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. )
Filed by the Registrant
þ
Filed by a Party other than the Registrant
o
Check the appropriate box:
þ
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 under §240.14a-12
First Mercury Financial 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):
o
No fee required.
þ
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: Common Stock, par value $0.01 per share, of First Mercury financial Corporation (the Company)
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(2)
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Aggregate number of securities to which transaction applies: 18,202,710 shares of the Companys common stock (which includes 277,995 shares of restricted common stock and 450,350 shares issuable upon exercise of outstanding options)
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(3)
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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): 18,202,710 shares of the Companys common stock multiplied by the merger consideration of $16.50 per share
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(4)
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Proposed maximum aggregate value of transaction:
$300,344,715
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Total fee paid:
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$21,414.58
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Fee paid previously with preliminary materials.
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o
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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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(3)
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Filing Party:
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(4)
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Date Filed:
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FIRST
MERCURY FINANCIAL CORPORATION
29110
Inkster Road, Suite 100
Southfield, MI 48034
Telephone
(248) 358-4010
[ ],
2010
Dear Fellow Stockholder:
We cordially invite you to attend a special meeting of the
stockholders of First Mercury Financial Corporation, which we
refer to as the Company, to be held on [ ],
2011, at [ ] p.m., local time, at the
corporate offices of the Company located at 29110 Inkster Road,
Suite 100, Southfield, MI 48034.
At the special meeting, you will be asked to approve the
adoption of the Agreement and Plan of Merger, dated as of
October 28, 2010, as it may be amended from time to time,
which we refer to as the merger agreement, among Fairfax
Financial Holdings Limited, which we refer to as Fairfax,
Fairfax Investments III USA Corp., an indirect wholly owned
subsidiary of Fairfax, which we refer to as Merger Sub, and the
Company, pursuant to which Merger Sub will be merged with and
into the Company and the Company will continue as the surviving
corporation. We refer to this transaction as the merger.
Following the merger, the Company will be a subsidiary of
Fairfax.
If the merger is completed, you will be entitled to receive
$16.50 in cash, without interest, less any applicable
withholding taxes, for each share of the Companys common
stock owned by you.
The board of directors of the Company has unanimously determined
that the merger is fair to, and in the best interests of, the
Companys stockholders, approved and declared advisable the
merger agreement and resolved to recommend that the stockholders
adopt the merger agreement. The board of directors made its
recommendation after consultation with its independent legal and
financial advisers and consideration of a number of factors.
The board of directors unanimously recommends that you vote
FOR approval of the proposal to adopt the merger
agreement and FOR approval of the proposal to
adjourn the special meeting, if necessary or appropriate, to
solicit additional proxies.
Approval of the proposal to adopt the merger agreement requires
the affirmative vote of holders of a majority of the outstanding
shares of the Companys common stock entitled to vote
thereon.
Your vote is very important.
Whether or not
you plan to attend the special meeting, please complete, date,
sign and return, as promptly as possible, the enclosed proxy
card in the accompanying prepaid reply envelope, or submit your
proxy by telephone or through the Internet. If you attend the
special meeting and vote in person, your vote by ballot will
revoke any proxy previously submitted.
The failure to vote
will have the same effect as a vote against approval of the
proposal to adopt the merger agreement
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If your shares of common stock of the Company are held in street
name by your bank, brokerage firm or other nominee, your bank,
brokerage firm or other nominee will be unable to vote your
shares of common stock of the Company without instructions from
you. You should instruct your bank, brokerage firm or other
nominee as to how to vote your shares of the Companys
common stock, following the procedures provided by your bank,
brokerage firm or other nominee.
The failure to instruct your
bank, brokerage firm or other nominee to vote your shares of the
Companys common stock FOR approval of the
proposal to adopt the merger agreement will have the same effect
as voting against the proposal to adopt the merger agreement.
The accompanying proxy statement provides you with detailed
information about the special meeting, the merger agreement and
the merger. A copy of the merger agreement is attached as
Annex A
to the proxy statement. We encourage you to
read the entire proxy statement and its annexes, including the
merger agreement, carefully. You may also obtain additional
information about the Company from documents we have filed with
the Securities and Exchange Commission.
If you have any questions or need assistance voting your shares
of common stock of the Company, please call
[ ], the Companys proxy solicitor,
toll-free at [ ] (banks and brokers call
collect at [ ] ).
Thank you in advance for your cooperation and continued support.
Sincerely,
Richard H. Smith
Chairman, President and Chief Executive Officer
This proxy statement is dated [ ], 2010, and is
first being mailed to the Companys stockholders on or
about [ ], 2010.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THE MERGER,
PASSED UPON THE MERITS OR FAIRNESS OF THE MERGER AGREEMENT OR
THE TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE MERGER, OR
PASSED UPON THE ADEQUACY OR ACCURACY OF THE INFORMATION
CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
FIRST
MERCURY FINANCIAL CORPORATION
29110
Inkster Road, Suite 100
Southfield, MI 48034
Telephone
(248) 358-4010
NOTICE OF SPECIAL
MEETING
A special meeting of the stockholders of First Mercury Financial
Corporation, which we refer to as the Company, will be held at
the corporate offices of the Company located at 29110 Inkster
Road, Suite 100, Southfield, MI 48034, on
[ ], 2011, at [ ] p.m.,
local time, for the following purposes:
1. To consider and vote on a proposal to adopt the
Agreement and Plan of Merger, dated as of October 28, 2010,
as it may be amended from time to time, which we refer to as the
merger agreement, among Fairfax Financial Holdings Limited, a
Canadian corporation, which we refer to as Fairfax, Fairfax
Investments III USA Corp., a Delaware corporation and an
indirect wholly owned subsidiary of Fairfax, which we refer to
as Merger Sub, and the Company. A copy of the merger agreement
is attached as
Annex A
to the accompanying proxy
statement.
2. To consider and vote on 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.
3. To transact any other business that may properly come
before the special meeting, or any adjournment or postponement
of the special meeting, by or at the direction of the board of
directors of the Company.
Stockholders of record at the close of business on
[ ], 2010, the record date fixed by the board
of directors for the special meeting, are entitled to notice of,
and to vote at, such meeting.
STOCKHOLDERS, WHETHER OR NOT THEY EXPECT TO ATTEND THE SPECIAL
MEETING IN PERSON, ARE REQUESTED TO COMPLETE, DATE, SIGN AND
RETURN THE ENCLOSED FORM OF PROXY IN THE ACCOMPANYING
POSTAGE PAID AND PRE-ADDRESSED ENVELOPE OR TO VOTE BY TELEPHONE
OR THROUGH THE INTERNET. THE PROXY IS REVOCABLE AT ANY TIME
PRIOR TO THE EXERCISE THEREOF AT THE SPECIAL MEETING BY WRITTEN
NOTICE TO THE COMPANY, AND STOCKHOLDERS WHO ARE PRESENT AT THE
MEETING MAY WITHDRAW THEIR PROXIES AND VOTE IN PERSON IF THEY SO
DESIRE.
By Order of the Board of Directors,
Richard H. Smith
Chairman, President & Chief Executive Officer
Dated: [ ], 2010
Southfield, Michigan
TABLE OF
CONTENTS
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Page
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1
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7
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15
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16
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16
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16
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16
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16
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21
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21
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32
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35
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35
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42
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44
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44
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44
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50
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52
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53
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54
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62
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Page
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63
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63
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63
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64
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65
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69
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70
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71
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75
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75
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75
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Agreement and Plan of Merger, dated as of October 28, 2010,
among Fairfax Financial Holdings Limited, Fairfax
Investments III USA Corp. and First Mercury Financial
Corporation
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A-1
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Opinion of Merrill Lynch, Pierce, Fenner & Smith
Incorporated, dated October 27, 2010
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B-1
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Voting Agreement, dated as of October 28, 2010, executed by
Richard H. Smith
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C-1
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Voting Agreement, dated as of October 28, 2010, executed by
Jerome M. Shaw.
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D-1
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Section 262 of the General Corporation Law of the State of
Delaware
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E-1
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ii
QUESTIONS
AND ANSWERS ABOUT THE SPECIAL MEETING AND THE MERGER
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 stockholder of the Company. 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,
all of which you should read carefully. You may obtain the
information incorporated by reference in this proxy statement
without charge by following the instructions under Where
You Can Find More Information beginning on
page 75.
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Q.
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Why am I receiving this document?
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A.
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First Mercury Financial Corporation, which we refer to as the
Company, us, our or we, has agreed to be acquired by Fairfax
Financial Holdings Limited, or Fairfax, pursuant to the terms of
the merger agreement described in this proxy statement. A copy
of the merger agreement is attached to this proxy statement as
Annex A
. The Companys stockholders must vote
to adopt the merger agreement before the transactions
contemplated by the merger agreement can be completed, and the
Company is holding a special meeting of its stockholders so that
its stockholders may vote with respect to the adoption of the
merger agreement.
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You are receiving this proxy statement because you own shares of
the Companys common stock. This proxy statement contains
important information about the proposed transaction and the
special meeting, and you should read it carefully. The enclosed
proxy statement allows you to vote your shares of the
Companys common stock without attending the special
meeting in person.
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Your vote is extremely important, and we encourage you to
vote as soon as possible.
For more information on how to
vote your shares of the Companys common stock, please see
the section of this proxy statement entitled The Special
Meeting beginning on page 16.
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Q.
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What is the proposed transaction and what effects will it
have on the Company?
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A.
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The proposed transaction is the acquisition of the Company by
Fairfax pursuant to the merger agreement. If the proposal to
adopt the merger agreement is approved by our stockholders and
the other closing conditions under the merger agreement have
been satisfied or waived, Fairfax Investments III USA
Corp., or Merger Sub, an indirect wholly owned subsidiary of
Fairfax, will merge with and into the Company, with the Company
continuing as the surviving corporation. We refer to this
transaction as the merger. As a result of the merger, the
Company will become a subsidiary of Fairfax and will no longer
be a publicly-held corporation. In addition, as a result of the
merger, our common stock will be delisted from the New York
Stock Exchange, or NYSE, and deregistered under the Securities
Exchange Act of 1934, as amended, or the Exchange Act, we will
no longer file periodic reports with the Securities and Exchange
Commission, or SEC, on account of our common stock and you will
no longer have any interest in our future earnings or growth.
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Q.
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What will I receive if the merger is completed?
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A.
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Upon completion of the merger, you will be entitled to receive
$16.50 in cash, without interest, which amount we refer to as
the merger consideration, less any applicable withholding taxes,
for each share of the Companys common stock that you own,
unless you properly exercise, and do not withdraw, your
appraisal rights under the Delaware General Corporation Law, or
the DGCL, with respect to such shares. For example, if you own
100 shares of the Companys common stock, you will
receive $1,650 in cash in exchange for your shares of the
Companys common stock, less any applicable withholding
taxes. Upon consummation of the merger, you will not own any
shares of the capital stock of the surviving corporation.
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Q.
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How does the merger consideration compare to the market price
of the Companys common stock prior to the announcement of
the merger?
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A.
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The merger consideration represents a premium of 45.2% to the
closing price of the Companys common stock on
October 28, 2010, the last trading day prior to the public
announcement of the merger agreement, and a premium of 67.3% to
closing price of the Companys common stock 30 days
prior to the announcement of the transaction on October 28,
2010.
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Q.
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Will I still be paid dividends on my shares of the
Companys common stock prior to the merger?
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A.
