ITEM 1.01. ENTRY INTO A MATERIAL DEFINITIVE AGREEMENT
Merger Agreement
On July 12, 2021, State Auto Financial Corporation, an Ohio corporation (“STFC”), and State Automobile Mutual Insurance Company, an Ohio mutual insurance company (“SAM”), entered into an
Agreement and Plan of Merger and Combination (the “Merger Agreement”) with Liberty Mutual Holding Company Inc., a Massachusetts mutual holding company (“LMHC”), Pymatuning, Inc., an Ohio corporation and wholly-owned indirect subsidiary of LMHC
(“Merger Sub I”), and Andover, Inc., an Ohio corporation and wholly-owned direct subsidiary of LMHC (“Merger Sub II”). The Merger Agreement provides for SAM to reorganize (in accordance with all applicable provisions of Sections 3913.25 to 3913.38
of the Ohio Revised Code) pursuant to a Plan of Reorganization adopted by the board of directors of SAM (the “SAM Board”), which reorganization shall be effectuated through a merger (pursuant to Section 3913.32(A) and Section 1702.411 of the Ohio
Revised Code and Section 19T(b)(ii) of Chapter 175 of the Massachusetts General Laws) of Merger Sub II with and into SAM, with SAM surviving such merger as an Ohio domiciled reorganized stock insurance subsidiary of LMHC (SAM, as so reorganized,
“Reorganized SAM”) and LMHC granting equity rights in LMHC to each SAM member upon the extinguishment of such SAM member’s equity rights in SAM at the effective time of such merger (the foregoing components of one simultaneous transaction,
collectively, the “SAM Transaction”). Simultaneously with the SAM Transaction, the Merger Agreement provides for LMHC to effect the acquisition of STFC through the merger of Merger Sub I with and into STFC (the “STFC Merger”) with STFC surviving the
STFC Merger as the surviving corporation (the STFC Merger, together with the SAM Transaction, the “Transactions”). Capitalized terms used but not otherwise defined in this Current Report on Form 8-K have the meanings set forth in the Merger
Agreement.
The SAM Transaction was unanimously approved by the SAM Board (upon the unanimous recommendation of a special committee of independent SAM directors). The STFC Merger was unanimously approved
by the STFC board of directors (upon the unanimous recommendation of a special committee of independent STFC directors (the “STFC Special Committee”)).
Pursuant to the Merger Agreement, each share of STFC’s common stock, no par value per share (each, a “Share”), that is issued and outstanding immediately prior to the effective time of the STFC
Merger (the “Effective Time”) (other than the SAM Owned Shares, the Cancelled Shares and the Dissenting Shares) shall be converted automatically into the right to receive an amount in cash, without interest, equal to $52.00 (the “Merger
Consideration”), and shall be automatically cancelled and retired and cease to exist.
The Merger Agreement contains certain provisions giving LMHC, SAM and STFC the right to terminate the Merger Agreement under certain circumstances. Subject to certain limitations, pursuant to
the Merger Agreement:
•
|
LMHC, SAM and STFC may terminate the Merger Agreement by mutual written consent, which consent shall have been approved by the action of their respective boards of directors;
|
•
|
LMHC, SAM or STFC may terminate the Merger Agreement if (a) any Governmental Authority shall have enacted any laws permanently preventing or otherwise permanently prohibiting the SAM
Transaction or the STFC Merger and such law shall have become final and nonappealable, (b) the SAM Member Approval shall not have been obtained following a vote thereon having been taken at the SAM Members Meeting, (c) the STFC Shareholder
Approval shall not have been obtained following a vote thereon having been taken at the STFC Shareholders Meeting or (d) the Transactions shall not have been consummated prior to May 12, 2022) (as such date may be extended by a period of
three months up to two times under certain circumstances);
|
•
|
STFC may terminate the Merger Agreement, prior to the receipt of the STFC Shareholder Approval, to enter into a definitive agreement to implement a Superior Proposal;
|
•
|
STFC or SAM may terminate the Merger Agreement if there has been a breach by LMHC, Merger Sub I or Merger Sub II of any representation, warranty, covenant or agreement contained in the
Merger Agreement to the extent such breach would result in the failure of a closing condition (subject to cure periods); and
|
•
|
LMHC may terminate the Merger Agreement if (a) prior to the receipt of the STFC Shareholder Approval, the STFC Special Committee makes an Adverse Recommendation Change, (b) STFC or SAM
willfully and materially breach certain covenants in the Merger Agreement relating to the SAM Member Meeting, the STFC Shareholder Meeting or the no-solicitation provisions set forth in the Merger Agreement or (c) STFC or SAM breaches any
representation, warranty, covenant or agreement in the Merger Agreement to the extent such breach would result in the failure of a closing condition (subject to cure periods).
