct, as
indemnity protection against any claim that may be made against
it with respect to that certificate, the paying agent will issue
in exchange for such lost, stolen or destroyed certificate, the
Merger Consideration with respect to the shares of the Company
common stock formerly represented by such certificate.
Representations
and Warranties
We make various representations and warranties in the Merger
Agreement to ACE and the Merger Sub, which may be subject to
important limitations and qualifications set forth in Company
SEC Documents, the Merger Agreement, and the disclosure
schedules thereto. Company SEC Documents means the
Companys Annual Report on
Form 10-K
for the fiscal year ended December 31, 2010, the
Companys Quarterly Reports on
Form 10-Q
for the fiscal quarters ended March 31, 2011 and
June 30, 2011 and the Companys proxy statement on
Schedule 14A filed on March 31, 2011. You should be
aware that it may not be appropriate to judge the accuracy of
such representations and warranties as of the date of this proxy
statement. Our representations and warranties in the Merger
Agreement relate to, among other things:
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our and our subsidiaries organization, good standing and
qualification to do business;
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our and our subsidiaries articles of incorporation and
bylaws and equivalent organizational documents;
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our minute books containing records of shareholder meetings and
board of directors meetings, our stock ledgers and our stock
books listing and describing all issuances, transfers and
cancellations of shares of capital stock;
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our capitalization, including the number of shares of our common
stock, restricted stock, restricted stock units, stock held in
treasury, stock options under the Company Stock Incentive Plan
and stock held under the ESOP;
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our corporate power and authority to enter into the Merger
Agreement and to consummate the transactions contemplated by the
Merger Agreement (including that our board of directors, in
accordance with the PBCL, unanimously adopted the Merger
Agreement, resolved to recommend the approval and adoption of
the Merger Agreement by the Companys shareholders,
directed that the Merger Agreement be submitted to the
Companys shareholders for approval and adoption, approved
the filing of the proxy statement with the SEC, and determined
that the Merger is fair in the best interest of the Company and
its shareholders and approved and declared the advisability of
the Merger Agreement);
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the absence of violations of or conflicts with our and our
subsidiaries governing documents, applicable law,
provisions of the ESOP, agreements with third parties and
material permits as a result of executing, delivering and
performing under the Merger Agreement;
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the required consents and approvals of governmental entities in
connection with the transactions contemplated by the Merger
Agreement;
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our operation of the Company and the Company subsidiaries in
compliance with all applicable laws and the regulations of the
NASDAQ Global Market;
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possession by the Company and the Companys subsidiaries of
material permits, franchises, grants, authorizations, licenses,
orders, approvals, easements, variances, certificates, consents
and other similar authorizations necessary to operate our
business in compliance with applicable legal requirements;
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our SEC filings since September 4, 2009, including any
financial statements and underlying books and records;
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inquiries or interrogatories from the SEC, Financial Industry
Regulatory Authority or any governmental authority;
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system of accounting administered in accordance with GAAP and
the absence of any accounting or auditing violations;
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compliance with the Sarbanes-Oxley Act of 2002;
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compliance with the Foreign Corrupt Practices Act of 1977;
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joint ventures and off balance sheet arrangements;
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the absence of material violations of applicable laws, including
laws related to insurance and breach of fiduciary duties by the
Company or any of its officers, directors, employees or agents
to the board of directors;
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the statutory statements of each Company subsidiary that
conducts the insurance operations of the Company as filed with
the insurance departments of their respective jurisdictions and
prepared in accordance with statutory accounting practices
prescribed or permitted by the insurance regulator in each
applicable jurisdiction and the reserves of each Company that
conducts the insurance operations of the Company;
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the absence of a Material Adverse Effect (as defined below),
actions outside of the ordinary course of business, and certain
other changes, events, circumstances or developments related to
the Company or the Companys subsidiaries since
December 31, 2010;
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legal proceedings, proceedings before any governmental
authority,
cease-and-desist
orders and governmental orders;
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employment agreements, multiemployer plans, compliance with
ERISA, and the Companys and the Company subsidiaries
employee benefit plans and stock option plans;
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the ESOP, any action or audit pending with respect to the ESOP;
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labor and employment matters, collective bargaining, absence of
charges of discrimination and misclassification of employee
issues;
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title to assets, absence of liens;
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tax matters;
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environmental matters and compliance with environmental laws;
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no shareholder rights plan;
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material contracts of the Company or any Company subsidiary;
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technology and intellectual property matters including material
licenses, title to owned intellectual property; open source
software, material computer systems and systems to protect
confidential information;
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insurance policies covering the Company and its subsidiaries,
directors and officers;
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conduct of, and matters related to, the Company subsidiaries
that conduct the insurance operations of the Company and
insurance holding companies, reinsurance, insurance and
reinsurance agreements, including Company financial statements,
actuarial analyses, and insurance pools;
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the shareholder vote necessary to consummate the Merger;
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opinion of Willis Capital Markets & Advisory;
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the accuracy of information supplied for inclusion in this proxy
statement;
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absence of characterization as an investment company;
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the absence of fees or commissions for brokers, finders or
investment bankers (other than Willis Capital
Markets & Advisors);
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no dissenters rights; and
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anti-takeover provisions.
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As used in the Merger Agreement, the term Material Adverse
Effect means any event, circumstance, development, change,
occurrence or state of facts or effect that, (1) alone or
in combination, has had or could be reasonably likely to have a
material adverse effect on the business, assets, properties,
condition (financial or otherwise) or results of operations of
the Company and the Company subsidiaries, taken as a whole,
except to the extent that any such material adverse effect
results, alone or in combination, from:
(i) changes in the U.S. economy in general or in
U.S. financial or securities markets (including credit
markets);
(ii) changes generally affecting the U.S. property and
casualty insurance industry;
(iii) changes in law or applicable accounting regulations,
or principles or interpretations, (whether administrative or
judicial) thereof becoming effective after the date of the
Merger Agreement, including accounting pronouncements by the
SEC, the National Association of Insurance Commissioners or the
Financial Accounting Standards Board;
(iv) any change in the Companys stock price or any
failure, in and of itself, by the Company to meet published
revenue or earnings projections (provided that the underlying
causes of such change or failure shall not be excluded);
(v) changes proximately caused by the announcement of the
execution of the Merger Agreement, including the identity of ACE;
(vi) any actions, suits, claims, hearings, arbitrations or
investigations or other proceedings related to the Merger
Agreement, the Merger or other transactions contemplated thereby
or before any governmental authority;
(vii) acts of war, armed hostilities, sabotage or
terrorism, or any escalation or worsening thereof;
(viii) earthquakes, hurricanes or other natural
disasters; and
(ix) any action taken by ACE or any of its affiliates or by
the Company not at the express written request of ACE or any of
its affiliates;
provided, however, that the exceptions in paragraphs (i), (ii),
(iii), (vii) and (viii) above apply solely to the
extent that they do not have a disproportionate impact on the
Company or the Companys subsidiaries, taken as a whole,
compared to other participants in the property and casualty
insurance industry in the United States; or (2) would
prevent or materially delay the consummation of the Merger or
any of the other transactions contemplated by the Merger
Agreement.
The Merger Agreement also contains various representations and
warranties made by ACE and the Merger Sub to us which may be
subject to important limitations and qualifications set forth in
the Merger Agreement. You should be aware that it may not be
appropriate to judge the accuracy of such representations and
warranties as of the date of this proxy statement. These
representations and warranties relate to, among other things:
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ACE and Merger Subs organization, valid existence and good
standing;
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ACEs ownership of all of the outstanding capital stock of
Merger Sub;
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ACE and Merger Subs corporate power and authority to
execute and deliver the Merger Agreement, to perform their
obligations thereunder and to consummate the transactions
contemplated by the Merger Agreement;
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the absence of any violation of or conflict with ACE and the
Merger Subs governing documents, applicable law or certain
agreements as a result of entering into the Merger Agreement and
consummating the Merger;
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the required consents and approvals of governmental entities in
connection with the transactions contemplated by the Merger
Agreement;
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absence of material legal proceedings;
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sufficient financing to permit the Merger Sub to consummate the
Merger and pay the aggregate Merger Consideration and other
amounts required pursuant to the Merger Agreement;
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the absence of fees or commissions for brokers, finders or
investment bankers; and
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the accuracy of information supplied for inclusion in this proxy
statement.
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The representations and warranties of each of the parties to the
Merger Agreement will expire upon the effective time of the
Merger.
Conduct
of Our Business Pending the Merger
For the period between September 7, 2011, the date of
execution of the Merger Agreement and the effective time of the
Merger, unless such action is required or prohibited by law or
ACE agrees to such action in writing, we have agreed:
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to conduct our business and the business of our subsidiaries
only in the ordinary course of business consistent with past
practice;
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to use commercially reasonable efforts to: (a) preserve
substantially intact our business organization and the business
organization of our subsidiaries and (b) to keep available
the services of our current officers and employees and the
officers and employees of our subsidiaries; and
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to take all steps and do all things necessary to preserve the
protections of our reinsurance agreements.
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Under the Merger Agreement, we have also agreed that neither we
nor our subsidiaries will take any of the following actions
until the effective time of the Merger unless such action is
required or prohibited by law, is specifically contemplated by
the Merger Agreement or ACE agrees to such action in writing:
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amend our articles of incorporation, by-laws or other
organizational documents;
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issue, sell, pledge, dispose of, grant or encumber, or authorize
any of the foregoing of any shares of any class of capital stock
of the Company or any subsidiary or issue any options, warrants,
convertible securities or other rights of any kind to acquire
the shares of such capital stock or any other ownership interest
of the Company or any Company subsidiary, provided that the
Company may issue Company common stock upon the exercise of
options granted prior to the date the Merger Agreement was
signed under the Company Stock Incentive Plan;
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make, declare, set aside or pay any dividend or other
distribution payable in cash, stock, property or otherwise with
respect to any of its capital stock, except for dividends by any
direct or indirect wholly owned subsidiary to the Company or any
other Company subsidiary;
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reclassify, combine, split, subdivide or redeem or purchase or
otherwise acquire, directly or indirectly, any of its capital
stock, or purchase or redeem or otherwise acquire any shares of
its capital stock or any of the shares of capital stock of its
subsidiaries, any other securities thereof or any rights,
warrants or options to acquire any such shares or other
securities;
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incur or assume any indebtedness for borrowed money in excess of
$25,000, guarantee any such indebtedness in excess of $25,000 or
issue or sell any debt securities or options, warrants, calls or
other rights to acquire any debt securities of the Company or
any Company subsidiary;
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make any investment in any person or loan or advance to any
person other than a Company subsidiary other than investments
made in the ordinary course of business consistent with past
practice and consistent with the Companys investment
guidelines;
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make any capital expenditure or expenditures which involves the
purchase of real property or is in excess of $50,000 in the
aggregate;
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sell, dispose of or otherwise transfer, lease out, or pledge,
mortgage, or otherwise encumber, any of its properties or assets
with a fair market value of equal to or more than $100,000 in
the aggregate, other than in accordance with the Companys
investment guidelines or pursuant to material contracts;
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directly or indirectly acquire any corporation, partnership,
limited liability company, joint venture, other business
organization or any property;
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adopt a plan or agreement of complete or partial liquidation,
dissolution, restructuring, recapitalization or other
reorganization;
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waive or release any right or claim or settle or compromise any
claim, audit, arbitration, suit, investigation, complaint or
other proceeding in excess of the amount of the corresponding
reserve established on the Companys consolidated balance
sheet as reflected in the most recent applicable Company SEC
Documents plus any applicable third party insurance proceeds,
except (A) as required by the express terms of any contract
in effect prior to the execution and delivery of the Merger
Agreement, (B) for any settlements or compromises of
insurance claims or litigation or arbitration arising in the
ordinary course of business or involving total aggregate
payments not in excess of the amount set forth in the Disclosure
Schedule;
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enter into any consent decree, injunction or similar restraint
or form of equitable relief in settlement of any material claim
or audit that would materially restrict the operations of the
business after the effective time of the Merger;
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materially change any of its accounting policies (whether for
financial accounting or tax purposes), except as required by
applicable law, GAAP or regulatory guidelines;
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other than in accordance with its current investment guidelines
or as otherwise required by the terms of the Merger Agreement,
restructure or materially change its investment securities
portfolio through purchases, sales or otherwise, or the manner
in which such portfolio is classified or reported;
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increase or agree to increase the compensation payable or to
become payable or the benefits provided to, grant any retention,
severance or termination pay to or enter into any employment
bonus, change in control or severance agreement with, its
current or former directors, officers or employees, except for
employees paid in the ordinary course of business, initial
compensation and benefits of individuals who are first employed
by the Company or any Company subsidiary after the date of the
Merger Agreement and for bonuses and retention, severance and
termination payments in an aggregate amount not to exceed
$100,000;
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establish, adopt, enter into, terminate or amend any collective
bargaining agreement or any new employee benefit plan, amend or
terminate any existing employee benefit plan, grant any equity
based or incentive compensation awards, enter into or amend any
employment, severance, retention, incentive or similar agreement
or other employment arrangements with any current or former
director, officer or employee of the Company or any Company
subsidiary or hire or terminate the employment, or modify the
contractual relationship of, any officer, employee or
independent contractor of the Company or any Company subsidiary,
other than hirings or terminations of employees, other than
officers, in the ordinary course of business consistent with
past practice;
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take any action, other than in the ordinary course of business
consistent with past practice, with respect to accounting
policies or procedures;
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file or amend any material tax return, make or change any
material tax election or settle or compromise any material tax
liability other than in the ordinary course of business as
required by law;
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amend, modify or consent to the termination of any material
contract or any material rights of the Company or any Company
subsidiary thereunder other than in the ordinary course of
business consistent with past practice or that would constitute
a Material Adverse Effect; or enter into any new agreement which
would have been considered a material contract if it were
entered into at or prior to the date hereof;
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forfeit, abandon, modify, waive, terminate or otherwise change
any of its permits, except as required under applicable law;
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take any action that would reasonably be expected to result in a
reduction of the insurer financial strength ratings of any
subsidiary of the Company that conducts the insurance operations
of the Company;
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offer or sell insurance or reinsurance of any line or class of
business in any new jurisdiction;
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knowingly violate or knowingly fail to perform any obligation or
duty imposed upon the Company or any of the Company subsidiaries
by any applicable law that is material to the business or
operations of the Company or any Company subsidiary;
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take any action that would reasonably be expected to, or omit to
take any action where such omission would reasonably be expected
to, prevent, materially delay or impede the consummation of the
Merger or cause any of its representations and warranties to
become untrue or have a Material Adverse Effect on the
transaction;
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take any action adverse to the interests of ACE with respect to
the Companys reinsurance agreements; and
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enter into any legally binding agreement or otherwise make a
commitment to do any of the foregoing.
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No
Solicitation of Transactions
We have agreed that we will not, and we will not authorize our
subsidiaries or our respective directors, officers,
employees, investment bankers, attorneys, accountants or other
advisors or representatives, directly or indirectly to:
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solicit, initiate or knowingly encourage, or knowingly take any
other action or fail to take any action in a way designed to
facilitate, any inquiries or the making of any proposal or offer
that constitutes, or could reasonably be expected to lead to,
any Takeover Proposal (as defined below);
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furnish any non-public information regarding the Company or any
subsidiaries to any person in connection with or in response to
a Takeover Proposal or an inquiry or indication of interest that
could reasonably be expected to lead to, any Takeover Proposal;
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engage in discussions or negotiations with any person with
respect to any Takeover Proposal;
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approve, endorse or recommend any Takeover Proposal; or
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enter into any letter of intent or similar document or any
agreement contemplating or otherwise relating to any Acquisition
Transaction (as defined below).
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In the Merger Agreement, a Takeover Proposal
generally means any unsolicited, bona fide, written offer,
proposal, inquiry or indication of interest contemplating or
otherwise relating to any Acquisition Transaction.
58
In the Merger Agreement, an Acquisition Transaction
means a transaction or series of transactions involving:
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any merger, consolidation, share exchange, business combination,
issuance of securities, acquisition of securities, tender offer,
exchange offer or other similar transaction (i) in which
the Company or any of its subsidiaries is a constituent
corporation, (ii) in which a person or group
(as defined in the Exchange Act and the rules promulgated
thereunder) of persons directly or indirectly acquires
beneficial or record ownership of securities representing more
than 10% of the outstanding securities of any class of voting
securities of the Company or any of its subsidiaries, or
(iii) in which the Company or any of its subsidiaries
issues or sells securities representing more than 10% of the
outstanding securities of any class of voting securities of the
Company or any of its subsidiaries; or
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other than in the ordinary course of business, any sale, lease,
exchange, transfer, license, acquisition or disposition of any
business or businesses or assets that constitute or account for
10% or more of the consolidated net revenues, net income or
assets of the Company and its subsidiaries.
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Despite the foregoing restrictions, if, following the receipt of
a bona fide written unsolicited Takeover Proposal that the
Company board of directors determines in good faith constitutes
or is reasonably likely to lead to a Superior Proposal (as
defined below) and the board of directors determines in good
faith, after consultation with outside counsel, that a failure
to do so would be inconsistent with its fiduciary duties under
applicable law, the Company may, at any time prior to the
adoption of the Merger Agreement by the Companys
shareholders, request information from the party making such
Takeover Proposal, furnish non-public information with respect
to the Company and the Companys subsidiaries to that party
pursuant to a customary confidentiality agreement (subject to
certain conditions set forth in the Merger Agreement) and
participate in discussions and negotiations with such party
regarding such Takeover Proposal.
Except as expressly permitted, neither the board of directors
nor any committee thereof shall:
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withdraw or modify the Companys recommendation to
shareholders to adopt the Merger Agreement in a manner adverse
to ACE, adopt or propose a resolution to withdraw or modify the
Companys recommendation to shareholders to adopt the
Merger Agreement in a manner adverse to ACE or take any other
action that is or becomes disclosed publicly to indicate that
the board of directors or any committee thereof does not support
the Merger and the Merger Agreement or does not believe that the
Merger and the Merger Agreement are in the best interests of the
Companys shareholders;
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fail to reaffirm, without qualification, the Companys
recommendation to shareholders to adopt the Merger Agreement, or
fail to state publicly, without qualification, that the Merger
and the Merger Agreement are in the best interests of the
Companys shareholders, within five Business Days after ACE
requests in writing that such action be taken;
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fail to announce publicly, within 10 business days after a
tender offer or exchange offer relating to securities of the
Company shall have been commenced, that the board of directors
recommends rejection of such tender or exchange offer;
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fail to issue, within 10 business days after a Takeover Proposal
is publicly announced, a press release announcing its opposition
to such Takeover Proposal;
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approve, endorse or recommend any Takeover Proposal; or
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resolve or propose to take any action described in the five
immediately preceding bullet points (each of the preceding
bullet points constituting, an adverse recommendation
change).
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At any time prior to the adoption of the Merger Agreement by the
Companys shareholders, the board of directors may effect,
or cause the Company to effect, as the case may be, an adverse
recommendation change if:
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after the date of the Merger Agreement, the Company receives an
unsolicited, bona fide, written offer to effect a transaction
which is considered a Superior Proposal and is not withdrawn;
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such offer was not obtained or made as a direct or indirect
result of a breach of the Merger Agreement, the confidentiality
agreement between Company and ACE Group Holdings, Inc., or any
standstill or similar agreement under which the
Company or any of its subsidiaries has any rights or obligations;
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the Company provides ACE the terms and conditions of the offer
and the identity of the person making the offer;
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the board of directors determines in good faith, after
consultation with a financial advisor of nationally recognized
reputation and outside legal counsel, that such offer
constitutes a Superior Proposal;
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the board of directors does not effect, or cause the Company to
effect, an adverse recommendation change within five business
days after ACE receives written notice from the Company
confirming that the board of directors has determined that such
offer is a Superior Proposal and if requested by ACE, engages in
good faith negotiations with ACE to amend the Merger Agreement
so that the offer is no longer a Superior Proposal;
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at the end of such five business day period, such offer has not
been withdrawn and continues to constitute a Superior
Proposal; and
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the board of directors determines in good faith, after obtaining
and taking into account the advice of outside legal counsel,
that, in light of such Superior Proposal, failure to make an
adverse recommendation change would be inconsistent with the
board of directors fiduciary duties under applicable law.
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In the Merger Agreement, a Superior Proposal means
an unsolicited, bona fide written offer made by a third party to
acquire, directly or indirectly, by merger or otherwise, all of
the outstanding shares of Company common stock or all or
substantially all of the assets of the Company and its
subsidiaries, which the board of directors determines in its
reasonable good faith judgment, taking into account, among other
things, all legal, financial, regulatory and other aspects of
the proposal and the person making the proposal and after
consultation with a financial advisor of nationally recognized
reputation and outside legal counsel that the offer
(A) provides a higher value to the shareholders of the
Company than the consideration payable in the Merger,
(B) is not subject to any financing condition or
contingency and (C) is reasonably capable of being
completed, taking into account all financial, legal, regulatory
and other aspects of such proposal.
Access to
Information
From the date of the Merger Agreement until the closing date of
the Merger, we have agreed to (and to cause our subsidiaries and
our officers, directors, employees, auditors and agents and
those of our subsidiaries to: (a) provide to the officers,
employees, agents, advisors, legal counsel, accountants,
consultants and other authorized representatives of ACE and the
Merger Sub and its representatives reasonable access, during
normal business hours to the officers, employees, agents,
properties, offices and other facilities of the Company and its
subsidiaries and to their books and records and (b) furnish
ACE and the Merger Sub such financial, operating and other data
and information as ACE and the Merger Sub through its officers,
employees or agents, may reasonably request.
Public
Announcements
Until the closing date, ACE, the Merger Sub and the Company
agree that they will not issue any public release or
announcement concerning the Merger Agreement without the prior
consent of the other party (which consent shall not be
unreasonably delayed or withheld), except as such release or
announcement may be required by applicable law or the rules or
regulations of any United States or
non-United
States securities exchange, in which case the party required to
make the release or announcement shall use its reasonable best
efforts to allow the other party reasonable time to comment on
such release or announcement in advance of such issuance. Any
formal employee communication programs or announcements by the
Company with respect to the Merger or the employment or benefit
arrangements to be effective following the effective time of the
Merger are subject to prior review and approval by ACE, which
shall not be unreasonably withheld, conditioned or delayed.
60
Shareholders
Meeting
In the Merger Agreement, we have agreed:
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to duly call, give notice of, convene and hold an annual or
special meeting of our shareholders as promptly as practicable
following the execution of the Merger Agreement for the purpose
of considering and taking action on the Merger Agreement and the
Merger, and
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to use our reasonable best efforts to solicit proxies from our
shareholders in favor of adoption of the Merger Agreement.
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Employee
Benefits Matters
Prior to the earlier to occur of (i) November 30, 2011
and (ii) five business days prior to the closing date, the
Company shall prepare in consultation with ACE and provide ACE
with true, complete and accurate financial calculations pursuant
to Section 280G of the Code with respect to parachute
payments.
ACE shall recognize the service of each employee of the Company
or any Company subsidiary prior to the closing date as service
with ACE for the purpose of any waiting period, vesting,
eligibility and benefit entitlement for any compensation or
employee benefit plans of ACE in which such employee
participates, or which are made available by ACE (but excluding
benefit accruals for defined benefit pension plans and excluding
eligibility for retiree medical and other retiree welfare
benefits). The Company shall amend and terminate the Company
401(k) plan prior to the closing date of the Merger. The ESOP
shall terminate automatically pursuant to its terms upon the
consummation of the Merger. The Company agrees to convert its
filing for an initial determination letter for the ESOP into a
filing for a final determination letter for termination of the
ESOP. Upon receipt of a final favorable determination letter
from the IRS, the account balances in the ESOP shall be
distributed to participants and beneficiaries. Prior to closing,
contributions to the ESOP and payments on the ESOP loan shall be
made consistent with past practices on the regularly scheduled
contribution or payment date; provided, however, that the
Company shall make a contribution to, and payment on, the ESOP
loan with respect to the period from January 1, 2011
through the date of the closing (or, if the closing occurs after
December 31, 2011, the period from January 1, 2012
through the date of the closing) but no further contributions
shall be made to the ESOP after closing or with respect to any
period after the closing.
Indemnification
and Insurance
Each of our directors and officers and the directors and
officers of our subsidiaries will be indemnified, defended and
held harmless to the extent such indemnified parties are
indemnified by the Company or the applicable Company subsidiary
pursuant to their respective by laws, articles of incorporation
or other organizational documents, against any and all losses,
claims, damages, costs, expenses, fines, liabilities and
judgments, including amounts paid in settlement arising in whole
or in part out of the fact that such person was or is a director
or officer of the Company or any of its subsidiaries and
pertaining to any action or omission existing or occurring at or
prior to the effective time of the Merger. ACE will amend the
organizational documents of the surviving corporation after the
effective time of the Merger to contain provisions no less
favorable to the indemnified parties with respect to limitation
of liabilities of directors and officers, indemnification and
advancement of expenses than are set forth in the by laws,
articles of incorporation or other organizational documents. ACE
is required to obtain directors and officers liability insurance
providing coverage for a period of six years following the
effective time of the Merger with respect to acts or omissions
occurring prior to the effective time of the Merger that were
committed by such officers and directors in their capacity as
such, provided that ACE shall not be required to expend per year
of coverage more than 250% of the annual amount expended by the
Company and any Company subsidiary as of the date of the Merger
Agreement.
61
Conditions
to the Merger
Conditions
to Each Partys Obligation to Effect the Merger
The obligations of each of the parties to effect the Merger are
subject to the satisfaction or waiver in writing by ACE and the
Company, at or prior to the effective time of the Merger of the
following conditions:
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our shareholders must have approved and adopted the Merger
Agreement;
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any waiting period applicable to the consummation of the Merger
under the HSR Act shall have expired or been terminated and no
action shall have been instituted by the Department of Justice
or Federal Trade Commission challenging or seeking to enjoin the
consummation of the Merger;
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all required insurance regulatory approvals or consents shall
have been received; and
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no governmental authority shall have enacted, issued,
promulgated, enforced or entered any law that has the effect of
making the acquisition of shares of Company common stock by ACE
or the Merger Sub or any affiliate of either of them illegal or
otherwise preventing or prohibiting consummation of the Merger,
and there shall not be instituted or pending any action by any
governmental authority relating to the Merger Agreement.
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Conditions
to Obligations of ACE and the Merger Sub
The obligations of ACE and the Merger Sub to effect the Merger
are subject to the satisfaction or waiver (where permissible),
in their sole discretion, of the following additional conditions:
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the Companys representations and warranties related to
capitalization shall be true and correct, except for
de
minimis
errors, and all other representations and warranties
of the Company set forth in the Merger Agreement must be true
and correct in all respects (without giving effect to any
limitation as to materiality or Material Adverse Effect) except
where the failure in the aggregate to be true would not have a
Material Adverse Effect, in each case, as of the date of the
Merger Agreement and as of the effective time of the Merger
(except to the extent expressly made as of an earlier date, in
which case as of such earlier date);
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the Company must have performed or complied in all material
respects with all agreements and covenants required by the
Merger Agreement to be performed or complied with by it on or
prior to the effective time of the Merger;
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the Company shall have delivered to ACE a certificate, dated as
of the date of the closing signed by a duly authorized officer
of the Company, certifying the satisfaction of the two
previously stated conditions;
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since the date of the Merger Agreement there shall not have
occurred any effect, event, condition or change that would,
individually or in the aggregate, have a Material Adverse
Effect; and
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none of the regulatory approvals obtained shall contain and no
law shall have been enacted or in effect that contains any
limitation, requirement or condition that would, individually or
in the aggregate, be reasonably expected to (i) materially
impair or interfere with the ability of the Company and its
subsidiaries to conduct their businesses after the effective
time of the Merger substantially in the manner as such
businesses are conducted as of the date of the Merger Agreement,
(ii) result in the sale, lease, license, disposal or
holding separate by ACE of any capital stock of the surviving
corporation after the effective time of the Merger or by the
Company or its subsidiaries of any of their material assets,
rights product lines, licenses business or other operations or
(iii) materially and adversely affect the benefits, taken
as a whole, that ACE would otherwise received from the
transactions contemplated by the Merger Agreement.
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62
Conditions
to Obligations of the Company
Our obligation to effect the Merger is subject to the
satisfaction or waiver (if applicable) by us of the following
additional conditions:
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the representations and warranties of ACE and the Merger Sub set
forth in the financing section of the Merger Agreement must be
true and correct in all respects and all other representations
and warranties of ACE and the Merger Sub contained in the Merger
Agreement shall be true and correct in all respects (without
giving effect to any limitation as to materiality), except as
would not, individually or in the aggregate, be reasonably
likely to have a material adverse effect on the ability of ACE
and the Merger Sub to consummate the Merger as of the effective
time of the Merger (except to the extent expressly made as of an
earlier date, in which case as of such earlier date);
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ACE and Merger Sub must have performed or complied in all
material respects with all agreements and covenants required by
the Merger Agreement to be performed or complied with by it on
or prior to the effective time of the Merger; and
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ACE and Merger Sub shall have delivered to the Company a
certificate, dated as of the date of the closing signed by a
duly authorized officer of ACE and the Merger Sub, certifying
the satisfaction of the conditions of the two conditions
previously stated.
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Termination
Subject to certain exceptions, the Merger Agreement may be
terminated and the Merger may be abandoned at any time prior to
the effective time of the Merger upon written notice from the
terminating party to the non-terminating party, in any of the
following ways:
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by mutual written consent of the Company and ACE;
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by either ACE or the Company if the Merger has not been
consummated by December 31, 2011, unless such date, which
we refer to as the outside date, is extended in
accordance with the Merger Agreement in order to obtain any
necessary insurance regulatory consents or approvals (provided,
that in no event will the Merger Agreement be extended beyond
March 31, 2012), except that this termination right will
not be available to any party whose failure to fulfill any
obligation under the Merger Agreement has been a principal cause
of or resulted in the failure of the Merger to occur on or
before such date;
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by either ACE or the Company if any governmental authority has
issued an order or ruling which has become final and
non-appealable preventing, prohibiting or making illegal the
consummation of the Merger, unless the party seeking to
terminate the Merger Agreement failed to comply in all material
respects with its obligations to prevent such a ruling;
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by either ACE or the Company if (i) the special meeting of
the Companys shareholders (including any adjournments
thereof) has been held and completed and (ii) the
Companys shareholders shall not have adopted the Merger
Agreement, except that the Company may not terminate if it has
not paid ACE all sums due;
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by ACE if (i) the board of directors failed to recommend
that the Companys shareholders vote to adopt the Merger
Agreement, (ii) there was an adverse recommendation change,
(iii) the board of directors approved, endorsed or
recommended any Takeover Proposal, (iv) the Company failed
to include the Companys recommendation to shareholders to
adopt the Merger Agreement in the proxy statement or
(v) the Company, or any of its subsidiaries or any
representative of the Company or any of its subsidiaries,
breached the obligations related to the shareholders
meeting, the proxy statement or non-solicitation of
alternative transactions or (vi) the board of directors or
one of its committees resolves or proposes to take any of the
foregoing actions;
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by ACE if the Company breaches any of its representations,
warranties, covenants or agreements in the Merger Agreement and
such breach would cause the conditions to the obligations of ACE
and Merger
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63
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Sub to consummate the Merger with respect to the accuracy of
representations and warranties of the Company and performance of
covenants and obligations of the Company not to be satisfied and
such breach cannot be cured or is not cured within 30 days
of notice of such breach (or the outside date, if earlier) and
such breach is not waived by ACE; or
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by the Company (i) if ACE or Merger Sub breach any of their
representations, warranties, covenants or agreements in the
Merger Agreement and such breach would cause the conditions to
the obligations of the Company to consummate the Merger with
respect to the accuracy of representations and warranties of ACE
and Merger Sub and performance of covenants and obligations of
ACE and Merger Sub not to be satisfied and such breach cannot be
cured or is not cured within 30 days of notice of such
breach (or the outside date, if earlier) and such breach is not
waived by the Company; or (ii) prior to the Companys
shareholders adopting the Merger Agreement, if it concurrently
enters into a definitive agreement providing for a Superior
Proposal and has followed the procedures and met the obligations
set forth in the Merger Agreement related to such Superior
Proposal and has paid or pays the Termination Fee to ACE (as
defined below).