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No. The merger agreement does not permit the Company to pay
any additional dividends on its common stock.
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Q.
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When do you expect the merger to be completed?
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A.
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We are working towards completing the merger as soon as
possible. Assuming timely satisfaction of necessary closing
conditions, we anticipate that the merger will be completed in
the first quarter of 2011. If our stockholders vote to approve
the proposal to adopt the merger agreement, the merger will
become effective as promptly as practicable following the
satisfaction or waiver of the other conditions to the merger.
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Q.
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What happens if the merger is not completed?
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A.
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If the merger agreement is not adopted by the stockholders of
the Company or if the merger is not completed for any other
reason, the stockholders of the Company will not receive any
payment for their shares of the Companys common stock in
connection with the merger. Instead, the Company will remain an
independent public company and the common stock will continue to
be listed and traded on the NYSE. Under specified circumstances,
the Company may be required to reimburse Fairfax for its
expenses or pay Fairfax a fee with respect to the termination of
the merger agreement, as described under The Merger
Agreement Termination Fee beginning on
page 65.
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Q.
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Is the merger expected to be taxable to me?
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A.
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The exchange of shares of common stock for cash pursuant to the
merger generally will be a taxable transaction for U.S. federal
income tax purposes. If you are a U.S. holder, as
defined under The Merger Material U.S. Federal
Income Tax Consequences of the Merger, you will generally
recognize gain or loss in an amount equal to the difference, if
any, between the cash payments made pursuant to the merger and
your adjusted tax basis in your shares of the Companys
common stock. If you are a
non-U.S.
holder, as defined under The Merger
Material U.S. Federal Income Tax Consequences of the
Merger, any gain that you realize generally will not be
subject to U.S. federal income tax, subject to certain
exceptions discussed in that section. You should read The
Merger Material U.S. Federal Income Tax Consequences
of the Merger beginning on page 50, which provides a
discussion of the U.S. federal income tax consequences of the
merger for U.S. holders and
non-U.S.
holders. You should also consult your tax adviser for a
complete analysis of the effect of the merger on your U.S.
federal, state, local and foreign taxes.
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Q:
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Do any of the Companys directors or officers have
interests in the merger that may differ from or be in addition
to my interests as a stockholder?
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A:
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Yes. In considering the recommendation of the board of directors
to vote in favor of the adoption of the merger agreement, you
should be aware that the Companys directors and officers
have interests in the merger that are different from, or in
addition to, the interests of our stockholders generally. The
board of directors was aware of and considered these interests,
among other matters, in evaluating and negotiating the merger
agreement and the merger, and in recommending that the merger
agreement be adopted by the stockholders of the Company. See
The Merger Interests of Certain Persons in the
Merger beginning on page 44.
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Q.
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When and where is the special meeting?
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A.
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The special meeting of stockholders of the Company will be held
on [], 2011, at [] p.m., local time, at the
corporate offices of the Company located at 29110 Inkster Road,
Suite 100, Southfield, Michigan 48034.
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Q.
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What am I being asked to vote on at the special meeting?
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A.
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You are being asked to consider and vote on proposals to adopt
the merger agreement and 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.
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Q.
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What vote is required for the Companys stockholders to
approve the proposal to adopt the merger agreement?
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A.
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The adoption of the merger agreement requires the affirmative
vote of the holders of a majority of the outstanding shares of
our common stock entitled to vote thereon.
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Because the affirmative vote required to approve the proposal to
adopt the merger agreement is based upon the total number of
outstanding shares of our common stock, failing to submit a
proxy or vote in person at the special meeting, abstaining from
the vote or failing to provide your bank, broker or other
nominee with
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instructions as to how to vote your shares will each have the
same effect as a vote against the proposal to adopt the merger
agreement.
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Q.
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What vote of our stockholders is required to approve the
proposal to adjourn the special meeting, if necessary or
appropriate, to solicit additional proxies?
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A.
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Approval of the proposal to adjourn the special meeting, if
necessary or appropriate, for the purpose of soliciting
additional proxies requires the affirmative vote of the holders
of a majority of the shares of common stock present in person or
represented by proxy and entitled to vote on the matter at the
special meeting, whether or not a quorum is present.
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Abstaining will have the same effect as a vote against the
proposal to adjourn the special meeting, if necessary or
appropriate, for the purpose of soliciting additional proxies.
If your shares of common stock are held through a bank,
brokerage firm or other nominee and you do not instruct your
bank, brokerage firm or other nominee as to how to vote your
shares of common stock, your shares of common stock will not be
voted, and this will not have any effect on the proposal to
adjourn the special meeting.
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Q.
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How does the board of directors recommend that I vote?
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A.
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The board of directors unanimously recommends that you vote
FOR
the proposal to adopt the merger
agreement and
FOR
the proposal to adjourn the
special meeting, if necessary or appropriate, to solicit
additional proxies.
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Q.
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How many votes are already committed to be voted in favor of
the adoption of the merger agreement?
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A.
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Pursuant to voting agreements, each dated as of October 28,
2010, between Fairfax and each of Richard H. Smith and Jerome M.
Shaw, which we refer to collectively as the voting agreements,
Messrs. Smith and Shaw, solely in their capacities as
stockholders, agreed, among other things, to vote in favor of
the proposal to adopt the merger agreement and against any
action, agreement, transaction or proposal that would result in
a material breach by the Company of any provision of the merger
agreement. See the section entitled Voting
Agreements beginning on page 68 for more information.
As of [Record Date], 2010, the record date for the special
meeting, Messrs. Smith and Shaw collectively were entitled
to vote 2,940,330 shares, or approximately 16.6%, of the
Companys outstanding common stock.
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Q.
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Who can vote at the special meeting?
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A.
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Stockholders of record as of the close of business on the record
date are entitled to receive notice of, and to vote at, the
special meeting. Each record holder of shares of our common
stock as of the record date is entitled to cast one vote on each
matter properly brought before the special meeting for each
share of common stock that such holder owns as of the record
date.
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Q.
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What is a quorum?
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A.
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A majority of the shares of our common stock outstanding at the
close of business on the record date and entitled to vote,
present in person or represented by proxy, at the special
meeting constitutes a quorum for the purposes of the special
meeting. Abstentions and broker non-votes are counted as present
for the purpose of establishing a quorum.
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Q.
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How do I vote?
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A.
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If you are a stockholder of record as of the record date, you
may vote your shares on matters presented at the special meeting
in any of the following ways:
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in person you may attend the
special meeting and cast your vote there;
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by proxy stockholders of record
have a choice of voting by proxy:
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over the Internet (the website address for
Internet voting is printed on your proxy card);
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by using the toll-free telephone number noted
on your proxy card; or
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by signing, dating and returning the enclosed
proxy card in the accompanying prepaid reply envelope.
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If you are a beneficial owner of shares of our common stock as
of the record date, please refer to the instructions provided by
your bank, brokerage firm or other nominee to see which of the
above choices are available to you. Please note that if you are
a beneficial owner and wish to vote in person at the special
meeting, you must have a legal proxy from your bank, brokerage
firm or other nominee.
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The control number located on your proxy card is designed to
verify your identity and allow you to vote your shares of our
common stock, and to confirm that your voting instructions have
been properly recorded when voting over the Internet or by
telephone.
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Q.
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What is the difference between being a stockholder of
record and a beneficial owner?
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A.
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If your shares of our common stock are registered directly in
your name with our transfer agent, Computershare
Trust Company, N.A., you are considered, with respect to
those shares of common stock, the stockholder of
record. In that case, this proxy statement, and your proxy
card, have been sent directly to you by the Company.
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If your shares of common stock are held through a bank,
brokerage firm or other nominee, you are considered the
beneficial owner of shares of our common stock held in street
name. In that case, this proxy statement has been forwarded to
you by your bank, brokerage firm or other nominee which may be,
with respect to those shares of common stock, the stockholder of
record. As the beneficial owner, you have the right to direct
your bank, brokerage firm or other nominee as to how to vote
your shares of common stock by following their instructions for
voting.
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Q.
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If my shares of common stock are held in street name by my
bank, brokerage firm or other nominee, will my bank, brokerage
firm or other nominee vote my shares of common stock for me?
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A.
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Your bank, brokerage firm or other nominee will only be
permitted to vote your shares of common stock of the Company if
you instruct your bank, brokerage firm or other nominee as to
how to vote. You should follow the procedures provided by your
bank, brokerage firm or other nominee regarding the voting of
your shares of the Companys common stock. If you do not
instruct your bank, brokerage firm or other nominee as to how to
vote your shares of the Companys common stock, your shares
of the Companys common stock will not be voted and that
will be the same as a vote against the proposal to adopt the
merger agreement and will have no effect on the proposal to
adjourn the special meeting, if necessary or appropriate, to
solicit additional proxies.
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Q.
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What is a proxy?
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A.
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A proxy is your legal designation of another person, who is also
referred to as a proxy, to vote your shares of common stock.
This written document describing the matters to be considered
and voted on at the special meeting is called a proxy statement.
The document used to designate a proxy to vote your shares of
stock is called a proxy card.
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Q.
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If a stockholder gives a proxy, how are the shares of common
stock voted?
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A.
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Regardless of the method you choose to vote, the individuals
named on the enclosed proxy card, or your proxies, will vote
your shares of common stock in the way that you indicate. When
completing the Internet or telephone processes or the proxy
card, you may specify whether your shares of 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.
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If you properly sign your proxy card but do not mark the boxes
indicating how your shares 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 and
FOR
the proposal to adjourn the
special meeting, if necessary or appropriate, to solicit
additional proxies.
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Q.
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Can I change or revoke my vote?
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A.
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You have the right to revoke a proxy, whether delivered over the
Internet, by telephone or by mail, at any time before it is
exercised, by voting again at a later date through any of the
methods available to you, by giving written notice of revocation
to our Corporate Secretary, which must be filed with our
Corporate Secretary by the time the special meeting begins, or
by attending the special meeting and voting in person.
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Q.
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What happens if I do not vote or submit a proxy card, or do
not instruct my bank, broker or other nominee as to how to vote,
or abstain from voting?
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A.
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If you fail to vote, either in person or by proxy, or fail to
instruct your bank, broker or other nominee as to how to vote,
it will have the same effect as a vote cast against the proposal
to adopt the merger agreement and will have no effect on the
proposal to adjourn the special meeting, if necessary or
appropriate, to solicit additional proxies. Abstaining will have
the same effect as a vote against the proposal to adopt the
merger agreement and the same effect as a vote against the
proposal to adjourn the special meeting, if necessary or
appropriate, to solicit additional proxies.
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Q.
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What do I do if I receive more than one proxy or set of
voting instructions?
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A.
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If you hold shares of our common stock in street name, or
through more than one bank, brokerage firm or other nominee, and
also directly as a record holder or otherwise, you may receive
more than one proxy or set of voting instructions relating to
the special meeting. These should each be voted and returned
separately in accordance with the instructions provided in this
proxy statement in order to ensure that all of your shares of
our common stock are voted.
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Q.
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What happens if I sell my shares of the Companys common
stock before the special meeting?
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A.
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The record date for stockholders entitled to vote at the special
meeting is prior to both the date of the special meeting and the
consummation of the merger. If you transfer your shares of
common stock before the record date, you will not be entitled to
vote at the special meeting and will not be entitled to receive
the merger consideration. If you transfer your shares of common
stock after the record date but before the special meeting you
will, unless special arrangements are made, retain your right to
vote at the special meeting but will transfer the right to
receive the merger consideration to the person to whom you
transfer your shares. The person to whom you transfer your
shares of the Companys common stock after the record date
will not have a right to vote those shares at the special
meeting.