|
Upon termination of the Merger Agreement, under specified circumstances, STFC (or, as applicable, SAM) may be required to pay a termination fee to LMHC in an aggregate amount of $70,793,307.
Pursuant to the Merger Agreement, LMHC has committed to (a) maintain the SAM and STFC Columbus, Ohio office location for a period of two years following the Closing Date (subject to LMHC’s
exercise of its business judgment to make such changes to the size or location of such office as it deems necessary and appropriate, based upon business needs), (b) continue to utilize the “State Auto” trademarks and brands associated with STFC’s
insurance products, either independently or in conjunction with trademarks and brands of LMHC, for a period of two years following the Closing Date and (c) substantially maintain certain of SAM and STFC’s philanthropic and charitable contributions
and activities for a period of five years following the Closing Date. In addition, pursuant to the Merger Agreement, for a two-year period following the Closing Date, (i) SAM shall not redomesticate or voluntarily adopt or enter into any plan of
complete or partial liquidation or dissolution and (ii) all of the issued and outstanding capital stock of Reorganized SAM shall be owned, at all times, directly or indirectly, by LMHC.
Pursuant to the Merger Agreement, LMHC must use reasonable best efforts to cause the SAM and STFC insurance companies to achieve an A.M. Best rating that is equivalent to the LMHC group rating
(including through the use of quota share reinsurance or reinsurance pooling arrangements and making any required filings with insurance regulators in connection therewith within ninety days of the date of the Merger Agreement). If the SAM and STFC
insurance companies have not achieved such rating by the Closing, then, pursuant to the Merger Agreement, LMHC shall commit to, no later than the end of the ninth month following the Closing, make any required filings with insurance regulators either
to enter into a financial guarantee, make a capital infusion, or take other reasonable steps to achieve such rating equivalence and, subject to receipt of required regulatory approvals, implement such measures. Pursuant to the Merger Agreement, if
the SAM and STFC insurance companies have not achieved such rating equivalence by the Closing, an advisory board comprised of three current members of the SAM Board shall be established. Such advisory board, pursuant to the Merger Agreement, would
then have the ability to provide advice and make recommendations to LMHC with respect to LMHC’s compliance of its covenant regarding the ratings equivalence set forth in the Merger Agreement, and would be dissolved once such ratings equivalence has
been achieved. Lastly, pursuant to the Merger Agreement, if the SAM and STFC insurance companies have not achieved such rating equivalence by the Closing, LMHC shall cause Reorganized SAM to not pay any dividends.
The closing of the Transactions is conditioned upon the SAM Member Approval having been obtained, the STFC Shareholder Approval having been obtained, the parties obtaining certain specified
governmental and regulatory approvals and other customary conditions to closing. The Transactions are expected to close in 2022.