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Termination
Fee and Expenses
The Merger Agreement requires that the Company pay ACE a
termination fee equal to $3,750,000 if:
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ACE terminates the Merger Agreement because (i) the board
of directors failed to recommend that the Companys
shareholders vote to adopt the Merger Agreement, (ii) there
was an adverse recommendation change, (iii) the board of
directors approved, endorsed or recommended any Takeover
Proposal, (iv) the Company failed to include the
Companys recommendation to shareholders to adopt the
Merger Agreement in the proxy statement, (v) the Company,
or any of its subsidiaries or any representative of the Company
or any of its subsidiaries, breached the obligations related to
the shareholders meeting, the proxy statement or
non-solicitation of alternative transactions or
(vi) the board of directors or one of its committees
resolves or proposes to take any of the foregoing actions;
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either the Company or ACE terminates the Merger Agreement
because the Merger has not been consummated by the outside date
or ACE terminates the Merger Agreement because the Company
breaches any of its representations, warranties, covenants or
agreements in the Merger Agreement and such breach would cause
the conditions to the obligations of ACE and Merger Sub to
consummate the Merger with respect to the accuracy of
representations and warranties of the Company and performance of
covenants and agreements of the Company not to be satisfied and
such breach cannot be cured or is not cured within 30 days
of notice of such breach (or the outside date, if earlier) and
on or before the date of such termination a Takeover Proposal
shall have been announced, disclosed or otherwise communicated
to the board of directors and the Company shall have entered
into a definitive agreement with respect to an Acquisition
Transaction or an Acquisition Transaction is consummated within
twelve months of such termination of the Merger Agreement;
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either the Company or ACE terminates the Merger Agreement
because the special meeting of the Companys shareholders
(including any adjournments thereof) shall have been held and
completed and the shareholders shall not have adopted and
approved the Merger Agreement and on or before the date of the
Company shareholders meeting, a Takeover Proposal shall
have been announced, disclosed or otherwise communicated to the
board of directors and (ii) the Company shall have entered
into a definitive agreement with respect to an Acquisition
Transaction or an Acquisition Transaction is consummated within
twelve months of such termination of the Merger
Agreement; or
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if the Merger Agreement is terminated by any party thereto at
any time during which the Merger Agreement was terminable in
circumstances in which ACE would be entitled to the payment of
the termination fee as described in any of the three immediately
preceding bullet points.
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The Merger Agreement provides that, except for the payment of
the termination fee (and certain related amounts) and payment of
the HSR filing (which ACE and the Company shall bear equally),
each party will
64
pay its own expenses incurred in connection with the Merger and
the transactions contemplated by the Merger Agreement, whether
or not the Merger is consummated.
Amendment
and Waiver
The Merger Agreement may be amended by the parties in writing by
action taken by or on behalf of their respective boards of
directors at any time prior to the effective time of the Merger.
Once the Company shareholders shall have adopted the Merger
Agreement, no amendment may be made that by law requires further
approval by our shareholders without obtaining such approval.
Until the effective time of the Merger, the parties may, to the
extent legally allowed:
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extend the time for the performance of any of the obligations or
other acts of the other parties in the Merger Agreement;
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waive any inaccuracies in the representations and warranties
contained in the Merger Agreement; and
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waive compliance with any of the conditions contained in the
Merger Agreement.
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Once the Company shareholders shall have adopted the Merger
Agreement, no waiver may be made that by law requires further
approval by our shareholders without obtaining such approval.
Specific
Performance
The parties agreed that irreparable damage would occur in the
event that any of the provisions of the Merger Agreement were
not performed in accordance with their specific terms on a
timely basis or were otherwise breached, and that the parties,
without the necessity of posting bond or other undertaking,
shall be entitled to an injunction or injunctions to prevent
breaches of the Merger Agreement and to specific performance of
the terms hereof to prevent breaches of the Merger Agreement and
to enforce specifically the terms and provisions of the Merger
Agreement, in addition to any other remedy to which they may be
entitled at law or in equity.
MARKET
PRICE AND DIVIDEND DATA
Our common stock is listed on the NASDAQ Global Market under the
ticker symbol PMIC. This table shows, for the
periods indicated, the high and low sales price per share for
our common stock as reported by the NASDAQ Global Market.
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Common Stock
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High
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Low
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Fiscal Year Ended December 31, 2011
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Third Quarter (through September 15, 2011)
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$
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20.13
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$
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14.25
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Second Quarter
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17.68
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13.78
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First Quarter
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15.34
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13.51
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Year Ended December 31, 2010
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Fourth Quarter
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$
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14.75
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$
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13.21
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Third Quarter
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14.81
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12.00
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Second Quarter
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14.95
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12.63
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First Quarter
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12.15
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10.35
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Year Ended December 31, 2009
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Fourth Quarter
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$
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11.08
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$
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10.00
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Third Quarter
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N/A
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N/A
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Second Quarter
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N/A
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N/A
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First Quarter
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N/A
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N/A
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65
The closing price per share of our common stock on
September 7, 2011 (the last trading day before announcement
of the Merger Agreement) was $16.30. The high and low sales
prices per share for our common stock as reported by the NASDAQ
Global Market on September 15, 2011, the latest practicable
trading day before the printing of this proxy statement were
$20.13 and $20.08, respectively.
As of September 15, 2011, 4,974,414 shares of our
common stock were held of record by shareholders eligible to
vote.
Following the completion of the Merger, our common stock will
not be traded on any public market.
Dividend
Policy
We do not currently pay dividends on our common stock. Payment
of dividends in the future is at the discretion of the board of
directors and will depend on a number of factors including our
operating results, overall financial condition, capital
requirements and general business conditions. We depend
primarily on dividends paid by Penn Millers Insurance Company,
our lead insurance company, to us and proceeds from the initial
public offering that were not contributed to Penn Millers
Insurance Company to provide funds for the payment of dividends.
If Penn Millers Insurance Company chooses to pay dividends to
Penn Millers Holding Corporation, we will receive dividends only
after Penn Millers Insurance Company provides notice to, and
without objection from, the Pennsylvania Insurance Department.
During any twelve-month period, the amount of dividends paid by
Penn Millers Insurance Company to us, without the prior approval
of the Pennsylvania Insurance Department, may not exceed the
greater of 10% of the insurance companys surplus as
regards policyholders as reported on its most recent annual
statement filed with the Pennsylvania Insurance Department or
the insurance companys statutory net income as reported on
such statement.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following tables present certain information regarding the
ownership of our common stock as of September 15, 2011, by:
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all those known by us to be beneficial owners of more than five
percent of our common stock;
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each director;
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each executive officer; and
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all of our directors and executive officers as a group.
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We calculate beneficial ownership by including shares owned in
each directors or executive officers name (or by any
member of his or her immediate family). Also, in calculating the
percentage ownership, we count securities which the director or
executive officer could purchase within 60 days of
September 15, 2011, (such as exercisable stock options that
are listed in a separate column as outstanding securities).
Except as otherwise noted, to our knowledge, the named
individual or their family members have sole voting and
investment power with respect to the securities beneficially
owned by the shareholder. Unless otherwise indicated, the
business address for each listed shareholder is 72 North
Franklin Street, Wilkes-Barre, Pennsylvania
18701-1301.
66
Security
Ownership of Certain Beneficial Owners
The following table sets forth information regarding persons or
entities that, to the knowledge of the Company, own of record or
beneficially, as of September 15, 2011, five percent or
more of the outstanding shares of Company common stock:
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Amount and
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Nature of
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Percent of
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Beneficial
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Common
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Name and Address of Beneficial Owner
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Ownership
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Stock(1)
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Penn Millers Holding Corporation Employee Stock Ownership Plan
Trust(2)
2201 Ridgewood Rd., #180
Wyomissing, PA 19610
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536,139
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10.78
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%
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Castine Capital Management Company(3)
One International Place, Suite 2401
Boston, Massachusetts 02110
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422,951
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8.50
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%
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Sardar Biglari(4)
175 East Houston Street, Suite 1300
San Antonio, Texas 78205
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416,598
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8.37
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%
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Aegis Financial Corp.(5)
1100 North Glebe Road, #1040
Arlington, VA 22201
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329,610
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6.63
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%
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Bradley Louis Radoff(6)
1177 West Loop South
Houston, TX 77027
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255,000
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5.13
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%
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(1)
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Calculation of percentage is based upon a total of
4,974,414 shares outstanding and entitled to vote at
September 15, 2011.
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(2)
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Under the Penn Millers Holding Corporation Employee Stock
Ownership Plan (which we refer to as the ESOP),
shares are allocated to accounts in the name of the individuals
who participate in the ESOP. The voting rights for shares in
each individual participants ESOP account are passed
through to that participant. Because participants can vote
shares in their ESOP accounts, but cannot sell them at this
time, participants in the ESOP have voting power and no
dispositive power over shares allocated to their ESOP accounts.
As of September 15, 2011, 536,139 shares were held in
the ESOPs related trust. Of these 536,139 shares,
59,140 shares were allocated to the accounts of eligible
ESOP participants. The remaining 476,999 shares were held
in an unallocated account in the ESOPs related trust and
will be allocated to eligible ESOP participants in accordance
with the terms of the ESOP. The ESOP trustee will vote the
unallocated shares held under the ESOP, and allocated shares for
which no direction is received, in its sole discretion, subject
to the ESOP trustees fiduciary responsibilities under
applicable law. The number of shares allocated to the account of
each executive officer is disclosed in the footnotes to the
beneficial ownership table which appears below under the heading
Security Ownership of Directors and Officers
and is also included in the total number of shares held by the
ESOP. Because of its role as trustee for the ESOP, National Penn
Investors Trust Company may also be deemed to have dispositive
power over the shares held by the ESOP.
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(3)
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Castine Capital Management, LLC shares dispositive and voting
power over 280,009 of its shares with Castine Partners II, LP.
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(4)
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Sardar Biglari has sole dispositive and voting power over
416,598 shares owned by Biglari Holdings, which has
208,299 shares with sole dispositive and voting power
through the Lion Fund LLP and 208,299 shares with sole
dispositive and voting power through Biglari Capital Corp.
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(5)
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Aegis Financial Corp is an investment advisor that acts through
its principal, Scott L. Barbee, with sole dispositive and voting
power over its shares.
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(6)
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Bradley Radoff has sole dispositive and voting power over
255,000 shares.
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67
Security
Ownership of Directors and Officers
The following table sets forth information concerning the number
of shares of Company common stock beneficially owned, as of
September 15, 2011, by each present director (and one
retired director) and nominee for director, each executive
officer and all of the Companys current directors and
executive officers as a group:
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Amount and
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Nature of
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Beneficial
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Percent of
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Name:
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Ownership(1)
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Class(2)
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Directors:
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Heather M. Acker(3)
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8,800
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*
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F. Kenneth Ackerman, Jr.(3)
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11,697
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*
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E. Lee Beard
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5,500
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*
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Dorrance R. Belin(3)
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15,300
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*
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John L. Churnetski(3)
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8,800
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*
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John M. Coleman(3)
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37,300
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*
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Douglas A. Gaudet(4)(5)
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58,031
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1.2
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%
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Kim E. Michelstein(3)
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10,300
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*
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Robert A. Nearing, Jr.(3)
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7,800
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*
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Donald A. Pizer(3)
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6,400
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*
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James M. Revie(6)
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7,500
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*
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Executive Officers:
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Michael O. Banks(5)(7)
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21,545
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*
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Harold W. Roberts(5)(8)
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12,155
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*
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Keith A. Fry(5)(9)
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4,259
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*
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Kevin D. Higgins(5)(10)
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11,661
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*
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Jonathan C. Couch(5)(11)
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5,932
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*
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Joseph J. Survilla(5)(12)
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3,972
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*
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All Directors and Executive Officers as a Group (17 persons)
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236,952
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4.8
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%
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*
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Less than one percent.
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(1)
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Shares beneficially owned means shares over which a person
exercises sole or shared voting or investment power or shares of
which a person has the right to acquire beneficial ownership
within 60 days of September 15, 2011. Unless otherwise
noted, the individuals and group noted above have sole voting
and investment power with respect to shares beneficially owned.
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(2)
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Calculation of percentages is based upon 4,974,414 shares
outstanding and entitled to vote on September 15, 2011 plus
shares that may be issued within 60 days of
September 15, 2011 to the applicable individuals and group
noted above having rights to exercise stock options if such
persons or group members exercise such rights within such period.
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(3)
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Includes 300 options to purchase shares of our common stock.
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(4)
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Includes 6,068 options to purchase shares of our common stock.
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(5)
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Includes shares allocated to employee accounts under the ESOP.
Messrs. Gaudet, Banks, Roberts, Fry, Higgins, Couch and
Survilla have earned 2,472, 2,197, 3,258, 304, 2,348, 1,044, and
1,966 shares each, respectively. These shares, a portion of
which are unvested, are eligible to be voted by the holder and
vest over 6 years. These unvested shares will become fully
vested upon the closing of the Merger.
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(6)
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Includes 1,500 options to purchase shares of our common stock.
Mr. Revie retired from the Companys board of
directors effective April 4, 2011.
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(7)
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Includes 2,598 options to purchase shares of our common stock.
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68
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(8)
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Includes 1,680 options to purchase shares of our common stock.
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(9)
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Includes 1,533 options to purchase shares of our common stock.
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(10)
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Includes 1,464 options to purchase shares of our common stock.
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(11)
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Includes 967 options to purchase shares of our common stock.
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(12)
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Includes 984 options to purchase shares of our common stock.
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ADVISORY
VOTE ON GOLDEN PARACHUTES
Section 14A of the Exchange Act, which was enacted as part
of the Dodd-Frank Wall Street Reform and Consumer Protection Act
of 2010, requires that we provide our shareholders with the
opportunity to vote to approve, on an non-binding, advisory
basis, the golden parachute compensation for our
named executive officers, as disclosed in the section of this
proxy statement entitled
The Merger
Interests of Executive Officers and Directors in the
Merger Golden Parachute
at
page .
We are asking our shareholders to indicate their approval of the
various change of control payments which our named executive
officers will or may be eligible to receive in connection with
the Merger. These payments are set forth in the table entitled
Golden Parachute Compensation
under the
section of this proxy statement entitled
The
Merger Interests of Executive Officers and Directors
in the Merger Golden Parachutes
and the
accompanying footnotes. The various plans and arrangements
pursuant to which these compensation payments may be made have
previously formed part of the Companys overall
compensation program for its named executive officers, which
have been disclosed to our shareholders as part of the
Compensation Discussion and Analysis and related sections of our
annual proxy statements. These historical arrangements were
adopted and approved by the Compensation Committee of our board
of directors, which is comprised solely of non-management
directors, and are believed to be reasonable and competitive
with the arrangements being offered by other
U.S.-based,
insurance product providers of similar size.
Accordingly, we are seeking approval of the following resolution
at the special meeting:
RESOLVED FURTHER, that the shareholders of the Company
approve, on a non-binding, advisory basis, the golden parachute
compensation which may be paid to the Companys named
executive officers in connection with the Merger.
Shareholders should note that this non-binding proposal
regarding golden parachute compensation is merely an advisory
vote that will not be binding on the Company or ACE, their
boards of directors or the compensation committees of the
Company or ACE. Further, the underlying plans and arrangements
are contractual in nature and not, by their terms, subject to
shareholder approval. Accordingly, regardless of the outcome of
the advisory vote, if the Merger is consummated our named
executive officers will be eligible to receive the various
change of control payments in accordance with the terms or
conditions applicable to those payments.
Approval of the non-binding proposal regarding certain
Merger-related executive compensation arrangements requires an
affirmative vote of a majority of the shares of our common stock
present in person or represented by proxy at the special meeting
and entitled to vote, assuming a quorum is present. For the
non-binding proposal regarding certain Merger-related executive
compensation arrangements, you may vote
FOR,
AGAINST
or
ABSTAIN.
Abstentions and properly executed broker non-votes, if any,
will be counted as present for the purpose of determining
whether a quorum is present at the special meeting, but will
have the same effect as a vote against the adoption of the
non-binding proposal. The failure to instruct your bank, broker
or other nominee how to vote your shares will not have any
effect on the non-binding proposal regarding certain
Merger-related executive compensation arrangements. No proxy
that is specifically marked against adoption of the Merger
Agreement will be voted
FOR
the non-binding
proposal, unless it is specifically marked
FOR
the non-binding proposal.
69
ADJOURNMENT
OF THE SPECIAL MEETING
We are submitting a proposal for consideration at the special
meeting to authorize the named proxies to approve one or more
adjournments of the special meeting if there are not sufficient
votes to adopt the Merger Agreement at the time of the special
meeting. Even though a quorum may be present at the special
meeting, it is possible that we may not have received sufficient
votes to adopt the Merger Agreement by the time of the special
meeting. In that event, we would need to adjourn the special
meeting in order to solicit additional proxies. The adjournment
proposal relates only to an adjournment of the special meeting
for purposes of soliciting additional proxies to obtain the
requisite shareholders approval to adopt the Merger Agreement.
Any other adjournment of the special meeting (e.g., an
adjournment required because of the absence of a quorum) would
be voted upon pursuant to the discretionary authority granted by
the proxy.
The proposal to approve one or more adjournments of the special
meeting requires the affirmative vote of holders of a majority
of the shares of Company common stock voting on the proposal.
Our board of directors unanimously recommends that you vote
FOR
the adjournment of the special meeting,
if necessary, for the purpose of soliciting additional proxies
to vote in favor of adopting the Merger Agreement.
If the special meeting is adjourned to a different date, time,
or place, we are not required to give notice of the new date,
time, or place if this information is announced at the special
meeting before adjournment or unless our board fixes a new
record date for the special meeting.
The adjournment proposal relates only to an adjournment of the
special meeting occurring for purposes of soliciting additional
proxies for adoption of the Merger Agreement proposal in the
event that there are insufficient votes to approve that
proposal. Our board of directors retains full authority to the
extent set forth in our bylaws and Pennsylvania law to postpone
the special meeting before it is convened, without the consent
of any of our shareholders.
OTHER
MATTERS
Other
Matters for Action at the Special Meeting
As of the date of this proxy statement, our board of directors
knows of no matters that will be presented for consideration at
the special meeting other than as described in this proxy
statement.
Shareholder
Proposals
If the Merger is consummated, we will not have public
shareholders and there will be no public participation in any
future meeting of shareholders of the Company. However, if the
Merger is not consummated, we expect to hold our 2012 annual
meeting of shareholders in 2012. The Company currently
anticipates that, in such event, the 2012 annual meeting of
shareholders will be held during the period
from ,
2012
to ,
2012, although the Company reserves the right to delay its
annual meeting as may be permitted under applicable law.
Proposals of shareholders intended to be presented at the 2012
Annual Meeting of Shareholders pursuant to
Rule 14a-8
under the Exchange Act must be received by the Company no later
than 5:00 p.m., Eastern Time, on December 7, 2011, in
order to be considered for inclusion in the Companys proxy
materials for that meeting. The Company suggests that proponents
submit their proposals via registered or certified mail.
Proposals should be addressed to our Corporate Secretary, 72
North Franklin Street P.O. Box P, Wilkes-Barre,
Pennsylvania
18773-0016.
Our bylaws require advance notice of business to be brought
before a shareholders meeting, including nominations of
persons for election as directors. To be timely, notice to our
Corporate Secretary must be received at our principal executive
office no less than 90 days prior to, and not more than
150 days before, the date of the annual meeting; provided,
however, that in the event that less than 21 days
notice or prior public disclosure of the date of the meeting is
given or made to shareholders, notice by the shareholders to be
timely must be received no later than the close of business on
the 7th day following the day on which notice of the date
of the annual meeting was mailed or such public disclosure was
made. The Companys by-laws also specify requirements
relating to the content of the notice which stockholders must
provide to the Secretary of
70
the Company for any matter, including a stockholder nomination
for director, to be properly presented at a stockholder meeting.
The bylaws, which have certain other related requirements, are
posted on our website at
www.pennmillers.com
.
Where You
Can Find More Information
We file annual, quarterly and current reports, proxy statements
and other information with the SEC. You may read and copy any
reports, statements or other information that we file with the
SEC at the SEC public reference room at the following location:
Public Reference Room, 100 F Street, N.E.,
Room 1580, Washington, D.C. 20549. Please call the SEC
at
1-800-SEC-0330
for further information on the public reference room. These SEC
filings are also available to the public from commercial
document retrieval services and at the website maintained by the
SEC at www.sec.gov. Reports, proxy statements and other
information concerning us may also be inspected at the offices
of the NASDAQ Stock Market at 1735 K Street, N.W.,
Washington, D.C. 20006.
Statements contained in this proxy statement, or in any document
incorporated by reference in this proxy statement regarding the
contents of any contract or other document, are not necessarily
complete and each such statement is qualified in its entirety by
reference to that contract or other document filed as an exhibit
with the SEC. The SEC allows us to incorporate by
reference into this proxy statement documents we file with
the SEC. This means that we can disclose important information
to you by referring you to those documents. The information
incorporated by reference is considered to be a part of this
proxy statement, and later information that we file with the SEC
will update and supersede that information. We incorporate by
reference the documents listed below and any documents filed by
us pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Exchange Act (in each case, other than those documents or the
portions of those documents not deemed to be filed) after the
date of this proxy statement and before the date of the special
meeting.
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Annual Report on
Form 10-K
for the fiscal year ended December 31, 2010 (filed with the
SEC on March 28, 2011);
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Quarterly Reports on
Form 10-Q
for the fiscal quarters ended June 30, 2011, (filed with
the SEC on August 12, 2011);
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Current Reports on
Form 8-K
filed with the SEC on August 15, 2011 and September 9,
2011; and
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Definitive Proxy Statement for our 2011 annual meeting of
shareholders filed with the SEC on March 31, 2011.
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Any person, including any beneficial owner of shares of Company
common stock, to whom this proxy statement is delivered may
request copies of proxy statements and any of the documents
incorporated by reference in this document or other information
concerning us by written or telephonic request directed to our
Corporate Secretary at the Companys address, which is Penn
Millers Holding Corporation, 72 North Franklin Street
P.O. Box P, Wilkes-Barre, Pennsylvania
18773-0016,
telephone
(800) 233-8347;
or from our proxy
solicitor,
(toll-free
at );
or from the SEC through the SEC website at the address provided
above. Documents incorporated by reference are available without
charge, excluding any exhibits to those documents unless the
exhibit is specifically incorporated by reference into those
documents.
* * *
Whether or not you plan to attend the special meeting, please
vote over the Internet, by telephone or by marking, signing,
dating and promptly returning the enclosed proxy in the envelope
provided.
You should rely only on the information contained in this proxy
statement. We have not authorized anyone to provide you with
information that is different from what is contained in this
proxy statement. This proxy statement is
dated ,
2011. You should not assume that the information contained in
this proxy statement is accurate as of any date other than that
date.
This proxy statement does not constitute the solicitation of
a proxy in any jurisdiction to or from any person to whom it is
not lawful to make any solicitation in that jurisdiction. The
delivery of this
71
proxy statement should not create an implication that there
has been no change in the affairs of the Company since the date
of this proxy statement or that the information herein is
correct as of any later date.
By Order of the Board of Directors,
Michael O. Banks
Executive Vice President, Chief Financial Officer &
Corporate Secretary
72
ANNEX A
EXECUTION VERSION
AGREEMENT AND PLAN OF MERGER
among
ACE AMERICAN INSURANCE COMPANY,
PANTHER ACQUISITION CORP.
and
PENN MILLERS HOLDING CORPORATION
dated as of September 7, 2011
TABLE OF CONTENTS
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ARTICLE I
DEFINITIONS
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SECTION 1.01 Definitions
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1
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ARTICLE II
THE MERGER
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SECTION 2.01 The Merger
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9
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SECTION 2.02 Effective Time; Closing
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9
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SECTION 2.03 Effect of the Merger
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9
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SECTION 2.04 Articles of Incorporation; By-laws
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10
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SECTION 2.05 Directors and Officers
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10
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ARTICLE III
EFFECT OF THE MERGER ON CAPITAL STOCK
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SECTION 3.01 Conversion of Securities
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10
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SECTION 3.02 Surrender of Shares; Stock Transfer Books
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11
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SECTION 3.03 Withholding Taxes
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12
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SECTION 3.04 Termination of Fund
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13
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SECTION 3.05 Transfer Books; No Further Ownership Rights in Company Common Stock
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13
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SECTION 3.06 Lost, Stolen or Destroyed Certificates
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13
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SECTION 3.07 Company Stock Plans and the Company ESOP
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13
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
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SECTION 4.01 Organization and Qualification; Company Subsidiaries
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15
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SECTION 4.02 Articles of Incorporation and By-laws; Minute Books and Stock Ledgers
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16
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SECTION 4.03 Capitalization
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16
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SECTION 4.04 Authority Relative to This Agreement
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18
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SECTION 4.05 No Conflict; Required Filings and Consents
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18
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SECTION 4.06 Permits; Compliance
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19
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SECTION 4.07 SEC Filings; Financial Statements; Reserves
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20
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SECTION 4.08 Company SAP Statements
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23
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SECTION 4.09 Absence of Certain Changes or Events
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24
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SECTION 4.10 Absence of Litigation
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24
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SECTION 4.11 Employee Benefit Plans
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25
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SECTION 4.12 Labor and Employment Matters
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29
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SECTION 4.13 Real Property; Title to Assets
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30
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SECTION 4.14 Taxes
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30
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SECTION 4.15 Environmental Matters
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32
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SECTION 4.16 No Rights Plan
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33
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SECTION 4.17 Material Contracts
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33
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SECTION 4.18 Technology and Intellectual Property
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34
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SECTION 4.19 Insurance
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37
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SECTION 4.20 Insurance and Reinsurance Matters
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37
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SECTION 4.21 Board Approval; Vote Required
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42
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SECTION 4.22 Opinion of Financial Advisor
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42
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SECTION 4.23 Information Supplied
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42
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SECTION 4.24 No Investment Company
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42
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SECTION 4.25 Brokers
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42
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SECTION 4.26 No Dissenters Rights
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42
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SECTION 4.27 Antitakeover Provisions
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SECTION 4.28 No Other Representations or Warranties
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ARTICLE V
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
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SECTION 5.01 Corporate Organization
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43
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SECTION 5.02 Ownership and Operations of Merger Sub
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43
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SECTION 5.03 Authority Relative to This Agreement
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SECTION 5.04 No Conflict; Required Filings and Consents
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SECTION 5.05 Legal Proceedings
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SECTION 5.06 Financing
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SECTION 5.07 Brokers
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SECTION 5.08 Information Supplied
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SECTION 5.09 No Other Representations or Warranties
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ARTICLE VI
CONDUCT OF BUSINESS PENDING THE MERGER
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SECTION 6.01 Conduct of Business by the Company Pending the Merger
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SECTION 6.02 Conduct of Business by Merger Sub
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ARTICLE VII
ADDITIONAL AGREEMENTS
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SECTION 7.01 Shareholders Meeting
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SECTION 7.02 Proxy Statement and ESOP Voting Materials
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50
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SECTION 7.03 Access to Information; Confidentiality
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51
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SECTION 7.04 No Solicitation of Transactions
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51
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SECTION 7.05 Directors and Officers Indemnification and Insurance
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55
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SECTION 7.06 Notification of Certain Matters
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56
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SECTION 7.07 Further Action; Reasonable Best Efforts
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SECTION 7.08 Public Announcements
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SECTION 7.09 Section 16 Matters
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SECTION 7.10 Takeover Statutes
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58
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SECTION 7.11 Delisting
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58
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SECTION 7.12 Employee and Benefit Plan Matters
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58
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SECTION 7.13 Securityholder Litigation
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60
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SECTION 7.14 Delivery of Subsequent Financial Statements
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ii
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ARTICLE VIII
CONDITIONS TO THE MERGER
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SECTION 8.01 Conditions to the Obligations of Each Party
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61
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SECTION 8.02 Conditions to the Obligations of Parent and Merger Sub
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SECTION 8.03 Conditions to the Obligations of the Company
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62
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ARTICLE IX
TERMINATION, AMENDMENT AND WAIVER
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SECTION 9.01 Termination
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63
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SECTION 9.02 Effect of Termination
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SECTION 9.03 Fees and Expenses
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SECTION 9.04 Amendment
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SECTION 9.05 Waiver
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ARTICLE X
GENERAL PROVISIONS
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SECTION 10.01 Notices
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SECTION 10.02 Severability
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67
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SECTION 10.03 Entire Agreement; Assignment
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67
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SECTION 10.04 Parties in Interest
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68
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SECTION 10.05 Specific Performance
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68
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SECTION 10.06 Governing Law
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68
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SECTION 10.07 Waiver of Jury Trial
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69
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SECTION 10.08 Interpretation and Rules of Construction
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69
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SECTION 10.09 Non-Survival of Representation, Warranties and Agreements
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69
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SECTION 10.10 Counterparts
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iii
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of September 7, 2011 (this
Agreement
), among
ACE AMERICAN INSURANCE COMPANY, a Pennsylvania domestic stock insurance company (
Parent
),
PANTHER ACQUISITION CORP., a Pennsylvania corporation and a wholly owned subsidiary of Parent
(
Merger Sub
), and PENN MILLERS HOLDING CORPORATION, a Pennsylvania corporation (the
Company
).
WHEREAS, the parties desire that Merger Sub, upon the terms and subject to the conditions of
this Agreement and in accordance with the provisions of the Pennsylvania Business Corporation Law
of 1988, as amended (
PBCL
), merge with and into the Company (the
Merger
);
WHEREAS, the Board of Directors of the Company (the
Company Board
) has unanimously
(i) determined that the Merger is fair to and in the best interests of the Company and its
shareholders, (ii) adopted this Agreement and approved the execution and delivery of this Agreement
by the Company and the consummation of the Merger and the other transactions contemplated hereby
and (iii) resolved to recommend that this Agreement be approved and adopted by the shareholders of
the Company;
WHEREAS, the Board of Directors of Merger Sub has unanimously adopted this Agreement and
resolved to recommend that this Agreement be approved and adopted by the sole shareholder of Merger
Sub;
WHEREAS, the Board of Directors of Parent has unanimously approved this Agreement;
WHEREAS, Parent, Merger Sub and the Company desire to make certain representations,
warranties, covenants and agreements in connection with the Merger and also to prescribe various
conditions to the Merger; and
WHEREAS, this Agreement is intended to constitute a plan of merger pursuant to Section 1922 of
the PBCL.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements
herein contained, and intending to be legally bound hereby, Parent, Merger Sub and the Company
hereby agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.01
Definitions
. (a) For purposes of this Agreement:
affiliate
of a specified person means a person who, directly or indirectly through
one or more intermediaries, controls, is controlled by, or is under common control with, such
specified person.
Business Day
means any day on which the principal offices of the SEC in Washington,
D.C. are open to accept filings, or, in the case of determining a date when any payment is due,
any day (other than a Saturday or Sunday) on which banks are not required or authorized to close in
the City of New York.
Code
means the Internal Revenue Code of 1986, as amended and in effect on the date
of this Agreement.
Company 401(k) Plan
means Penn Millers Holding Corporation 401(k) Plan.
Company Common Stock
means the common stock, par value $0.01 per share, of the
Company.
Company Employee Stock Ownership Plan
means Penn Millers Holding Corporation
Employee Stock Ownership Plan.
Company Intellectual Property
means all Intellectual Property used in or necessary
for the conduct of the business of the Company or any of the Company Subsidiaries, or material
Intellectual Property owned or held for use by the Company or any of the Company Subsidiaries,
including the Owned Intellectual Property.
Company SAP Statements
means the statutory statements of each of the Company
Insurance Subsidiaries as filed with the insurance departments in their respective jurisdictions of
domicile for the quarters ended June 30 and March 31, 2011 and the years ended December 31, 2010,
2009 and 2008, in each case together with the exhibits, schedules, amendments, supplements and
notes thereto and any affirmations and certifications filed therewith.
Company SEC Documents
means (i) the Companys Annual Report on Form 10-K for the
fiscal year ended December 31, 2010 filed with the SEC on March 28, 2011, (ii) the Companys
Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31, 2011 and June 30, 2011 filed
with the SEC on May 12, 2011 and August 12, 2011, respectively, and (iii) the Companys Proxy
Statement on Schedule 14A filed with the SEC on March 31, 2011.
Contract
means all oral or written contracts, agreements, commitments, arrangements,
leases and other instruments to which any person is a party.
control
(including the terms controlled by and under common control with) means
the possession, directly or indirectly, of the power to direct or cause the direction of the
management and policies of a person, whether through the ownership of voting securities, by
contract or otherwise.
ERISA Affiliate
means, with respect to a person in question, any corporation, trade
or business which, together with such person, is a member of a controlled group of corporations or
a group of trades or businesses under common control within the meaning of Section 414 of the Code.
Exchange Act
means the Securities Exchange Act of 1934, as amended.
2
HSR Act
means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.
Insurance Laws
means all laws, rules and regulations applicable to the business of
insurance or the regulation of insurance holding companies, whether domestic or foreign, and all
applicable orders and directives of Governmental Authorities and market conduct recommendations
resulting from market conduct examinations of Insurance Regulators.
Insurance Pool
means any insurance pool in which any Company Subsidiary currently
participates or previously participated, including with respect to the administration or operation
of such pool or the underwriting of risks thereunder.
Insurance Regulators
means all Governmental Authorities regulating the business of
insurance under the Insurance Laws.