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Q.
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Who will solicit and pay the cost of soliciting proxies?
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A.
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The Company has engaged [Proxy Solicitor] to assist in the
solicitation of proxies for the special meeting. The Company
estimates that it will pay [Proxy Solicitor] a fee of
approximately $[ ]. The Company
will reimburse [Proxy Solicitor] for reasonable
out-of-pocket
expenses and will indemnify [Proxy Solicitor] and its affiliates
against certain claims, liabilities, losses, damages and
expenses. The Company also will reimburse banks, brokers and
other custodians, nominees and fiduciaries representing
beneficial owners of shares of the Companys common stock
for their expenses in forwarding soliciting materials to
beneficial owners of the Companys 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.
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Q.
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What do I need to do now?
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A.
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Even if you plan to attend the special meeting, after carefully
reading and considering the information contained in this proxy
statement, please vote promptly to ensure that your shares are
represented at the special meeting. If you hold your shares of
the Companys common stock in your own name as the
stockholder of record, please vote your shares of the
Companys common stock by completing, signing, dating and
returning the enclosed proxy card in the accompanying prepaid
reply envelope, by using the telephone number printed on your
proxy card or by following the Internet voting instructions
printed on your proxy card. If you decide to attend the special
meeting and vote in person, your vote by ballot at the special
meeting will revoke any proxy previously submitted. If you are a
beneficial owner of shares of the Companys common stock,
please refer to the instructions provided by your bank,
brokerage firm or other nominee to see which of the above
choices are available to you.
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Q.
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Should I send in my stock certificates now?
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A.
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No. You will receive a letter of transmittal shortly after
the completion of the merger describing how you may exchange
your shares of the Companys common stock for the merger
consideration. If your shares of common
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stock are held in street name by your bank, brokerage firm or
other nominee, you will receive instructions from your bank,
brokerage firm or other nominee as to how to effect the
surrender of your street name shares of the Companys
common stock in exchange for the merger consideration. Please do
NOT return your stock certificate(s) with your proxy.
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Q.
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Am I entitled to exercise appraisal rights under the DGCL
instead of receiving the merger consideration for my shares of
the Companys common stock?
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A.
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Yes. As a holder of the Companys common stock, you are
entitled to appraisal rights under the DGCL with respect to any
or all of your shares of the Companys common stock in
connection with the merger if you take certain actions and meet
certain conditions. See Appraisal Rights beginning
on page 71.
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Q.
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Who can help answer my other questions?
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A.
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If you have additional questions about the merger, need
assistance in submitting your proxy or voting your shares of the
Companys common stock, or need additional copies of the
proxy statement or the enclosed proxy card, please contact:
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[PROXY SOLICITOR],
[ ]
[ ]
[ ]
[ ]
For media inquiries, please contact:
First Mercury Financial Corporation
29110 Inkster Road, Suite 100
Southfield, MI 48034
Attention:
[ ]
6
SUMMARY
The following summary highlights selected information in this
proxy statement and may not contain all the information that may
be important to you. Accordingly, we encourage you to read
carefully this entire proxy statement, its annexes and the
documents referred to in this proxy statement. Each item in this
summary includes a page reference directing you to a more
complete description of that topic. You may obtain the
information incorporated by reference in this proxy statement
without charge by following the instructions under Where
You Can Find More Information beginning on page 75.
Parties
to the Merger (Page 16)
First Mercury Financial Corporation, which we refer to as the
Company, we, us or our, provides insurance products and services
primarily to the specialty commercial insurance markets,
focusing on niche and underserved segments where it believes
that it has underwriting expertise and other competitive
advantages. The Company offers insurance products through its
distribution subsidiaries:
CoverX
®
,
FM Emerald and AMC, which are recognized brands among insurance
producers.
Fairfax Financial Holdings Limited, which we refer to as
Fairfax, a Canadian corporation headquartered in Toronto,
Canada, is a financial services holding company which, through
its subsidiaries, is engaged in property and casualty insurance
and reinsurance and investment management.
Fairfax Investments III USA Corp., or Merger Sub, a
Delaware corporation, is an indirect wholly owned subsidiary of
Fairfax and was formed by Fairfax solely for purposes of
entering into the merger agreement and completing the
transactions contemplated by the merger agreement. Upon
completion of the merger, Merger Sub will be merged with and
into the Company and will cease to exist.
In this proxy statement, we refer to the Agreement and Plan of
Merger, dated as of October 28, 2010, as it may be amended
from time to time, among Fairfax, Merger Sub and the Company, as
the merger agreement, and the merger of Merger Sub with and into
the Company pursuant to the merger agreement as the merger.
The
Merger (Page 21)
The merger agreement provides that Merger Sub will merge with
and into the Company. The Company will be the surviving
corporation in the merger and will continue to do business
following the merger, as a subsidiary of Fairfax. As a result of
the merger, the Company will cease to be a publicly-traded
company. If the merger is completed, you will not own any shares
of the capital stock of the surviving corporation.
Merger
Consideration (Page 21)
In the merger, each issued and outstanding share of our common
stock, par value $0.01 per share (except for shares owned by
Fairfax, shares held by the Company in treasury, or any of their
respective subsidiaries, shares owned by stockholders who
properly exercise appraisal rights under the DGCL and shares of
the Companys restricted stock), will be cancelled and
converted into the right to receive $16.50 in cash, without
interest, which amount we refer to as the merger consideration,
less any applicable withholding taxes.
The
Special Meeting (Page 16)
Time,
Place and Purpose of the Special Meeting
(Page 16)
The special meeting will be held on
[ ],
2011, starting at [ ] p.m., local time, at the
corporate offices of the Company located at 29110 Inkster Road,
Suite 100, Southfield, Michigan 48034.
At the special meeting, holders of our common stock will be
asked to approve the proposal to adopt the merger agreement, and
to approve any adjournment of the special meeting, if necessary
or appropriate, 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.
7
Record
Date and Quorum (Page 17)
You are entitled to receive notice of, and to vote at, the
special meeting if you owned shares of the Companys common
stock as of the close of business on
[ ],
2010, the record date for the special meeting, which we refer to
as the record date. You will have one vote for each share of
common stock that you owned on the record date. As of the record
date, there were
[ ] shares
of common stock outstanding and entitled to vote at the special
meeting. A majority of the shares of common stock outstanding at
the close of business on the record date and entitled to vote,
present in person or represented by proxy at the special meeting
constitutes a quorum for purposes of the special meeting.
Vote
Required (Page 17)
Approval of the proposal to adopt the merger agreement requires
the affirmative vote of the holders of a majority of the
outstanding shares of the Companys common stock entitled
to vote thereon.
Approval of the proposal to adjourn the special meeting, if
necessary or appropriate, for the purpose of soliciting
additional proxies requires the affirmative vote of holders of a
majority of the shares of the Companys common stock
present in person or represented by proxy and entitled to vote
on the matter at the special meeting, whether or not a quorum is
present.
Concurrently with the execution and delivery of the merger
agreement, Richard H. Smith, the Chairman, President and Chief
Executive Officer of the Company, and Jerome M. Shaw, a director
of the Company, each solely in his capacity as a stockholder of
the Company, entered into a voting agreement with Fairfax with
respect to their respective shares of the Companys common
stock. We refer to these agreements as the voting agreements.
Their shares constituted approximately 16.6% of the total issued
and outstanding shares of Companys common stock as of
October 28, 2010. Pursuant to the voting agreements,
Messrs. Smith and Shaw (i) have agreed to vote, or
cause to be voted, their shares of Company common stock in favor
of the approval of the merger agreement and the transactions
contemplated thereby, against any action, agreement, transaction
or proposal including any takeover proposal as
defined in the merger agreement that would result in a material
breach by the Company under the merger agreement or a failure of
any condition to the Companys obligations under the merger
agreement to be satisfied and in favor of any other matter
necessary to the consummation of the transactions contemplated
by the merger agreement and (ii) have granted Fairfax an
irrevocable proxy to vote their shares in accordance with the
foregoing if Messrs. Smith and Shaw fail to do so.
Proxies
and Revocation (Page 19)
Any stockholder of record entitled to vote at the special
meeting may submit a proxy by telephone, over the Internet, or
by returning the enclosed proxy card in the accompanying prepaid
reply envelope, or may vote in person by appearing at the
special meeting. If your shares of the Companys common
stock are held in street name by your bank, broker or other
nominee, you should instruct your bank, broker or other nominee
on how to vote your shares of the Companys common stock
using the instructions provided by your bank, broker or other
nominee. If you fail to submit a proxy or to vote in person at
the special meeting, or do not provide your bank, broker or
other nominee with instructions, as applicable, your shares of
the Companys common stock will not be voted on the
proposal to adopt the merger agreement, which will have the same
effect as a vote against the proposal to adopt the merger
agreement, and your shares of common stock will not have any
effect on the proposal to adjourn the special meeting.
You have the right to revoke a proxy, whether delivered over the
Internet, by telephone or by mail, at any time before it is
exercised, by voting again at a later date through any of the
methods available to you, by giving written notice of revocation
to our Corporate Secretary, which must be filed with our
Corporate Secretary before the special meeting begins, or by
attending the special meeting and voting in person.
Background
of the Merger (Page 21)
A description of the actions that led to the execution of the
merger agreement, including our discussions with Fairfax, is
included under the section entitled The Merger
Background of the Merger below, which begins on
page 21.
8
Reasons
for the Merger; Recommendation of the Board of Directors
(Page 32)
After careful consideration, the board of directors unanimously
(i) determined that the merger is fair to, and in the best
interests of, the Companys stockholders,
(ii) approved and declared advisable the merger agreement
and (iii) directed that the merger agreement be submitted
for consideration by the stockholders of the Company at a
special meeting of stockholders and resolved to recommend that
our stockholders vote to adopt the merger agreement. For the
factors considered by the board of directors in reaching its
decision to approve the merger agreement, please see the section
entitled The Merger Reasons for the
Merger below, which begins on page 32.
The board of directors unanimously recommends that you vote
FOR
the proposal to adopt the merger
agreement and
FOR
the proposal to adjourn the
special meeting, if necessary or appropriate, to solicit
additional proxies.
Opinion
of BofA Merrill Lynch (Page 35)
In connection with the merger, Merrill Lynch, Pierce,
Fenner & Smith Incorporated, which we refer to as BofA
Merrill Lynch, the Companys financial adviser, delivered
to the Companys board of directors a written opinion,
dated October 27, 2010, as to the fairness, from a
financial point of view and as of the date of the opinion, of
the merger consideration to be received by holders of Company
common stock (other than Fairfax and its subsidiaries). The full
text of the written opinion, dated October 27, 2010, of
BofA Merrill Lynch, which describes, among other things, the
assumptions made, procedures followed, factors considered and
limitations on the review undertaken, is attached as
Annex B to this document and is incorporated by reference
herein in its entirety.
BofA Merrill Lynch provided its
opinion to the Companys board of directors for the benefit
and use of the Companys board of directors in connection
with and for purposes of its evaluation of the merger
consideration from a financial point of view. BofA Merrill
Lynchs opinion does not address any other aspect of the
merger and does not constitute a recommendation to any
stockholder as to how to vote or act in connection with the
proposed merger.