Pursuant to the Merger Agreement, effective upon the Effective Time, (i) each restricted stock award (each, a “STFC RSA”) that is outstanding immediately prior to the Effective Time, whether
vested or unvested, shall become fully vested, in the case of a time-based vesting STFC RSA, or become vested at the target level of performance, in the case of a performance based vesting STFC RSA, and shall automatically be converted, to the extent
vested after giving effect to this clause, into the right to receive the Merger Consideration; (ii) each STFC restricted stock unit (each, a “STFC RSU”) that is outstanding immediately prior to the Effective Time, whether vested or unvested, shall
become fully vested, in the case of a time-based vesting STFC RSU, or become vested at the target level of performance, in the case of a performance based vesting STFC RSU, and shall be automatically converted, to the extent vested after giving
effect to this clause, into the right to receive a lump-sum amount in cash, without interest, equal to the product of (A) the Merger Consideration and (B) the number of Shares subject to such STFC RSU; (iii) each option to acquire Shares (each, a
“STFC Stock Option”) that is outstanding immediately prior to the Effective Time shall, whether vested or unvested, be deemed to be fully vested and shall be cancelled and converted into the right to receive a lump-sum amount in cash, without
interest, equal to the product of (A) the excess, if any, of (1) the Merger Consideration, over (2) the per share exercise price of such STFC Stock Option, multiplied by (B) the total number of Shares subject
to such STFC Stock Option immediately prior to the Effective Time; and (iv) each STFC cash-based performance award unit (each, a “STFC PAU”) that is outstanding immediately prior to the Effective Time shall become vested at the target level of
performance, and shall automatically be cancelled and converted into the right to receive a lump-sum amount in cash, without interest, equal to $1.00 and such amount shall be in full satisfaction of such STFC PAU.
The foregoing description of the Merger Agreement is qualified in its entirety by reference to the complete text of the Merger Agreement, a copy of which is filed herewith as Exhibit 2.1 and is
incorporated herein by reference, and is intended to provide investors and security holders with information regarding its terms. It is not intended to provide any other factual information about STFC, SAM, LMHC, Merger Sub I or Merger Sub II. The
Merger Agreement contains representations and warranties that the parties to the Merger Agreement made to, and solely for the benefit of, each other. Any inaccuracies in such representations and warranties are subject to waiver by such parties in
accordance with the Merger Agreement without notice or liability to any other person. In addition, some representations and warranties may have been included in the Merger Agreement for the purpose of allocating risk between STFC, SAM, LMHC, Merger
Sub I or Merger Sub II, rather than to establish matters as facts. Persons other than the parties to the Merger Agreement should not rely on the representations and warranties as characterizations of the actual state of facts or circumstances as of
the date of the Merger Agreement or as of any other date.
Voting Agreement
On the date of, but following, the execution of the Merger Agreement, SAM entered into a voting and support agreement (the “Voting Agreement”) with LMHC. As of the date hereof, SAM
beneficially owns approximately 58.8% of the issued and outstanding Shares. Pursuant to the Voting Agreement, SAM has agreed, among other things, to vote its Shares at the STFC Shareholders Meeting (i) in favor of (a) the adoption of the Merger
Agreement and (b) any proposal to adjourn or postpone the STFC Shareholders Meeting if there are insufficient Shares represented to constitute the necessary quorum; and (ii) against (a) any Takeover Proposal, (b) any action, proposal, transaction, or
agreement which would reasonably be expected to result in a breach of any representation, warranty, covenant or agreement of SAM or STFC under the Merger Agreement or of SAM under the Voting Agreement, and (c) any action, proposal, transaction, or
agreement that would reasonably be expected to prevent or materially delay or materially impair consummation of the STFC Merger.
The obligations and rights of the parties under the Voting Agreement shall terminate upon the earliest of: (a) the Effective Time; (b) the date on which the Merger Agreement is terminated in
accordance with its terms; and (c) the termination of the Voting Agreement by mutual consent of the parties.
The foregoing description of the Voting Agreement is qualified in its entirety by reference to the complete text of the Voting Agreement, a copy of which is filed herewith as Exhibit 99.1 and
is incorporated herein by reference.