Intellectual Property
means all right, title and interest in or relating to
intellectual property, whether protected, created or arising under the laws of the United States or
any other jurisdiction, including: (i) all patents and applications therefor, including all
continuations, divisionals, and continuations-in-part thereof and patents issuing thereon, along
with all reissues, reexaminations and extensions thereof; (ii) all trademarks, service marks, trade
names, service names, brand names, trade dress rights, logos, corporate names, trade styles, logos
and other source or business identifiers and general intangibles of a like nature, together with
the goodwill associated with any of the foregoing, along with all applications, registrations,
renewals and extensions thereof; (iii) all Internet domain names; (iv) all copyrights and all mask
work, database and design rights, whether or not registered or published, all registrations and
recordations thereof and all applications in connection therewith, along with all reversions,
extensions and renewals thereof; (iv) trade secrets; (v) all other intellectual property rights
arising from or relating to Technology, and (vi) all contracts granting any right relating to or
under the foregoing.
Material Adverse Effect
means any event, circumstance, development, change,
occurrence, state of facts or effect that (i) alone or in combination, has had, or could be
reasonably likely to have, a materially adverse effect on the business, assets, properties,
condition (financial or otherwise) or results of operations of the Company and the Company
Subsidiaries, taken as a whole, except to the extent that any such material adverse effect results,
alone or in combination, from: (A) changes in the U.S. economy in general or in U.S. financial or
securities markets (including credit markets), (B) changes generally affecting the U.S. property
and casualty insurance industry, (C) changes in Law or applicable accounting regulations, or
principles or interpretations (whether administrative or judicial) thereof becoming effective after
the date hereof, including accounting pronouncements by the SEC, the National Association of
Insurance Commissioners or the Financial Accounting Standards Board, (D) any change in the
Companys stock price or any failure, in and of itself, by the Company to meet published revenue or
earnings projections (provided that the underlying causes of such change or failure shall not be
excluded), (E) changes proximately caused by the announcement of the execution of this Agreement,
including the identity of Parent, (F) any Actions, suits, claims, hearings, arbitrations or
investigations or other proceedings relating to this Agreement, the Merger or the other
transactions contemplated hereby by or before any Governmental Authority, (G) acts of war, armed
hostilities, sabotage or terrorism, or any escalation or worsening thereof, (H) earthquakes,
hurricanes or other natural disasters, and (I) any action taken by Parent or any of its affiliates
or by the Company at the express written request of Parent or any of its affiliates;
provided
,
however
, that the exceptions indicated in clauses (A), (B), (C), (G) and
(H), shall apply solely to the extent that the events or changes described therein do not have a
disproportionate impact on the Company and the Company Subsidiaries, taken as a whole, compared to
all other participants in the property and casualty insurance industry in the United States; or
(ii) would prevent or materially delay the consummation of the Merger or any of the other
transactions contemplated by this Agreement.
3
Material Licenses
means (i) all material licenses, royalty agreements, consents and
other agreements pursuant to which licenses or rights are granted by the Company or any of the
Company Subsidiaries to any person with respect to any Intellectual Property owned by the Company
or any of the Company Subsidiaries and (ii) all licenses, royalty agreements, consents and other
agreements pursuant to which licenses or rights are granted by any person to the Company or any of
the Company Subsidiaries with respect to any Intellectual Property (other than commercially
available off the shelf Software licensed to the Company or any of its Subsidiaries on standard
shrink wrap terms for less than a one-time license fee of $25,000 or $50,000 in the aggregate for
any such Software).
Open Source Software
shall mean all Software that is distributed as free software,
open source software, or under a similar licensing or distribution model, including the GNU
General Public License, GNU Lesser General Public License, Mozilla Public License, BSD Licenses,
the Artistic License, the Netscape Public License, the Sun Community Source License, the Sun
Industry Standards License and the Apache License.
Owned Intellectual Property
means (i) each issued patent owned by the Company or any
of the Company Subsidiaries, each pending patent application filed by or on behalf of the Company
or any of the Company Subsidiaries, each trademark registration, service mark registration, and
copyright registration owned by the Company or any of the Company Subsidiaries, each application
for trademark registration, service mark registration, and copyright registration made by or on
behalf of the Company or any of the Company Subsidiaries, each domain name registered by or on
behalf of the Company or any of the Company Subsidiaries, each material trade name, d/b/a,
unregistered trademark, and unregistered service mark used by the Company or any of the Company
Subsidiaries in connection with its business and (ii) material Software developed by or for the
Company or any of its Subsidiaries and owned by the Company or any of its Subsidiaries.
person
means an individual, corporation, partnership, limited partnership, limited
liability company, sole proprietorship, trust, association or other entity.
Personal Data
means information relating to an identified or identifiable person,
including information that can be used to identify a person, directly or indirectly, by reference
to an identification number or to one or more other factors specific to such person.
4
Privacy Law
means any law or regulation relating to the collection, processing,
storage, use, sharing, disclosure, loss, access, transfer, security, encryption and/or safeguarding
of Personal Data or notices or approvals in connection with Personal Data.
Pool Member
means any current or former member of an Insurance Pool (other than a
Company Insurance Subsidiary).
Restrictive Condition
means any limitation, requirement or condition that would,
individually or in the aggregate, reasonably be expected to (i) materially impair or interfere with
the ability of the Company and its subsidiaries to conduct their respective businesses, taken as a
whole, after the Effective Time substantially in the manner as such businesses are conducted as of
the date hereof, (ii) result in the sale, lease, license, disposal or holding separate (x) by
Parent of any capital stock of the Surviving Corporation after the Effective Time or (y) by the
Company or its subsidiaries of any of their material assets, rights, product lines, licenses,
categories of assets or businesses or other operations or interests therein or (iii) materially and
adversely affect the benefits, taken as a whole, that Parent would otherwise receive from the
transactions contemplated by this Agreement.
SAP
means statutory accounting principals prescribed or permitted by the domiciliary
state insurance department of the applicable Company Insurance Subsidiary.
SEC
means the Securities and Exchange Commission.
Securities Act
means the Securities Act of 1933, as amended.
Software
means any and all (i) computer programs, code and libraries, including any
and all software implementations of algorithms, models and methodologies, whether in source code,
object code, human-readable or other form; (ii) databases and compilations, including any and all
data and collections of data, whether machine readable or otherwise; (iii) descriptions,
flow-charts and other work product used to design, plan, organize and develop any of the foregoing,
screens, user interfaces, report formats, firmware, development tools, templates, menus, buttons
and icons; and (iv) all documentation, including user manuals and other training documentation
related to any of the foregoing.
Subsidiary
or
Subsidiaries
of any person means another person in which
such person (or any other subsidiary of such person) (a) is a general partner (in the case of a
partnership) or managing member (in the case of a limited liability company), (b) is entitled to
elect at least a majority of the board of directors, board of managers or similar governing body or
(c) owns, directly or indirectly, through one or more intermediaries, more than fifty percent (50%)
of the outstanding voting securities, equity securities, profits interest or capital interest.
Taxes
means any and all taxes, fees, levies, assessments, duties, tariffs, imposts
and other similar charges of any kind (together with any and all interest, penalties, additions to
tax and additional amounts imposed with respect thereto) imposed by any Governmental Authority or
taxing authority, including: taxes or other charges on or with respect to income, franchise,
windfall or other profits, gross receipts, property, sales, use, capital stock, premium, payroll,
employment, social security, workers compensation, unemployment compensation or net worth; taxes
or other charges in the nature of excise, withholding, ad valorem, stamp, transfer, value-added or
gains taxes; license, registration and documentation fees; and customers duties, tariffs and
similar charges.
5
Technology
means, collectively, all Software, information, designs, formulae,
algorithms, procedures, methods, techniques, ideas, know-how, research and development, technical
data, programs, subroutines, tools, materials, specifications, processes, inventions (whether
patentable or unpatentable and whether or not reduced to practice), apparatus, creations,
improvements, works of authorship and other similar materials, and all recordings, graphs,
drawings, reports, analyses, and other writings, and other tangible embodiments of the foregoing,
in any form whether or not specifically listed herein, and all related technology, that are used
in, incorporated in, embodied in, displayed by or relate to, or are used in connection with the
foregoing.
Trustee
means National Penn Investors Trust Company.
(b) The following terms have the meaning set forth in the Sections set forth below:
|
|
|
Defined Term
|
|
Location of Definition
|
|
|
|
Acquisition Transaction
|
|
7.04(f)(ii)
|
Action
|
|
4.10
|
Adverse Recommendation Change
|
|
7.04(b)
|
Agreement
|
|
Recitals
|
Articles of Merger
|
|
2.02
|
Book Entry Shares
|
|
3.01(c)
|
Certificate
|
|
3.01(c)
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Closing
|
|
2.02
|
Closing Date
|
|
2.02
|
Company
|
|
Recitals
|
Company Actuarial Analyses
|
|
4.20(d)
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Company Actuary
|
|
4.20(d)
|
Company Board
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|
Recitals
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Company Confidentiality Information
|
|
4.18(i)
|
Company Employee
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|
7.12(c)
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Company Financial Statements
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|
4.07(b)
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Company GAAP Reserves
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4.07(k)
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Company Holding Company Act Reports
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4.20(h)
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Company Insurance Intermediary
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4.20(a)
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6
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Defined Term
|
|
Location of Definition
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|
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Company Insurance Subsidiaries
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|
4.20(a)
|
Company Investments
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4.20(k)
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Company Option
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|
3.07(a)
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Company Preferred Stock
|
|
4.03(a)
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Company Producers
|
|
4.20(f)
|
Company Recommendation
|
|
4.21(a)
|
Company Regulatory Agreement
|
|
4.06(e)
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Company Reinsurance Agreements
|
|
4.20(b)
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Company Restricted Stock
|
|
3.07(b)
|
Company Restricted Stock Units
|
|
3.07(c)
|
Company SAP Reserves
|
|
4.08(b)
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Company SAP Statements
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4.08(a)
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Company SEC Reports
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4.07(a)
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Company Stock Plan
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|
3.07(a)
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Company Subsidiary
|
|
4.01(a)
|
Confidentiality Agreement
|
|
7.03(b)
|
Constituent Documents
|
|
4.05(a)
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Contingent Worker
|
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4.12(a)
|
Disclosure Schedule
|
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Article IV
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Effective Time
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|
2.02
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Enforceability Exceptions
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|
4.04
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Environmental Laws
|
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4.15(b)(i)
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ERISA
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4.11(a)
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ESOP
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3.07(d)
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Exchange Fund
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3.02(a)
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Expenses
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9.03
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FCPA
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407(h)
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FINRA
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4.07(a)
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GAAP
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4.07(b)
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Governmental Authority
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4.05(b)
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Hazardous Materials
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|
4.15(b)(ii)
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Indemnified Liabilities
|
|
7.05(a)
|
7
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|
|
Defined Term
|
|
Location of Definition
|
|
|
|
Indemnified Parties
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|
7.05(a)
|
Information Technology Systems
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|
4.18(g)
|
IRS
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|
4.11(b)
|
June 2011 Balance Sheet
|
|
4.07(c)
|
Law
|
|
4.05(a)
|
Liens
|
|
4.13(a)
|
Material Contracts
|
|
4.17(a)
|
Maximum Amount
|
|
7.05(c)
|
Merger
|
|
Recitals
|
Merger Consideration
|
|
3.01(c)
|
Merger Sub
|
|
Recitals
|
Multiemployer Plan
|
|
4.11(c)
|
Multiple Employer Plan
|
|
4.11(c)
|
Option Consideration
|
|
3.07(a)
|
Outside Date
|
|
9.01(b)
|
Parent
|
|
Recitals
|
Paying Agent
|
|
3.02(a)
|
PBCL
|
|
Recitals
|
PBGC
|
|
4.11(f)
|
Permits
|
|
4.06(b)
|
Permitted Liens
|
|
4.13(a)
|
Plans
|
|
4.11(a)
|
Pre-Closing Company Statutory Financial Statements
|
|
7.14
|
Proxy Statement
|
|
7.02(a)
|
Section 409A
|
|
4.11(h)
|
Shareholder Approval
|
|
4.21(b)
|
Shareholders Meeting
|
|
7.01(a)
|
SAP
|
|
4.08(b)
|
SOX
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|
4.07(g)
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SSAP
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|
4.20(c)
|
Superior Proposal
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|
7.04(f)(iii)
|
Surviving Corporation
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2.01
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Takeover Proposal
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|
7.04(f)(i)
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Termination Fee
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|
9.03(b)
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Underwater Option
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3.07(a)
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Willis
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4.22
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8
ARTICLE II
THE MERGER
SECTION 2.01
The Merger
. Upon the terms and subject to the conditions set forth in
this Agreement, and in accordance with the PBCL, (a) at the Effective Time (as defined in
Section 2.02
), Merger Sub shall be merged with and into the Company, and (b) as a result of
the Merger, the separate corporate existence of Merger Sub shall cease and the Company shall be the
surviving corporation in the Merger (the
Surviving Corporation
).
SECTION 2.02
Effective Time; Closing
. On the last Business Day of the month during
which the satisfaction or waiver of the conditions set forth in Article VII occurs (other than
those conditions that by their nature are to be satisfied at the Closing) (the
Closing
Date
), the parties hereto shall cause the Merger to be consummated by filing articles of
merger (the
Articles of Merger
) with the Department of State of the Commonwealth of
Pennsylvania, in such form as is required by, and executed in accordance with, the relevant
provisions of the PBCL (the date and time of such filing of the Articles of Merger (or such later
time as may be agreed by each of the parties hereto and specified in the Articles of Merger) being
the
Effective Time
). Immediately prior to such filing of the Articles of Merger, a
closing (the
Closing
) shall be held at the offices of Ballard Spahr LLP, 1735 Market
Street, 51
st
floor, Philadelphia, PA 19103, or such other place as the parties shall
agree, for the purpose of confirming the satisfaction or waiver, as the case may be, of the
conditions set forth in
Article VII
.
SECTION 2.03
Effect of the Merger
. At the Effective Time, the effect of the Merger
shall be as provided in Section 1929 of the PBCL. Without limiting the generality of the
foregoing, and subject thereto, at the Effective Time, all the property, rights, privileges, powers
and franchises of the Company and Merger Sub shall vest in the Surviving Corporation, and all
debts, liabilities, obligations, restrictions, disabilities and duties of the Company and Merger
Sub shall become the debts, liabilities, obligations, restrictions, disabilities and duties of the
Surviving Corporation. If at any time after the Effective Time the Surviving Corporation shall
consider or be advised that any deeds, bills of sale, assignments or assurances or any other acts
or things are necessary, desirable or proper (a) to vest, perfect or confirm, of record or
otherwise, in the Surviving Corporation its right, title or interest in, to or under any of the
rights, privileges, powers, franchises, properties or assets of either of the Company or Merger
Sub, or (b) to carry out the purposes of this Agreement, the Surviving Corporation and its proper
officers and directors or their designees shall be authorized to execute and deliver, in the name
and on behalf of either of the Company or merger Sub, all such deeds, bills of sale, assignments
and assurances and to do, in the name and on behalf of either the Company or Merger Sub, all such
other acts and things as may be necessary, desirable or proper to vest, perfect or confirm the
Surviving Corporations right, title or interest in, to or under any of the rights, privileges,
powers, franchises, properties or assets of the Company or Merger Sub and otherwise to carry out
the purposes of this Agreement.
9
SECTION 2.04
Articles of Incorporation; By-laws
.
(a) At the Effective Time, the Articles of Incorporation of the Company will be amended and
restated in their entirety to be identical to the Articles of Incorporation of Merger Sub as in
effect immediately prior to the Effective Time, except that Article I of such Articles of
Incorporation shall be amended to read as follows: The name of the corporation is Penn Millers
Holding Corporation. Such Articles of Incorporation, as so amended, will be the Articles of
Incorporation of the Surviving Corporation until thereafter further amended as provided therein or
by applicable Law.
(b) Unless otherwise determined by Parent prior to the Effective Time, at the Effective Time,
the By-laws of Merger Sub as in effect immediately prior to the Effective Time shall be the By-laws
of the Surviving Corporation until thereafter amended as provided by law, the Articles of
Incorporation of the Surviving Corporation and such By-laws.
(c) Notwithstanding anything in this Agreement to the contrary, the Articles of Incorporation
and the By-Laws of the Surviving Corporation will include the provisions required by
Section
7.05
.
SECTION 2.05
Directors and Officers
. The directors of Merger Sub immediately prior
to the Effective Time shall be the initial directors of the Surviving Corporation, each to hold
office in accordance with the Articles of Incorporation and By-laws of the Surviving Corporation,
and the officers of the Company immediately prior to the Effective Time shall be the initial
officers of the Surviving Corporation, in each case until their respective successors are duly
elected or appointed and qualified or until the earlier of their death, resignation or removal.
ARTICLE III
EFFECT OF THE MERGER ON CAPITAL STOCK
SECTION 3.01
Conversion of Securities
. At the Effective Time, by virtue of the
Merger and without any action on the part of Merger Sub, the Company or the holders of any of the
following securities:
(a)
Capital Stock of Merger Sub
. Each share of capital stock of Merger Sub issued and
outstanding immediately prior to the Effective Time shall be converted into and become one validly
issued, fully paid and non-assessable share of common stock, par value $0.01 per share, of the
Surviving Corporation and shall constitute the only shares of capital stock of the Surviving
Corporation.
(b)
Cancellation of Treasury Stock and Parent-Owned Stock
. Any shares of Company
Common Stock that are owned by the Company as treasury stock or any Company Subsidiary, and any
Company Common Stock owned by Parent or Merger Sub, shall be automatically canceled and shall cease
to exist and no consideration shall be delivered in exchange therefor.
10
(c)
Conversion of Company Common Stock.
Each share of Company Common Stock issued and
outstanding immediately prior to the Effective Time (other than shares to be canceled in accordance
with
Section 3.01(b)
) shall be converted into the right to receive $20.50 in cash, without
interest (the
Merger Consideration
). As of the Effective Time, all such Company Common
Stock shall no longer be outstanding and shall automatically be canceled and shall cease to exist,
and each holder of a certificate (a
Certificate
), or uncertificated book-entry shares
(
Book-Entry Shares
), which immediately prior to the Effective Time represented any such
Company Common Stock shall thereafter cease to have any rights with respect thereto, except the
right to receive the Merger Consideration to be paid in consideration therefor upon surrender of
such Certificate or Book-Entry Shares in accordance with
Section 3.02(b)
, without interest.
If, between the date of this Agreement and the Effective Time, (a) the outstanding shares of
Company Common Stock shall be increased, decreased, changed into or exchanged for a different
number of shares or different class, in each case, by reason of any reclassification,
recapitalization, stock split, split-up, combination or exchange of shares, (b) a stock dividend or
dividend payable in any other securities of the Company shall be declared with a record date within
such period, or (c) any similar event shall have occurred, then the Merger Consideration shall be
appropriately adjusted to provide the holders of Company Common Stock the same economic effect as
contemplated by this Agreement prior to such event.
SECTION 3.02
Surrender of Shares; Stock Transfer Books
.
(a)
Paying Agent
. Prior to the Effective Time, the Company shall designate a bank or
trust company (reasonably acceptable to Parent) to act as agent (the
Paying Agent
) for
the holders of shares of Company Common Stock to receive the funds to which holders of shares of
Company Common Stock shall become entitled pursuant to
Section 3.01(c)
. At or prior to the
Effective Time, Parent shall deposit or cause to be deposited with the Paying Agent, for the
benefit of the holders of Company Common Stock, cash in an amount sufficient to pay the aggregate
Merger Consideration required to be paid in accordance with this Agreement (such cash being
hereinafter referred to as the
Exchange Fund
). The Exchange Fund may not be used for any
other purpose. The Paying Agent shall invest the Exchange Fund as directed by the Surviving
Corporation in one or more of the following: (i) direct obligations of the United States of
America; (ii) obligations for which the full faith and credit of the United States of America is
pledged to provide for payment of all principal and interest; and (iii) commercial paper
obligations receiving the highest rating from either Moodys Investor Services, Inc. or Standard &
Poors, a division of The McGraw Hill Companies;
provided
,
however
, that no gain or
loss on the Exchange Fund will affect the amounts payable to the holders of shares of Company
Common Stock following completion of the Merger, and Parent shall take all actions necessary to
ensure that the Exchange Fund at all times includes cash sufficient to satisfy Parents obligations
under this
Article III
.
11
(b)
Procedures
. Promptly, and in any event no later than ten (10) days, after the
Effective Time, Parent and the Surviving Corporation shall cause the Paying Agent to mail to each
holder of record of Company Common Stock converted pursuant to
Section 3.01(c)
into the
right to receive the Merger Consideration a letter of transmittal and related instructions which
shall (i) specify that the delivery shall be effected, and risk of loss and title shall pass, only
upon proper delivery of the Certificates (or book-entry transfer of the Book-Entry Shares) to the
Paying Agent and (ii) otherwise be in customary form and include customary provisions (including
with respect to delivery of an agents message regarding the book-entry transfer of Book-Entry
Shares) for use in effecting the surrender of the Certificates and Book-Entry Shares in exchange
for the Merger Consideration. Upon surrender of a Certificate for cancellation to the Paying
Agent, together with such letter of transmittal, duly completed and validly executed in accordance
with the instructions (or, in the case of Book-Entry Shares, receipt of an agents message by the
Paying Agent or such other evidence, if any, of transfer as the Paying Agent may reasonably
request), the holder of such Certificate (or Book-Entry Shares, as applicable) shall be entitled to
receive in exchange therefor the Merger Consideration, without interest, for each share of Company
Common Stock formerly represented by such Certificate (or Book-Entry Shares, as applicable), and
the Certificate (or Book-Entry Shares, as applicable) so surrendered shall forthwith be canceled.
If any portion of such consideration is to be issued and paid to a person other than the person in
whose name the surrendered Certificate or Book-Entry Shares were registered, it shall be a
condition to such issuance and payment that (i) the Certificate so surrendered shall be properly
endorsed or shall otherwise be in proper form for transfer or such Book-Entry Share shall be
properly transferred and (ii) the person requesting such issuance shall have paid any transfer and
other Taxes required by reason of the issuance and payment of such consideration to a person other
than the registered holder of such Certificate or Book-Entry Shares surrendered or shall have
established to the reasonable satisfaction of the Paying Agent and the Surviving Corporation that
such Tax either has been paid or is not applicable. Until surrendered as contemplated by this
Section 3.02(b)
, each Certificate shall be deemed at any time after the Effective Time to
represent only the right to receive the Merger Consideration as contemplated by this
Article
III
, without interest. Notwithstanding anything to the contrary in this Agreement, (i) a
holder of Book-Entry Shares shall not be required to deliver a Certificate to the Paying Agent to
receive the consideration to which such holder is entitled pursuant to this
Article III
in
respect of such Book-Entry Shares. All cash paid upon the surrender for exchange of any
Certificates or Book-Entry Shares in accordance with the terms hereof shall be deemed to have been
paid in full satisfaction of all rights pertaining to the shares of Company Common Stock
represented by such Certificates or Book-Entry Shares and (ii) Merger Consideration payable with
respect to shares of Company Common Stock held under the ESOP shall be paid to the Trustee for the
benefit of the ESOP and its participants.
SECTION 3.03
Withholding Taxes
. Each of Parent, the Surviving Corporation and the
Paying Agent shall be entitled to deduct and withhold from any amounts otherwise payable pursuant
to this Agreement in respect of shares of Company Common Stock such amount as it is required to
deduct and withhold with respect to the making of such payment under the Code or any Law. To the
extent that amounts are so withheld and are paid or will be paid in accordance with applicable Law
to the appropriate Governmental Authority in accordance with applicable Law, such withheld amounts
shall be treated for purposes of this Agreement as having been paid to the holder of the shares of
Company Common Stock in respect of which such deduction and withholding was made.
12
SECTION 3.04
Termination of Fund
. At any time following the twelve (12) month
anniversary of the Effective Time, the Surviving Corporation shall be entitled to require the
Paying Agent to deliver to it any funds which had been made available to the Paying Agent and not
disbursed to holders of shares of Company Common Stock (including all interest and other income
received by the Paying Agent in respect of all funds made available to it), and, thereafter, such
holders shall be entitled to look to the Surviving Corporation (subject to abandoned property,
escheat and other similar laws) only as general creditors thereof with respect to any Merger
Consideration that may be payable upon due surrender of the Certificates held by them. The
Surviving Corporation shall pay all charges and expenses, including those of the Paying Agent, in
connection with the exchange of Company Common Stock for the Merger Consideration, except for those
charges and expenses of holders of Company Common Stock, Notwithstanding the foregoing, neither
the Surviving Corporation nor the Paying Agent shall be liable to any holder of Company Common
Stock for any Merger Consideration delivered in respect of such Company Common Stock to a public
official pursuant to any abandoned property, escheat or other similar Law.
SECTION 3.05
Transfer Books; No Further Ownership Rights in Company Common Stock
. At
the close of business on the day of the Effective Time, the stock transfer books of the Company
shall be closed and thereafter there shall be no further registration of transfers of shares of
Company Common Stock on the records of the Company. From and after the Effective Time, the holders
of shares of Company Common Stock outstanding immediately prior to the Effective Time shall cease
to have any rights with respect to such shares of Company Common Stock except as otherwise provided
herein or by applicable Law.
SECTION 3.06
Lost, Stolen or Destroyed Certificates
. If any Certificate shall have
been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming
such Certificate to be lost, stolen or destroyed and, if required by the Surviving Corporation, the
posting by such person of a bond, in such reasonable amount as the Surviving Corporation may
direct, as indemnity against any claim that may be made against it with respect to such
Certificate, the Paying Agent will issue in exchange for such lost, stolen or destroyed Certificate
the Merger Consideration with respect to the shares of Company Common Stock formerly represented by
such Certificate to which the holders thereof are entitled pursuant to
Section 3.01(c)
.
SECTION 3.07
Company Stock Plans and the Company ESOP
.
(a)
Company Options
. Prior to the Effective Time, the Company shall take all actions
under the Company Stock Incentive Plan (the
Company Stock Plan
) and otherwise necessary
to provide that the unexercised portion of each option outstanding immediately prior to the
Effective Time that represents the right to acquire shares of Company Common Stock (each, a
Company Option
) shall at the Effective Time vest in full, to the extent unvested, and
then be canceled, terminated and converted at the Effective Time into the right to receive a cash
amount equal to the Option Consideration for each share of Company Common Stock then subject to the
Company Option. For purposes of this Agreement,
Option Consideration
means, with respect
to any share of Company Common Stock subject to a particular Company Option, an amount equal to
the excess, if any, of (i) the Merger Consideration over (ii) the exercise price payable in respect
of such share of Company Common Stock subject to such Company Option and any required withholding
Taxes. It is understood for the avoidance of doubt that a Company Option for which such exercise
price equals or exceeds the Merger Consideration (
Underwater Option
) per share shall be
canceled and terminated without the receipt of any Option Consideration. The Option Consideration
shall be paid as soon as practicable after the Effective Time, but in no event later than ten (10)
days after the Closing Date.
13
(b)
Restricted Stock
. As of the Effective Time, each restricted share of Company
Common Stock granted under the Company Stock Plan that is outstanding and subject to forfeiture
immediately prior to the Effective Time (the
Company Restricted Stock
) will become fully
vested without restrictions and will be treated as a share of Company Common Stock as set forth in
Section 3.01(c)
.
(c)
Restricted Stock Units
. As of the Effective Time, each restricted stock unit
granted under the Company Stock Plan that represents the right to receive a share of Company Common
Stock that is outstanding immediately prior to the Effective Time (the
Company Restricted
Stock Units
) will become fully vested and will be converted into a right to receive the Merger
Consideration, less any required withholding Taxes. The Merger Consideration paid in respect of
the Restricted Stock Units shall be paid as soon as practicable after the Closing Date, but in no
event later than ten (10) days after the Closing Date.
(d)
Employee Stock Ownership Plan
. Payment of Merger Consideration with respect to
shares of Company Common Stock held under the Company Employee Stock Ownership Plan (the
ESOP
) shall be made to the Trustee in accordance with
Section 3.02(b)
. The
terms of the ESOP shall govern the rights of participants and beneficiaries, including with respect
to allocations, vesting, and distribution.
(e) All amounts payable pursuant to this
Section 3.07
shall be subject to any required
withholding Taxes or proof of eligibility for exemption therefrom, in accordance with
Section
3.03
.
(f) Effective at the Effective Time, the Company Stock Plan and all awards thereunder shall
terminate, and all rights under any provision of any other plan, program or arrangement providing
for the issuance or grant of any other interest with respect to the capital stock or other equity
interests of the Company or any Company Subsidiary shall be cancelled, without any liability on the
part of the Company or any Company Subsidiary (except as otherwise expressly provided in this
Agreement).
(g) From and after the Effective Time, no person shall have any right under the Company Stock
Plan or under any other plan, program, agreement or arrangement with respect to equity interests of
the Company or any Company Subsidiary (except as otherwise expressly provided in this Agreement).
(h) Not later than immediately prior to the Effective Time, the Companys Board of Directors
or any committee thereof administering the Company Stock Plan shall adopt all resolutions necessary
to provide for the foregoing, and the Company shall take any other action necessary to effect the
foregoing. The Company shall cooperate with Parent, and keep Parent fully informed, with respect
to all resolutions, actions and consents that the Company intends to adopt, take and obtain in
connection with the matters described in this
Section 3.07
. Without limiting the
foregoing, the Company shall provide Parent with a reasonable opportunity to review and comment on
all such resolutions and consents and shall not undertake any obligation in connection with any
such resolution, action or consent without the prior written consent of Parent, which consent shall
not be unreasonably withheld, delayed or conditioned.
14
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
As an inducement to Parent and Merger Sub to enter into this Agreement, the Company hereby
represents and warrants to Parent and Merger Sub that, except as set forth in (i) the Company SEC
Documents (excluding any risk factor disclosure contained therein under the heading Risk Factors,
any disclosure of risks included in any forward looking statements disclaimer or any other
statements that are non-specific, predictive or forward looking in nature) or (ii) the items set
forth in the Disclosure Schedule (the
Disclosure Schedule
) delivered by the Company to
Parent concurrently with the execution and delivery of this Agreement (it being acknowledged and
agreed by Parent and Merger Sub that any matter set forth in any section or subsection of the
Disclosure Schedule will be deemed to be disclosed with respect to all representations or
warranties by the Company to which it is readily apparent from the face of the disclosure that the
matters so disclosed are applicable to such other section or subsection of the Disclosure Schedule,
but will expressly not be deemed to constitute an admission by the Company or any Company
Subsidiary, or otherwise to imply, that any such matter rises to the level of a Material Adverse
Effect or is otherwise material for purposes of this Agreement or the Disclosure Schedule):
SECTION 4.01
Organization and Qualification; Company Subsidiaries
.
(a) Each of the Company and each subsidiary of the Company (each, a
Company
Subsidiary
) is a legal entity duly organized, validly existing and in good standing under the
laws of the jurisdiction of its incorporation or organization and has the requisite corporate power
and authority to own, lease and operate its properties and to carry on its business as it is now
being conducted, except where the failure to have such power or authority would not have a Material
Adverse Effect. The Company and each Company Subsidiary is duly qualified or licensed to do
business, and is in good standing, in each jurisdiction where the character of the properties
owned, leased or operated by it or the nature of its business makes such qualification or licensing
necessary, except for such failures to be so qualified or licensed and in good standing that would
not have a Material Adverse Effect.
(b) A true and complete list of all Company Subsidiaries, together with the form of legal
entity and the jurisdiction of incorporation or organization of each Company Subsidiary, the
percentage of the outstanding capital stock or other equity interest of each Company Subsidiary
owned by the Company and each other Company Subsidiary, and the names of the directors and
executive officers of each Company Subsidiary, is set forth in
Section 4.01(b)
of the
Disclosure Schedule. Except for the Company Subsidiaries and investment assets held by the Company
or any Company Subsidiary, the Company does not directly or indirectly own any equity interest in,
or any interest convertible into or exchangeable or exercisable for any equity interest in, any
person.
15
SECTION 4.02
Articles of Incorporation and By-laws; Minute Books and Stock Ledgers
.
The Articles of Incorporation of the Company and the By-laws of the Company as most recently filed
by the Company with the SEC are true and correct copies and are in full force and effect. The
Company is not in violation of any of the provisions of its Articles of Incorporation or its
By-laws. The Company has made available to Parent complete and correct copies of the Constituent
Documents of each Company Subsidiary. The Company has made available to Parent all of the minute
books in its possession containing the records of the meetings of the shareholders, the Board of
Directors and any committee of the Board of Directors of the Company and each of the Company
Subsidiaries, other than the Special Committee of the Board of Directors formed in May 2011 for the
purpose of reviewing strategic alternatives for the Company, since January 1, 2008. The minute
books of the Company and the Company Subsidiaries reflect all of the material actions taken by each
of their respective Boards of Directors (including each committee thereof) and shareholders from
January 1, 2008 through the date of this Agreement. The Company has made available to Parent all
of the stock ledgers of the Company Subsidiaries. The stock books and stock ledgers of the Company
accurately and completely list and describe all issuances, transfers and cancellations of shares of
capital stock of the Company. The stock books and stock ledgers of each Company Subsidiary
accurately and completely list and describe all issuances, transfers and cancellations of shares of
capital stock of such Company Subsidiary.