No
Financing Condition (Page 44)
The merger is not subject to any financing condition. We
anticipate that the total funds needed to complete the merger
will be approximately $294 million. Fairfax has informed us
that it will fund this amount with its available cash.
Interests
of Certain Persons in the Merger (Page 44)
When considering the recommendation by the board of directors,
you should be aware that our officers and directors have
interests in the merger that are different from, or in addition
to, your interests as a stockholder. The board of directors was
aware of and considered these interests, among other matters, in
evaluating and negotiating the merger agreement and the merger,
and in recommending that the merger agreement be adopted by the
stockholders of the Company. These interests include the
following:
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the vesting and cash-out of all restricted stock and options to
purchase common stock held by our officers and directors;
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the payment of severance to our officers if a termination of
employment were to occur in connection with the merger;
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from and after the effective time, our present and former
officers and directors are indemnified against any and all
losses in connection with any action arising out of the fact
that such person is or was a director or officer of the Company
at or prior to the effective time, including any such losses
arising out of or pertaining to the merger agreement or the
transactions contemplated thereby. The surviving corporation is
also required under the merger agreement to maintain in its
organizational documents for a period of six years after the
effective time, provisions with respect to the exculpation and
indemnification of the current and former directors and officers
of the Company that are the same as those currently set forth in
the Companys certificate of incorporation; and
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the interests of the Companys officers in continuing their
roles with the Company after the merger.
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9
Material
U.S. Federal Income Tax Consequences of the Merger
(Page 50)
The exchange of shares of common stock for cash pursuant to the
merger generally will be a taxable transaction for
U.S. federal income tax purposes. Stockholders who are
U.S. holders and who exchange their shares of common stock
in the merger will generally recognize gain or loss in an amount
equal to the difference, if any, between the cash payments made
pursuant to the merger and their adjusted tax basis in their
shares of common stock. Stockholders who are
non-U.S. holders
and who realize gain on the exchange of their shares of the
Companys common stock in the merger generally will not be
subject to U.S. federal income tax on the realized gain,
subject to certain exceptions. You should read The
Merger Material U.S. Federal Income Tax
Consequences of the Merger beginning on page 50,
which provides a discussion of tax consequences of the merger
for U.S. holders and
non-U.S. holders
as defined in that discussion. You should consult your tax
adviser for a complete analysis of the effect of the merger on
your U.S. federal, state, local and foreign taxes.
Regulatory
Approvals (Page 52)
In connection with the merger, the approval of certain state
insurance departments, or similar governing bodies are required.
These include the approvals of the Arkansas Insurance
Department, Delaware Insurance Department, the Illinois
Department of Insurance and the Minnesota Department of
Commerce, which we collectively refer to as insurance regulatory
approvals. Fairfax and its affiliates filed applications for
such approvals on November 8, 2010. Although the Company
and Fairfax do not expect any of the regulatory approvals to be
withheld, there is no assurance that all of such regulatory
approvals will be obtained.
In addition, the insurance laws and regulations of certain
U.S. states require that, prior to an acquisition of an
insurance company doing business in that state or licensed by
that state (or the acquisition of its holding company), a notice
filing that discloses certain market share data in that
jurisdiction must be made and an applicable waiting period must
expire or be terminated.
Under the
Hart-Scott-Rodino
Antitrust Improvements Act of 1976, or the HSR Act, and the
rules promulgated thereunder by the Federal Trade Commission, or
the FTC, the merger cannot be completed until each of the
Company and Fairfax file a notification and report form with the
FTC and the Antitrust Division of the Department of Justice, or
the DOJ, under the HSR Act and the applicable waiting period has
expired or been terminated. Each of the Company and Fairfax
filed such a notification and report form on November 5,
2010 and requested early termination of the applicable waiting
period.
The
Merger Agreement (Page 54)
Treatment
of Equity Interests (Page 55)
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Common Stock.
At the effective time of the
merger, or the effective time, each issued and outstanding share
of the Companys common stock (except for shares held by
Fairfax, shares held by the Company in treasury, or any of their
respective subsidiaries, shares held by stockholders who
properly exercise appraisal rights under the DGCL and shares of
the Companys restricted stock) will be cancelled and
converted into the right to receive the merger consideration of
$16.50 in cash, without interest, less any applicable
withholding taxes.
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Employee Stock Options.
At the effective time,
the Company will terminate the Companys stock incentive
plans, and each outstanding option to purchase shares of the
common stock of the Company granted under a Company incentive
plan that is outstanding and unexercised, whether or not vested
or exercisable, will become fully vested and exercisable. In
addition, as of the effective time, the Company will also cancel
each outstanding and unexercised stock option granted under the
Company incentive plans. Each holder of an applicable option
will receive a per share amount in cash equal to the excess, if
any, of the per share merger consideration over the applicable
per share exercise price of such stock option, less any
applicable withholding taxes.
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Restricted Stock.
At the effective time, each
issued and outstanding share of common stock of the Company
granted under the Company incentive plans that is subject to
forfeiture prior to the effective time will be canceled and
converted automatically into the right to receive the merger
consideration, less any applicable withholding taxes.
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10
No
Solicitation of Other Offers (Page 60)
The merger agreement contains detailed provisions that restrict
the Company, its subsidiaries and their respective directors,
officers, employees, investment bankers, financial advisers,
attorneys, accountants or other representatives from soliciting,
initiating or encouraging, or taking any other action designed
to facilitate, the submission of any other takeover proposal (as
defined in the merger agreement). The merger agreement also
restricts the Company, its subsidiaries and their respective
directors, officers, employees, investment bankers, financial
advisers, attorneys, accountants or other representatives from
participating in any discussions or negotiations regarding any
other takeover proposal unless such takeover proposal is or
could reasonably be expected to lead to a superior proposal (as
defined in the merger agreement). The merger agreement does not,
however, prohibit the board of directors from considering,
recommending to the Companys stockholders and entering
into an alternative transaction with a third party if specified
conditions are met, including that the alternative transaction
constitutes a superior proposal and subject to, in certain
cases, the payment to Fairfax of a termination fee.
Conditions
to the Merger (Page 63)
The respective obligations of the Company, Fairfax and Merger
Sub to consummate the merger are subject to the satisfaction or
waiver of certain customary conditions, including the adoption
of the merger agreement by our stockholders, receipt of required
antitrust and other regulatory approvals, the accuracy of the
representations and warranties of the parties (subject to
materiality qualifications), the absence of any legal
restrictions on the consummation of the merger and material
compliance by the parties with their respective covenants and
agreements under the merger agreement.
Termination
of the Merger Agreement (Page 64)
The merger agreement may be terminated at any time prior to the
effective time of the merger, notwithstanding the adoption of
the merger agreement by the Companys stockholders, by
mutual written consent of the Company and Fairfax.
The merger agreement may also be terminated at any time prior to
the completion of the merger, notwithstanding the adoption of
the merger agreement by the Companys stockholders, by
either the Company or Fairfax if:
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the merger is not completed on or before June 30, 2011,
which date, we refer to as the outside date, except that this
right to terminate the merger agreement will not be available to
any party whose failure to comply with the merger agreement
results in the failure of the merger to be completed by that
date;
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any final, non-appealable governmental injunction, order, decree
or ruling (whether temporary, preliminary or permanent) has been
enacted, issued, enforced or entered by any governmental
authority in the U.S. or Canada, which has the effect of
preventing, prohibiting or making illegal the completion of the
merger, except that the right to terminate under this provision
shall not be available to any party whose failure to fulfill any
material obligations under the merger agreement has been the
cause of, or resulted in, the failure of the effective time to
occur on or before the outside date; or
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the Companys stockholders fail to adopt the merger
agreement at the special meeting of the Companys
stockholders;
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Fairfax may terminate the merger agreement if:
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the Company has breached any of its representations, warranties,
covenants or agreements under the merger agreement and such
breach would give rise to the failure of the related conditions
to Fairfaxs obligation to close to be satisfied and has
not or cannot be cured within 30 days after Fairfax gives
the Company written notice of such breach;
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our board of directors or any committee thereof makes an adverse
recommendation change (as defined in the merger
agreement); or
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the Company shall have failed to include in this proxy statement
its recommendation to stockholders to adopt the merger agreement;
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11
The Company may terminate the merger agreement if:
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Fairfax has breached any of its representations, warranties,
covenants or agreements under the merger agreement and such
breach would give rise to the failure of the related conditions
to the Companys obligation to close to be satisfied and
has not or cannot be cured within 30 days after the Company
gives Fairfax written notice of such breach; or
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concurrently with such termination, the Company enters into a
definitive agreement providing for a superior proposal, provided
that prior to or simultaneously with the entry into such
definitive agreement, the Company has paid to Fairfax the
termination fee described below.
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In the event that the merger agreement is terminated as
described above, the merger agreement will (subject to certain
exceptions) become void, and there will be no liability under
the merger agreement on the part of any party to the merger
agreement, except for the parties obligations with respect
to expense reimbursement described below under
Expenses and except that no party will
be relieved from liability for any willful breach of the merger
agreement prior to the date of such termination.
Termination
Fee (Page 65)
The Company has agreed to pay Fairfax a termination fee of
$9.0 million, which amount represents approximately 3.0% of
the equity value of the transaction, if the merger agreement is
terminated under any of the following circumstances:
(i) Fairfax terminates the merger agreement because the
board of directors or any committee thereof makes an adverse
recommendation change;
(ii) the Company terminates the merger agreement because it
enters into a definitive agreement providing for a superior
proposal;
(iii) Fairfax or the Company terminates the merger
agreement because the effective time shall not have occurred
before the outside date or Fairfax terminates the merger
agreement because the Company has breached one or more of its
representations, warranties, covenants or agreements under the
merger agreement and such breach would give rise to the failure
of the related conditions to Fairfaxs obligation to close
to be satisfied and has not or cannot be cured within
30 days after Fairfax gives the Company written notice of
such breach; and
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prior to the time of such termination a takeover proposal shall
have been publicly announced with respect to the
Company; and
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within 12 months after the date of such termination, the
Company enters into a definitive agreement with respect to (and
subsequently consummates the contemplated transaction), or
consummates, a transaction contemplated by a takeover proposal
(provided that all references to 10% in the definition of
takeover proposal shall be replaced with
50%); or
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(iv) Fairfax or the Company terminates the merger agreement
because the Companys stockholders fail to adopt the merger
agreement at the special meeting of the Companys
stockholders; and
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prior to the time of such failure to adopt the merger agreement
a takeover proposal shall have been publicly announced with
respect to the Company; and
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within 12 months after the date of such termination, the
Company enters into a definitive agreement with respect to (and
subsequently consummates the contemplated transaction), or
consummates, a transaction contemplated by a takeover proposal
(provided that all references to 10% in the definition of
takeover proposal shall be replaced with 50%).
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If the merger agreement is terminated as a result of
clause (i) above, the termination fee will be payable by
the Company to Fairfax no later than two business days following
such termination. If the merger agreement is terminated as a
result of clause (ii) above, the termination fee will be
payable by the Company to Fairfax prior to or simultaneously
with such termination. If the merger is terminated as a result
of clauses (iii) or (iv) above, the
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termination fee will be payable by the Company to Fairfax no
later than two business days following the consummation of such
other transaction.
Expenses
(Page 66)
The merger agreement further provides for a reciprocal
obligation of each party to reimburse the other party for its
expenses, up to a maximum of $1.5 million, if such other
party terminates the merger agreement because of an uncured or
incurable breach of any representation, warranty, covenant or
agreement in the merger agreement by the non-terminating party
that would cause the failure of the related conditions to the
terminating partys obligation to close under the merger
agreement, provided the terminating party is not itself in
material breach of any of its representations, warranties,
covenants or agreements in the merger agreement. Additionally,
if either party terminates the merger agreement as a result of
the Companys stockholders failure to adopt the merger
agreement at the special meeting of the Companys
stockholders, the Company will reimburse Fairfax for expenses up
to $1.5 million. Any termination fee payable by the Company
after the reimbursement of expenses would be reduced by any such
reimbursement of expenses paid to Fairfax.
Remedies
(Page 66)
If Fairfax is entitled to terminate the merger agreement and
receive a termination fee from the Company, Fairfaxs
receipt of such termination fee will be the sole and exclusive
remedy of Fairfax and Merger Sub against the Company, regardless
of the circumstances of such termination.
The parties are entitled to specific performance of the terms of
the merger agreement in addition to any other remedy at law or
in equity.
Market
Price of Common Stock (Page 69)
The closing price of the common stock on the NYSE, on
October 28, 2010 the last trading day prior to the public
announcement of the execution of the merger agreement, was
$11.36 per share of common stock. On
[ ],
2010, the most recent practicable date before this proxy
statement was mailed to our stockholders, the closing price for
the common stock on the NYSE was
$[ ] per share of common stock. You
are encouraged to obtain current market quotations for common
stock in connection with voting your shares of common stock.
Appraisal
Rights (Page 71)
Stockholders are entitled to appraisal rights under the DGCL
with respect to any or all of their shares of the Companys
common stock in connection with the merger, provided they meet
all of the conditions set forth in Section 262 of the DGCL.
This means that you are entitled to have the fair value of your
shares of common stock determined by the Delaware Court of
Chancery and to receive payment based on that valuation. The
ultimate amount you receive in an appraisal proceeding may be
less than, equal to or more than the amount you would have
received under the merger agreement.
To exercise your appraisal rights, you must submit a written
demand for appraisal to the Company before a vote is taken on
the merger agreement, you must not submit a proxy or otherwise
vote in favor of the proposal to adopt the merger agreement and
you must hold your shares continuously through the effective
time and otherwise comply with Section 262 of the DGCL.
Your failure to follow exactly the procedures specified under
the DGCL may result in the loss of your appraisal rights. See
Appraisal Rights beginning on page 71 and the
text of the Delaware appraisal rights statute reproduced in its
entirety as
Annex E
to this proxy statement. If you
hold your shares of common stock through a bank, brokerage firm
or other nominee and you wish to exercise appraisal rights, you
should consult with your bank, broker or other nominee to
determine the appropriate procedures for the making of a demand
for appraisal by the nominee. In view of the complexity of the
DGCL, stockholders who may wish to pursue appraisal rights
should consult their legal and financial advisers promptly.
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Delisting
and Deregistration of Common Stock (Page 75)
If the merger is completed, the Companys common stock will
be delisted from the NYSE and deregistered under the Securities
Exchange Act of 1934, as amended, or the Exchange Act. As such,
we would no longer file periodic reports with the SEC on account
of our common stock.
Litigation
Relating to the Merger (Page 53)
A putative class action lawsuit relating to the merger has been
filed in the United States District Court Eastern District of
Michigan Southern Division. The complaint, which purports to be
brought as class action on behalf of all of the Companys
stockholders, excluding the defendants and their affiliates,
alleges that the consideration that stockholders will receive in
connection with the merger is inadequate and that the
Companys directors breached their fiduciary duties to
stockholders in negotiating and approving the merger agreement.
The complaint further alleges that the Company and Fairfax aided
and abetted the alleged breaches by the Companys
directors. The complaint seeks various forms of relief,
including injunctive relief that would, if granted, prevent the
merger from being consummated in accordance with the
agreed-upon
terms. The defendants believe that the complaints are without
merit and intend to defend the actions vigorously.
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CAUTIONARY
STATEMENT CONCERNING FORWARD-LOOKING INFORMATION
This proxy statement, and the documents to which we refer you in
this proxy statement, as well as information included in oral
statements or other written statements made or to be made by us,
contain statements that, in our opinion, may constitute
forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Statements
containing words such as expect, anticipate, believe, estimate,
likely or similar words that are used herein or in other written
or oral information conveyed by or on behalf of the Company, are
intended to identify forward-looking statements. Forward-looking
statements are made based upon managements current
expectations and beliefs concerning future developments and
their potential effects on the Company. Such forward-looking
statements are not guarantees of future events. Actual results
may differ, even materially, from those contemplated by the
forward-looking statements due to, among others, the following
factors:
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the stockholders of the Company may not adopt the merger
agreement;
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litigation in respect of the merger could delay or prevent the
closing of the merger;
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the parties may be unable to obtain governmental and regulatory
approvals required for the merger, or required governmental and
regulatory approvals may delay the merger or result in the
imposition of conditions that could cause the parties to abandon
the merger;
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the parties may be unable to complete the merger because, among
other reasons, conditions to the closing of the merger may not
be satisfied or waived;
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the possibility of disruption from the merger making it more
difficult to maintain business and operational relationships;
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developments beyond the parties control, including but not
limited to, changes in domestic or global economic conditions,
competitive conditions and consumer preferences, adverse weather
conditions or natural disasters, health concerns, international,
political or military developments and technological
developments; or
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the risk factors and other factors referred to in
the Companys reports filed with or furnished to the SEC.
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Consequently, all of the forward-looking statements we make in
this document are qualified by the information contained or
incorporated by reference herein, including, but not limited to,
(i) the information contained under this heading and
(ii) the information contained under the headings
Risk Factors and that is otherwise disclosed in our
annual report on
Form 10-K
for the year ended December 31, 2009, filed with the SEC on
March 16, 2010, and each quarterly report on
Form 10-Q
filed thereafter (see Where You Can Find More
Information beginning on page 75).
You should carefully consider the cautionary statements
contained or referred to in this section in connection with any
subsequent written or oral forward-looking statements that may
be issued by us or persons acting on our behalf. Except as
required by law, we undertake no obligation to update any of
these forward-looking statements.
15
PARTIES
TO THE MERGER
The
Company
First Mercury Financial Corporation
29110 Inkster Road, Suite 100
Southfield, MI 48034
(248) 358-4010
The Company is a Delaware corporation headquartered in
Southfield, Michigan. The Company provides insurance products
and services primarily to the specialty commercial insurance
markets, focusing on niche and underserved segments where it
believes that it has underwriting expertise and other
competitive advantages. During the Companys 37 years
of underwriting risks, First Mercury has developed the
underwriting expertise and cost-efficient infrastructure which
has enabled it to effectively underwrite such risks. The
Companys risk-taking subsidiaries offer insurance products
through its distribution subsidiaries:
CoverX
®
,
FM Emerald and AMC, which are recognized brands among insurance
producers. For more information about the Company, please visit
the Companys website at
http://www.firstmercury.com.
The information contained on the Companys website is not
incorporated into, and does not form a part of, this proxy
statement or any other report or document on file with or
furnished to the SEC. See also Where You Can Find More
Information beginning on page 75. The Companys
common stock is publicly traded on the NYSE under the symbol
FMR.
Fairfax
Fairfax Financial Holdings Limited
95 Wellington Street West, Suite 800
Toronto, Ontario M5J 2N7
Canada
(416) 367-4941
Fairfax is a Canadian corporation with its principal financial
office in Toronto, Canada. Fairfax is a financial services
holding company which, through its subsidiaries, is engaged in
property and casualty insurance and reinsurance and investment
management. Fairfax provides a full range of property and
casualty products, maintaining a diversified portfolio of risks
across classes of business, geographic regions, and types of
insureds.
Merger
Sub
Fairfax Investments III USA Corp.
c/o Fairfax
Financial Holdings Limited
95 Wellington Street West, Suite 800
Toronto, Ontario M5J 2N7
Canada
(416) 367-4941
Merger Sub is a Delaware corporation and an indirect wholly
owned subsidiary of Fairfax that was formed by Fairfax solely
for purposes of entering into the merger agreement and
completing the transactions contemplated by the merger
agreement. Merger Sub has not engaged in any business except for
activities incidental to its formation and as contemplated by
the merger agreement. At the effective time of the merger,
Merger Sub will merge with and into the Company and will cease
to exist and the Company will continue as the surviving
corporation and a subsidiary of Fairfax.
THE
SPECIAL MEETING
Time,
Place and Purpose of the Special Meeting
This proxy statement is being furnished to our stockholders as
part of the solicitation of proxies by the board of directors
for use at the special meeting to be held on
[ ],
2011, starting
at[ ] p.m.,
local time, at the
16
corporate offices of the Company located at 29110 Inkster Road,
Suite 100, Southfield, Michigan 48034, or at any
postponement or adjournment thereof. At the special meeting,
holders of our common stock will be asked to approve the
proposal to adopt the merger agreement and to approve the
proposal to adjourn the special meeting, if necessary or
appropriate, 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.
Our stockholders must approve the proposal to adopt the merger
agreement in order for the merger to occur. If our stockholders
fail to approve the proposal to adopt the merger agreement, the
merger will not occur. A copy of the merger agreement is
attached as
Annex A
to this proxy statement. We
encourage you to read the merger agreement carefully in its
entirety.
Record
Date and Quorum
We have fixed the close of business on
[ ],
2010 as the record date for the special meeting, and only
holders of record of our common stock on the record date are
entitled to vote at the special meeting. You are entitled to
receive notice of, and to vote at, the special meeting if you
owned shares of common stock at the close of business on the
record date. On the record date, there were
[ ] shares
of common stock outstanding and entitled to vote. Each share of
common stock entitles its holder to one vote on all matters
properly brought before the special meeting.
A majority of the shares of our common stock outstanding at the
close of business on the record date and entitled to vote,
present in person or represented by proxy, at the special
meeting constitutes a quorum for the purposes of the special
meeting. Shares of our common stock represented at the special
meeting but not voted, including shares of common stock for
which a stockholder directs an abstention from
voting, as well as broker non-votes (as described
below), will be counted for purposes of establishing a quorum. A
quorum is necessary to transact business at the special meeting.
Once a share of common stock is represented at the special
meeting, it will be counted for the purpose of determining a
quorum at the special meeting and any adjournment of the special
meeting. However, if a new record date is set for the adjourned
special meeting, a new quorum will have to be established. In
the event that a quorum is not present at the special meeting,
the stockholders who are present in person or represented by
proxy may be asked to vote as to whether the special meeting
will be adjourned or postponed to solicit additional proxies.
Attendance
Only stockholders of record or their duly authorized proxies
have the right to attend the special meeting. To gain
admittance, you must present valid photo identification, such as
a drivers license or passport. If your shares of common
stock are held through a bank, brokerage firm or other nominee,
please bring to the special meeting a copy of your brokerage
statement evidencing your beneficial ownership of common stock
and valid photo identification. If you are the representative of
a corporate or institutional stockholder, you must present valid
photo identification along with proof that you are the
representative of such stockholder. Please note that cameras,
recording devices and other electronic devices will not be
permitted at the special meeting.
Vote
Required
Approval of the proposal to adopt the merger agreement requires
the affirmative vote of the holders of a majority of the
outstanding shares of our common stock entitled to vote thereon.