SECTION 4.03
Capitalization
.
(a) The authorized capital stock of the Company consists of ten million (10,000,000) shares of
Company Common Stock and one million (1,000,000) shares of preferred stock (
Company Preferred
Stock
). As of the date of this Agreement, (i) 5,444,022 shares of Company Common Stock were
issued and outstanding, all of which were validly issued and are fully paid and nonassessable
(which includes 105,838 shares of Company Restricted Stock that will vest in accordance with
Section 3.07(b)
and 0 shares of Company Common Stock that will vest in accordance with
Section 3.07(c)
), (ii) 469,608 shares of Company Common Stock were held in the treasury of
the Company, (iii) 0 shares of Company Common Stock were held by the Company Subsidiaries, (iv)
150,984 shares of Company Common Stock are reserved for future issuance under the Company Stock
Plan (of which 150,984 were subject to outstanding Company Options), (v) 539,999 shares of Company
Common Stock held under the ESOP (whether or not allocated to the accounts of participants and
beneficiaries) and (vi) and 0 Company Restricted Stock Units were outstanding. As of the date of
this Agreement, no shares of Company Preferred Stock are issued and outstanding. Except with
respect to the ESOP and as set forth in this
Section 4.03
, there are no options, warrants
or other rights, agreements, arrangements or commitments of any character relating to the issued or
unissued capital stock of the Company or any Company Subsidiary to which the Company or any Company
Subsidiary is a party or obligating the Company or any Company Subsidiary to issue or sell any
shares of capital stock of, or other equity interests in, the Company or any Company Subsidiary.
Except with respect to the ESOP, there are no outstanding contractual obligations of the Company or
any Company Subsidiary to repurchase, redeem or otherwise acquire any shares of Company Common
Stock or any capital stock of any Company Subsidiary or to provide funds to, or make any investment
(in the form of a loan, capital contribution or otherwise) in, any Company Subsidiary or any other
person. Except as set forth in
Section 4.03(a)
of the Disclosure Schedule or as otherwise
contemplated hereunder, there are no commitments or agreements of any character to which the
Company is bound obligating the Company to accelerate the vesting of any awards under the Company
Stock Plan as a result of the Merger. All outstanding shares of Company Common Stock and all
outstanding shares of capital stock of each Company Subsidiary have been issued and granted in
compliance in all material respects with applicable Law.
16
(b) (i) Each outstanding share of capital stock of each Company Subsidiary that is a
corporation is duly authorized, validly issued, fully paid and nonassessable, and (ii) each
outstanding equity interest of each Company Subsidiary that is a limited liability company has been
validly issued and the owner thereof has been duly admitted as a member of such Company Subsidiary,
and each such share or equity interest, as the case may be, is owned by the Company or another
Company Subsidiary free and clear of all security interests, liens, claims, pledges, options,
rights of first refusal, agreements, limitations on the Companys or any Company Subsidiarys
voting rights, charges and other encumbrances of any nature whatsoever.
(c) As of the date of this Agreement, no bonds, debentures, notes or other indebtedness of the
Company entitling the holder of such instrument the right to vote (or that is convertible into or
exercisable for securities having the right to vote) on any matters on which shareholders of the
Company may vote are issued or outstanding.
(d) Except with respect to the ESOP, neither the Company nor any Company Subsidiary is party
to an agreement (i) restricting the transfer of, (ii) relating to the voting of or (iii) requiring
the registration under any securities Law for sale of, any shares of Company Common Stock, any
shares of Company Preferred Stock or any other capital stock of, or other equity interests in, the
Company or any Company Subsidiary.
(e)
Section 4.03(e)
of the Disclosure Schedule sets forth the following information
with respect to each Company Option, Company Restricted Stock and Company Restricted Stock Unit
outstanding as of the date of this Agreement: (i) the plan pursuant to which such Company Option,
Company Restricted Stock or Company Restricted Stock Unit was granted; (ii) the name of the holder
of such Company Option, Company Restricted Stock or Company Restricted Stock Unit; (iii) the number
of shares of Company Common Stock subject to such Company Option, the number of shares of Company
Restricted Stock or the number of Company Restricted Stock Units; (iv) the exercise price of such
Company Stock Option; (v) the date on which such Company Option, Company Restricted Stock or
Company Restricted Stock Unit was granted; (vi) the extent to which such Company Option, Company
Restricted Stock or Company Restricted Stock Unit is vested and/or exercisable as of the date of
this Agreement and the times and extent to which such Company Option, Company Restricted Stock or
Company Restricted Stock Unit is scheduled to become vested and/or exercisable after the date of
this Agreement; and (vii) the date on which such Company Option, Company Restricted Stock or
Company Restricted Stock Unit expires.
17
SECTION 4.04
Authority Relative to This Agreement
. The Company has all necessary
corporate power and authority to execute and deliver this Agreement and, subject to obtaining the
Shareholder Approval, to perform its obligations hereunder and to consummate the Merger. On or
prior to the date of this Agreement, the Board of Directors of the Company has unanimously (a) duly
authorized the execution, delivery and performance of this Agreement by the Company and the
consummation by the Company of the Merger, (b) resolved to recommend the approval and adoption of
this Agreement by the Companys shareholders, (c) directed that this Agreement be submitted to the
Companys shareholders for approval and adoption, and (d) approved the filing of the Proxy
Statement with the SEC. The Company has the corporate power and authority to enter into this
Agreement and, subject to the receipt of approval of this Agreement by the Companys shareholders
and the required approval of any Governmental Body, to carry out its obligations hereunder. No
other corporate proceedings on the part of the Company are necessary to authorize this Agreement or
to consummate the Merger (other than, with respect to the Merger, the Shareholder Approval and the
filing and recordation of appropriate merger documents as required by the PBCL). This Agreement
has been duly and validly executed and delivered by the Company and, assuming the due
authorization, execution and delivery by Parent and Merger Sub, constitutes legal, valid and
binding obligations of the Company, enforceable against the Company in accordance with its terms,
except as such enforceability may be limited by applicable Law affecting creditors rights
generally, by general equitable principles and by the discretion of any Governmental Authority
before which any proceeding seeking enforcement may be brought (the
Enforceability
Exceptions
).
SECTION 4.05
No Conflict; Required Filings and Consents
.
(a) The execution and delivery of this Agreement by the Company do not, and the performance of
this Agreement by the Company will not, and the consummation of the Merger by the Company will not,
(i) conflict with or violate the Articles of Incorporation of the Company, the By-laws of the
Company or any equivalent organizational documents of any Company Subsidiary (the
Constituent
Documents
), (ii) assuming that all consents, approvals and other authorizations described in
Section 4.05(b)
have been obtained and that all filings and other actions described in
Section 4.05(b)
have been made or taken, conflict with or violate any federal, state,
provincial, municipal or local statute, law, ordinance, regulation, rule, code, executive order,
injunction, judgment, decree or other order (
Law
) applicable to the Company or any
Company Subsidiary or by which any property or asset of the Company or any Company Subsidiary is
bound or subject, (iii) violate any provisions of the ESOP (or the trust thereunder) or any Law
applicable to the ESOP, (iv) result in any breach of or constitute a default (or an event which,
with notice or lapse of time or both, would become a default) under, or, except as set forth in
Section 4.20(b)
of the Disclosure Schedule, give to others any right of termination,
amendment, acceleration or cancellation of, or result in the creation of a lien or other
encumbrance on any property or asset of the Company or any Company Subsidiary pursuant to, any
note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other
instrument or obligation to which the Company or any Company Subsidiary is a party or by which the
Company or a Company Subsidiary or any property or asset of the Company or any Company Subsidiary
is bound or affected, (v) cause the suspension or revocation of any material Permit; or (vi) cause
the Company or any Company Subsidiary to take any action or create an obligation for the Company or
any Company Subsidiary to take any action that, if taken following the entry by the Company into
this Agreement, would have required the consent of Parent pursuant to
Section 6.01
; except,
with respect to clauses (ii) and (iv), for any such conflicts, violations, breaches, defaults or
other occurrences which would not, individually or in the aggregate, constitute a Material Adverse
Effect.
18
(b) The execution and delivery of this Agreement by the Company do not, and the performance of
this Agreement by the Company will not, require any consent, approval, authorization or permit of,
or filing with or notification to, any federal, state, provincial, municipal or local government,
governmental, regulatory or administrative authority, agency, instrumentality or commission or any
court, tribunal or judicial or arbitral body (a
Governmental Authority
), except for (i)
applicable requirements of the Exchange Act, (ii) the pre-merger notification requirements of the
HSR Act, (iii) the filing and recordation of appropriate merger documents as required by the PBCL
and (iv) any consent, approval, authorization, Permit, filing or notification listed in
Section
4.05(b)
of the Disclosure Schedule.
(c) No consent or approval of any other party (other than the shareholders of the Company or
any Governmental Authority as specifically described
in Section 4.05(b)
) is required to be
obtained by the Company for the execution, delivery or performance of this Agreement by the Company
or the performance by the Company of this Agreement, except where the failure to obtain any such
consent or approval would not prevent or delay the consummation of the Merger, or otherwise prevent
the Company from performing its obligations under this Agreement, or, individually or in the
aggregate, have a Material Adverse Effect.
SECTION 4.06
Permits; Compliance
.
(a) Since January 1, 2008, (i) the business and operations of the Company and the Company
Subsidiaries have been conducted in compliance with all applicable Laws (including Insurance Laws)
and (ii) the Company has complied with the applicable listing and corporate governance rules and
regulations of the NASDAQ Global Market except, in each case, where the failure to so conduct such
business and operations or comply with such rules and regulations would not, individually or in the
aggregate, have a Material Adverse Effect.
(b) Each of the Company and the Company Subsidiaries is in possession of all material
franchises, grants, authorizations, licenses, permits, easements, variances, exceptions, consents,
certificates, approvals and orders of any Governmental Authority necessary for it to own, lease and
operate its properties or to carry on its business as it is now being conducted (the
Permits
). The Company and the Company Subsidiaries have complied in all material
respects with, and are not in default in any material respect under any, and have maintained and
conducted their respective businesses in all material respects in compliance with, such Permits.
Each Permit is in full force and effect in accordance with its terms, and there is no proceeding
or, to the knowledge of the Company, investigation to which the Company or any Company Subsidiary
is subject before a Governmental Authority that is pending or threatened in writing that would be
expected to result in the revocation, failure to renew or suspension of, or placement of a
restriction on, any such Permit, except where the failure to be in full force and effect in
accordance with their terms, revocation, failure to renew, suspension or restriction would not,
individually or in the aggregate, have a Material Adverse Effect.
(c) Neither the Company nor any Company Subsidiary is in conflict with, or in default, breach
or violation of, (a) any Law (including any Insurance Law) applicable to the Company or any Company
Subsidiary or by which any property or asset of the Company or any Company Subsidiary is bound or
affected, or (b) any note, bond, mortgage, indenture, contract, agreement, lease, Permit or other
instrument or obligation to which the Company or any Company Subsidiary is a party or by which the
Company or any Company Subsidiary or any property or asset of the Company or any Company Subsidiary
is bound, except, in either case, for any such conflicts, defaults, breaches or violations that,
individually or in the aggregate, would not constitute a Material Adverse Effect.
19
(d) There is no proceeding to which the Company or any Company Subsidiary is subject before
any Governmental Authority pending or threatened in writing regarding whether the Company or any
Company Subsidiary has violated any Law, nor any investigation by any Governmental Authority
pending or threatened in writing with respect to possible violations of any applicable Laws, which,
if determined or resolved adversely against the Company or any Company Subsidiary, would,
individually or in the aggregate, reasonably be expected to be material to the Company or any one
or more of the Company Subsidiaries, or would reasonably be expected to prevent or materially delay
the consummation of the transactions contemplated by this Agreement. Since January 1, 2008, the
Company and each Company Subsidiary has each timely filed all material reports, registrations,
statements and certifications, together with any amendments required to be made with respect
thereto, required to be filed by it with any applicable Insurance Regulator, or such failure to
file has been remedied.
(e) Neither Company nor any Company Subsidiary is subject to any cease-and-desist or other
order issued by, or is a party to any written agreement, consent agreement or memorandum of
understanding with, or is a party to any commitment letter or similar undertaking to, or is subject
to any order or directive by, or has been a recipient of any supervisory letter from, or has
adopted any board resolutions at the request of, any Governmental Authority that: (i) limits the
ability of Company or any Company Subsidiary to conduct any line of business; (ii) requires any
investments of any Company Insurance Subsidiary to be treated as non-admitted assets; (iii)
requires divestiture of any investments of Company or any Company Subsidiary; (iv) in any manner
imposes any requirements on Company or any Company Subsidiary in respect of risk-based capital
requirements that add to or otherwise modify the risk-based capital requirements imposed under Law,
(v) in any manner relate to the ability of Company or any Company Subsidiary to pay or declare
dividends or distributions; or (vi) otherwise restricts the conduct of the business, underwriting
policies or management of Company or any Company Subsidiary (each, whether or not set forth in the
Company Disclosure Schedule, a
Company Regulatory Agreement
), nor has Company or any
Company Subsidiary been advised in writing by any Governmental Authority that it is considering
issuing or requesting any such Company Regulatory Agreement.
SECTION 4.07
SEC Filings; Financial Statements; Reserves
.
(a) The Company has filed all forms, reports, schedules, statements, and documents required to
be filed by it with, or furnished by it to, the SEC since September 4, 2009 (the
Company SEC
Reports
). The Company SEC Reports (including any financial statements, supplements or
schedules included therein) (i) were prepared in accordance, in all material respects, with the
requirements of the Securities Act or the Exchange Act, as the case may be, and the rules and
regulations promulgated thereunder and (ii) did not, at the time they were filed or furnished, or,
if amended, as of the date of such amendment, contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary in order to make the
statements made therein, in the light of the circumstances under which they were made, not
misleading. No Company Subsidiary is required to file any form, report or other document with the
SEC. The Company has not received any inquiries or interrogatories, whether in writing or
otherwise, from the SEC, Financial Industry Regulatory Authority (
FINRA
) or any other
Governmental Authority, or, to the knowledge of the Company, been the subject of any investigation,
audit, review or hearing by or in front of such persons, in each case with respect to any of the
Company SEC Reports or any of the information contained therein that have not been fully resolved.
20
(b) Each of the consolidated financial statements (including, in each case, any notes thereto)
contained in the Company SEC Reports (the
Company Financial Statements
) was prepared in
accordance with United States generally accepted accounting principles (
GAAP
) applied on
a consistent basis throughout the periods indicated (except as may be indicated in the notes
thereto) and each fairly presents, in all material respects, the consolidated financial position,
results of operations and cash flows of the Company and its consolidated subsidiaries as at the
respective dates thereof and for the respective periods indicated therein except as otherwise noted
therein (subject, in the case of unaudited statements, to normal and recurring year-end adjustments
which are not, in the aggregate, material to the Company and the Company Subsidiaries, taken as a
whole). The books and records of the Company and each of the Company Subsidiaries (i) are and have
been properly prepared and maintained in form and substance adequate for preparing audited
consolidated financial statements, in accordance with GAAP consistently applied and any other
accounting requirements and applicable Law, in each case, applicable to the Company or such Company
Subsidiary, (ii) reflect only actual transactions, and (iii) fairly reflect all assets and
liabilities of the Company and each of the Company Subsidiaries and all contracts and other
transactions to which the Company or any of the Company Subsidiaries is or was a party or by which
the Company or any of the Company Subsidiaries or any of their respective businesses or assets is
or was affected.
(c) Except as and to the extent set forth on the consolidated balance sheet of the Company and
its consolidated subsidiaries as of June 30, 2011, including the notes thereto (the
June 2011
Balance Sheet
), neither the Company nor any Company Subsidiary has any liability or obligation
of any nature (whether accrued, absolute, contingent, determined, determinable or otherwise),
whether or not required to be reflected or reserved against on a consolidated balance sheet of the
Company prepared in accordance with GAAP or the notes thereto, except for liabilities and
obligations (i) incurred in the ordinary course of business consistent with past practice since
June 30, 2011 or (ii) disclosed in
Section 4.07(c)
of the Disclosure Schedule.
(d) The Company has resolved all comments contained in comment letters received by the Company
from the SEC or the staff thereof prior to the date of this Agreement.
(e) The Company maintains disclosure controls and procedures required by Rule 13a-15 or Rule
15d-15 under the Exchange Act designed to ensure that all material information concerning the
Company and the Company Subsidiaries is made known on a timely basis to the individuals responsible
for the preparation of the Companys SEC filings and such controls are effective.
21
(f) The Company maintains a standard system of accounting established and administered in
accordance with GAAP. The Company and the Company Subsidiaries maintain a system of internal
control over financial reporting sufficient to provide reasonable assurance that: (i) transactions
are executed in accordance with managements general or specific authorizations; (ii) information
is recorded, processed, summarized and reported as necessary, to permit preparation of financial
statements in conformity with GAAP and timely filing of Company SEC Reports and to maintain asset
accountability, and accumulated and communicated to Company management, as appropriate, to allow
timely decisions regarding required disclosure; (iii) access to assets is permitted only in
accordance with managements general or specific authorization; and (iv) the recorded
accountability for assets is compared with the existing assets at reasonable intervals and
appropriate action is taken with respect to any differences. Management of the Company has fully
disclosed to the Companys auditors and the audit committee of the Company Board, and has made
available to Parent true and complete copies of any such disclosure regarding, (i) any significant
deficiencies and material weaknesses in the design or operation of internal control over financial
reporting that are reasonably likely to adversely affect the Companys ability to record, process,
summarize and report financial information and (ii) any fraud, whether or not material, that
involves management or other employees who have a significant role in the Companys internal
control over financial reporting, in each case that are within the knowledge of the Company.
(g) The Company is in compliance in all material respects with (i) the provisions of the
Sarbanes-Oxley Act of 2002, as amended (
SOX
), and (ii) the rules and regulations of
NASDAQ Global Market, in each case, that are applicable to the Company.
(h) Neither the Company nor any Company Subsidiary, nor, to the knowledge of the Company, any
director, officer, agent, employee or Affiliate of the Company or any Company Subsidiary is aware
of any action, or any allegation made by any Governmental Entity of any action, or has taken any
action, directly or indirectly, (i) that would constitute a violation by such Persons of the
Foreign Corrupt Practices Act of 1977, as amended, and the rules and regulations thereunder (the
FCPA
), including making use of the mails or any means or instrumentality of interstate
commerce corruptly in furtherance of an offer, payment, promise to pay or authorization of the
payment of any money, or other property, gift, promise to give, or authorization of the giving of
anything of value to any foreign official (as such term is defined in the FCPA) or any foreign
political party or official thereof or any candidate for foreign political office, in contravention
of the FCPA, or (ii) that would constitute an offer to pay, a promise to pay or a payment of money
or anything else of value, or an authorization of such offer, promise or payment, directly or
indirectly, to any employee, agent or representative of another company or entity in the course of
their business dealings with the Company or any Company Subsidiary, in order to unlawfully induce
such person to act against the interest of his or her employer or principal. There is no current,
pending, or, to the knowledge of the Company, threatened charges, proceedings, investigations,
audits, or complaints against the Company or any Company Subsidiary or, to the knowledge of the
Company, any director, officer, agent, employee or Affiliate of the Company with respect to the
FCPA or any other anti-corruption Law or regulation.
22
(i) Neither the Company nor any of its Subsidiaries is a party to, or has any commitment to
become a party to, any joint venture, off-balance sheet partnership or any similar Contract
(including any Contract relating to any transaction or relationship between or among the Company
and any of its Subsidiaries, on the one hand, and any unconsolidated Affiliate, including any
structured finance, special purpose or limited purpose entity, on the other hand, or any
off-balance sheet arrangement (as defined in Item 303(a) of Regulation S-K promulgated by the
SEC)), where the result, purpose or intended effect of such Contract is to avoid disclosure of any
material transaction involving, or material liabilities of, the Company or any of its Subsidiaries
in the Company SEC Reports.
(j) Since January 1, 2008, (i) neither the Company nor any of the Company Subsidiaries nor, to
the knowledge of the Company, any director, officer, employee, auditor, accountant, consultant,
attorney, agent, advisor or representative of the Company or any of the Company Subsidiaries has
received or otherwise had or obtained knowledge of any material complaint, allegation, assertion or
claim, whether written or oral, regarding the accounting, reserving or auditing practices,
procedures, methodologies or methods of the Company or any of the Company Subsidiaries or their
respective internal controls, including any material complaint, allegation, assertion or claim that
the Company or any of the Company Subsidiaries has engaged in illegal accounting or auditing
practices, and (ii) no director, officer, employee, auditor, accountant, consultant, attorney,
agent, advisor or representative of the Company or any of the Company Subsidiaries, whether or not
employed by the Company or any of the Company Subsidiaries, has reported evidence of a material
violation of applicable Laws, breach of fiduciary duty or similar violation by the Company or any
of its officers, directors, employees or agents to the Board of Directors of the Company or any
committee thereof.
(k) Each Company Insurance Subsidiary has assets that qualify as admitted assets under the
Insurance Laws in an amount at least equal to the sum of all its reserves and liability amounts and
its minimum statutory capital and surplus as required by such Insurance Laws. The Company
Financial Statements, as of the date thereof, set forth all of the reserves of such Company
Insurance Subsidiary as of such date (collectively, the
Company GAAP Reserves
). The
Company GAAP Reserves (i) were determined in accordance with GAAP consistently applied, (ii) were
computed on the basis of methodologies consistent in all material respects with those used in prior
periods, (iii) were fairly stated in all material respects in accordance with sound actuarial
principles, (iv) were established in accordance with prudent insurance practices generally followed
in the insurance industry, and (v) satisfied the requirements of all applicable Laws in all
material respects.
SECTION 4.08
Company SAP Statements
.
(a) Each of the Company Insurance Subsidiaries has filed or submitted all Company SAP
Statements required to be filed with or submitted to the insurance departments of their respective
jurisdictions of domicile on forms prescribed or permitted by such department. Prior to the date
of this Agreement, the Company has provided to Parent a complete and correct copy of the following
statutory statements, in each case together with the exhibits, schedules and notes thereto
(collectively, the
Company SAP Statements
): (i) the annual statement of each Company
Insurance Subsidiary as of and for the annual periods ended December 31, 2010, in each case as
filed with the Insurance Regulator of the jurisdiction of domicile of such Company Insurance
Subsidiary, and (ii) the quarterly statements of each Company Insurance Subsidiary as of and for
the quarterly periods ended March 31, 2011 and
23
June 30, 2011, in each case, as filed with the
Insurance Regulator of the jurisdiction of domicile of such Company Insurance Subsidiary. The
Company SAP Statements (A) have been derived from and are in accordance with the books and records
of the applicable Company Insurance Subsidiary, (B) have been prepared in accordance with all
applicable Laws (including Insurance Laws) and the statutory accounting practices prescribed or
permitted by the Insurance Regulator of the jurisdiction in which the applicable Company Insurance
Subsidiary is domiciled (
SAP
), and (C) fairly present, in all material respects, in
accordance with SAP, the statutory financial position, results of operations, assets, liabilities,
capital and surplus, changes in statutory surplus and cash flows of the Company Insurance
Subsidiaries as at the respective dates of, and for the periods referred to therein. No material
deficiency has been asserted by any Insurance Regulator with respect to any of the Company SAP
Statements that remains unresolved prior to the date hereof.
Section 4.08
of the
Disclosure Schedule sets forth a true and complete list of all accounting practices used by one or
more of the Company Insurance Subsidiaries in connection with the Company SAP Statements that
depart from the National Association of Insurance Commissioners Accounting Practices and
Procedures Manual and all such departures have been approved in writing by the applicable Insurance
Regulator, in accordance with applicable Law.
(b) The Company SAP Statements, as of the date thereof, set forth all of the reserves of each
Company Insurance Subsidiary as of such date (collectively, the
Company SAP Reserves
).
The Company SAP Reserves (i) were determined in accordance with SAP consistently applied, (ii) were
computed on the basis of methodologies consistent in all material respects with those used in prior
periods, (iii) were fairly stated in all material respects in accordance with sound actuarial
principles, (iv) were established in accordance with prudent insurance practices generally followed
in the insurance industry, and (v) satisfied the requirements of all applicable Laws in all
material respects.
SECTION 4.09
Absence of Certain Changes or Events
. Since December 31, 2010, except
as disclosed in
Section 4.09
of the Disclosure Schedule, (a) the Company and the Company
Subsidiaries have conducted their businesses in all material respects in the ordinary course of
business and in a manner consistent with past practice, (b) there has not been any action taken or
committed to be taken by the Company or any Company Subsidiary which, if taken following entry by
the Company into this Agreement, would have required the consent of Parent pursuant to
Section
6.01
and (c) no event or events or development or developments have occurred that have had or
would reasonably expected to have, individually or in the aggregate, a Material Adverse Effect.
SECTION 4.10
Absence of Litigation
. Since January 1, 2008, there has been no
litigation, suit, claim, action, complaint, demand, summons, cease and desist letter, subpoena,
injunction, notice of violation, investigation or other proceeding (
Action
) pending or,
to the knowledge of the Company, taken or threatened to be taken against the Company, any Company
Subsidiary, any property or asset of the Company or any Company Subsidiary, or any present officer,
director or employee of the Company or any Company Subsidiary before any Governmental Authority,
other than Actions involving claims and other benefits under or in connection with insurance
policies issued by the Company Subsidiaries (other than extracontractual or bad faith claims),
Actions for subrogation recoveries and Actions involving the collection of premiums, in each case
in the ordinary course of business. Neither the Company nor any Company Subsidiary nor any
property or asset of the Company or any Company Subsidiary is subject to any continuing order of,
consent decree, settlement agreement or similar written agreement with, or, to the knowledge of the
Company, continuing investigation by, any Governmental Authority, or any order, writ, judgment,
injunction, decree, determination or award of any Governmental Authority.
24
SECTION 4.11
Employee Benefit Plans
.
(a)
Section 4.11(a)
of the Disclosure Schedule lists each employee benefit plan (as
defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended
(
ERISA
)) and all bonus, stock option, stock purchase, employee stock ownership,
restricted stock, incentive, compensation, deferred compensation, retiree medical or life
insurance, supplemental retirement, retention, vacation pay, cafeteria, unemployment compensation,
severance and other benefit plans, programs or arrangements, and all employment, termination,
change in control, golden parachute, restrictive covenant, severance and other contracts or
agreements, that are maintained, contributed to or sponsored by the Company or any Company
Subsidiary or with respect to which the Company or any Company Subsidiary has an obligation to
contribute or otherwise has any liability or reasonable expectation of liability (collectively, the
Plans
).
(b) With respect to each Plan, the Company has made available to Parent a true and complete
copy of each of the following documents, if applicable: (i) all of the documents pursuant to which
such Plan is maintained, administered and funded, including (without limitation) the plan documents
and amendments thereto, all trust agreements and other funding arrangements, custodial agreements,
insurance contracts, administration and service contracts, investment management agreements,
investment advisor agreements, subscription and participation agreements, recordkeeping agreements,
summary plan descriptions and summaries of material modifications, (ii) the three most recently
filed Internal Revenue Service (
IRS
) Forms 5500 with all applicable attachments and
schedules thereto, except as set forth in
Section 4.11(b)
of the Disclosure Schedule, (iii)
the most recently received IRS determination letter or favorable opinion letter and all other
material correspondence with Governmental Authorities, (iv) results of all nondiscrimination,
top-heavy, and other compliance testing for the three most recently ended plan years, (v) the three
most recent actuarial reports, (vi) a current schedule of the Plans assets (and the fair market
value thereof assuming liquidation of any asset that is not readily tradeable) held with respect to
any Plan that is funded, (vii) all employee elections under Section 83(b) of the Code, (viii) all
participant election forms under each Plan that is a nonqualified deferred compensation plan, (ix)
all ESOP loan documentation, and (x) the three most recently prepared financial statements and the
accountants opinions of such financial statements in connection with each such Plan. There are no
perquisites provided (or committed to be provided) to executive-level employees other than the
perquisites described in the employment agreements set forth (or required to be set forth) in
Section 4.11(a)
of the Disclosure Schedule.
25
(c) None of the Company, the Company Subsidiaries or any ERISA Affiliate (including any entity
that during the past six years was a subsidiary of the Company or any Company Subsidiary) has now
or at any time in the prior six years, contributed to, had an obligation to contribute to,
sponsored or maintained a multiemployer plan (within the meaning of Section 3(37) or 4001(a)(3) of
ERISA) (a
Multiemployer Plan
), a single employer pension plan (within the meaning of
Section 4001(a)(15) of ERISA) for which the Company or any Company Subsidiary could incur liability
under Section 4063 or 4064 of ERISA (a
Multiple Employer Plan
), or a multiple employer
welfare arrangement (within the meaning of Section 3(40) of ERISA). Except as set forth in
Section 4.11(c)
of the Disclosure Schedule, none of the Plans provides for or promises
retiree medical, retiree disability, retiree life insurance or other retiree welfare benefits to
any current or former employee, officer or director of the Company or any Company Subsidiary (other
than as required by Section 4980B of the Code or applicable state continuation coverage Law).
(d) Except as set forth in
Section 4.11(d)
of the Disclosure Schedule, each Plan has
been operated in accordance with its terms and in material compliance with the requirements of all
applicable Laws including ERISA and the Code. No Action or audit is pending or, to the knowledge
of the Company, threatened with respect to any Plan (other than claims for benefits in the ordinary
course).
(e) Each Plan that is an employee pension benefit plan (within the meaning of Section 3(2) of
ERISA) is the subject of a favorable determination letter or favorable opinion letter issued by the
IRS with respect to the qualified status of such Plan under Section 401(a) of the Code and the
tax-exempt status of any trust that forms a part of such Plan under Section 501(a) of the Code (or,
in the case of the ESOP, the Company has timely submitted a request for the initial favorable
determination letter); all amendments to any such Plan for which the remedial amendment period
(within the meaning of Section 401(b) of the Code and applicable regulations) has expired are
covered by a favorable IRS determination letter; and no event has occurred that will or could give
rise to disqualification of any such Plan under such sections or to a tax under Section 511 of the
Code.
(f) With respect to each Plan that is subject to Title IV of ERISA, (i) there has been no
reportable event (as described in Section 4043 of ERISA); (ii) no steps have been taken to
terminate such Plan; (iii) there has been no withdrawal (within the meaning of Section 4063 of
ERISA) of a substantial employer (as defined in Section 4001(a)(2) of ERISA); (iv) no event or
condition has occurred which might constitute grounds under Section 4042 of ERISA for the
termination of or the appointment of a trustee to administer any such Plan; (v) no event or
condition has occurred which would give rise to liabilities under Section 4062(e) of ERISA; (vi)
the minimum funding standards of Section 412 of the Code have been satisfied, no waiver of the
minimum funding standards have been granted and none of the Company, any Company Subsidiary, or any
of their ERISA Affiliates has requested a funding waiver; (vii) no event has occurred with respect
to any such Plan which has resulted or could reasonably be expected to result a lien being imposed
on the assets of the Company, any Company Subsidiary or any of their ERISA Affiliates; and (viii)
except as set forth in
Section 4.11(f)
of the Disclosure Schedule, if each such Plan were
terminated immediately after the Closing Date, there would be no unfunded liabilities with respect
to any such Plan, its participants or beneficiaries or the Pension Benefit Guaranty Corporation
(the
PBGC
).
26
(g) All contributions, premiums or payments required to be made with respect to any Plan have
been made or properly accrued on or before their due dates.
(h) Except as set forth in
Section 4.11(h)
of the Disclosure Schedule, each Plan that
is a nonqualified deferred compensation plan (as defined for purposes of Section 409A of the
Code) that is subject to the requirements of Section 409A of the Code and all applicable IRS
guidance promulgated thereunder (collectively,
Section 409A
) (i) was operated in good
faith compliance with Section 409A between January 1, 2005 and December 31, 2008 and (ii) has
complied in form and operation with the requirements of Section 409A since January 1, 2009. With
respect to any person receiving benefits under or pursuant to a Plan that is a nonqualified
deferred compensation plan,
Section 4.11(h)
of the Disclosure Schedule sets forth the
payment schedule and respective payment amounts.
(i) None of the assets of any Plan are invested in employer real property or, except for the
ESOP, are invested in employer securities.
(j) None of the Company, any Company Subsidiary, or any of their ERISA Affiliates is a
nonqualified entity within the meaning of Section 457A of the Code.
(k) Each Plan that constitutes a group health plan (as defined in Section 607(i) of ERISA or
Section 4980B(g)(2) of the Code), including any plans of current and former affiliates that must be
taken into account under Sections 4980B and 414(t) of the Code or Sections 601-608 of ERISA, have
been operated in compliance with applicable Law, including the continuation coverage requirements
of Section 4980B of the Code and Section 601 of ERISA, the portability and nondiscrimination
requirements of Sections 9801 and 9802 of the Code, and the requirements of Parts 6 and 7 of
Subtitle B of Title I of ERISA, to the extent such requirements are applicable.