For the proposal to adopt the merger agreement, you may vote
FOR
,
AGAINST
or
ABSTAIN
. Abstentions will have the same
effect as a vote against the proposal to adopt the merger
agreement, and will count for the purpose of determining whether
a quorum is present.
If you fail to submit a proxy or to vote
in person at the special meeting, it will have the same effect
as a vote against the proposal to adopt the merger agreement.
If your shares of common stock are registered directly in your
name with our transfer agent, Computershare Trust Company,
N.A., you are considered, with respect to those shares of common
stock, the stockholder of record. This proxy
statement and proxy card have been sent directly to you by the
Company.
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If your shares of the Companys common stock are held
through a bank, brokerage firm or other nominee, you are
considered the beneficial owner of shares of common
stock held in street name. In that case, this proxy statement
has been forwarded to you by your bank, brokerage firm or other
nominee who is considered, with respect to those shares of
common stock, the stockholder of record. As the beneficial
owner, you have the right to direct your bank, brokerage firm or
other nominee as to how to vote your shares by following their
instructions for voting.
Under the rules of the NYSE, brokers who hold shares in street
name for customers have the authority to vote on
routine proposals when they have not received
instructions from beneficial owners. However, brokers are
precluded from exercising their voting discretion with respect
to approving non-routine matters. The proposal to adopt the
merger agreement is considered a non-routine proposal and, as a
result, brokers are not empowered to vote shares of common stock
absent specific instructions from the beneficial owner of such
shares of the Companys common stock. We generally refer to
situations where brokers have not received such specific
instructions from beneficial owners of the Companys common
stock as broker non-votes.
These broker non-votes will be
counted for purposes of determining a quorum, but will have the
same effect as a vote against the proposal to adopt the merger
agreement.
The proposal to adjourn the special meeting, if necessary or
appropriate, to solicit additional proxies requires the
affirmative vote of the holders of a majority of the shares of
common stock present in person or represented by proxy and
entitled to vote on the matter at the special meeting, whether
or not a quorum is present. For the proposal to adjourn the
special meeting, if necessary or appropriate to solicit
additional proxies, you may vote
FOR
,
AGAINST
or
ABSTAIN
. For
purposes of this proposal, if your shares of the Companys
common stock are present at the special meeting but are not
voted with respect to this proposal, or if you have given a
proxy and abstained on this proposal, this will have the same
effect as if you voted against the proposal. If you fail to
submit a proxy or vote in person at the special meeting, or
there are broker non-votes on the issue, as applicable, the
shares of the Companys common stock not voted will have no
effect on the proposal to adjourn the special meeting, if
necessary or appropriate, to solicit additional proxies.
If you are a stockholder of record, you may vote your shares of
the Companys common stock on matters presented at the
special meeting in any of the following ways:
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in person you may attend the special meeting and
cast your vote there;
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by proxy stockholders of record have a choice of
voting by proxy:
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over the Internet (the website address for Internet voting is
printed on your proxy card);
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by using the toll-free telephone number noted on your proxy
card; or
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by signing, dating and returning the enclosed proxy card in the
accompanying prepaid reply envelope.
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If you are a beneficial owner of shares of our common stock as
of the record date, you will receive instructions from your
bank, brokerage firm or other nominee that you must follow in
order to have your shares of the Companys common stock
voted. Those instructions will identify which of the above
choices are available to you in order to have your shares voted.
Please note that if you are a beneficial owner and wish to vote
in person at the special meeting, you must have a legal proxy
from your bank, brokerage firm or other nominee naming you as
the proxy.
The control number located on your proxy card is designed to
verify your identity and allow you to vote your shares of the
Companys common stock, and to confirm that your voting
instructions have been properly recorded when voting over the
Internet or by telephone.
Please refer to the instructions on your proxy or voting
instruction card to determine the deadlines for voting over the
Internet or by telephone. If you choose to vote by mailing a
proxy card, your proxy card must be filed with our Corporate
Secretary by the time the special meeting begins
. Please do
not send in your stock certificates with your proxy card.
When the merger is completed, a separate letter of
transmittal will be mailed to you that will enable you to
receive the merger consideration in exchange for your stock
certificates.
If you vote by proxy, regardless of the method you choose to
vote, the individuals named on the enclosed proxy card, and each
of them, with full power of substitution, or your proxies, will
vote your shares of common stock in the
18
way that you indicate. When completing the Internet or telephone
voting processes or the proxy card, you may specify whether your
shares of the Companys 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 common stock should be voted on a
matter, the shares of common stock represented by your properly
signed proxy will be voted
FOR
the proposal
to adopt the merger agreement and
FOR
the
proposal to adjourn the special meeting, if necessary or
appropriate, to solicit additional proxies.
If you have any questions or need assistance voting your shares,
please call [PROXY SOLICITOR], our proxy solicitor, toll-free at
[ ]
(banks and brokers call collect at
[ ] ).
IT IS IMPORTANT THAT YOU VOTE YOUR SHARES OF COMMON
STOCK PROMPTLY. WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL
MEETING, PLEASE COMPLETE, DATE, SIGN AND RETURN, AS PROMPTLY AS
POSSIBLE, THE ENCLOSED PROXY CARD IN THE ACCOMPANYING PREPAID
REPLY ENVELOPE, OR SUBMIT YOUR PROXY BY TELEPHONE OR THROUGH THE
INTERNET. STOCKHOLDERS WHO ATTEND THE SPECIAL MEETING MAY REVOKE
THEIR PROXIES AND VOTE IN PERSON.
Concurrently with the execution and delivery of the merger
agreement, Richard H. Smith, the Chairman, President and Chief
Executive Officer of the Company, and Jerome M. Shaw, a director
of the Company, each solely in his capacity as a stockholder of
the Company, entered into voting agreements with Fairfax with
respect to their respective shares of Company common stock. We
refer to these agreements as the voting agreements. Such shares
constituted approximately 16.6% of the total issued and
outstanding shares of Company common stock as of
October 28, 2010. Pursuant to the voting agreements,
Messrs. Smith and Shaw (i) have agreed to vote, or
cause to be voted, these shares (together with any shares of
Company common stock acquired by them on or after
October 28, 2010) in favor of the approval of the
merger agreement and the transactions contemplated thereby,
against any action, agreement, transaction or proposal including
any takeover proposal as defined in the merger
agreement that would result in a material breach by the Company
under the merger agreement or a failure of any condition to the
Companys obligations under the merger agreement to be
satisfied and in favor of any other matter necessary to the
consummation of the transactions contemplated by the merger
agreement and (ii) have granted Fairfax an irrevocable
proxy to vote their shares in accordance with the foregoing if
they fail to do so.
In the voting agreements, Messrs. Smith and Shaw have
agreed not to, on or after October 28, 2010, among other
things, sell, assign, transfer, lien, pledge, dispose or
otherwise encumber any of their shares of Company common stock,
deposit any shares into a voting trust or enter into a voting
agreement or arrangement or grant any proxies with respect to
their shares. Messrs. Smith and Shaw also have agreed not
to take any action that the Company is prohibited from taking
under the merger agreement with respect to the solicitation of
alternative transaction proposals. The voting agreements will
terminate upon the earliest to occur of (i) the termination
of the merger agreement in accordance with its terms, and
(ii) the effective time of the merger.
Proxies
and Revocation
Any stockholder of record entitled to vote at the special
meeting may submit a proxy by telephone, over the Internet or by
returning the enclosed proxy card in the accompanying prepaid
reply envelope, or may vote in person at the special meeting. If
your shares of the Companys common stock are held in
street name by your bank, broker or other nominee, you should
instruct your bank, broker or other nominee, on how to vote your
shares of the Companys common stock using the instructions
provided by your bank, broker or other nominee. If you fail to
submit a proxy or vote in person at the special meeting, or
abstain, or you do not provide your bank, broker or other
nominee, with instructions, as applicable, your shares of the
Companys common stock will not be voted on the proposal to
adopt the merger agreement, which will have the same effect as a
vote against the proposal to adopt the merger agreement.
You have the right to revoke a proxy, whether delivered over the
Internet, by telephone or by mail, at any time before it is
exercised, by voting at a later date through any of the methods
available to you, by giving written notice of revocation to our
Corporate Secretary, which must be filed with our Corporate
Secretary before the special meeting begins, or by attending the
special meeting and voting in person.
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Adjournments
and Postponements
Any adjournment or postponement of the special meeting may be
made from time to time by approval of the holders of a majority
of the shares of the Companys common stock present in
person or represented by proxy at the special meeting, whether
or not a quorum exists, without further notice other than by an
announcement made at the special meeting. If a quorum is not
present at the special meeting, or if a quorum is present at the
special meeting but there are not sufficient votes at the time
of the special meeting to adopt the merger agreement, then the
Companys stockholders may be asked to vote on a proposal
to adjourn or postpone the special meeting so as to permit
further solicitation of proxies. Any adjournment or postponement
of the special meeting for the purpose of soliciting additional
proxies will allow the Companys stockholders who have
already sent in their proxies to revoke them at any time prior
to their use at the special meeting as adjourned or postponed.
Anticipated
Date of Completion of the Merger
We are working towards completing the merger as soon as
possible. Assuming timely satisfaction of necessary closing
conditions, we anticipate that the merger will be completed in
the first quarter of 2011. If our stockholders vote to approve
the proposal to adopt the merger agreement, the merger will
become effective as promptly as practicable following the
satisfaction or waiver of the other conditions to the merger.
Rights of
Stockholders Who Seek Appraisal
Stockholders are entitled to appraisal rights under the DGCL
with respect to any or all of their shares of the Companys
common stock in connection with the merger. This means that you
are entitled to have the fair value of your shares of common
stock determined by the Delaware Court of Chancery and to
receive payment based on that valuation. The ultimate amount you
receive in an appraisal proceeding may be less than, equal to or
more than the amount you would have received under the merger
agreement.
To exercise your appraisal rights, you must submit a written
demand for appraisal to the Company before a vote is taken on
the merger agreement, you must not vote in favor of the proposal
to adopt the merger agreement and you must hold your shares
continuously through the effective time and otherwise comply
with Section 262 of the DGCL. Your failure to follow
exactly the procedures specified under the DGCL may result in
the loss of your appraisal rights. See Appraisal
Rights beginning on page 71 and the text of the
Delaware appraisal rights statute reproduced in its entirety as
Annex E
to this proxy statement. If you hold your
shares of common stock through a bank, brokerage firm or other
nominee and you wish to exercise appraisal rights, you should
consult with your bank, broker or other nominee to determine the
appropriate procedures for the making of a demand for appraisal
by the nominee. In view of the complexity of the DGCL,
stockholders who may wish to pursue appraisal rights should
consult their legal and financial advisers.
Solicitation
of Proxies; Payment of Solicitation Expenses
The Company has engaged [PROXY SOLICITOR] to assist in the
solicitation of proxies for the special meeting. The Company
estimates that it will pay [PROXY SOLICITOR]. a fee of
approximately
$[ ].
The Company will reimburse [PROXY SOLICITOR] for reasonable
out-of-pocket
expenses and will indemnify [PROXY SOLICITOR] and its affiliates
against certain claims, liabilities, losses, damages and
expenses. The Company also will reimburse brokers, banks and
other custodians, nominees and fiduciaries representing
beneficial owners of shares of the Companys common stock
for their expenses in forwarding soliciting materials to
beneficial owners of the Companys 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. Our directors,
officers and employees will not be paid any additional amounts
for soliciting proxies.
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 [PROXY SOLICITOR] our proxy solicitor, toll-free at
[ ]
(banks and brokers call collect at
[ ] ).
20
THE
MERGER
This discussion of the merger is qualified in its entirety by
reference to the merger agreement, which is attached to this
proxy statement as Annex A. You should read the entire
merger agreement carefully because it is the legal document that
governs the merger.
The merger agreement provides that Merger Sub will merge with
and into the Company. The Company will be the surviving
corporation in the merger and will continue to do business
following the merger as a subsidiary of Fairfax. As a result of
the merger, the Company will cease to be a publicly traded
company. You will not own any shares of the capital stock of the
surviving corporation.
Merger
Consideration
In the merger, each issued and outstanding share of the
Companys common stock (other than shares of the
Companys common stock held by Fairfax, shares held by the
Company in treasury or shares held by any of their respective
subsidiaries, shares of the Companys common stock held by
stockholders who properly exercise appraisal rights under the
DGCL and shares of the Companys restricted stock) will, at
the effective time, be cancelled and converted into the right to
receive the merger consideration of $16.50 in cash, without
interest, less any applicable withholding taxes.
Background
of the Merger
The Companys board and senior management have regularly
reviewed and considered business alternatives that could enhance
stockholder value, including strategic alternatives, financing
alternatives and opportunities for growth. Periodically,
beginning as early as six months following the Companys
initial public offering in October 2006, the board has received
unsolicited indications from various parties regarding mergers
or acquisitions of the Company and has periodically received
input from financial advisers regarding potential transactions.
Based on those indications and discussions, the board has
continued to maintain an informed understanding of the
Companys value. The board has also discussed business
alternatives that did not involve a sale of the Company as a
means to enhance stockholder value.
In July 2009, the Companys management reported to its
board that over the preceding thirty to sixty days, the Company
had received a number of unsolicited calls from private equity
groups interested in discussing potential transactions. Those
calls were discussed with the board and the Companys
outside counsel. The board instructed management to request
preliminary input from several financial advisers regarding
considerations for the Company in light of the then current
economic and market environment facing the property and casualty
industry generally and the Company specifically. Management
contacted four financial advisers. Each of these financial
advisers presented their input to the Company in late July 2009
in a series of meetings attended by the Companys chief
executive officer, Richard H. Smith, chief financial officer,
John A. Marazza, and general counsel, Michael W. Roskiewicz, as
well as three of the Companys board members, Jerome M.
Shaw, Louis J. Manetti and George R. Boyer III. The input of
these financial advisers was summarized by management and
presented to the full board as a basis for a strategic planning
session among senior management and the board during a board
meeting held on August 19 and 20, 2009. During this session, the
board discussed various options available to the Company with an
objective of enhancing stockholder value, including continuing
on a stand alone basis, identifying and pursuing acquisition
targets, identifying and pursuing companies of a comparable size
to the Company for a merger of equals, seeking
increased capital either through the public markets or private
equity groups, and undertaking a process to sell the Company.
The board determined that in light of the instability of the
economy generally, the Company should opportunistically evaluate
alternatives that might arise but that, due to the state of the
credit and equity markets, it was unlikely that a transaction
could be consummated at an attractive price. Nevertheless, the
Board did direct management to continue periodic discussions
with parties that contacted the Company in order to gauge their
level of interest.
In September, October and November 2009, following discussions
with the board, Messrs. Smith, Marazza and Roskiewicz met
with several private equity groups that had requested meetings.
After those discussions, one private equity group, which we
refer to as Party 1, indicated an interest in pursuing an
acquisition of the Company at a price
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range of $17.00 to $19.00 per share, subject to further
diligence. During the same period, Mr. Smith met with the
chief executive officer of a larger insurance company, which we
refer to as Party 2. Following the meeting, Party 2 expressed an
interest in pursuing a transaction with the Company at a price
range of approximately $18.00 to $20.00 per share, subject to
further diligence.
At board meetings on November 11 and 12, 2009, the board
received a detailed presentation on fiduciary duties under
Delaware law from its outside counsel, McDermott
Will & Emery LLP, which we refer to herein as
McDermott Will & Emery. At the meetings, the Company
also retained a financial adviser to help evaluate the proposals
from Party 1 and Party 2. The financial adviser assisted the
board by preparing, among other things, (i) a detailed
review of the strengths and weaknesses of the proposals from
Party 1 and Party 2, (ii) a review of the insurance
industry generally, with a focus on the challenges facing
smaller public insurance companies, (iii) an examination of
strategic activity in the market, (iv) a review of the
Companys operating metrics relative to others in its
industry, (v) advantages and disadvantages of the Company
continuing as an independent public company, and
(vi) considerations related to undertaking a potential
transaction, including considerations for a financial buyer
versus a strategic buyer. The board directed Mr. Smith and
the Companys financial adviser to seek to improve the
proposals.
In late November 2009, Mr. Smith asked Party 1 whether it
was willing to increase its proposed price, at which time Party
1 submitted a revised proposal at a price range of $18.00 to
$19.50 per share, but sought exclusivity in connection with its
revised proposal. Mr. Smith also sought additional
clarification from Party 2 with respect to its proposal. At a
series of meetings in November and December 2009, the board
discussed the revised proposals with management, McDermott
Will & Emery and its financial adviser focusing on
(i) the proposed prices, (ii) which party would be
more likely to close at its proposed price and
(iii) whether undertaking either transaction was in the
best interests of the Companys stockholders. The board had
several discussions with McDermott Will & Emery
regarding its fiduciary duties in connection with these
proposals. The board determined not to grant exclusivity to
Party 1 and Party 1 thereafter ceased discussions.
In December 2009, the board decided to continue to pursue
discussions with Party 2. In the middle of January 2010, after
continued negotiations, Party 2 indicated that it was no longer
willing to pursue a transaction with the Company at the price
range previously proposed.
When informed of Party 2s decision at a board meeting on
January 13, 2010, the board determined to terminate
discussions with Party 2. The board discussed other alternatives
for enhancing stockholder value, including payment of a special
cash dividend and acquisitions. The board received input from
management and its financial adviser on the impact of a special
dividend on the Companys financial position.
At a board meeting on February 22, 2010, the board declared
a special cash dividend of $2.00 per share, which was paid on
March 31, 2010.
At board meetings on May 10 and 11, 2010, BofA Merrill Lynch was
introduced to the board as a possible financial adviser to the
Company in connection with several potential strategic
alternatives, including possible acquisitions that the Company
was pursuing. BofA Merrill Lynch made a presentation to the
board regarding the state of the property and casualty insurance
market and its perspective on the Company. Separately at these
meetings, Mr. Smith informed board members that an
insurance company, which we refer to as Party 3, and a large
private equity fund, which we refer to as Party 4, had expressed
interest in meeting with the Company to discuss unspecified
strategic alternatives. The board also received a detailed
presentation on the Companys loss and loss adjustment
expense reserves from management.
On May 14, 2010, Mr. Smith and Mr. Marazza met
with Party 4 and generally discussed the Company and the
insurance industry as well as the state of the capital markets.
On May 17, 2010, the president and chief executive officer
and chief financial officer of Party 3, together with Party
3s financial adviser, visited the Companys offices
and met with Mr. Smith and Mr. Marazza and BofA
Merrill Lynch. The president and chief executive officer of
Party 3 indicated an interest in exploring a potential
acquisition of the Company. Mr. Smith indicated that the
Company would be willing to share some limited information
subject to execution of an acceptable confidentiality agreement.
On June 7, 2010, Party 3 and the Company entered into a
confidentiality agreement and Party 3 subsequently conducted
limited diligence.
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During a June 30, 2010 meeting of the board, the board
discussed Party 3s interest and the nature and extent of
the limited discussions between the Company and Party 3 to date.
BofA Merrill Lynch attended this meeting and provided the board
with an overview of Party 3s interest and some preliminary
financial analysis on the Company. The board members discussed
Party 3 and whether it was in the Companys and the
stockholders best interests to continue discussions with
Party 3. In this regard, the board discussed the continuing
difficult conditions in the economy generally, and in the
property and casualty insurance market specifically, the lack of
any obvious catalyst to drive improvement in the market, the
Companys prospects for growth and access to capital, the
disadvantages presented by the Companys size and the
likely impact of these conditions on the Companys current
and future share price. Based on these factors, the board
determined that the Company should continue dialogue with Party
3.
On July 11 and 12, 2010, representatives of the Company and BofA
Merrill Lynch met with representatives of Party 3 in New York
and made a series of management presentations regarding the
Company that included an overview and history of the Company and
covered the Companys underwriting, claims, actuarial,
legal, reinsurance and finance/accounting areas. Following these
management meetings, Party 3 continued its due diligence process
through early August, 2010.
On August 5, 2010, Mr. Smith had dinner with
Mr. V. Prem Watsa, the Chairman and Chief Executive Officer
of Fairfax, in Toronto. Also in attendance at the dinner as
financial adviser to the Company was BofA Merrill Lynchs
primary representative, who has a longstanding and close
relationship with Fairfax as further described below. This
dinner had been scheduled in June 2010 by BofA Merrill Lynch at
the request of Mr. Smith to discuss expansion of the
Companys security guard business into Canada where Fairfax
has significant operations. During the dinner, Mr. Smith
and Mr. Watsa discussed the property and casualty insurance
market and its future prospects, investment strategies, and
management and business philosophy. Mr. Watsa inquired
whether Mr. Smith would be willing to provide further
information about the Company to Fairfax.
On August 9, 2010, the president and chief executive
officer of Party 3 delivered to Mr. Smith a non-binding
indication of interest regarding the acquisition of the Company
by Party 3. Party 3s proposal (i) stated a price
ranging from $16.50 to $18.00 per share, (ii) identified
numerous areas of due diligence that remained outstanding, and
(iii) requested a sixty day exclusivity period. In
addition, the president and chief executive officer of Party 3
identified three additional areas of concern regarding
completing the transaction on the proposed terms: (A) the
price proposed represented a significant premium to the then
current market price and any subsequent decrease in the
Companys stock price could jeopardize the support of Party
3 for the transaction at the price proposed, (B) the impact
of increasing competition noted in certain of the Companys
business lines, and (C) constraints on liquidity resulting
from the Companys payment of the $2.00 per share special
cash dividend earlier in the year and its planned acquisition of
Valiant Insurance Group, Inc.
On August 9, 2010, the Company entered into a
confidentiality agreement with Fairfax and provided Fairfax
representatives with certain limited nonpublic information.
During the week of August 9, 2010, BofA Merrill Lynch had a
series of telephone conversations with Mr. Watsa to gauge
Fairfaxs preliminary level of interest based on the
information made available to Fairfax. Mr. Watsa indicated
that Fairfax was interested in pursuing a transaction to acquire
the Company.