(l) There have been no prohibited transactions (as described in Section 406 of ERISA or
Section 4975 of the Code) with respect to any Plan and none of the Company, any Company Subsidiary
or any of their ERISA Affiliates has engaged in any prohibited transaction.
(m) There have been no acts or omissions by the Company, any Company Subsidiary, or any of
their ERISA Affiliates which have given rise to or may give rise to interest, fines, penalties,
taxes or related charges under any applicable Law, including ERISA and the Code.
(n) Except as set forth in
Section 4.11(n)
of the Disclosure Schedule, neither the
execution of this Agreement nor the consummation of the transactions contemplated hereby will (i)
entitle any employee of the Company or any Company Subsidiary to severance pay or any increase in
severance pay upon termination of employment after the date hereof; or (ii) accelerate the time of
vesting or the time of payment, or result in any payment or funding (through a grantor trust or
otherwise), or increase the amount, of compensation or benefits due to any current or former
director, officer or employee of the Company, any Company Subsidiary, or any of their ERISA
Affiliates. None of the payments contemplated by the Plans would, in the aggregate, constitute
excess parachute payments (as defined in Section 280G of the Code (without regard to subsection
(b)(4) thereof)) or would exceed the amount deductible pursuant to Section 162(m) of the Code.
Section 4.11(n)
of the Disclosure Schedule, as of the date of this Agreement, sets forth a
good faith estimate of all parachute payments (including excess parachute payments) anticipated by
the Company to be paid in connection with transactions contemplated by this Agreement prepared in
accordance with the principles and methodologies set forth in Treasury Regulation Section 1.280G-1
and other applicable guidance.
27
(o) There has been no act or omission that would impair the ability of the Company or any
Company Subsidiary (or any successor thereto or the Surviving Corporation) to unilaterally amend or
terminate any Plan.
(p) ESOP.
(i) The ESOP has been operated and administered at all times in compliance in all material
respects with its terms and with the provisions of applicable Law, including applicable provisions
of ERISA and the Code. Since its inception, the ESOP is intended to be qualified under Section
401(a) of the Code and is intended to be exempt from tax under Section 501(a) of the Code, and the
ESOP has intended to be qualified as a valid employee stock ownership plan (within the meaning of
Sections 409 and 4975(e)(7) of the Code) and there has been no act or omission that would
reasonably be expected to adversely affect the tax-qualified status of the ESOP, the tax-exempt
status of the trust under the ESOP or the validity of the ESOP as an employee stock ownership plan
(within the meaning of Sections 409 and 4975(e)(7) of the Code).
(ii) Except as set forth in
Section 4.11(p)(ii)
of the Disclosure Schedule, (a) there
are no loans or other extensions of credit between the ESOP and any other person; (b) there are no
shares of Company Common Stock held in the ESOP that have not been allocated to the accounts of
participants or beneficiaries of the ESOP; and (c) all contributions to the ESOP due with respect
to periods ending on or prior to the Closing have been timely made and all such contributions that
are not yet due shall have been made prior to the Closing. Each ESOP loan that is set forth in the
Disclosure Schedule satisfies the requirements of an exempt loan within the meaning of Section
4975(d)(3) and Treasury Regulation Section 54.4975-7(b).
(iii) As promptly as practicable following execution of this Agreement, the ESOP will be
amended so that during the pendency of the transactions contemplated by this Agreement, and
continuing through and subsequent to the Closing, should it occur, the Trustee shall be fully
independent and empowered to act as a discretionary and independent Trustee with respect to the
ESOPs participation in the transactions contemplated by this Agreement.
(iv) (A) The ESOPs conversion of shares pursuant to this Agreement into the right to receive,
and the ESOPs receipt of, Merger Consideration (I) will not result in a violation of ERISA, the
Code, or any other Law applicable to the ESOP, including, a violation of Section 406 or Section 407
of ERISA or Section 4975 of the Code, (II) will not result in a violation of any agreement to which
the ESOP is a party or is otherwise bound, and (III) will not result in the imposition of any
excise Tax on any person, including, any excise Tax under Section 4975 or Section 4978 of the Code,
and (B) in accordance with the terms of the ESOP documents and applicable Law, voting rights with
respect to allocated shares held by the ESOP are required to be passed through to participants in
or beneficiaries of the ESOP with regard to approval of the Merger.
28
(v) There is no Action or audit pending or, to the knowledge of the Company, threatened,
concerning any matter with respect to the ESOP relevant as to whether any representation set forth
in this
Section 4.11(p)
was, has or will at any time become inaccurate (other than in
respect of (A) periodic timely requests to the Internal Revenue Service to issue a favorable
determination letter to the effect that the ESOP is a tax-qualified plan under Section 401(a) of
the Code and an employee stock ownership plan and that the trust under the ESOP continues to be a
tax-exempt trust under Section 501(a) of the Code and (B) Annual Reports Form 5500 series), and no
Trustee or other fiduciary of the ESOP has made any assertion with respect to the ESOP contrary to,
or inconsistent with the accuracy of, any such representation.
SECTION 4.12
Labor and Employment Matters
.
(a) Except as set forth in
Section 4.12(a)
of the Disclosure Schedule, (i) neither the
Company nor any Company Subsidiary is a party to any collective bargaining, trade union or other
labor union contract applicable to persons employed by the Company or any Company Subsidiary, and,
to the knowledge of the Company, there are no organizational campaigns, petitions or other
unionization activities seeking recognition of a collective bargaining unit which could affect the
Company or any Company Subsidiary; (ii) there are no material controversies, strikes, slowdowns or
work stoppages pending or, to the knowledge of the Company, threatened between the Company or any
Company Subsidiary and any of their respective employees and neither the Company nor any Company
Subsidiary has experienced any material controversy, strike, slowdown or work stoppage within the
prior five years; (iii) there are no unfair labor practice complaints pending or, to the knowledge
of the Company, threatened against the Company or any Company Subsidiary before the National Labor
Relations Board or any other Governmental Authority or any current union representation questions
involving employees of the Company or any Company Subsidiary; (iv) except as would not constitute a
Material Adverse Effect, the Company and each Company Subsidiary are currently in compliance with
all Laws relating to the employment of labor, including those related to wages and hours; (v)
except as would not constitute a Material Adverse Effect, there is no charge of discrimination in
employment or employment practices, for any reason, including age, gender, race, religion or other
legally protected category, which is now pending before the United States Equal Employment
Opportunity Commission, or any other Governmental Authority in any jurisdiction in which the
Company or any Company Subsidiary has employed or currently employs any person; and (vi) except as
would not constitute a Material Adverse Effect, the Company has not misclassified any person as an
independent contractor, temporary employee, leased employee or any other servant or agent
compensated other than through reportable wages as an employee of the Company or the Company
Subsidiaries (each a
Contingent Worker
) and no Contingent Worker has been improperly
excluded from any Plan and the Company does not employ or engage any volunteer workers, paid or
unpaid interns or any other unpaid workers
.
(b)
Section 4.12(b)
of the Disclosure Schedule sets forth an accurate list showing, as
of the date hereof, for each current employee of the Company or any Company Subsidiary the name,
current annual salary rate, bonus for 2010, anticipated bonus for 2011, the date of first
employment, a description of position or job function, and accrued and unused paid time off
(including vacation and sick leave) entitlement. The Company has provided to Parent a true and
complete copy of each employee handbook of the Company and each Company Subsidiary.
29
SECTION 4.13
Real Property; Title to Assets
.
(a)
Section 4.13(a)
of the Disclosure Schedule lists each parcel of real property
currently owned by the Company or any Company Subsidiary. Each such parcel of real property (i) is
owned free and clear of all mortgages, pledges, liens, security interests, conditional and
installment sale agreements, encumbrances, charges or other claims of third parties of any kind,
including any easement, right of way or other encumbrance to title, or right of first refusal,
right of first offer or similar right (collectively,
Liens
), other than (A) Liens for
current Taxes and other governmental charges and assessments not yet payable or that are being
contested in good faith or for which adequate reserves have been established in accordance with
GAAP, (B) inchoate mechanics and materialmens Liens for construction in progress, (C) workmens,
repairmens, warehousemens and carriers Liens arising in the ordinary course of business of the
Company or such Company Subsidiary consistent with past practice, (D) all matters of record, Liens
and other imperfections of title and encumbrances that would not materially impair the continued
use and utility of such property encumbered thereby, (E) zoning restrictions, survey exceptions,
utility easements, rights of way and similar Liens imposed by any Governmental Authority, (F)
interests of any lessee in any leased property, (G) transfer restrictions imposed by applicable
securities Laws and (H) Liens that do not materially adversely affect the use and enjoyment of such
real property (collectively,
Permitted Liens
), and (ii) is neither subject to any
governmental decree or order to be sold nor being condemned, expropriated or otherwise taken by any
public authority with or without payment of compensation therefor, nor, to the knowledge of the
Company, has any such condemnation, expropriation or taking been proposed.
(b) There are no contractual or legal restrictions that preclude or restrict in any material
respect the ability to use any real property owned or leased by the Company or any Company
Subsidiary for the purposes for which it is currently being used. There are no material latent
defects or material adverse physical conditions affecting the real property, and improvements
thereon, owned or leased by the Company or any Company Subsidiary other than those that would not
have a Material Adverse Effect.
(c) Each of the Company and the Company Subsidiaries has good and valid title to, or, in the
case of leased properties and assets, valid leasehold or subleasehold interests in, all of its
properties and assets, tangible and intangible, real, personal and mixed, used or held for use in
its business, free and clear of any Liens (other than Permitted Liens). Each of the Company and
the Company Subsidiaries are in material compliance with applicable Law with respect to the real
properties owned or leased by it.
SECTION 4.14
Taxes
.
(a) The Company and the Company Subsidiaries have filed all United States federal income and
all material United States federal non-income, state, local Tax returns and reports required to be
filed by them and have paid and discharged all Taxes required to be paid or discharged that are
material in amount, other than such payments as are being contested in good faith by appropriate
proceedings. All such Tax returns are true, accurate and complete in all material respects.
30
(b) Neither the IRS nor any other taxing authority or agency is now asserting in writing or,
to the knowledge of the Company, threatening to assert against the Company or any Company
Subsidiary any material deficiency or claim for any Taxes or interest thereon or penalties in
connection therewith.
(c) Neither the Company nor any Company Subsidiary has granted any waiver of any statute of
limitations with respect to, or any extension of a period for the assessment of, any Tax with
respect to any Tax period that remains open to assessment.
(d) The accruals and reserves for Taxes reflected in the June 2011 Balance Sheet are adequate
to cover all Taxes accruable through such date in accordance with GAAP. There are no material Tax
liens upon any property or assets of the Company or any of the Company Subsidiaries except liens
for current Taxes not yet due and payable.
(e) Neither the Company nor any of the Company Subsidiaries has been required to include in
income any adjustment pursuant to Section 481 of the Code for any open Tax year by reason of a
voluntary change in accounting method initiated by the Company or any of the Company Subsidiaries,
and the IRS has not initiated or proposed any such adjustment or change in accounting method, in
either case which adjustment or change would have a Material Adverse Effect.
(f) Neither the Company nor any of the Company Subsidiaries has entered into a material
transaction in any open Tax year that is being accounted for under the installment method of
Section 453 of the Code.
(g) Neither the Company nor any of the Company Subsidiaries has any material intercompany
items (as defined in Treas. Reg. Sec. 1.1502-13(b)(2)) or material deferred intercompany gain or
loss arising under the provisions of the applicable consolidated return regulations in effect for
transactions occurring in taxable years beginning before July 12, 1995, which intercompany items,
gain or loss are attributable to a transfer or other disposition of stock of a Company Subsidiary
that is treated as a corporation for federal income tax purposes, and none of the shares of stock
of any Company Subsidiary had an excess loss account within the meaning Treas. Reg. Sec.
1.1502-19(a)(2) as of the close of the last Tax year or will have an excess loss account as of the
Effective Time.
(h) Neither the Company nor any of the Company Subsidiaries has ever been a member of an
affiliated, combined, consolidated or unitary Tax group other than the group for which the Company
is the common parent and neither the Company nor any of the Company Subsidiaries has any material
liability for Taxes of any other Person under Treasury regulation section 1.1502-6 (or any similar
provision of state, local or foreign Law), as a transferee or successor, by contract or otherwise,
other than a Person that is a member of any affiliated, combined, consolidated or unitary Tax group
for which the Company is the common parent.
(i) No closing agreements, private letter rulings, technical advice memoranda or similar
agreement or rulings have been entered into or issued by any taxing authority with respect to the
Company or any of the Company Subsidiaries.
31
(j) All material Taxes which the Company and each of the Company Subsidiaries is required by
law to withhold or collect, including any amounts required to be withheld for Taxes of Employees,
have been duly and timely withheld or collected and, to the extent required, have been paid over to
the proper Governmental Authority, other than any Taxes properly reserved for on the June 2011
Balance Sheet.
(k) Neither the Company nor any of the Company Subsidiaries is a party to any Tax allocation
or other agreements pursuant to which it will have an obligation to make any payments after the
Closing Date.
(l) Neither the Company nor any of the Company Subsidiaries has engaged in any transaction
that gives rise to (i) a registration obligation with respect to any person under Section 6111 of
the Code; (ii) a list maintenance obligation with respect to any person under Section 6112 of the
Code; (iii) a disclosure obligation as a reportable transaction under Section 6011 of the Code;
or (iv) or engaged in any transaction that did not have economic substance within the meaning of
Section 7701(o) of the Code.
(m) Neither the Company nor any of the Company Subsidiaries has been a distributing
corporation or a controlled corporation in connection with a distribution described in Section
355 of the Code within the last two (2) years.
(n) Neither the Company nor any of the Company Subsidiaries has received written notice from
any taxing authority that the Company or any of the Company Subsidiaries is subject to any material
Tax in a jurisdiction other than a Tax jurisdiction where a Tax Return is currently filed.
SECTION 4.15
Environmental Matters
.
(a) Except for those matters that, individually or in the aggregate would not have a Material
Adverse Effect, (i) each of the Company and each Company Subsidiary is, and has been, in compliance
with all applicable Environmental Laws, (ii) there is no investigation, suit, claim, action or
proceeding relating to or arising under Environmental Laws that is pending or, to the knowledge of
the Company, threatened against the Company or any Company Subsidiary or any real property
currently or, to the knowledge of the Company, owned, operated or leased by the Company or any
Company Subsidiary, (iii) other than as provided for in insurance and reinsurance contracts issued
in the ordinary course of the Companys business, neither the Company nor any Company Subsidiary
has received any notice of or entered into any obligation, liability, order, settlement, judgment,
injunction or decree relating to or arising under Environmental Laws and (iv) to the knowledge of
the Company, no facts, circumstances or conditions exist with respect to the Company or any Company
Subsidiary including at any property currently or formerly owned, operated or leased by the Company
or any Company Subsidiary that could reasonably be expected to result in the Company and/or any
Company Subsidiary incurring liabilities under Environmental Laws.
32
(b) For purposes of this Agreement:
(i)
Environmental Laws
means all Laws relating to the environment, preservation or
reclamation of natural resources, the presence, management or release of, or exposure to, Hazardous
Materials, or to human health and safety.
(ii)
Hazardous Materials
means any material, substance of waste that is regulated,
classified, or otherwise characterized under or pursuant to any Environmental Law as hazardous,
toxic, a pollutant, a contaminant, radioactive or words of similar meaning or effect,
including petroleum and its by-products, asbestos, polychlorinated biphenyls, radon, mold, urea
formaldehyde insulation, chlorofluorocarbons and all other ozone-depleting substances.
SECTION 4.16
No Rights Plan
. The Company does not have in place any shareholders
rights plan.
SECTION 4.17
Material Contracts
.
(a)
Section 4.17(a)
of the Disclosure Schedule lists the following types of contracts
and agreements to which the Company or any Company Subsidiary is a party as of the date hereof
(such contracts and agreements as are required to be set forth in
Section 4.17(a)
of the
Disclosure Schedule being the
Material Contracts
): (i) each material contract (as such
term is defined in Item 601(b)(10) of Regulation S-K of the SEC) with respect to the Company and
the Company Subsidiaries; (ii) all contracts and agreements that contain obligations in excess of
$50,000 or are otherwise material to the current business, assets, liabilities, financial condition
or results of operations of the Company or any Company Subsidiary; (iii) all contracts and
agreements evidencing indebtedness for borrowed money in excess of $50,000; (iv) all joint venture,
partnership, strategic alliance and business acquisition or divestiture agreements; (v) all
contracts and agreements relating to issuances of securities of the Company or any Company
Subsidiary; (vi) all contracts and agreements with any Governmental Authority to which the Company
or any Company Subsidiary is a party and that are material to the business and operations of the
Company and the Company Subsidiaries, taken as a whole; (vii) all contracts and agreements that
limit, or purport to limit the ability of the Company or any of its affiliates (including Parent or
any of its affiliates following the merger) to compete in any line of business or with any person
or entity or in any geographic area or during any period of time or to acquire the securities of
any other person; (viii) all contracts and agreements that obligate the Company or any Company
Subsidiary or will obligate Parent or any of its subsidiaries following the Merger, in each case,
to extend most-favored nation pricing to any person, (ix) all contracts and agreements that impose
exclusivity obligations on the Company or any Company Subsidiary or that will impose exclusivity
obligations on Parent or any of its subsidiaries following the Merger, in each case, with respect
to customers or suppliers, (x) all contracts and agreements that impose obligations on the Company
or any Company Subsidiary or will impose obligations on Parent or any of its subsidiaries following
the Merger, in each case, with respect to non-solicitation provisions with respect to customers or
suppliers; (xi) all contracts and agreements that relate to or contain provisions or covenants that
obligate or upon the occurrence of a condition precedent will obligate the Company or any Company
Subsidiary to guarantee indebtedness for borrowed money; (xii) all contracts and agreements that
are a guaranty or contain provisions or covenants
relating to indemnification or holding harmless by the Company or any Company Subsidiary;
(xiii) all contracts and agreements that are employment (other than an employment at will),
severance, retention, incentive or similar contracts applicable to any employee of the Company or
any of the Company Subsidiaries, including contracts to employ executive officers and other
contracts with officers or directors of the Company or any of the Company Subsidiaries, other than
agent contracts with insurance agents; and (xiv) all other contracts and agreements (other than (A)
insurance policies issued by any Company Subsidiary in the ordinary course of business, (B)
reinsurance contracts (whether assumed or ceded) entered into by a Company Subsidiary in the
ordinary course of business and (C) contracts between the Company or any Company Subsidiary, on one
hand, and any agent, broker or producer, on the other hand, entered into in the ordinary course of
business) the absence of such contract or agreement would constitute a Material Adverse Effect.
With respect to each Material Contract, a complete and accurate copy of such contract has
previously been made available to Parent.
33
(b) Except as would not constitute a Material Adverse Effect, (i) each Material Contract is a
valid and binding agreement, except to the extent it has previously expired in accordance with its
terms, (ii) none of the Company or any Company Subsidiary has received any claim of default under
or cancellation of any Material Contract and none of the Company or any Company Subsidiary is in
breach or violation of, or default under, any Material Contract, (iii) to the Companys knowledge,
no other party is in breach or violation of, or default under, any Material Contract and (iv)
neither the execution of this Agreement nor the consummation of the Merger shall constitute a
default under, give rise to cancellation rights under, or otherwise adversely affect any of the
material rights of the Company or any Company Subsidiary under any Material Contract.
SECTION 4.18
Technology and Intellectual Property
.
(a)
Section 4.18(a)(i)
of the Disclosure Schedule contains a complete and accurate
list of all Owned Intellectual Property.
Section 4.18(a)(ii)
of the Disclosure Schedule
contains a complete and accurate list of all Material Licenses. All Owned Intellectual Property
listed in
Section 4.18(a)(i)
of the Disclosure Schedule is solely and exclusively owned by
the Company and the Company Subsidiaries, free and clear of all Liens (other than Permitted Liens).
All necessary issuance, registration, maintenance, renewal and other relevant filing fees in
connection with any of the Owned Intellectual Property listed or required to be listed on
Section 4.18(a)(i)
of the Disclosure Schedule have been timely paid, and all necessary
documents, certificates and other relevant filings in connection with any such Owned Intellectual
Property have been timely filed, with the relevant governmental entities and Internet domain name
registrars in the United States or foreign jurisdictions, as the case may be, for the purpose of
maintaining such Owned Intellectual Property and all issuances, registrations and applications
therefor are in full force and effect. The Company Intellectual Property constitutes all
Intellectual Property used in or necessary for the conduct of the business of the Company or any of
the Company Subsidiaries.
(b) To the knowledge of the Company, all of the Company Intellectual Property, and all of the
rights of the Company and the Company Subsidiaries in and to the Company Intellectual Property, are
valid, subsisting and enforceable.
34
(c) To the knowledge of the Company, no Company Intellectual Property is subject to any
outstanding order, judgment or decree adversely affecting the Companys or any of its Subsidiaries
use thereof in the conduct of their respective businesses. Prior to the date hereof, there have
been no written claims made or threatened in writing against the Company or any of the Company
Subsidiaries asserting (i) the invalidity, misuse or unenforceability of any of the Company
Intellectual Property, or (ii) that the operation of the business of the Company or any of the
Company Subsidiaries infringes, violates, misappropriates or otherwise conflicts with any
Intellectual Property or any other proprietary or privacy right of any third party. To the
knowledge of the Company, none of the Company Intellectual Property, the development,
manufacturing, licensing, marketing, importation, exportation, offer for sale, sale, use or other
exploitation of any products or services in connection with the respective businesses of the
Company and the Company Subsidiaries, or the respective business practices, methods or operations
of the Company and the Company Subsidiaries, infringes, violates, misappropriates or otherwise
conflicts with (or has infringed, violated, misappropriated or otherwise conflicted with) any
Intellectual Property or other proprietary or privacy right of any person. To the knowledge of the
Company, no person has infringed upon, misappropriated, diluted, violated or otherwise conflicted
with or is currently infringing upon, misappropriating, diluting, violating or otherwise
conflicting with any Company Intellectual Property owned by or exclusively licensed to the Company
or any of the Company Subsidiaries. No written claims or unwritten claims have been made against
any person by the Company or any of the Company Subsidiaries alleging that any person is infringing
upon, misappropriating, diluting, violating or otherwise conflicting, or has infringed upon,
misappropriated, diluted, violated or otherwise conflicted with, any Company Intellectual Property
owned by or exclusively licensed to the Company or any of the Company Subsidiaries.
(d) To the knowledge of the Company, no material trade secret included in the Company
Intellectual Property has been authorized to be disclosed or has been actually disclosed by the
Company or any of the Company Subsidiaries to any third party other than pursuant to a written
non-disclosure agreement restricting the disclosure and use thereof. No employee, consultant,
independent contractor or any other third party has any right, title or interest, directly or
indirectly, in any Owned Intellectual Property.
(e) Other than as set forth in
Section 4.18(e)(i)
of the Disclosure Schedule, none of
the Company or any of the Company Subsidiaries is currently a party to or otherwise bound by any
source code escrow agreement or any other agreement (or a party to or otherwise bound by any
agreement obligating the Company or any of the Company Subsidiaries to enter into a source code
escrow agreement or other agreement) requiring the deposit, delivery or disclosure of source code
or related materials for any Software. Except as set forth in
Section 4.18(e)(ii)
of the
Disclosure Schedule, (i) no Owned Intellectual Property that is Software contains or is used with
any Open Source Software and (ii) the Company and the Company Subsidiaries are in compliance with
all open source licenses (such as the GNU Public License or Mozilla Public License) governing
Open Source Software that is used in the conduct of the businesses of the Company and the Company
Subsidiaries.
35
(f) Except with respect to commercially available off the shelf Software licensed to the
Company or any of the Company Subsidiaries on standard shrink wrap terms for less than a one-time
license fee of $25,000 or $50,000 in the aggregate or as otherwise set
forth in
Section 4.18(f)
of the Disclosure Schedule, none of the Company or any of the
Company Subsidiaries is required, obligated or under any liability whatsoever to make any payments
by way of royalties, fees or otherwise, or to provide any other consideration of any kind, to any
owner or licensor of, or other claimant to, any Intellectual Property, or any other person, with
respect to the use of such Intellectual Property or in connection with the conduct of the
respective businesses of the Company and each of the Company Subsidiaries as currently conducted.
(g) All of the material computer systems that are used in the businesses of the Company or the
Company Subsidiaries as currently conducted, including hardware, software, databases, firmware,
telecommunications and related cabling, wiring and peripherals (collectively, the
Information
Technology Systems
) are in good working order and have capacity and functions that are
adequate for the conduct of the businesses of the Company and the Company Subsidiaries, as
conducted as of the date hereof and anticipated to be conducted in the future. To the knowledge of
the Company, for the three (3) years preceding the Closing Date, (i) no part of the Information
Technology Systems is or has been infected by any virus or other extraneously induced malfunction
that has caused a material loss of performance of the Information Technology Systems or the loss of
any material data stored on the Information Technology Systems, (ii) no part of the Information
Technology Systems has experienced any substantial and unscheduled outage or malfunction, (iii)
there has been no breach, security incident or unauthorized access to or disclosure, use or loss of
any Personal Data, whether on or through the Information Technology Systems or, to the knowledge of
the Company, any third party service provider working on behalf of the Company or any of the
Company Subsidiaries, that has required notification to any person or Governmental Authority
pursuant to any applicable breach notification laws or Privacy Laws, or taking any other action as
required by any Privacy Law. The Company and the Company Subsidiaries are in compliance with their
own privacy and security policies and any Privacy Laws. As of the date of this Agreement, neither
the Company nor any of the Company Subsidiaries is prohibited by any Privacy Law or their own
privacy or security policies from providing Parent with, or transferring to Parent, all or any
portion of the Personal Data collected, processed, stored, acquired and used in the conduct of the
businesses of the Company or any of the Company Subsidiaries on or after the date hereof, in
connection with the transactions and provision of services contemplated hereby. The Company and
the Company Subsidiaries have implemented and followed reasonable security programs and policies
containing technical and organizational measures to protect and safeguard Personal Data, including
ongoing review and updating of all such plans and policies.
(h) The Company has implemented a reasonable and industry standard plan, in the event of a
failure of the Information Technology Systems (whether due to natural disaster, power failure or
otherwise), intended to reasonably minimize any disruption to the operations of the Company or any
of the Company Subsidiaries in the event of such a failure.
(i) The Company and the Company Subsidiaries have taken reasonable measures to protect and
preserve the confidentiality and value of trade secrets or other material confidential information
and proprietary know-how, ideas and information used, held for use or necessary for any business of
the Company and the Company Subsidiaries (
Company Confidential Information
). To the
knowledge of the Company, the Company and the Company Subsidiaries have required all of their
employees and contractors to comply with, and no current
or former employee or contractor of any of the Company or the Company Subsidiaries has
breached or violated, any Company or Company Subsidiary policy or agreements with respect to any
Company Confidential Information.
36
SECTION 4.19
Insurance
. Copies of all material insurance policies maintained by the
Company and the Company Subsidiaries as the insured and all policies covering directors and
officers of the Company as of the date hereof have been provided to Parent or Merger Sub. Except
as would not have a Material Adverse Effect, (a) all such policies are in full force and effect and
(b) neither the Company nor any of the Company Subsidiaries is in breach or default, and, to the
knowledge of the Company, no event has occurred which, with notice or the lapse of time, would
constitute such a breach or default, or permit termination or modification under any policy.
Except as set forth in
Section 4.19
of the Disclosure Schedule, the consummation of the
Merger will not cause the revocation, cancellation or termination of any insurance policy of the
Company or the Company Subsidiaries.
SECTION 4.20
Insurance and Reinsurance Matters
.
(a) The Company conducts all of its insurance operations that are required to be conducted
through a licensed insurance company or insurance intermediary through the Company Subsidiaries set
forth in
Section 4.20(a)(i)
of the Disclosure Schedule (collectively, the
Company
Insurance Subsidiaries
). Each of the Company Insurance Subsidiaries is (i) duly licensed or
authorized as an insurance company in its jurisdiction of incorporation, (ii) duly licensed,
authorized or otherwise eligible to transact the business of insurance in each other jurisdiction
where it is required to be so licensed, authorized or eligible and (iii) duly authorized or
eligible in its jurisdiction of incorporation and each other applicable jurisdiction to write each
line of business reported as being written in the Company SAP Statements, except in the case of
clauses (i), (ii) and (iii) as would not have a Material Adverse Effect.
Section
4.20(a)(ii)
of the Disclosure Schedule lists for each Company Insurance Subsidiary (A) the name
of such Company Insurance Subsidiary, (B) the state or jurisdiction of its incorporation or
organization, (C) each jurisdiction in which it is licensed or authorized to carry on an insurance
business, (D) the types of insurance and other products it is licensed to write in each
jurisdiction in which it is licensed or authorized to carry on an insurance business, and (E) the
record owner of its shares, other equity interests and any other securities convertible into equity
interests. None of the Company Insurance Subsidiaries are commercially domiciled under the laws
of any jurisdiction or is otherwise treated as domiciled in a jurisdiction other than its
respective jurisdiction of incorporation or organization. Except as set forth in
Section
4.20(a)(iii)
of the Company Disclosure Schedule, each of the Company Subsidiaries that acts as
an insurance broker, agent, managing general agent, producer or intermediary (
Company
Insurance Intermediary
) is duly licensed in each jurisdiction in which it is required to be so
licensed, except where the failure to be so licensed would not, individually or in the aggregate,
reasonably be expected to be material to the Company and its Subsidiaries. No Company Insurance
Subsidiary is commercially domiciled in any jurisdiction. The Company Insurance Intermediaries are
set forth in
Section 4.20(a)(ii)
of the Disclosure Schedule.
37
(b) To the knowledge of the Company, as of the date hereof, all ceded reinsurance treaties or
agreements, including retrocessional agreements, to which any Company Subsidiary (or, to the
knowledge of the Company, any Pool Member, to the extent such treaty or
agreement reinsures risks of an Insurance Pool) is a party or under which any Company
Subsidiary (or, to the knowledge of the Company, any Pool Member, to the extent such treaty or
agreement reinsures risks of an Insurance Pool) has any existing rights, obligations or liabilities
(the
Company Reinsurance Agreements
) since January 1, 2008 are listed on
Schedule
4.20(b)
of the Disclosure Schedule. The Company has made available to Parent correct and
complete copies of all of the Company Reinsurance Agreements entered into with an inception date of
January 1, 2008 up to and including the date hereof, all such Company Reinsurance Agreements are in
full force and effect in accordance with their terms, and the consummation of the Merger will not
result in a violation or breach of, or constitute (with or without notice or lapse of time or both)
a default (or give rise to any unilateral right to commutation, result in a mandatory commutation
or result in the loss of any benefit) under, any of the terms, conditions, or provisions of any
Company Reinsurance Agreements. The Company has reasonably concluded that all reinsurance
recoverable amounts reflected in the Company Financial Statements or Company SAP Statements, with
respect to the Company Reinsurance Agreements, are collectible. Neither the Company nor any
Company Subsidiary is in default as to any material provision thereof, except as would not,
individually or in the aggregate, reasonably be expected to be material to the Company and the
Company Subsidiaries. Since January 1, 2010, neither the Company nor any Company Subsidiary
thereof has received any written notice to the effect that (i) the financial condition of any
reinsurer party to any Company Reinsurance Agreement is materially impaired with the result that a
default thereunder may reasonably be anticipated, (ii) there is a dispute with respect to any
amounts recoverable by any Company Subsidiary pursuant to any Company Reinsurance Agreement or
(iii) a reinsurer intends to cancel or commute any Company Reinsurance Agreement.
Section
4.20(b)(x)
of the Disclosure Schedule sets forth a list of each dispute or series of related
disputes pending, or to the knowledge of the Company, threatened between the Company, any of the
Company Subsidiaries (or, to the knowledge of the Company, any Pool Member, to the extent such
dispute relates to risks of an Insurance Pool), on the one hand, and any reinsurer, on the other
hand. Other than as set forth in
Section 4.20(b)(x)(i)
of the Disclosure Schedule, none of
the Company Insurance Subsidiaries is a party to any reinsurance pools or fronting arrangements
under which any obligations remain outstanding.
(c) With respect to any Company Reinsurance Agreement for which any Company Insurance
Subsidiary has taken credit for reinsurance ceded on its Company SAP Statement, (i) there have been
no separate written or oral agreements between any of the Company or Company Subsidiaries (or, to
the knowledge of the Company, any Pool Member) and the assuming reinsurer, not referenced in such
Company Reinsurance Agreement, that would, under any circumstances reduce, limit, mitigate or
otherwise affect any actual or potential loss to the parties under any such Company Reinsurance
Agreement, other than inuring contracts that are explicitly defined in any such Company Reinsurance
Agreement, (ii) for each such Company Reinsurance Agreement entered into, renewed or amended on or
after January 1, 2010, for which risk transfer is not reasonably considered to be self-evident,
documentation concerning the economic intent of the transaction and the risk transfer analysis
evidencing the proper accounting treatment, as required by Statement of Statutory Accounting
Principles (
SSAP
) No. 62, is available for review by the domiciliary state insurance
departments for each of the Company Insurance Subsidiaries, (iii) from and after January 1, 2008,
each of the Company Insurance Subsidiaries complies and has complied in all material respects with
all of the requirements set forth in SSAP No. 62 and (iv),) each of the Company Insurance
Subsidiaries
has and has had from and after January 1, 2008 appropriate controls in place to monitor the
use of reinsurance and adhere to the provisions of SSAP No. 62. None of the Company Insurance
Subsidiaries, nor to the knowledge of the Company, any counterparty to an insurance contract or
Company Reinsurance Agreement with any Company Insurance Subsidiary, has accounted at any time for
risks ceded or assumed as reinsurance under SAP and as a deposit under GAAP, or as reinsurance
under GAAP and as a deposit under SAP.
38
(d)
Section 4.20(d)
of the Disclosure Schedule lists each actuary, independent or
otherwise, that has reviewed, on behalf of the Company or any Company Subsidiary, the reserves for
losses and loss adjustment expenses of the Company or such Company Subsidiary and/or its premium
rates for liability insurance in each of the years commencing after December 31, 2007 (collectively
the
Company Actuaries
and separately a
Company Actuary
).
Section
4.20(d)
of the Disclosure Schedule lists each and every actuarial report, and all attachments,
supplements, addenda and modifications thereto prepared for or on behalf of the Company or any
Company Subsidiary by the Company Actuaries, or delivered by the Company Actuaries to the Company
or any Company Subsidiary, since January 1, 2008, in which a Company Actuary has (i) either
expressed an opinion on the adequacy of the Company GAAP Reserves or the Company SAP Reserves, or
(ii) expressed an opinion as to the adequacy of such premiums or made a recommendation as to the
premiums that should be charged by a Company Insurance Subsidiary (collectively, the
Company
Actuarial Analyses
). The Company has made available to Parent a true and complete copy of
each of the Company Actuarial Analyses since December 31, 2007. The information and data furnished
by the Company and the Company Insurance Subsidiaries and their affiliates in connection with the
preparation of the Company Actuarial Analyses, as well as the actuarial information provided to
Parent, was complete and accurate in all material respects.
(e) Except for regular periodic assessments in the ordinary course of business or assessments
based on developments that are publicly known within the insurance industry, as of the date hereof,
no claim or assessment is pending or, to the knowledge of the Company, threatened in writing
against any Company Insurance Subsidiary by any state insurance guaranty association in connection
with such associations fund relating to insolvent insurers, except for any such claims or
assessments that would not, individually or in the aggregate, reasonably be expected to have a
Material Adverse Effect.
(f) Since January 1, 2008, to the knowledge of the Company, (i) , each insurance agent,
third-party administrator, marketer, underwriter, wholesaler, broker, producer, reinsurance
intermediary and distributor that wrote, sold, produced or managed insurance business for one or
more of the Company Insurance Subsidiaries and/or any Insurance Pool (collectively,
Company
Producers
), at the time such Company Producer wrote, sold, or produced such business, was duly
licensed and appointed as required by applicable Law(for the type of business written, sold,
produced or managed), in the particular jurisdiction in which such Company Producer wrote, sold or
produced business and (ii) each of the agency agreements and appointments between the Company
Producers, including as subagents under the Companys affiliated insurance agency, and the Company
and any of the Company Subsidiaries, is valid and binding and in full force and effect in
accordance with its terms, except as would not, individually or in the aggregate, have a Material
Adverse Effect. To the knowledge of the Company, as of the date hereof, no Company Producer has
been since January 1, 2008, or is
currently, in violation (or with or without notice or lapse of time or both, would be in
violation) of any term or provision of any Law applicable to the writing, sale, production or
administration of insurance or other business for the Company, any of the Company Subsidiaries or
any Insurance Pool, except for such failures to be licensed or such violations which have been
cured, which have been resolved or settled through agreements with the applicable Governmental
Authority, or which are barred by an applicable statute of limitations. None of the Company
Insurance Subsidiaries has received written notice of any material disputes with any current or
former Company Producer concerning commissions except for such disputes that have been settled or
otherwise resolved. Except as set forth in
Section 4.20(f)
of the Disclosure Schedule, to
the knowledge of the Company, as of the date hereof, no Company Producer individually accounting
directly or indirectly for 10% or more of the total gross premiums of all of the Company
Subsidiaries for the year ended December 31, 2010, has notified the Company or any Company
Subsidiary that such Company Producer will be unable in any material respect or unwilling to
continue its relationship as a Company Producer with the Company or any of the Company Subsidiaries
or any Insurance Pool within twelve months after the date hereof.
39
(g) To the knowledge of the Company,
Section 4.20(g)
of the Disclosure Schedule sets
forth, with respect to each Insurance Pool, a list complete and accurate in all material respects,
of the participations of each Pool Member for each year of such Insurance Pools existence
(beginning with the year of such pools creation), which list reflects all adjustments to pool
participations, including as a result of intra-pool transfers, withdrawals and liquidations.
Neither the Company nor any Company Subsidiary is in material default as to any material provision
of any Pool Agreement. Since January 1, 2008, neither the Company nor any Company Subsidiary has
received any written notice to the effect that (i) the financial condition of any Pool Member is
materially impaired with the result that a default thereunder may reasonably be anticipated or (ii)
there is a material dispute with respect to any material amounts recoverable by any Company
Subsidiary pursuant to any Pool Agreement.
(h) Since January 1, 2008, the Company and the Company Insurance Subsidiaries (a) have filed
or submitted with all applicable Insurance Regulators, all registration statements, notices and
reports, together with all exhibits and amendments thereto required under the Insurance Laws
applicable to insurance holding companies (the
Company Holding Company Act Reports
), (b)
have timely filed all Company SAP Statements and (c) have filed all other reports and statements,
together with all amendments and supplements thereto, required to be filed with any Insurance
Regulator under the Insurance Laws.
Section 4.20(h)
of the Disclosure Schedule sets forth
a list of, and Company has made available to Parent, accurate and complete copies of, all Company
Holding Company Act Reports, all other reports and statements filed by the Company or any of the
Company Subsidiaries with any Insurance Regulator and all reports of examination (including
financial, market conduct and similar examinations) of any the Company Insurance Subsidiary issued
by an Insurance Regulator for periods ending and events occurring, on or after January 1, 2008 and
prior to the date of this Agreement. All such Company Holding Company Act Reports and other
reports and statements were prepared in good faith and complied in all material respects with the
Insurance Laws when filed. No deficiencies have been asserted by any Governmental Authority with
respect to such Company Holding Company Act Reports and other reports and statements.
40
(i)
Section 4.20(i)
of the Disclosure Schedule lists all financial examinations that
any Governmental Authority has conducted with respect to the Company or any Company Subsidiary
since January 1, 2006. The Company has made available to Parent correct and complete copies of all
such financial examinations and all material correspondence and other information provided by the
Company or any Company Subsidiary to a Governmental Authority in connection with such financial
examinations. There are no regulatory or other financial examinations of the Company or of any
Company Subsidiary currently in process.
(j) All policies, binders, slips, certificates and other agreements of insurance in effect as
of the date hereof (including all applications, endorsements, supplements, riders and ancillary
agreements in connection therewith) issued by any Company Insurance Subsidiary, and any and all
marketing materials, agent agreements, broker agreements, service contracts, and managing general
agent agreements to which the Company or any Company Subsidiary is a party, are, to the extent
required under applicable Law, on forms approved by the Insurance Regulators or have been filed
with and not objected to by such Insurance Regulators within the period provided for objection, and
all of such forms comply with the Insurance Laws in all material respects. As to premium rates
established by any Company Insurance Subsidiary, which are required to be filed with or approved by
any Insurance Regulators, the rates have been so filed or approved, the premiums charged conform
thereto, and such premiums comply with the Insurance Laws. No Company Insurance Subsidiary has
issued any participating policies or any retrospectively rated policies of insurance.
(k) The Company Financial Statements reflect all securities, mortgages and other investments
(collectively, the
Company Investments
) owned by the Company and the Company Subsidiaries
as of December 31, 2010 and June 30, 2011. All transactions in the Company Investments by the
Company from June 30, 2011, to the date hereof have complied in all material respects with the
investment policy of the Company. A complete list of all the Company Investments owned, directly
or indirectly, by the Company as of June 30, 2011, that are in arrears or default in payment of
principal or interest or dividends or have been or should have been, classified as non-performing,
non-accrual, ninety (90) days past due, as still accruing and doubtful of collection, as in
foreclosure or any comparable classification, or are permanently impaired, in bankruptcy, or which
are included on any watch list are set forth in
Section 4.20(k)
of the Disclosure
Schedule, and there have been no changes since such date that would, individually or in the
aggregate, have a Material Adverse Effect. Except as set forth in the Company Financial
Statements, there are no Liens on any of the Company Investments, other than any special deposits
reflected in the Company Financial Statements.
(l) As of the date hereof, Penn Millers Insurance Company has been assigned an A- insurer
financial strength rating with a stable outlook by A.M. Best Company, Inc. As of the date hereof,
American Millers Insurance Company has been assigned a B++ insurer financial strength rating with
a stable outlook by A.M. Best Company, Inc. To the knowledge of the Company, as of the date
hereof, A.M. Best Company, Inc. has not indicated that it intends to lower any such rating or put
any Company Insurance Subsidiary under review.
41
SECTION 4.21
Board Approval; Vote Required
.
(a) The Company Board, by resolutions duly adopted by unanimous vote at a meeting duly called
and held and not subsequently rescinded or modified in any way prior to the date hereof, has duly
(i) determined that the Merger is fair to and in the best interests of the Company and its
shareholders, (ii) approved this Agreement and declared its advisability, and (iii) resolved to
recommend that the shareholders of the Company adopt this Agreement and directed that this
Agreement be submitted to a vote of the Companys shareholders entitled to vote thereon at the
Shareholders Meeting (collectively, the
Company Recommendation
).
(b) The affirmative vote of a majority of the votes cast by all shareholders of the Company
entitled to vote on the Agreement is required to approve and adopt this Agreement (
Shareholder
Approval
). No other vote of the shareholders of the Company is required by applicable Law,
the Companys Constituent Documents or otherwise in order for the Company to consummate the Merger.
SECTION 4.22
Opinion of Financial Advisor
. The Company Board has received an opinion
of Willis Securities, Inc. (
Willis
) to the effect that, as of the date of such opinion
and subject to the qualifications and limitations set forth therein, the Merger Consideration to be
received by holders of Company Common Stock is fair, from a financial point of view, to such
holders, a copy of which opinion will be delivered to Parent, solely for informational purposes,
following receipt thereof by the Company.
SECTION 4.23
Information Supplied
. The Proxy Statement will not, at the date the
Proxy Statement (or any amendment or supplement thereto) is first mailed to shareholders of the
Company and at the time of the Shareholders Meeting, contain any untrue statement of a material
fact or omit to state any material fact necessary in order to make the statements therein, in light
of the circumstances under which they were made, not misleading. Notwithstanding the foregoing,
the Company makes no representation or warranty with respect to such portions of the Proxy
Statement that relate expressly to Parent, Merger Sub or any of their affiliates or to statements
made therein based on information supplied by or on behalf of Parent or Merger Sub for inclusion or
incorporation by reference therein. The Proxy Statement will comply as to form in all material
respects with the requirements of the Exchange Act and the rules and regulations promulgated
thereunder.
SECTION 4.24
No Investment Company
. Neither the Company nor any Company Subsidiary
is an investment company, or a company controlled by an investment company, within the
meaning of the Investment Company Act of 1940, as amended.
SECTION 4.25
Brokers
. No broker, finder or investment banker (other than Willis) is
entitled to any brokerage, finders or other fee or commission in connection with the Merger based
upon arrangements made by or on behalf of the Company. The Company has heretofore furnished to
Parent a complete and correct copy of all agreements between the Company and Willis pursuant to
which such firm would be entitled to any payment relating to the Merger.
SECTION 4.26
No Dissenters Rights
. None of Companys shareholders will be entitled
to exercise appraisal or dissenters rights under the PBCL or other applicable Law in connection
with the transactions contemplated hereunder.
42
SECTION 4.27
Antitakeover Provisions
. The Company has taken, or will take prior to
or at the Closing, all actions that can be taken by it in order to exempt Parent and Merger Sub,
this Agreement and the Merger from any provisions of an antitakeover nature contained in the
Constituent Documents of the Company or under applicable Law, including any fair price, business
combination or control share acquisition statute or other similar statute or regulation,
including the provisions of the Pennsylvania Takeover Disclosure Law (70 P.S. §71 et seq.), to the
extent applicable to any of the transactions contemplated hereunder.
SECTION 4.28
No Other Representations or Warranties
. Except for the representations
and warranties contained in this Agreement, including any modification or qualification thereto
included in the Disclosure Schedule, none of the Company, the Company Subsidiaries or any other
person on behalf of the Company or the Company Subsidiaries makes any other express or implied
representation or warranty with respect to the Company, any of the Company Subsidiaries or any
information provided to Parent or Merger Sub with respect to the Company or any of the Company
Subsidiaries.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
As an inducement to the Company to enter into this Agreement, Parent and Merger Sub hereby,
jointly and severally, represent and warrant to the Company that:
SECTION 5.01
Corporate Organization
. Parent is a corporation duly organized, validly
existing and in good standing under the laws of the Commonwealth of Pennsylvania and Merger Sub is
a corporation duly organized, validly existing and in good standing under the laws of the
Commonwealth of Pennsylvania.
SECTION 5.02
Ownership and Operations of Merger Sub
. Parent owns of record, and as
of the Effective Time will own, all of the outstanding capital stock of Merger Sub. Merger Sub was
formed solely for the purpose of engaging in the transactions contemplated by this Agreement and
has not engaged in any business activities or conducted any operations other than in connection
with the transactions contemplated by this Agreement.
SECTION 5.03
Authority Relative to This Agreement
. Each of Parent and Merger Sub has
all necessary corporate power and authority to execute and deliver this Agreement, to perform its
obligations hereunder and to consummate the Merger. The execution and delivery of this Agreement
by Parent and Merger Sub and the consummation by Parent and Merger Sub of the Merger have been duly
and validly authorized by all necessary corporate action on the part of Parent and Merger Sub, and
no other corporate proceedings on the part of Parent or Merger Sub are necessary to authorize this
Agreement or to consummate the Merger (other than, with respect to the Merger, the filing and
recordation of appropriate merger documents as required by the PBCL). This Agreement has been duly
and validly executed and delivered by Parent and Merger Sub and, assuming due authorization,
execution and delivery by the Company, constitutes a legal, valid and binding obligation of each of
Parent and Merger Sub enforceable against each of Parent and Merger Sub in accordance with its
terms, subject to the Enforceability Exceptions.
43
SECTION 5.04
No Conflict; Required Filings and Consents
.
(a) The execution and delivery of this Agreement by Parent and Merger Sub do not, and the
performance of this Agreement by Parent and Merger Sub will not, and the consummation of the Merger
by Parent and Merger Sub will not, (i) conflict with or violate the Articles or Certificate of
Incorporation or By-laws or other organizational documents of either Parent or Merger Sub, (ii)
assuming that all consents, approvals and other authorizations described in
Section 5.04(b)
have been obtained and that all filings and other actions described in
Section 5.04(b)
have
been made or taken, conflict with or violate any Law applicable to Parent or Merger Sub or by which
any property or asset of either of them is bound or subject, or (iii) result in any breach of, or
constitute a default (or an event which, with notice or lapse of time or both, would become a
default) under, or give to others any rights of termination, amendment, acceleration or
cancellation of, or result in the creation of a lien or other encumbrance on any property or asset
of Parent or Merger Sub pursuant to, any note, bond, mortgage, indenture, contract, agreement,
lease, license, permit, franchise or other instrument or obligation to which Parent or Merger Sub
is a party or by which Parent or Merger Sub or any property or asset of either of them is bound or
affected, except, with respect to clauses (ii) and (iii), for any such conflicts, violations,
breaches, defaults or other occurrences which would not, individually or in the aggregate, prevent
or materially delay consummation of the Merger or otherwise prevent Parent or Merger Sub from
performing its obligations under this Agreement.
(b) The execution and delivery of this Agreement by Parent and Merger Sub do not, and the
performance of this Agreement by Parent and Merger Sub will not, require any consent, approval,
authorization or permit of, or filing with or notification to, any Governmental Authority, except
for (i) applicable requirements of the Exchange Act, (ii) the pre-merger notification requirements
of the HSR Act, (iii) the filing and recordation of appropriate merger documents as required by the
PBCL, (iv) the consents, approvals, authorizations, Permits, filings and notifications listed in
Section 5.04(b)
of the Disclosure Schedule and (v) where the failure to obtain such
consents, approvals, authorizations or Permits, or to make such filings or notifications, would
not, individually or in the aggregate, prevent or materially delay consummation of the Merger, or
otherwise prevent Parent or Merger Sub from performing its obligations under this Agreement.
(c) Parent has no reason to believe that any facts or conditions related to it, Merger Sub or
any of its other affiliates, including its identity, business, investments, investors, regulatory
status or planned approach to financing the transactions contemplated hereby or operating the
business of the Company and the Company Subsidiaries after the Effective Time, are reasonably
likely to impede its ability promptly to obtain any governmental approvals required to be obtained
by Parent or Merger Sub in connection with the consummation of the transactions contemplated by
this Agreement.
SECTION 5.05
Legal Proceedings
. Except insofar as do not, and as would not
reasonably be expected to, individually or in the aggregate, prevent or materially delay
consummation of the Merger, or otherwise prevent Parent or Merger Sub from performing its
obligations under this Agreement, there is no pending or, to the knowledge of Parent, threatened,
material legal, administrative, arbitral or other proceeding, claim, suit or action against, or
governmental or regulatory investigation of, Parent or any of its subsidiaries, nor is there any
injunction, order, judgment, ruling or decree imposed (or, to the knowledge of Parent,
threatened to be imposed) upon Parent or any of its subsidiaries or the assets of Parent or any of
its subsidiaries, by or before any Governmental Authority.
44
SECTION 5.06
Financing
. Parent has and, at the Effective Time, will have sufficient
funds to permit Merger Sub to consummate the Merger, to pay the aggregate Merger Consideration and
the other amounts required to be paid by Parent and Merger Sub under this Agreement, and to perform
the other obligations of Parent and Merger Sub hereunder.
SECTION 5.07
Brokers
. No broker, finder or investment banker is entitled to any
brokerage, finders or other fee or commission in connection with this Agreement or the Merger
based upon arrangements made by or on behalf of Parent or Merger Sub.
SECTION 5.08
Information Supplied
. The information supplied by or on behalf of
Parent, Merger Sub or any of their affiliates for inclusion or incorporation by reference in the
Proxy Statement will not, at the date the Proxy Statement (or any amendment or supplement thereto)
is first mailed to shareholders of the Company and at the time of the Shareholders Meeting,
contain any untrue statement of a material fact, or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading.
SECTION 5.09
No Other Representations or Warranties
. Except for the representations
and warranties contained in this Agreement, neither Parent nor Merger Sub nor any other person on
its behalf makes any other express or implied representation or warranty with respect to Parent or
Merger Sub or any information provided to the Company or any Company Subsidiaries with respect to
Parent or Merger Sub.
ARTICLE VI
CONDUCT OF BUSINESS PENDING THE MERGER
SECTION 6.01
Conduct of Business by the Company Pending the Merger
. The Company
agrees that, between the date of this Agreement and the Closing Date, except (x) to the extent
required or prohibited by applicable Law, (y) to the extent Parent otherwise agrees in writing, or
(z) as set forth in
Section 6.01
of the Disclosure Schedule (with specific reference to the
applicable subsection below), (a) the businesses of the Company and the Company Subsidiaries shall
be conducted only in the ordinary course of business consistent with past practice, (b) the Company
shall use its commercially reasonable efforts to preserve substantially intact the business
organization of the Company and the Company Subsidiaries and to keep available the services of the
current officers and employees of the Company and the Company Subsidiaries and (c) the Company
shall take all steps, and do all things, necessary to preserve the protections of the Company
Reinsurance Agreements by, among other things, promptly notifying, billing and collecting
reinsurance claims and processing all due premium transactions, including premium adjustments,
timely filing claims against insolvent estates, if necessary, obtaining and maintaining in force
all required collateral or other security as required under the Insurance Laws and/or the terms of
the Company Reinsurance Agreements, and otherwise complying with all terms of the Company
45
Reinsurance Agreements. The Company agrees that, between the date of this Agreement and the
Closing Date, except (w) to the extent required or
prohibited by applicable Law, (x) as otherwise specifically contemplated by this Agreement,
(y) to the extent Parent otherwise agrees in writing, or (z) as set forth in
Section 6.01
of the Disclosure Schedule (with specific reference to the applicable subsection below), neither
the Company nor any Company Subsidiary shall, between the date of this Agreement and the Closing
Date, directly or indirectly, do any of the following:
(i) amend its Constituent Documents;
(ii) issue, sell, pledge, dispose of, grant or encumber, or authorize the issuance, sale,
pledge, disposition, grant or encumbrance of, any shares of any class of capital stock of the
Company or any Company Subsidiary, or any options, warrants, convertible securities or other rights
of any kind to acquire any shares of such capital stock, or any other ownership interest (including
any phantom interest), of the Company or any Company Subsidiary (excluding allocations, sales or
other dispositions of Company Common Stock by the administrator or Trustee under and pursuant to
the terms of the ESOP),
provided
,
however
that the Company may issue Company Common
Stock upon the exercise of options granted under the Company Stock Plan that are outstanding as of
the date hereof and in accordance with the terms thereof;
(iii) declare, set aside, make or pay any dividend or other distribution, payable in cash,
stock, property or otherwise, with respect to any of its capital stock, except for dividends by any
direct or indirect wholly owned Company Subsidiary to the Company or any other Company Subsidiary;
reclassify, combine, split, subdivide or redeem, or purchase or otherwise acquire, directly or
indirectly, any of its capital stock; or purchase, redeem or otherwise acquire any shares of
capital stock of the Company or any of the Company Subsidiaries or any other securities thereof or
any rights, warrants or options to acquire, any such shares or other securities;
(iv) (i) incur or assume any indebtedness for borrowed money in excess of $25,000, (ii)
guarantee any indebtedness (or enter into a keep well or similar agreement) in excess of $25,000
or (iii) issue or sell any debt securities or options, warrants, calls or other rights to acquire
any debt securities of the Company or any of its Subsidiaries;
(v) make any investment (by contribution to capital, property transfers, purchase of
securities or otherwise) in, or loan or advance (other than travel and similar advances to its
employees in the ordinary course of business consistent with past practice) to, any person other
than a Company Subsidiary or other than investments in the ordinary course of business consistent
with past practice and consistent with the Companys investment guidelines;
(vi) make any capital expenditure or expenditures which (i) involves the purchase of real
property or (ii) is in excess of $50,000 in the aggregate;
(vii) sell, dispose of or otherwise transfer (by merger or otherwise), lease out or license
out, or pledge, mortgage or otherwise encumber, any of its properties or assets (including
securities of Company Subsidiaries, which shall not be subject to the exceptions set forth in
clauses (i) and (ii) below), other than (i) disposal of investments in accordance with the
Companys investment guidelines as the same may be amended from time to time, (ii)
dispositions of assets with a fair market value of less than $100,000 in the aggregate, or
(iii) pursuant to Material Contracts in effect on the date hereof and listed on
Section
4.17(a)
of the Disclosure Schedule, correct and complete copies of which have been made
available to Parent;
46
(viii) directly or indirectly acquire (by merger, consolidation, acquisition of equity
interests or assets or any other business combination) any corporation, partnership, limited
liability company, joint venture, other business organization (or division thereof) or any
property;
(ix) adopt a plan or agreement of complete or partial liquidation, dissolution, restructuring,
recapitalization or other reorganization;
(x) (i) waive or release any right or claim or settle or compromise any claim, audit,
arbitration, suit, investigation, complaint or other proceeding in excess of the amount of the
corresponding reserve established on the consolidated balance sheet of the Company as reflected in
the most recent applicable Required Company SEC Document plus any applicable third party insurance
proceeds, except (A) as required by the express terms of any contract in effect prior to the
execution and delivery of this Agreement, (B) for any settlements or compromises of insurance
claims or litigation or arbitration arising in the ordinary course of business or (C) for any
settlements or compromises involving total aggregate payments not in excess of the amount set forth
in
Section 6.01
of the Disclosure Schedule, it being understood that this subsection (C)
shall be in addition to and not in limitation of subsections (A) and (B) above, or (ii) enter into
any consent decree, injunction or similar restraint or form of equitable relief in settlement of
any material claim or audit that would materially restrict the operations of the business after the
Effective Time;
(xi) alter or amend in any material respect any existing underwriting, claim handling, agency
management, loss control, investment, actuarial, pricing, reserving, reinsurance, financial
reporting or Tax or other accounting practices, guidelines or policies (including compliance
policies and those practices, guidelines and policies used in the preparation of its financial
statements and the establishment of reserves) or any material assumption underlying an actuarial
practice or policy, except as may be required by a change in GAAP, SAP or applicable Law after the
date hereof;
(xii) other than in accordance with its current investment guidelines or as otherwise required
by the terms of this Agreement, restructure or materially change its investment securities
portfolio through purchases, sales or otherwise, or the manner in which such portfolio is
classified or reported;
(xiii) (A) increase or agree to increase the compensation payable or to become payable or the
benefits provided to, grant any retention, severance or termination pay to or enter into any
employment bonus, change in control or severance agreement with, its current or former directors,
officers or employees (except (x) increases in the ordinary course of business consistent with past
practice in salaries, wages, bonuses, incentives or benefits of employees of the Company or any
Company Subsidiary who are not directors or executive officers of the Company, (y) with respect to
the initial compensation and benefits of individuals who are first employed by the Company or any
Company Subsidiary after the date hereof and (z) for bonuses
and retention, severance and termination payments in an aggregate amount not to exceed
$100,000), or (B) establish, adopt, enter into, terminate or amend any collective bargaining
agreement or any new employee benefit plan, (C) amend or terminate any existing Plan, (D) grant any
equity based or incentive compensation awards; (E) enter into or amend any employment, severance,
retention, incentive or similar agreement or other employment arrangements with any current or
former director, officer or employee of the Company or any Company Subsidiary; or (F) hire or
terminate the employment, or modify the contractual relationship of, any officer, employee or
independent contractor of the Company or any Company Subsidiary, other than hirings or terminations
of employees other than officers in the ordinary course of business consistent with past practice;
47
(xiv) take any action, other than in the ordinary course of business consistent with past
practice, with respect to accounting policies or procedures, except as required by changes in GAAP
or relevant SAP, in either case as agreed to by The Companys independent auditors;
(xv) make or change any material Tax election, Tax return or method of Tax accounting, settle
or compromise any material Tax liability, consent to any material claim or assessment relating to
Taxes, or waive any statute of limitations in respect of a material amount of Taxes or agree to any
extension of time with respect to an assessment or deficiency for a material amount of Taxes (other
than pursuant to extensions of time to file Tax returns obtained in the ordinary course of business
consistent with past practice);
(xvi) amend, modify or consent to the termination of any Material Contract, or amend, waive,
modify or consent to the termination of any material rights of the Company or any Company
Subsidiary thereunder, in each case other than in the ordinary course of business consistent with
past practice or other than as would not constitute a Material Adverse Effect; or enter into any
new agreement which would have been considered a Material Contract if it were entered into at or
prior to the date hereof;
(xvii) forfeit, abandon, modify, waive, terminate or otherwise change any of its Permits,
except as may be required in order to comply with applicable Law;
(xviii) take any action that is not expressly permitted by or provided for in this Agreement
that would reasonably be expected to result in a reduction of the insurer financial strength
ratings of any Company Insurance Subsidiary;
(xix) offer or sell insurance or reinsurance of any line or class of business in any
jurisdiction other than such lines and classes of insurance and reinsurance that it offers and
sells on the date of this Agreement;
(xx) knowingly violate or knowingly fail to perform any obligation or duty imposed upon the
Company or any of the Company Subsidiaries by any applicable Law that is material to the business
or operations of the Company or any Company Subsidiary;
(xxi) take any action that would reasonably be expected to, or omit to take any action where
such omission would reasonably be expected to, prevent, materially delay or impede the consummation
of the Merger;
48
(xxii) take any action adverse to the interests of Parent with respect to the Company
Reinsurance Agreements, including but not limited to, novating, commuting, destroying (whether or
not in compliance with the Companys records retention policy) or taking any other actions that
are, or are deemed to be, adverse to the interests of Parent under the Company Reinsurance
Agreements;
(xxiii) take any actions or omit to take any actions that would cause any of its
representations and warranties herein to become untrue or that would, individually or in the
aggregate, have a Material Adverse Effect; and
(xxiv) enter into any legally binding agreement or otherwise make a commitment to do any of
the foregoing.
SECTION 6.02
Conduct of Business by Merger Sub
. Subject to
Section 7.07
,
Merger Sub agrees that, between the date of this Agreement and the Effective Time, it shall not
conduct any business or enter into any agreements of any nature, or amend its Constituent
Documents.
ARTICLE VII
ADDITIONAL AGREEMENTS
SECTION 7.01
Shareholders Meeting
.
(a) Subject to
Section 7.04
, the Company, acting through the Company Board, shall, in
accordance with applicable law and the Companys Articles of Incorporation and the Companys
By-laws, duly call, give notice of, convene and hold an annual or special meeting of its
shareholders as promptly as practicable following the execution of this Agreement for the purpose
of considering and taking action on this Agreement and the Merger (the
Shareholders
Meeting
). At the Shareholders Meeting, Parent and Merger Sub shall cause all shares of
Company Common Stock then owned by them and their subsidiaries to be voted in favor of the approval
and adoption of this Agreement and the Merger. The Company shall not submit any other proposal to
such holders in connection with the Shareholders Meeting without the prior written consent of
Parent. The Company (in consultation with Parent) shall set a single record date for persons
entitled to notice of, and to vote at, the Shareholders Meeting and shall not change such record
date (whether in connection with the Shareholders Meeting or any adjournment or postponement
thereof) without the prior written consent of Parent. The Company shall ensure that all proxies
solicited in connection with the Shareholders Meeting are solicited in compliance with all
applicable Law.
(b) Subject to
Section 7.04
, the Company shall use its reasonable best efforts to
solicit from its shareholders proxies in favor of the adoption of this Agreement. With respect to
the ESOP, the Trustee shall solicit participants in and beneficiaries of the ESOP to direct the
Trustee as to the voting of shares held in their respective accounts under the ESOP in accordance
with the terms of the ESOP documents and applicable Law and the Trustee shall recommend to the ESOP
participants in the Proxy Statement that such participants and beneficiaries direct the Trustee
with respect to the shares allocated to their respective accounts under the ESOP to vote, and the
Trustee shall vote the unallocated shares held under the ESOP, in favor of the adoption of this
Agreement and the transactions contemplated herein.
49
SECTION 7.02
Proxy Statement and ESOP Voting Materials
.
(a) As promptly as practicable following the execution of this Agreement, the Company shall
prepare and file with the SEC a proxy statement to be sent to the shareholders of the Company in
connection with the Shareholders Meeting (such proxy statement together with, as the context
dictates, any ancillary documents to be sent to such shareholders, each as amended or supplemented,
being referred to herein as the
Proxy Statement
), and shall use its reasonable best
efforts to have the Proxy Statement cleared by the SEC as promptly as practicable. The Proxy
Statement shall comply as to form in all material respects with the applicable provisions of the
Exchange Act. Parent, Merger Sub and the Company shall cooperate with each other in the
preparation of the Proxy Statement, and the Company shall notify Parent of the receipt of any
comments of the SEC with respect to the Proxy Statement and of any requests by the SEC for any
amendment or supplement thereto or for additional information and shall provide to Parent promptly
copies of all correspondence between the Company or any representative of the Company and the SEC
with respect thereto. The Company shall give Parent and its counsel a reasonable opportunity to
review and comment on the Proxy Statement, including all amendments and supplements thereto, prior
to such documents being filed with the SEC or disseminated to holders of shares of Company Common
Stock and shall give Parent and its counsel a reasonable opportunity to review and comment on all
responses to requests for additional information and replies to comments prior to their being filed
with, or sent to, the SEC. Each of the Company, Parent and Merger Sub agrees to use its reasonable
best efforts, after consultation with the other parties hereto, to respond promptly to all such
comments of and requests by the SEC and to cause the Proxy Statement and all required amendments
and supplements thereto to be mailed to the holders of shares of Company Common Stock entitled to
vote at the Shareholders Meeting at the earliest reasonably practicable time. If at any time
prior to the Shareholders Meeting any event shall occur, or fact or information shall be
discovered, that should be set forth in an amendment or supplement to the Proxy Statement so that
such document would not include any misstatement of a material fact or omit to state any material
fact necessary to make the statements therein, in light of the circumstances under which they are
made, not misleading, the party that discovers such information shall promptly notify the other
parties hereto and the Company shall prepare and file with the SEC such amendment or supplement as
promptly as practicable and, to the extent required by Law, cause such amendment or supplement to
be disseminated to the shareholders of the Company.
(b) Subject to
Section 7.04
, the Proxy Statement shall: (i) state that the Company
Board has, through a unanimous vote, (A) determined that the Merger is fair to and in the best
interests of the Company and its shareholders and (B) approved this Agreement and declared its
advisability; (ii) include the Company Recommendation; and (iii) include the written opinion of
Willis referred to in
Section 4.22
herein, that, as of the date of this Agreement, the
Merger Consideration is fair, from a financial point of view, to the shareholders of the Company
(other than Parent and its affiliates).
(c) The Trustee shall provide Parent and the Company and their respective counsel a reasonable
opportunity to review and provide comments on all written materials in addition to the Proxy
Statement, if any, to be provided to ESOP participants and beneficiaries relating to pass-through
voting regarding the adoption of this Agreement and the transactions contemplated herein.
50
SECTION 7.03
Access to Information; Confidentiality
.
(a) From the date hereof until the Closing Date, the Company shall, and shall cause the
Company Subsidiaries and the officers, directors, employees, auditors and agents of the Company and
the Company Subsidiaries to, afford the officers, employees, agents, advisors, legal counsel,
accountants, consultants and other authorized representatives of Parent and Merger Sub reasonable
access during normal business hours to the officers, employees, agents, properties, offices and
other facilities, books and records (including the work papers of independent accountants, if
available and subject to the consent of such independent accountants) of the Company and each
Company Subsidiary, and shall furnish Parent and Merger Sub with such financial, operating and
other data and information as Parent or Merger Sub, through its officers, employees or agents, may
reasonably request;
provided
,
however
, that all such access will be coordinated
through, and all such requests will be directed to, the Chief Executive Officer of the Company.
The Company shall be entitled to have representatives present at all times during any such
inspection, and no such inspection shall unreasonably disrupt or interfere with the operations of
the Company or any Subsidiary of the Company.
(b) All information obtained by Parent or Merger Sub pursuant to this
Section 7.03
shall be kept confidential in accordance with the letter agreement, dated June 23, 2011 (the
Confidentiality Agreement
), between ACE Group Holdings, Inc. and the Company.
SECTION 7.04
No Solicitation of Transactions
.
(a) The Company shall immediately cease any discussions or negotiations with any person that
may be ongoing with respect to a Takeover Proposal (as hereinafter defined). From the date hereof,
the Company shall not, nor shall it authorize or permit any Company Subsidiary to, nor shall it
authorize or permit any director, officer or employee of the Company or any of the Company
Subsidiaries or any investment banker, attorney, accountant or other advisor or representative of
the Company or any of the Company Subsidiaries to, directly or indirectly (and it shall instruct
and cause each applicable Company Subsidiary, if any, to instruct each such director, officer,
employee, investment banker, attorney, accountant or other advisor or representative of the Company
or any of the Company Subsidiaries not to) (i) solicit, initiate or knowingly encourage, or
knowingly take any other action or fail to take any action in a way designed to facilitate, any
inquiries or the making of any proposal or offer that constitutes, or could reasonably be expected
to lead to, any Takeover Proposal, (ii) furnish any non-public information regarding the Company or
any of its subsidiaries to any person in connection with or in response to a Takeover Proposal or
an inquiry or indication of interest that could reasonably be expected to lead to a Takeover
Proposal, (iii) engage in discussions or negotiations with any person with respect to any Takeover
Proposal, (iv) approve, endorse or recommend any Takeover Proposal or (v) enter into any letter of
intent or similar document or any agreement contemplating or otherwise relating to any Acquisition
Transaction;
provided
,
however
, that if, following the receipt of a bona fide
written unsolicited Takeover Proposal that the Company Board determines in good faith constitutes
or is reasonably likely to lead to a Superior Proposal and that did not result from a breach of
this
Section 7.04
or any other provision of this Agreement, the Company Board determines in
good faith, after consultation with outside counsel, that a failure to do so would be inconsistent
with its fiduciary duties under applicable Law, the Company may, at any time prior to obtaining the
Shareholder Approval, in response to
51
such Takeover Proposal and subject to compliance with this
Section 7.04
, (A) request
information from the party making such Takeover Proposal for the purpose of informing itself about
the Takeover Proposal that has been made and the party that made it, (B) furnish non-public
information with respect to the Company and the Company Subsidiaries to the party making such
Takeover Proposal pursuant to a customary confidentiality agreement,
provided
,
however
, that (1) such confidentiality agreement may not include any provision calling for
an exclusive right to negotiate with the Company, (2) such confidentiality agreement shall permit
the Company to comply with its obligations hereunder, (3) such confidentiality agreement contains
terms no less favorable to the Company than the terms of the Confidentiality Agreement and (4) the
Company furnishes to Parent all such non-public information delivered to such person (to the extent
not previously delivered or made available to Parent) substantially concurrently with its delivery
to the requesting party, and (C) participate in discussions and negotiations with such party
regarding such Takeover Proposal. Without limiting the generality of the foregoing, the Company
acknowledges and agrees that any violation of or the taking of any action inconsistent with any of
the restrictions set forth in the preceding sentence by any representative of the Company or any of
its subsidiaries, whether or not such representative is purporting to act on behalf of the Company
or any of its Subsidiaries, shall be deemed to constitute a breach of this
Section 7.04
by
the Company.
(b) Except as expressly permitted in
Section 7.04(c)
, neither the Company Board nor
any committee thereof shall: (i) withdraw or modify the Company Recommendation in a manner adverse
to Parent, or adopt or propose a resolution to withdraw or modify the Company Recommendation in a
manner adverse to Parent or take any other action that is or becomes disclosed publicly to indicate
that the Company Board or any committee thereof does not support the Merger and this Agreement or
does not believe that the Merger and this Agreement are in the best interests of the Companys
shareholders; (ii) fail to reaffirm, without qualification, the Company Recommendation, or fail to
state publicly, without qualification, that the Merger and this Agreement are in the best interests
of the Companys shareholders, within five Business Days after Parent requests in writing that such
action be taken; (iii) fail to announce publicly, within 10 Business Days after a tender offer or
exchange offer relating to securities of the Company shall have been commenced, that the Company
Board recommends rejection of such tender or exchange offer; (iv) fail to issue, within 10 Business
Days after a Takeover Proposal is publicly announced, a press release announcing its opposition to
such Takeover Proposal; (v) approve, endorse or recommend any Takeover Proposal; or (vi) resolve or
propose to take any action described in clauses (i) through (v) of this sentence (each of the
foregoing actions described in clauses (i) through (vi) of this sentence being referred to as
Adverse Recommendation Change
).
(c) Notwithstanding anything to the contrary contained in
Section 7.04(b)
, at any time
prior to receipt of Shareholder Approval, the Company Board may effect, or cause the Company to
effect, as the case may be, an Adverse Recommendation Change if: (A) after the date of this
Agreement, an unsolicited, bona fide, written offer to effect a transaction of the type referred to
in the definition of the term Superior Proposal is made to the Company and is not withdrawn; (B)
such unsolicited, bona fide, written offer was not obtained or made as a direct or indirect result
of a breach of (or any action inconsistent with) this Agreement, the Confidentiality Agreement or
any standstill or similar agreement under which the Company or any of its subsidiaries has any
rights or obligations; (C) the Company provides Parent the terms and
conditions of the offer that is the basis of the potential action by the
52
Company Board and the
identity of the person making the offer; (D) the Company Board determines in good faith, after
consultation with a financial advisor of nationally recognized reputation and outside legal
counsel, that such offer constitutes a Superior Proposal; (E) the Company Board does not effect, or
cause the Company to effect, an Adverse Recommendation Change at any time within five Business Days
after Parent receives written notice from the Company confirming that the Company Board has
determined that such offer is a Superior Proposal; (F) during such five Business Day period, if
requested by Parent, the Company engages in good faith negotiations with Parent to amend this
Agreement in such a manner that the offer that was determined to constitute a Superior Proposal no
longer constitutes a Superior Proposal; (G) at the end of such five Business Day period, such offer
has not been withdrawn and continues to constitute a Superior Proposal (taking into account any
changes to the terms of this Agreement proposed by Parent as a result of the negotiations required
by clause (F) or otherwise); and (H) the Company Board determines in good faith, after obtaining
and taking into account the advice of outside legal counsel, that, in light of such Superior
Proposal, failure to make an Adverse Recommendation Change would be inconsistent with the Company
Boards fiduciary duties under applicable Law (it being understood that in the event of any
material revision to the terms of a Superior Proposal or any change to the consideration offered
under a Superior Proposal, the provisions of this
Section 7.04(c)
shall apply to such
revised or changed offer as if it were a new offer hereunder).
(d) In addition to the obligations of the Company set forth in
Sections 7.04(a)
and
7.04(b)
, the Company shall promptly (and in any event within 24 hours of receipt thereof)
advise Parent orally and in writing of any request for confidential information in connection with
a Takeover Proposal or of any Takeover Proposal, the material terms and conditions of such request
or Takeover Proposal (including any material amendment or modification of such terms and
conditions) and the identity of the person making such request or Takeover Proposal. Commencing
upon the provision of any notice referred to in the immediately preceding sentence, the Company (or
its outside counsel) shall advise and confer with Parent (or its outside counsel) regarding any
Takeover Proposal and the material terms of such Takeover Proposal and shall keep Parent advised as
promptly as reasonably practicable of all other material developments which could reasonably be
expected to result in the Company Board making an Adverse Recommendation Change or exercising any
of its other rights under
Section 7.04(a),
7.04(b)
or
7.04(c)
.
(e) Nothing contained in this
Section 7.04
shall prohibit the Company from taking and
disclosing to its shareholders a position contemplated by Rule 14d-9 or Rule 14e-2(a) promulgated
under the Exchange Act or from making any disclosure to its shareholders pursuant to Rule 14d-9 or
Rule 14e-2(b) promulgated under the Exchange Act or Item 1012(a) of Regulation M-A or otherwise;
provided
,
however
, that neither the Company nor the Company Board nor any committee
thereof shall make an Adverse Recommendation Change, except in accordance with
Section
7.04(b)
or
7.04(c)
.
(f) For purposes of this Agreement:
(i)
Takeover Proposal
means any unsolicited bona fide written offer, proposal,
inquiry or indication of interest (other than an offer, proposal, inquiry or
indication of interest by Parent) contemplating or otherwise relating to any Acquisition
Transaction.
53
(ii)
Acquisition Transaction
means any transaction or series of transactions
involving (a) any merger, consolidation, share exchange, business combination, issuance of
securities, acquisition of securities, tender offer, exchange offer or other similar transaction
(i) in which the Company or any of its Subsidiaries is a constituent corporation, (ii) in which a
Person or group (as defined in the Exchange Act and the rules promulgated thereunder) of Persons
directly or indirectly acquires beneficial or record ownership of securities representing more than
10% of the outstanding securities of any class of voting securities of the Company or any of its
Subsidiaries, or (iii) in which the Company or any of its Subsidiaries issues or sells securities
representing more than 10% of the outstanding securities of any class of voting securities of the
Company or any of its Subsidiaries; or (b) any sale (other than sales of inventory in the ordinary
course of business), lease (other than in the ordinary course of business), exchange, transfer
(other than sales of inventory in the ordinary course of business), license (other than
nonexclusive licenses in the ordinary course of business), acquisition or disposition of any
business or businesses or assets that constitute or account for 10% or more of the consolidated net
revenues, net income or assets of the Company and its Subsidiaries.
(iii)
Superior Proposal
means an unsolicited, bona fide written offer that did not
result from a breach of any provision of this
Section 7.04
made by a third party to
acquire, directly or indirectly, by merger or otherwise, all of the outstanding shares of Company
Common Stock or all or substantially all of the assets of the Company and its subsidiaries, which
the Company Board determines in its reasonable good faith judgment, taking into account, among
other things, all legal, financial, regulatory and other aspects of the proposal and the person
making the proposal and after consultation with a financial advisor of nationally recognized
reputation and outside legal counsel (A) provides a higher value to the shareholders of the Company
than the consideration payable in the Merger (taking into account all of the terms and conditions
of such proposal and this Agreement (including any changes to the terms of this Agreement proposed
by Parent in response to such Superior Proposal or otherwise)), (B) is not subject to any financing
condition or contingency and (C) is reasonably capable of being completed, taking into account all
financial, legal, regulatory and other aspects of such proposal.
(g) The Company agrees not to release or permit the release of any person from, or to waive or
permit the waiver of any provision of, any confidentiality, standstill or similar agreement to
which the Company or any of its subsidiaries is a party, and will use its commercially reasonable
efforts to enforce or cause to be enforced each such agreement at the request of Parent. The
Company also will promptly, and in any event no later than five (5) Business Days after the date of
this Agreement, request each person that has executed a confidentiality agreement within 12 months
prior to the date of this Agreement, in connection with its consideration of a possible Acquisition
Transaction or equity investments to return all confidential information heretofore furnished to
such Person by or on behalf of the Company or any of its subsidiaries.
54
SECTION 7.05
Directors and Officers Indemnification and Insurance
.
(a) From and after the Effective Time, Parent shall cause the Surviving Corporation to, and
the Surviving Corporation shall, indemnify, defend and hold harmless, to the same extent such
Indemnified Parties are indemnified as of the date of this Agreement by the Company or the
applicable Company Subsidiary pursuant to their respective Constituent Documents, each person who
is now, or has been at any time prior to the date of this Agreement or who becomes such prior to
the Effective Time, an officer or director of the Company or any of its subsidiaries (the
Indemnified Parties
) against (i) any and all losses, claims, damages, costs, expenses,
fines, liabilities or judgments, including any amounts that are paid in settlement with the
approval of the Surviving Corporation (which approval shall not be unreasonably withheld or
delayed) of or in connection with any Action based in whole or in part on or arising in whole or in
part out of the fact that such person is or was a director or officer of the Company or any of its
subsidiaries and pertaining to any action or omission existing or occurring at or prior to the
Effective Time and whether asserted or claimed prior to, or at or after, the Effective Time
(
Indemnified Liabilities
), and (ii) all Indemnified Liabilities based in whole or in part
on, or arising in whole or in part out of, or pertaining to this Agreement or the transactions
contemplated hereby. The Surviving Corporation will provide to the Indemnified Parties all rights
and privileges available to such parties in the Constituent Documents, including the advancement of
expenses.
(b) Without limiting the foregoing, from and after the Effective Time, Parent shall cause the
organizational documents of the Surviving Corporation to contain provisions no less favorable to
the Indemnified Parties with respect to limitation of liabilities of directors and officers,
indemnification and advancement of expenses than are set forth as of the date hereof in the
Constituent Documents, which provisions shall not be amended, repealed or otherwise modified in a
manner that would adversely affect the rights thereunder of the Indemnified Parties.
(c) Parent shall cause the individuals serving as officers and directors of the Company and
any Company Subsidiary immediately prior to the Effective Time who are then covered by the
directors and officers liability insurance policy currently maintained by the Company or any
Company Subsidiary (a correct and complete copy of which has heretofore been delivered to Parent)
to be covered for a period of six (6) years from the Effective Time by such policy (provided that
Parent may substitute therefor policies of at least the same coverage and amounts containing terms
and conditions that are not less advantageous in any material respect than such policy) with
respect to acts or omissions occurring prior to the Effective Time that were committed by such
officers and directors in their capacity as such;
provided
,
however
, that in no
event shall Parent be required to expend per year of coverage more than 250% of the amount
currently expended by the Company and any Company Subsidiary per year of coverage as of the date of
this Agreement (the
Maximum Amount
) to maintain or procure insurance coverage pursuant
hereto. If Parent is unable to maintain or obtain the insurance called for by this
Section
7.05(c)
, Parent shall obtain as much comparable insurance as available for the Maximum Amount.
The Indemnified Parties may be required to make reasonable application and provide reasonable and
customary representations and warranties to applicable insurance carriers for the purpose of
obtaining such insurance.
55
(d) If the Surviving Corporation or any of its respective successors or assigns (i)
consolidates with or merges with or into any other person and is not the continuing or surviving
corporation, limited liability company, partnership or other entity of such consolidation or merger
or (ii) transfers or conveys all or substantially all of its properties and assets to any person
then, and in each such case, as a condition to any such merger, consolidation, transfer or
conveyance, proper provision will be made so that the successors and assigns of the Surviving
Corporation assume all of the obligations set forth in this
Section 7.05
.
(e) This
Section 7.05
is intended for the irrevocable benefit of, and to grant third
party rights to, the Indemnified Parties, and will be binding on all successors and assigns of the
Company, Parent and the Surviving Corporation. Each of the Indemnified Parties will be entitled to
enforce the covenants contained in this
Section 7.05
.
SECTION 7.06
Notification of Certain Matters
. The Company shall give prompt notice to
Parent, and Parent shall give prompt notice to the Company, of (a) any representation or warranty
made by it in this Agreement being or becoming untrue or inaccurate or any failure of the Company
or any of Company Subsidiary on one hand, or the Parent or Merger Sub on the other hand, to comply
with or satisfy in any material respect any covenant, condition or agreement to be complied with or
satisfied by it under this Agreement, such that the conditions set forth in
Section 8.02(a)
and
(b)
or
Section 8.03(a)
and
(b)
, as applicable, would not be satisfied
or any change, event or effect which would, individually or in the aggregate, have a Material
Adverse Effect and (b) upon receipt of any notice or other communication from any Governmental
Authority in connection with the transactions contemplated by this Agreement or from any person
alleging that the consent of such person is or may be required in connection with this Agreement or
the transactions contemplated hereby;
provided
,
however
, that no such notification
shall affect the representations, warranties, covenants or agreements or the conditions to the
respective parties obligations under this Agreement. Between the date of this Agreement and the
Closing Date, the Company will use commercially reasonable efforts to promptly correct and
supplement the information set forth in the Disclosure Schedule in order to cause such Disclosure
Schedule to remain correct and complete in all material respects;
provided
,
however
, that any such correction or supplement to the Disclosure Schedule will be
disregarded for purposes of determining whether the condition to Closing set forth in
Section
8.02(a)
has been satisfied, or whether Parent has the right to terminate this Agreement
pursuant to
Section 9.01(f)
. The Company shall update the Disclosure Schedule to a date
that is no earlier than ten (10) Business Days prior to the Closing Date and no later than seven
(7) Business Days prior to the Closing Date and shall deliver such update to Parent not less than
three (3) Business Days prior to the Closing Date;
provided
,
further
, that any
failure to provide such prompt notice pursuant to this
Section 7.06
shall not constitute a
failure to comply with the conditions set forth in
Sections 8.02(a) or (b)
.
SECTION 7.07
Further Action; Reasonable Best Efforts
.
(a) Upon the terms and subject to the conditions of this Agreement, each of the parties hereto
shall (i) make promptly (and in any event within twenty (20) days of the date hereof) its
respective filings, and thereafter make any other required submissions, under the HSR Act or other
applicable foreign, federal or state antitrust, competition or fair trade Laws with respect to the
Merger and (ii) use its reasonable best efforts to take, or cause to be taken, all
appropriate action, and to do, or cause to be done, all things necessary, proper or advisable
under applicable Laws to consummate and make effective the Merger, including, using its reasonable
best efforts to obtain all Permits, consents, approvals, authorizations, qualifications and orders
of Governmental Authorities (including the approval of the Pennsylvania Department of Insurance)
and parties to contracts with the Company and the Company Subsidiaries as are necessary for the
consummation of the Merger and to fulfill the conditions to the Merger. Parent, on the one hand,
and the Company, on the other hand, shall each have responsibility for one-half of the filing fees
associated with Parents HSR Act filing. Parent shall have responsibility for the filing fees
associated with its change of control applications, and Parent and the Company shall have
responsibility for their other respective filing fees associated with any other required filings.
56
(b) In furtherance and not in limitation of
Section 7.07(a)
: (i) as soon as
practicable following the date of this Agreement (and in any event within twenty (20) days of the
date hereof), Parent shall with the cooperation of the Company prepare and file with the relevant
insurance regulators requests for approval of the transactions contemplated by this Agreement and
shall use its reasonable best efforts to have such insurance regulators approve the transactions
contemplated by this Agreement; (ii) the Company will have the right to review in advance, and
Parent shall consult with the Company in advance, in each case subject to applicable Laws relating
to the exchange of information, with respect to all the information relating to the Company or any
Company Subsidiary that appears in any filing made with, or materials submitted to, any third party
or any Governmental Authority by Parent or any of its affiliates relating to this Agreement or the
Merger; (iii) Parent and its affiliates shall consult with the Company prior to participating in
any substantive meeting, conference call, discussion or communication, whether or not through
representatives, with any Governmental Authority with respect to any filing, submission,
investigation or inquiry relating to this Agreement or the Merger, and shall provide the Company
and its representatives the opportunity to attend and participate thereat; (iv) without limiting
any of the rights set forth in this
Section 7.07(b)
, Parent and its affiliates shall
furnish in advance to the Company copies of all correspondence, filings, submissions and written
communications between Parent, any of its affiliates or any of their respective representatives, on
one hand, and any Governmental Authority, on the other hand, with respect to this Agreement or the
Merger, and shall consult with the Company on and take into account any reasonable comments the
Company may have to such correspondence, filing, submission or written communication prior to their
being made; (v) Parent and its affiliates shall keep the Company apprised of the status of matters
relating to completion of the transactions contemplated hereby, shall inform the Company of the
substance of any material oral communications with any Governmental Authority for which it was
impractical to have advance consultation or participation in accordance with clause (iii) above,
and shall respond to inquiries and requests received from any Governmental Authority or third
party, in each case with respect to this Agreement or the Merger, as promptly as practicable; and
(vi) each party agrees not to extend any waiting period under the HSR Act or enter into any
agreement, arrangement or understanding with any Governmental Authority not to consummate or delay
the transactions contemplated hereby, except with the prior written consent of the other parties,
which consent may not be unreasonably withheld, conditioned or delayed. Notwithstanding anything
to the contrary contained in this Agreement, (i) neither Parent nor any of its affiliates shall be
required to divest or hold separate or otherwise take or commit to take any action that limits its
freedom of action with respect to, or its ability to retain, the Company or any of the businesses,
product lines or assets of Parent, the Company or any of their respective subsidiaries or
affiliates, or that
otherwise would, individually or in the aggregate, result in a material negative impact on the
business, assets, liabilities, properties or condition (financial or otherwise) of Parent and its
subsidiaries, taken as a whole, or the Company and its subsidiaries, taken as a whole, and (ii) the
Company shall not, without Parents prior written consent, take or agree to take any such action.
57
SECTION 7.08
Public Announcements
. Until the Closing Date, Parent, Merger Sub and
the Company agree that, other than as contemplated by
Section 7.04
, no public release or
announcement concerning this Agreement shall be issued by either party without the prior consent of
the other party (which consent shall not be unreasonably delayed or withheld), except as such
release or announcement may be required by applicable Law or the rules or regulations of any United
States or non-United States securities exchange, in which case the party required to make the
release or announcement shall use its reasonable best efforts to allow the other party reasonable
time to comment on such release or announcement in advance of such issuance. The parties have
agreed upon the form of a joint press release announcing the execution of this Agreement. Any
formal employee communication programs or announcements by the Company with respect to the Merger
or the employment or benefit arrangements to be effective following the Effective Time shall be
subject to prior review and approval by Parent, which shall not be unreasonably withheld,
conditioned or delayed.
SECTION 7.09
Section 16 Matters
. Prior to the Effective Time, the Company Board, or
an appropriate committee of non-employee directors thereof, shall adopt a resolution consistent
with the interpretive guidance of the SEC so that the disposition by any officer or director of the
Company who is a covered person of the Company for purposes of Section 16 of the Exchange Act of
Company Common Stock or Company Restricted Stock pursuant to this Agreement in connection with the
Merger shall be an exempt transaction for purposes of Section 16 of the Exchange Act.
SECTION 7.10
Takeover Statutes
. If any fair price, business combination or
control share acquisition statute or other similar statute or regulation, including the
provisions of the Pennsylvania Takeover Disclosure Law (70 P.S. §71 et seq.), shall become
applicable to the Merger, Parent and the Company and their respective Boards of Directors shall use
their commercially reasonable efforts to grant such approvals and take such actions as are
necessary so that the Merger may be consummated as promptly as practicable on the terms
contemplated hereby and thereby and otherwise act to minimize the effects of any such statute or
regulation on the Merger.
SECTION 7.11
Delisting
. Each of the parties agrees to cooperate with each other in
taking, or causing to be taken, all actions necessary to delist the Company Common Stock from the
NASDAQ Global Market and to terminate registration under the Exchange Act;
provided
,
however
, that such delisting and termination will not be effective until after the
Effective Time.
SECTION 7.12
Employee and Benefit Plan Matters
.
(a) Prior to the earlier to occur of (i) November 30, 2011 and (ii) five (5) Business Days
prior to the Closing Date, the Company shall prepare in consultation with Parent, and shall deliver
to Parent true, complete, and accurate final calculations made pursuant to Section 280G of the Code
with respect to all parachute payments (including any excess
parachute payments) to be made to any person in connection with the transactions contemplated
by this Agreement (and all such information as Parent may reasonably request for determining the
amount of any such parachute payments) using the principles and methodologies set forth in Treasury
Regulation Section 1.280G-1 and other applicable guidance.
58
(b) Parent shall, or shall cause its affiliates to, recognize the service of each employee of
the Company or any of the Company Subsidiaries (and their predecessors) prior to the Closing Date
as service with Parent, the Surviving Corporation or any of their affiliates for purposes of any
tax-qualified pension plan, 401(k) savings plan, severance plan, welfare benefit plan (including
any plan or arrangement relating to vacation, paid time off or holidays), and any other
compensation or employee benefits plan maintained by Parent, the Surviving Corporation or any of
their affiliates in which such employee participates, or which are made available by Parent, the
Surviving Corporation or any of their affiliates following the Closing Date for purposes of any
waiting period, vesting, eligibility and benefit entitlement (but excluding benefit accruals for
defined benefit pension plans and excluding eligibility for retiree medical and other retiree
welfare benefits)).
(c) Subject to any required third-party consent, Parent shall, or shall cause its affiliates
to, (i) waive any pre-existing condition limitations, exclusions, actively-at-work requirements and
waiting periods under any employee welfare benefit plans maintained by Parent, the Surviving
Corporation or any of their affiliates in which Company Employees participate from and after the
Closing Date; and (ii) credit the dollar amount incurred by each employee of the Company or the
Company Subsidiaries who accept such offer of employment and who remain employed following the
Closing by the Parent, the Surviving Corporation or any of their affiliates (and his or her
eligible dependents) (each, a
Company Employee
) during the calendar year in which the
Closing Date occurs for purposes of satisfying such years deductibles, co-pays and similar
expenses under such employee welfare benefit plans maintained by Parent, the Surviving Corporation
or any of their affiliates in which such Company Employee participates from and after the Closing
Date.
(d) Prior to the Effective Time and the Closing, the Company shall amend and terminate the
Company 401(k) Plan, it being understood and agreed by the parties hereto that the wind-up of such
plan, including the distribution of benefits to participants and beneficiaries, shall occur after
the Closing, but all contributions due and owing to such plan for all periods (including for the
final short plan year, if any) shall have been accrued as of the Closing Date. Prior to the
Effective Time and the Closing, the Company shall terminate such other Plans as Parent may request.
(e) Prior to the Effective Time and the Closing and effective as of the Closing Date, the
Company shall amend the ESOP to provide that the ESOP (a) shall no longer be considered an
employee stock ownership plan within the meaning of Section 4975(e)(7) of the Code and (b) shall
no longer permit distributions to participants and beneficiaries in the form of qualifying
employer securities (as defined in Section 4975(e)(8) of the Code). As of the date of Closing,
the ESOP shall terminate by its terms. As soon as practicable following the execution of this
Agreement, the Company shall file all necessary documents with the IRS to convert its current
initial request for a favorable determination letter with respect to the ESOP into a request for a
favorable determination letter that the ESOP is, upon its termination (and as
amended in accordance with this
Section 7.12(e)
) qualified under the provisions of
Sections 401(a), 409, and 4975(e)(7) of the Code (or, if, prior to the submission of such
documentation to convert such request, the ESOP has received an initial favorable determination
letter from the IRS, the Company shall file all necessary documents with the IRS to request a final
favorable determination letter with respect to the ESOP). As soon as practicable after the receipt
of a final favorable determination letter from the IRS, the account balances in the ESOP, including
any surplus in the suspense account after full repayment of the outstanding ESOP loan and all of
the ESOPs administrative expenses that are payable from the ESOP Trust shall be distributed to
participants and beneficiaries in accordance with the provisions of the Code and applicable law and
the terms of the ESOP;
provided
,
however
, that any cash received as Merger
Consideration shall not be invested in, or distributed as, qualifying employer securities (as
defined in Section 4975(e)(8) of the Code). Prior to Closing, contributions to the ESOP and
payments on the ESOP loan shall be made consistent with past practices on the regularly scheduled
contribution or payment date;
provided
,
however
, that the Company shall make a
contribution to, and payment on, the ESOP loan with respect to the period from January 1, 2011
through the date of the Closing
(or, if the Closing occurs after December 31, 2011, the
period from January 1, 2012 through the date of the Closing) but no further contributions shall be
made to the ESOP after Closing or with respect to any period after the Closing.
59
(f) Within a reasonable period (but in no event more than five days) after receipt by the
Trustee of Merger Consideration with respect to shares held under the ESOP, the Company, the
applicable committee or the Trustee (as the case may be under the terms of the applicable ESOP
documents) shall cause any then-outstanding ESOP loan balances and accrued interest thereon to be
repaid in full, and subsequently shall allocate any remaining unallocated amounts to the accounts
of participants and beneficiaries under the ESOP in accordance with the terms of the ESOP and
applicable Law.
(g) To the extent any Plan is noncompliant in either form or operation, the Company shall take
all steps necessary to correct fully such noncompliance prior to the Effective Time and the
Closing. Without limiting the generality of
Section 10.04
, this
Section 7.12
shall
be binding upon and inure solely to the benefit of each of the parties to this Agreement, and
nothing in this
Section 7.12
, expressed or implied, is intended to confer upon any other
person any rights or remedies of any nature whatsoever under or by reason of this
Section
7.12
and no provision of this
Section 7.12
will create any third party beneficiary
rights in any current or former employee, director or individual independent contractor of the
Company or any of the Company Subsidiaries in respect of continued employment (or resumed
employment) or service or any other matter.
SECTION 7.13
Securityholder Litigation
. The Company shall promptly advise Parent
orally and in writing of any action, suit, claim or other litigation, legal, administrative or
arbitration proceeding or governmental investigation commenced after the date of this Agreement
against the Company or any of its directors or officers by any shareholder of the Company relating
to this Agreement and the Merger and shall keep Parent reasonably informed regarding any such
litigation. The Company shall give Parent the opportunity to consult with the Company regarding
the defense or settlement of any such action, suit, claim or other litigation, legal,
administrative or arbitration proceeding or governmental investigation and shall consider Parents
views with respect thereto. The Company shall not settle any such action, suit, claim or
other litigation, legal, administrative or arbitration proceeding or governmental
investigation without the prior written consent of Parent.
60
SECTION 7.14
Delivery of Subsequent Financial Statements
. Prior to the Effective
Time, the Company shall timely file complete and correct copies of each annual and quarterly
statutory financial statement of each Company Insurance Subsidiary (collectively, the
Pre-Closing Company Statutory Financial Statements
) with the Insurance Regulator of the
jurisdiction of domicile of such Company Insurance Subsidiary, in accordance with applicable Law.
Each Pre-Closing Company Statutory Financial Statement shall (a) be derived from and shall be in
accordance with the books and records of the applicable Company Insurance Subsidiary, (b) be
prepared in accordance with all applicable Laws and SAP, and (c) fairly present, in all material
respects, in accordance with SAP, the statutory financial position, results of operations, assets,
liabilities, capital and surplus, changes in statutory surplus and cash flows of the applicable
Company Insurance Subsidiary at the respective dates of, and for the periods referred to therein.
The Company shall provide to Parent a complete and correct copy of each Pre-Closing Company
Statutory Financial Statement concurrently with the filing of such Pre-Closing Company Statutory
Financial Statement with the applicable Insurance Regulator.
ARTICLE VIII
CONDITIONS TO THE MERGER
SECTION 8.01
Conditions to the Obligations of Each Party
. The obligations of each
party to effect the Merger shall be subject to the satisfaction or waiver in writing by Parent and
the Company, at or prior to the Effective Time, of the following conditions:
(a)
Shareholder Approval
. The Shareholder Approval shall have been obtained;
(b)
HSR Act
. Any waiting period (and any extension thereof) applicable to the
consummation of the Merger under the HSR Act shall have expired or been terminated, and no action
shall have been instituted by the Department of Justice or Federal Trade Commission challenging or
seeking to enjoin the consummation of the Merger, unless such action shall have been withdrawn,
terminated or resolved by written order of a Governmental Authority that is final and
non-appealable;
(c)
Consents and Approvals
. All approvals or consents required pursuant to
Section 4.05(b)
and
Section 5.04(b)
shall have been received; and
(d)
No Order
. No Governmental Authority shall have enacted, issued, promulgated,
enforced or entered any Law (whether temporary, preliminary or permanent) that is then in effect
and has the effect of making the acquisition of shares of Company Common Stock by Parent or Merger
Sub or any affiliate of either of them illegal or otherwise preventing or prohibiting consummation
of the Merger and there shall not be instituted or pending any Action by any Governmental Authority
relating to this Agreement.
61
SECTION 8.02
Conditions to the Obligations of Parent and Merger Sub
. The obligations
of Parent and Merger Sub to consummate the Merger are subject to the satisfaction or
waiver in writing (where permissible), in their sole discretion, of the following additional
conditions:
(a)
Representations and Warranties
. (i) The representations and warranties of the
Company contained in
Section 4.03
shall be true and correct, except for
de minimis
errors,
and (ii) all other representations and warranties of the Company contained in this Agreement shall
be true and correct in all respects (without giving effect to any limitation as to materiality or
Material Adverse Effect set forth therein) except where the failure in the aggregate to be true
would not have a Material Adverse Effect, in the case of each of (i) and (ii), as of the date of
this Agreement and as of the Effective Time, as though made on and as of the Effective Time (except
to the extent expressly made as of an earlier date, in which case as of such earlier date).
(b)
Agreements and Covenants
. The Company shall have performed or complied in all
material respects with all agreements and covenants required by this Agreement to be performed or
complied with by it on or prior to the Effective Time.
(c)
Officer Certificate
. The Company shall have delivered to Parent a certificate,
dated the date of the Closing, signed by a duly authorized officer of the Company, certifying as to
the satisfaction of the conditions specified in
Sections 8.02(a)
and
8.02(b)
.
(d)
No Material Adverse Effect
. Since the date of this Agreement, there shall not
have occurred any effect, event, condition or change that would, individually or in the aggregate,
have a Material Adverse Effect.
(e)
No Restrictive Condition
. None of the regulatory approvals obtained in order to
satisfy the condition set forth in
Section 8.01(b)
or
(c)
shall contain any
Restrictive Condition, and no Law shall have been enacted or be in effect that contains any
Restrictive Condition.
SECTION 8.03
Conditions to the Obligations of the Company
. The obligations of the
Company to consummate the Merger are subject to the satisfaction or waiver (where permissible) of
the following additional conditions:
(a)
Representations and Warranties
. (i) The representations and warranties of Parent
and Merger Sub contained in
Section 5.06
shall be true and correct in all respects, and
(ii) all other representations and warranties of Parent and Merger Sub contained in this Agreement
shall be true and correct in all respects (without giving effect to any limitation as to
materiality set forth therein) except as would not, individually or in the aggregate, be reasonably
likely to have a material adverse effect on the ability of Parent and Merger Sub to consummate the
Merger, in the case of each of (i) and (ii), as of the Effective Time, as though made on and as of
the Effective Time (except to the extent expressly made as of an earlier date, in which case as of
such earlier date).
(b)
Agreements and Covenants
. Parent and Merger Sub shall have performed or complied
in all material respects with all agreements and covenants required by this Agreement to be
performed or complied with by it on or prior to the Effective Time.
62
(c)
Officer Certificate
. Parent and Merger Sub shall have delivered to the Company a
certificate, dated the date of the Closing, signed by a duly authorized officer of Parent and
Merger Sub, certifying as to the satisfaction of the conditions specified in
Sections
8.03(a)
and
8.03(b)
.
ARTICLE IX
TERMINATION, AMENDMENT AND WAIVER
SECTION 9.01
Termination
. This Agreement may be terminated and the Merger may be
abandoned at any time prior to the Effective Time, upon written notice (other than in the case of
Section 9.01(a)
) from the terminating party to the non-terminating party, specifying the
subsection of this
Section 9.01
pursuant to which such termination is effected,
notwithstanding any requisite approval and adoption of this Agreement and the Merger by the
shareholders of the Company:
(a) By mutual written consent of each of Parent and the Company; or
(b) By either Parent or the Company if the Effective Time shall not have occurred on or
before December 31, 2011 (the
Outside Date
)
provided
,
however
, that the
Outside Date shall be extended day-by-day for each day during which the condition set forth in
Section 8.01(c)
is not satisfied;
provided
,
however
, that in no event shall
the Outside Date be extended beyond March 31, 2012;
provided
,
further
, that the
right to terminate this Agreement under this
Section 9.01(b
) shall not be available to any
party whose failure to fulfill any obligation under this Agreement has been the cause of, or
resulted in, the failure of the Effective Time to occur on or before the Outside Date, or
(c) By either Parent or the Company if any Governmental Authority of competent jurisdiction
shall have enacted, issued, promulgated, enforced or entered any injunction, order, decree or
ruling, which has become final and non-appealable and has the effect of preventing, prohibiting or
making illegal the consummation of the Merger
provided
,
however
, the terminating
party has complied in all material respects with its obligations hereunder to prevent the
enactment, issuance, enforcement or entry of such injunction, order, decree or ruling, or
(d) By either Parent or the Company if (i) the Shareholders Meeting (including any
adjournments thereof) shall have been held and completed and (ii) the Shareholder Approval shall
not have been obtained;
provided
,
however
, that the Company shall not be permitted
to terminate this Agreement pursuant to this
Section 9.01(d)
if the Company has not made
any payment(s) required to be made to Parent pursuant to
Section 9.03(b)(iii)
, if
applicable; or
(e) By Parent if (i) the Company Board shall have failed to recommend that the Companys
shareholders vote to adopt this Agreement, (ii) there shall have occurred an Adverse Recommendation
Change, (iii) the Company Board shall have approved, endorsed or recommended any Takeover Proposal,
(iv) the Company shall have failed to include the Company Recommendation in the Proxy Statement,
(v) the Company, or any of its subsidiaries or any representative of the Company or any of its
subsidiaries, shall have violated, breached or
taken any action inconsistent with any of the provisions set forth in
Section 7.01
,
7.02
or
7.04
, or (vi) the Company Board or any committee thereof shall have
resolved or proposed to take any action described in clauses (i) through (v) of this sentence; or
63
(f) By Parent upon a breach of any representation, warranty, covenant or agreement on the part
of the Company set forth in this Agreement such that the conditions set forth in
Section
8.02(a)
and
Section 8.02(b)
would not be satisfied, such breach cannot be cured or has
not been cured within 30 days of the receipt by the Company of notice thereof (or, if earlier,
before the Outside Date), and such breach has not been waived by Parent pursuant to the provisions
hereof; or
(g) By the Company (i) upon a breach of any representation, warranty, covenant or agreement on
the part of Parent and Merger Sub set forth in this Agreement such that the conditions set forth in
Section 8.03(a)
and
Section 8.03(b)
would not be satisfied, such breach cannot be
cured or has not been cured within 30 days of the receipt by Parent of notice thereof (or, if
earlier, before the Outside Date), and such breach has not been waived by the Company pursuant to
the provisions hereof; or (ii) prior to receipt of Shareholder Approval, if it concurrently enters
into a definitive agreement providing for a Superior Proposal;
provided
,
however
,
that it shall have complied with the provisions of
Section 7.04(c)
as if such termination
were an Adverse Recommendation Change made in compliance with such section;
provided
,
further
, that the Company shall not have violated, breached or taken any action
inconsistent with any of the provisions set forth in
Section 7.04
and the Company shall
have paid or pays the Termination Fee to Parent in accordance with
Section 9.03
.
SECTION 9.02
Effect of Termination
. In the event of the termination of this
Agreement pursuant to
Section 9.01
, this Agreement (except for this
Section 9.02
,
Section 9.03
and
Article X
) shall forthwith become void, and there shall be no
liability on the part of any party hereto (or any of its officers, directors, employees,
affiliates, agents, legal and financial advisors and other representatives), except (a) as set
forth in
Section 9.03
and (b) that nothing herein shall relieve any party from liability
for any knowing and intentional breach hereof prior to the date of such termination.
SECTION 9.03
Fees and Expenses
.
(a) Except as otherwise set forth in
Section 7.07(a)
and this
Section 9.03
,
all Expenses incurred in connection with this Agreement and the transactions contemplated by this
Agreement shall be paid by the party incurring such expenses, whether or not the Merger is
consummated.
Expenses
, as used in this Agreement, shall include all reasonable
out-of-pocket expenses (including all reasonable fees and expenses of counsel, accountants,
investment bankers, experts and consultants to a party hereto and its affiliates) incurred by a
party or on its behalf in connection with or related to the authorization, preparation,
negotiation, execution and performance of this Agreement, the preparation, printing, filing and
mailing of the Proxy Statement, the solicitation of shareholder approvals, the filing of any
required notices under the HSR Act or other regulations and all other matters related to the
closing of the Merger and the other actions contemplated by this Agreement.
64
(b) The Company agrees to pay Parent (or its designees) an amount equal to $3,750,000 (the
Termination Fee
) if this Agreement is terminated:
(i) by Parent pursuant to
Section 9.01(e)
;
(ii) by Parent or the Company pursuant to
Section 9.01(b)
or by Parent pursuant to
Section 9.01(f)
and, in either case, (x) on or before the date of any such termination, a
Takeover Proposal shall have been announced, disclosed or otherwise communicated to the Company
Board, and (y) a definitive agreement is entered into by the Company with respect to an Acquisition
Transaction or an Acquisition Transaction is consummated within 12 months of such termination of
the Agreement; or
(iii) by Parent or the Company pursuant to
Section 9.01(d)
and (x) on or before the
date of the Shareholders Meeting a Takeover Proposal shall have been announced, disclosed or
otherwise communicated to the Company Board, and (y) a definitive agreement is entered into by the
Company with respect to an Acquisition Transaction or an Acquisition Transaction is consummated
within 12 months of such termination of the Agreement;
(iv) by any party hereto at any time during which the Agreement was otherwise terminable in a
circumstance in which Parent would be entitled to payment of the Termination Fee pursuant to
Section 9.03(b)(i), (ii) or (iii)
.
(c) Any Termination Fee required to be paid (i) pursuant to
Section 9.03(b)(i)
shall
be paid within two Business Days after termination by Parent, (ii) pursuant to
Section
9.03(b)(ii) or (iii)
shall be paid within two Business Days after the event giving rise to such
payment, and (iii) pursuant to
Section 9.03(b)(iv)
, at the time such fee would be payable
pursuant to
Section 9.03(b)(i), (ii) or (iii)
, as applicable.
(d) If the Company fails to pay when due any amount payable under this
Section 9.03
,
then (i) the Company shall reimburse Parent for all costs and expenses (including fees of counsel)
incurred in connection with the enforcement by Parent of its rights under this
Section
9.03
, and (ii) the Company shall pay to Parent interest on such overdue amount (for the period
commencing as of the date such overdue amount was originally required to be paid and ending on the
date such overdue amount is actually paid to Parent in full) at a rate per annum equal to 3% over
the prime rate (as announced by Citibank N.A.) in effect on the date such overdue amount was
originally required to be paid.
(e) If Parent is entitled to terminate this Agreement and receive a Termination Fee, receipt
of such Termination Fee in full will constitute liquidated damages and be the sole and exclusive
remedy regardless of the circumstances of such termination, except as set forth in
Sections
9.02(b)
and
9.03(d)
.
(f) The parties hereto acknowledge that the agreements contained in this
Section 9.03
are an integral part of the transactions contemplated by this Agreement and that, without these
agreements, the parties would not enter into this Agreement. Payment of the fees and expenses
described in this
Section 9.03
shall not be in lieu of liability pursuant to
Section
9.02(b)
.
65
SECTION 9.04
Amendment
. This Agreement may be amended by the parties hereto by
action taken by or on behalf of their respective Boards of Directors at any time prior to the
Effective Time;
provided
,
however
, that, after the Shareholder Approval has been
obtained, no amendment may be made that would require further approval of the shareholders of the
Company under applicable Law without such further approval. This Agreement may not be amended
except by an instrument in writing signed by each of the parties hereto.
SECTION 9.05
Waiver
. At any time prior to the Effective Time, any party hereto may
(a) extend the time for the performance of any obligation or other act of any other party hereto,
(b) waive any inaccuracy in the representations and warranties of any other party contained herein
or in any document delivered pursuant hereto and (c) waive compliance with any agreement of any
other party or any condition to its own obligations contained herein;
provided
,
however
, that after the Shareholder Approval has been obtained, there shall be made no
waiver that by Law requires further approval by shareholders of the Company without the further
approval of such shareholders. Any such extension or waiver shall be valid if set forth in an
instrument in writing signed by the party or parties to be bound thereby. The failure or delay by
any party to this Agreement to assert any of its rights under this Agreement or otherwise shall not
constitute a waiver of such rights nor shall any single or partial exercise by any party to this
Agreement of any of its rights under this Agreement preclude any other or further exercise of such
rights or any other rights under this Agreement.
ARTICLE X
GENERAL PROVISIONS
SECTION 10.01
Notices
. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be given (and shall be deemed to have been
duly given upon receipt) by delivery in person, by overnight courier, by facsimile or email (to the
extent an email address is specified in or in accordance with this
Section 10.01
) or by
registered or certified mail (postage prepaid, return receipt requested) to the respective parties
at the following addresses (or at such other address for a party as shall be specified in a notice
given in accordance with this
Section 10.01
):
if to Parent or Merger Sub:
c/o ACE Group
1133 Avenue of the Americas, 44
th
Floor
New York, NY 10036
Attention: Deputy General Counsel, Corporate Affairs
Facsimile No.: 212-827-4449
with a copy (which shall not constitute notice) to:
Mayer Brown LLP
71 South Wacker Drive
Chicago, Illinois 60606
Attention: Edward S. Best and Andrew J. Noreuil
Facsimile No.: 312-701-7711
E-mail: ebest@mayerbrown.com; anoreuil@mayerbrown.com
66
if to the Company:
Penn Millers Holding Corporation
72 North Franklin Street, P.O. Box P
Wilkes-Barre, Pennsylvania 18773
Attention: Douglas A. Gaudet, CPCU, President and CEO
Facsimile No.: 570-829-4568
E-mail: dgaudet@pennmillers.com
with a copy (which shall not constitute notice) to:
Ballard Spahr LLP
1735 Market Street
51
st
floor
Philadelphia, Pennsylvania 19103
Attention: Justin P. Klein, Esq.
Facsimile No.: 215-864-8999
E-mail:kleinj@ballardspahr.com
SECTION 10.02
Severability
. If any term or other provision of this Agreement is
invalid, illegal or incapable of being enforced by any rule of law, or public policy, all other
conditions and provisions of this Agreement shall nevertheless remain in full force and effect.
Upon such determination that any term or other provision is invalid, illegal or incapable of being
enforced, the parties hereto agree that the court making such determination will have the power to
limit the term or provision, to delete specific words or phrases, or to replace any invalid or
unenforceable term or provision with a term or provision that is valid and enforceable and that
comes closest to expressing the intention of the invalid or unenforceable term or provision, and
this Agreement will be enforceable as so modified so long as the economic or legal substance of the
Merger is not affected in any manner materially adverse to any party. In the event such court does
not exercise the power granted to it in the prior sentence, the parties hereto shall negotiate in
good faith to modify this Agreement so as to effect the original intent of the parties as closely
as possible in a mutually acceptable manner in order that the Merger be consummated as originally
contemplated to the fullest extent possible.
SECTION 10.03
Entire Agreement; Assignment
. This Agreement, together with the
Confidentiality Agreement, constitutes the entire agreement among the parties with respect to the
subject matter hereof and supersedes, except as set forth in
Section 7.03(b)
, all prior
agreements and undertakings, both written and oral, among the parties, or any of them, with respect
to the subject matter hereof. This Agreement shall not be assigned (whether pursuant to a merger,
by operation of Law or otherwise), except that either of Parent and Merger Sub may (in its sole
discretion) assign all or any of its rights and obligations hereunder to any wholly owned
subsidiary of Parent,
provided
,
however
, that no such assignment shall relieve the
assigning party of its obligations hereunder.
67
SECTION 10.04
Parties in Interest
. This Agreement shall be binding upon and inure
solely to the benefit of each party hereto (and their successors and permitted assigns), and
nothing in this Agreement, express or implied, is intended to or shall confer upon any other person
(including any director, officer or employee of the Company or any Company Subsidiary) any right,
benefit or remedy of any nature whatsoever under or by reason of this Agreement, other than the
provisions of
Section 7.05
(which are intended to be for the benefit of the persons covered
thereby or the persons entitled to payment thereunder and may be enforced by such persons).
SECTION 10.05
Specific Performance
. The parties hereto agree that irreparable damage
would occur in the event that any of the provisions of this Agreement were not performed in
accordance with their specific terms on a timely basis or were otherwise breached, and that the
parties, without the necessity of posting bond or other undertaking, shall be entitled to an
injunction or injunctions to prevent breaches of the Agreement and to specific performance of the
terms hereof to prevent breaches of this Agreement and to enforce specifically the terms and
provisions of this Agreement, in addition to any other remedy to which they may be entitled at law
or in equity. Each of the other parties hereto agrees that it will not oppose the granting of such
relief on the basis that there is an adequate remedy available at law. Except as expressly
provided herein, the rights, obligations and remedies created by this Agreement are cumulative and
in addition to any other rights, obligations and remedies otherwise available at law or in equity.
Except as expressly provided herein, nothing in this Agreement will be considered an election of
remedies.
SECTION 10.06
Governing Law
. This Agreement shall be governed by, and construed in
accordance with, the laws of the Commonwealth of Pennsylvania applicable to contracts executed in
and to be performed in the Commonwealth of Pennsylvania. Each of the parties hereto hereby
irrevocably and unconditionally submits, for itself and its property, to the jurisdiction of the
courts of the Commonwealth of Pennsylvania and the federal courts sitting in the Middle District of
Pennsylvania, in any action or proceeding arising out of or relating to this Agreement or the
agreements delivered in connection herewith or the transactions contemplated hereby or for
recognition or enforcement of any judgment relating thereto, and each of the parties hereby
irrevocably and unconditionally (i) agrees not to commence any such action except in such court,
(ii) agrees that any claim in respect of any such action or proceeding may be heard and determined
in such court, (iii) waives, to the fullest extent it may legally and effectively do so any
objection which it may now or hereafter have to venue of any such action or proceeding in such
court, and (iv) waives, to the fullest extent permitted by law, the defense of any inconvenient
forum to the maintenance of such action or proceeding in such court. Each of the parties hereto
agrees that a final judgment in any such action or proceeding shall be conclusive and may be
enforced in other jurisdictions by suit on the judgment or in any other manner provided by Law.
Each of the parties to this Agreement irrevocably consents to service of process in any such action
or proceeding in the manner provided for notices in
Section 10.01
of this Agreement;
provided
,
however
, that nothing in this Agreement shall affect the right of any
party to this Agreement to serve process in any other manner permitted by Law.
68
SECTION 10.07
Waiver of Jury Trial
. EACH OF THE PARTIES HERETO HEREBY WAIVES TO THE
FULLEST EXTENT PERMITTED BY APPLICABLE LAW ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY WITH RESPECT TO
ANY LITIGATION
DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR THE
MERGER. EACH OF THE PARTIES HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY
OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT
OF LITIGATION, SEEK TO ENFORCE THAT FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER
HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT AND THE MERGER, AS APPLICABLE, BY, AMONG
OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS
SECTION 10.07
.
SECTION 10.08
Interpretation and Rules of Construction
. In this Agreement, except to
the extent otherwise provided or that the context otherwise requires: (a) when a reference is made
in this Agreement to an Article, Section, sub-Section or Disclosure Schedule, such reference is to
the corresponding Article, Section or sub-Section of, or Disclosure Schedule to, this Agreement
unless otherwise indicated; (b) the table of contents and headings for this Agreement are for
reference purposes only and do not affect in any way the meaning or interpretation of this
Agreement; (c) whenever the words include, includes or including are used in this Agreement,
they are deemed to be followed by the words without limitation; (d) the words hereof, herein
and hereunder and words of similar import, when used in this Agreement, refer to this Agreement
as a whole and not to any particular provision of this Agreement; (e) the words known or
knowledge mean the actual knowledge of the executive officers of a party to this Agreement after
conducting an investigation that is reasonable under the circumstances and in the context of the
negotiation, execution and delivery of this Agreement; (f) the term executive officer has the
meaning given to such term in Rule 3b-7 under the Exchange Act; (g) the definitions contained in
this Agreement are applicable to the singular as well as the plural forms of such terms; (h) any
Law defined or referred to herein or in any agreement or instrument that is referred to herein
means such Law or statute as from time to time amended, modified or supplemented, including by
succession of comparable successor Laws; (i) the use of or is not intended to be exclusive unless
expressly indicated otherwise; and (j) the masculine gender shall include the feminine and neuter
genders; the feminine gender shall include the masculine and neuter genders; and the neuter gender
shall include the masculine and feminine genders. The parties hereto agree that any rule of
construction to the effect that ambiguities are to be resolved against the drafting party shall not
be applied in the construction or interpretation of this Agreement. No summary of this Agreement
prepared by or on behalf of any party will affect the meaning or interpretation of this Agreement.
SECTION 10.09
Non-Survival of Representation, Warranties and Agreements
. None of the
representations, warranties, covenants and other agreements in this Agreement or in any instrument
delivered pursuant to this Agreement, including any rights arising out of any breach of such
representations, warranties, covenants and other agreements, will survive the Effective Time,
except for those covenants and agreements contained herein and therein that by their terms apply or
are to be performed in whole or in part after the Effective Time.
SECTION 10.10
Counterparts
. This Agreement may be executed and delivered (including
by facsimile and other means of electronic transmission) in one or more counterparts, and by the
different parties hereto in separate counterparts, each of which when executed shall be
deemed to be an original but all of which taken together shall constitute one and the same
agreement.
[Signature Page follows]
69
IN WITNESS WHEREOF, Parent, Merger Sub and the Company have caused this
Agreement to be executed as of the date first written above.
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ACE AMERICAN INSURANCE COMPANY
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By:
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/s/ James M. English
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Name:
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James M. English
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Title:
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Executive Vice President
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PANTHER ACQUISITION CORP.
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By:
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/s/ James M. English
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Name:
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James M. English
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Title:
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President
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PENN MILLERS HOLDING CORPORATION
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By:
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/s/ Douglas A. Gaudet
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Name:
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Douglas A. Gaudet, CPCU
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Title:
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President and Chief Executive Officer
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ANNEX B
September 7, 2011
Board of Directors
Penn
Millers Holding Corporation
72 North
Franklin Street
Wilkes-Barre,
Pennsylvania 18773
Board of Directors:
We understand that Penn Millers Holding Corporation (Penn Millers) proposes to enter into
an Agreement and Plan of Merger, dated as of September 7, 2011 (the Merger Agreement), with ACE
American Insurance Company (ACE) and Panther Acquisition Corp., a wholly owned subsidiary of ACE
(Merger Sub), pursuant to which Merger Sub will be merged with and into Penn Millers and Penn
Millers will become a wholly owned subsidiary of ACE (the Merger). In the Merger, each
outstanding share of the common stock, par value $0.01 per share, of Penn Millers (Penn Millers
Common Stock) will be converted into the right to receive $20.50 in cash (the Merger
Consideration). The terms and conditions of the Merger are more fully set forth in the Merger
Agreement.
The Board of Directors of Penn Millers has requested our opinion as to the fairness, from a
financial point of view, to holders of Penn Millers Common Stock of the Merger Consideration to be
received by such holders.
In connection with rendering our opinion, we have, among other things, reviewed: (i) the
Merger Agreement; (ii) certain publicly available financial statements and other information of
Penn Millers, including Penn Millers annual reports to shareholders and annual reports on Form
10-K for the fiscal years ended December 31, 2009 and 2010 and quarterly reports on Form 10-Q for
the periods ended March 31, 2011 and June 30, 2011; (iii) certain non-public financial and
operating information relating to Penn Millers furnished to us by the management of Penn Millers,
including certain financial projections relating to Penn Millers that were prepared by management
of Penn Millers; (iv) the stock price trading history of Penn Millers Common Stock; (v) a
comparison of certain financial information of Penn Millers with similar information for other
companies that we deemed relevant; (vi) a comparison of the financial terms of the Merger with the
financial terms, to the extent publicly available, of certain transactions that we deemed relevant;
and (vii) the results of Penn Millers efforts, with our assistance, to solicit indications of
interest from third parties with respect to a possible acquisition of Penn Millers. In addition, we
have had discussions regarding certain aspects of the Merger, as well as past and current
operations, financial projections, current financial condition and prospects of Penn Millers, with
certain members of senior management of Penn Millers and performed such analyses and examinations
and considered such other factors that we deemed appropriate.
Board of Directors
Penn Millers Holding Corporation
September 7, 2011
Page 2
In rendering our opinion, we have assumed and relied upon, without independent verification,
the accuracy and completeness of all financial and other information publicly available or
provided to or otherwise reviewed by or discussed with us and further have relied upon the
assurances of management of Penn Millers that it is not aware of any facts or circumstances that
would make such information inaccurate or misleading. With respect to the financial projections of
Penn Millers utilized in our financial analyses, we have assumed, upon the advice of Penn Millers,
that such projections have been reasonably prepared by Penn Millers on bases reflecting the best
currently available estimates and good faith judgments of the future operating and financial
performance of Penn Millers. We express no view as to any such financial projections or the
assumptions on which they are based.
In arriving at our opinion, we also have assumed, upon the advice of Penn Millers, that the
representations and warranties of each party contained in the Merger Agreement are true and
correct, that each party will perform all of the covenants and agreements required to be performed
by it under the Merger Agreement and that all conditions to the consummation of the Merger will be
satisfied without waiver or modification thereof. We further have assumed, upon the advice of Penn
Millers, that all governmental, regulatory or other consents, approvals or releases necessary for
the consummation of the Merger will be obtained without any delay, limitation, restriction or
condition that would have an adverse effect on Penn Millers or the Merger.
We are not actuaries and our services did not include any actuarial determination or
evaluation by us or any attempt to evaluate actuarial assumptions, allowances for losses with
respect thereto or premium rates for liability insurance and, accordingly, we have made no analysis
of, and express no opinion as to, the adequacy of Penn Millers reserves for losses and loss
adjustment expenses, such premiums or other matters with respect thereto. We have not conducted a
physical inspection of the properties and facilities of Penn Millers and have not made, nor assumed
any responsibility for making, any independent valuation or appraisal of the assets or liabilities
(contingent or otherwise) of Penn Millers or any of its subsidiaries, nor have we been furnished
with any such appraisals, nor have we evaluated the solvency or fair value of Penn Millers or any
of its subsidiaries under any state or federal laws relating to bankruptcy, insolvency or similar
matters.
Our opinion does not address any terms (other than the Merger Consideration to the extent
expressly specified herein) or other aspects or implications of the Merger, including, without
limitation, the form or structure of the Merger or any other agreement, arrangement or
understanding to be entered into in connection with or contemplated by the Merger or otherwise. We
express no view as to, and our opinion does not address, (i) the fairness (financial or otherwise)
of the amount or nature or any other aspect of any compensation to any officers, directors, or
employees of any party to the Merger, or any class of such persons, relative to the Merger
Consideration or otherwise; (ii) the relative merits of the Merger as compared to alternative
business or financial strategies that might be available to Penn Millers or the effect of any
other transaction in which Penn Millers might engage; or (iii) the underlying business decision of
Penn Millers to engage in the Merger. We also express no view or opinion as to the prices at which
Penn Millers Common Stock will trade at any time.
Our opinion is necessarily based on economic, market and other conditions as in effect on,
and the information made available to us as of, the date hereof. It is understood that
Board of Directors
Penn Millers Holding Corporation
September 7, 2011
Page 3
subsequent developments may affect this opinion and that we do not have any obligation to update,
revise or reaffirm this opinion. As you are aware, the credit, financial and stock markets have
been experiencing unusual volatility and we express no view or opinion as to any potential effects
of such volatility on Penn Millers or the Merger. We are not legal, regulatory, accounting or tax
experts and have assumed the accuracy and completeness of assessments by Penn Millers and its
advisors with respect to legal, regulatory, accounting and tax matters.
We have acted as financial advisor to the Special Committee of Independent Members of the
Board of Directors of Penn Millers in connection with the Merger and will receive fees for our
services, the substantial portion of which is contingent upon consummation of the Merger. We also
will receive a fee in connection with the delivery of this opinion. In addition, Penn Millers has
agreed to reimburse our expenses and to indemnify us against certain liabilities arising out of
our engagement. In addition, we and our affiliates in the past have provided, currently are
providing and in the future may provide investment banking and financial advisory services to ACE
and its affiliates unrelated to the Merger and would expect to receive compensation for such
services. Specifically, in the past two years, we have acted as financial advisor to ACE in
connection with certain potential acquisition and financing transactions. In addition, certain of
our affiliates have business relationships with ACE and its affiliates and have provided
insurance-related services to ACE and its affiliates during the past two years, for which our
affiliates received customary compensation.
This opinion has been approved by the fairness opinion committee of Willis Securities, Inc.
This opinion is for the information of the Board of Directors of Penn Millers (in its capacity as
such) in connection with its evaluation of the Merger and does not constitute a recommendation to
any holder of Penn Millers Common Stock as to how such holder should act or vote in connection with
the Merger or otherwise.
Based upon and subject to the foregoing, it is our opinion that, as of the date hereof, the
Merger Consideration to be received by holders of Penn Millers Common Stock is fair, from a
financial point of view, to such holders.
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Very truly yours,
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/s/ Willis Securities, Inc.
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WILLIS SECURITIES, INC.
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x
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PLEASE MARK VOTES
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REVOCABLE PROXY
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AS IN THIS EXAMPLE
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PENN MILLERS HOLDING CORPORATION
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SPECIAL MEETING OF SHAREHOLDERS
______, 2011
The shareholder of record hereby appoints F.
Kenneth Ackerman, Jr. and Michael O. Banks, and either of
them, with full power of substitution, as Proxies for the
shareholder, to attend the Special Meeting of Shareholders
of Penn Millers Holding Corporation (the Company), to
be held at the offices of Penn Millers Holding
Corporation, 72 North Franklin Street, Wilkes-Barre,
Pennsylvania 18701-1301 on ______, 2011 at
______ (Eastern Time), and any adjournments or
postponements thereof, and to vote all shares of the
common stock of the Company that the shareholder is
entitled to vote upon each of the matters referred to in
this Proxy and, at their discretion, upon such other
matters as may properly come before this meeting.
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Please be sure to date and sign
this proxy card in the box below.
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Date
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Sign above
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Co-holder (if any) sign above
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For
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Against
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Abstain
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1. To adopt
the Agreement and Plan of Merger, dated September 7, 2011, by and
among ACE American Insurance Company, Panther Acquisition Corp. and
Penn Millers Holding Corporation.
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For
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Against
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Abstain
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2.
To approve, on a non-binding advisory basis, the golden
parachute compensation that may be payable to the
Companys named executive officers in connection with the merger.
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For
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Against
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Abstain
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3.
To adjourn
the special meeting, if necessary or appropriate, to solicit
additional proxies to approve the proposal to adopt the merger
agreement.
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THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR
EACH OF THE LISTED PROPOSALS.
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS.
This Proxy, when properly executed, will be voted
in the manner directed herein by the shareholder of
record. If no direction is made, this Proxy will be
voted FOR all Proposals.
é
Detach above card, sign, date and mail in postage paid envelope provided.
é
PENN MILLERS HOLDING CORPORATION
PLEASE ACT PROMPTLY
PLEASE COMPLETE, DATE, SIGN, AND MAIL THIS PROXY CARD PROMPTLY
IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
Note: Please sign exactly as your name appears on this Proxy. If signing for estates,
trusts, corporations or partnerships, title or capacity should be stated. If shares are held
jointly, each holder should sign.
Important Notice Regarding the Availability of Proxy Materials for
Our Special Meeting of Shareholders to Be Held on ______, 2011
The
notice and proxy statement are available at
__________
IF YOUR ADDRESS HAS CHANGED, PLEASE CORRECT THE ADDRESS IN THE SPACE PROVIDED BELOW AND RETURN
THIS PORTION WITH THE PROXY IN THE ENVELOPE PROVIDED.
6717
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