On August 16, 2010, Mr. Smith and the primary
representative of BofA Merrill Lynch had dinner in New York City
with Mr. Andy Barnard, president and chief executive
officer of Odyssey Re Holdings Corp., which we refer to as
Odyssey Re, a subsidiary of Fairfax and an underwriter of
property and casualty reinsurance as well as specialty
insurance. During the dinner, Mr. Smith described the
Companys history, lines of business, business philosophy,
operating structure, management structure and philosophy, and
his views on the market and potential areas of expansion for the
Company. After this dinner, in preparation for the
Companys regularly scheduled board meeting on August 18
and 19, 2010, BofA Merrill Lynch had a series of telephone
conversations with Mr. Watsa regarding Fairfaxs
continued interest in pursuing a potential acquisition of the
Company. Mr. Watsa indicated that Fairfax remained
interested in pursuing a potential acquisition of the Company
but would not be in a position to submit a written proposal in
time for the board meeting. Mr. Watsa did however ask BofA
Merrill Lynch to convey to the Companys board that
(i) Fairfax had a sincere interest in pursuing a
transaction, (ii) Mr. Watsa believed the transaction
price would be between $17.00 and $18.00 per share in cash
without any financing condition, (iii) Fairfax would
require 30 days of exclusivity, and (iv) in connection
with a transaction, Fairfax would require
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Mr. Smith and the Companys founder and director,
Mr. Jerome M. Shaw, to enter into voting agreements
agreeing to vote in favor of the transaction. Mr. Watsa
also stated that while a complete and thorough diligence process
needed to be completed, the primary areas that Fairfax would
focus on were claims and loss and loss adjustment expense
reserves.
On August 18 and 19, 2010, the Companys board met and
considered Party 3s proposal and Fairfaxs oral
indication of interest. BofA Merrill Lynch gave a presentation
to the board on both proposals. BofA Merrill Lynch began the
presentation by explaining that the primary representative of
BofA Merrill Lynch had previously served as chief financial
officer of Odyssey Re and has a longstanding and close
relationship with senior executives of Fairfax and certain of
its subsidiaries, and that BofA Merrill Lynch had represented
Fairfax and certain of its subsidiaries in many transactions
over the years. However, BofA Merrill Lynch represented that it
did not view this relationship as an impediment to representing
the Company in a transaction with Fairfax. BofA Merrill Lynch
pointed out in this regard that BofA Merrill Lynch had recently
represented Zenith National Insurance Corp. in connection with
its acquisition by Fairfax. The board members questioned BofA
Merrill Lynch regarding its relationship and the history of its
other representations of and opposite Fairfax. The board sought
input from McDermott Will & Emery, who confirmed that
there was no legal prohibition of the board utilizing BofA
Merrill Lynch but that its relationships with Fairfax would need
to be considered by the board and, in the event a transaction
was realized, disclosed to stockholders. McDermott
Will & Emery advised the board to evaluate whether it
believed BofA Merrill Lynch could act independently and in the
best interest of the Company and its stockholders in
representing the Company and in evaluating the fairness of the
consideration, from a financial point of view, to be paid to
stockholders in any potential transaction. The board discussed
the relationship of BofA Merrill Lynch with Fairfax, the role it
would play in the transactions under consideration and whether
there were questions or issues regarding its ability to act in
the best interest of the Company or its stockholders. The board
also discussed BofA Merrill Lynchs work for the Company on
the Valiant transaction. Following these discussions, the board
concluded that it believed BofA Merrill Lynch could act in the
best interest of the Company and its stockholders and that the
involvement of the BofA Merrill Lynch representative who has a
longstanding and close relationship with Fairfax and had once
been an executive officer of a Fairfax subsidiary was
appropriate.
BofA Merrill Lynch then made a presentation to the board
regarding both proposals and provided a preliminary valuation
analysis of the Company. BofA Merrill Lynch also reviewed
background information regarding Party 3 and Fairfax. BofA
Merrill Lynch also outlined the due diligence conducted by each
party through the date of the meeting and the remaining
diligence issues identified by each party. Following BofA
Merrill Lynchs presentation, the board members asked
questions regarding, and discussed various aspects of, the
acquisition proposals, the potential buyers, the likelihood that
each potential acquirer would complete a transaction, what
additional diligence each party needed to complete, and the
likely timing of a transaction. The board members took
particular note of the fact that both proposals offered a
premium of nearly 100% to the then current trading price of the
Companys stock. The board members also had an extensive
discussion regarding the fact that neither party was willing to
proceed without exclusivity. The board then held further
discussion regarding whether it would grant exclusivity to
either party in light of the fact that Party 3s proposal
contained extensive conditionality and Fairfaxs indication
was not fully developed.
The board also discussed the current economic conditions
generally, as well as the specific challenges in the property
and casualty insurance market. Reference was made to
presentations to the board by the Companys underwriting
staff the day before, which demonstrated the difficult pricing
environment and increased competition from the admitted market.
While the board was of the view that the Company was positioned
to survive current market conditions, the board believed it was
appropriate to consider the opportunity to provide cash to
stockholders through a sale of the Company. The board also noted
that the Company would have difficulty growing without becoming
part of a larger organization that had a larger balance sheet
and greater capital flexibility to support the Companys
business.
McDermott Will & Emery again reviewed with the board
its fiduciary duties under Delaware law in the context of a
potential sale of the Company. The board asked questions and
discussed its role, including in particular whether price was
the only factor to be considered when selecting a buyer or
whether deal certainty could play a role in its decision.
Counsel confirmed that deal certainty could be taken into
consideration.
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Following further discussion, with input from BofA Merrill
Lynch, it was determined that both Fairfax and Party 3 had the
necessary financial resources and capabilities to complete an
acquisition of the Company. The board directed BofA Merrill
Lynch to inform both parties that the board was deferring its
decision on exclusivity for two weeks to allow time for the
parties to complete additional valuation and diligence work and
that the board would consider exclusivity at a price of $18.00
per share or above if a party was able to significantly narrow
the scope of its remaining due diligence and provide greater
certainty in completing a transaction on the respective terms
outlined.
Following the board meetings, BofA Merrill Lynch had
conversations with Party 3s financial adviser and
Mr. Watsa regarding the boards decision. Party
3s financial adviser conveyed Party 3s willingness
to undertake a transaction at $18.00 per share subject to its
previously stated due diligence concerns. Mr. Watsa was
amenable to the process proposed and confirmed to BofA Merrill
Lynch that his team would commence its due diligence review
quickly.
On August 23, 2010, the Companys board met via a
telephone conference during which BofA Merrill Lynch updated the
board on its conversations with Party 3 and Fairfax. The board
members asked BofA Merrill Lynch questions and discussed various
strategies and approaches for next steps. In response to the
boards questions, BofA Merrill Lynch expressed its belief
that both Party 3 and Fairfax were sincere in their desire to
complete a transaction.
Based upon this input, and after extensive discussion of the
risks that either or both parties might withdraw their proposals
if they were not granted exclusivity immediately, the board
directed BofA Merrill Lynch to request that each party complete
such further diligence as such party deemed appropriate to be in
a position to make a thorough presentation to the board on or
about September 9, 2010. Thereafter, the board would make a
determination on whether to grant exclusivity to a party.
The board also discussed whether to contact other potential
purchasers. The board members discussed the various acquisition
proposals the Company had previously received, including
specifically proposals from Party 1 and Party 2 received in
November and December of 2009. The board noted that when taking
the Companys special $2.00 per share cash dividend paid in
March 2010 into account, the proposals from Party 3 and Fairfax
represented greater value to stockholders than either of the
2009 proposals.
On August 23 and 24, 2010, BofA Merrill Lynch advised
representatives of Party 3 and of Fairfax of the process
established by the board. Each agreed to this process, but Party
3 expressly stated that it made no assurance it could eliminate
any of the conditions to its proposal during that time. On and
after August 23, 2010, both Party 3 and Fairfax were
provided access to additional information related to the
Company, its operations, finances, regulatory structure, policy
forms, underwriting, claims handling, actuarial and reserving
practices, personnel and corporate organization. Fairfax
requested the opportunity to visit the Companys
headquarters in Southfield, Michigan and to meet with key
members of the Companys management team.
On August 24, 2010, Mr. Smith and BofA Merrill Lynch
met with a representative of Party 4 in Southfield, Michigan.
During this meeting, the Party 4 representative expressed
interest in a transaction pursuant to which Party 4 would
acquire the Company. Mr. Smith and BofA Merrill Lynch
advised the Party 4 representative that the Company would
consider whether to entertain such discussions, but that the
Company was in discussions with other parties and that Party 4
would be late in the process and would need to commit
significant resources to catch up. On August 25, 2010, the
Party 4 representative called Mr. Smith and confirmed Party
4s interest in a transaction, proposed dates for meetings
between Company management and representatives of Party 4 and
requested that the Company forward a confidentiality agreement
to enable Party 4 to review information. Mr. Smith agreed
to management meetings and set tentative dates of August 29 and
30, 2010.
On August 26, 2010, the Company entered into a
confidentiality agreement with Party 4 and provided Party 4
representatives with full access to the Companys diligence
materials. The Party 4 representative called Mr. Smith to
discuss the planned management meetings and to advise
Mr. Smith that Party 4 would be using an industry
consultant to assist it in evaluating the Company.
Also on August 26, 2010, Mr. Smith received a phone
call from the president and chief executive officer of Party 3
during which they discussed the status of Party 3s
proposal and addressed questions, concerns and logistics of
Party 3s presentation to the board. Mr. Smith advised
the president and chief executive officer of Party 3 of the
importance to the board of deal certainty based on the
boards prior experience and advised him to manage his
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diligence process and structure his presentation so as to
confirm to the board both certainty of the price proposed and
certainty of executing a definitive agreement in respect of, and
consummating, a transaction. The president and chief executive
officer of Party 3 reiterated his interest in completing an
acquisition of the Company but expressed reservations that Party
3 would be able to resolve any material portion of Party
3s due diligence concerns during this two week period.
From August 26, 2010 through September 1, 2010, the
Company received and responded to supplemental diligence
requests from each of Party 3, Party 4 and Fairfax.
On August 29 and 30, 2010 representatives of the Company met
with representatives of Party 4 and made a series of management
presentations that included an overview and history of the
Company and covered the Companys underwriting, claims,
actuarial, legal, reinsurance and finance/accounting areas. On
the evening of August 29, 2010, Messrs. Smith and
Marazza attended dinner with Party 4s representatives,
during which there was a general discussion of business
conditions in the property and casualty insurance industry, and
limited discussion of a potential transaction involving the
Company.
On September 1, 2010, representatives of the Company met
with representatives of Fairfax and made a series of management
presentations that included an overview and history of the
Company and covered the Companys underwriting, claims,
actuarial, legal, reinsurance and finance/accounting areas. The
discussions and meetings with representatives of Fairfax
continued through September 2, 2010.
Over the weekend of September 4 and 5, 2010, the Company
responded to due diligence requests and participated in
diligence conference calls with representatives of Fairfax,
focused primarily on the Companys balance sheet, loss and
loss adjustment expense reserves and investment portfolio.
On September 7, 2010, representatives of Party 4 visited
the Companys offices in Southfield, Michigan and met with
members of senior management of the claims and actuarial
departments and of the various underwriting units of the
Company. Following these meetings, a representative of Party 4
advised BofA Merrill Lynch that it had identified some areas of
concern during the course of its due diligence and did not
believe it could proceed at a price in the range of $18.00 per
share.
On the evening of September 7, 2010, the board met via
teleconference to discuss the recent activity. Mr. Smith
explained that since the boards last meeting, Party 4 had
expressed interest in the Company. Party 4 had visited the
Company and undertaken due diligence, but as a result of its due
diligence concluded it was not able to pay a price in the range
that the Company was considering. Mr. Smith and BofA
Merrill Lynch also described the diligence efforts undertaken by
both Fairfax and Party 3, the issues that had been identified
and the messages that had been delivered to each party in
preparation for the board presentations on September 9 and 10,
2010. Mr. Smith then explained the timing of the
presentations by each party and the expected process. The board
members then asked Mr. Smith and BofA Merrill Lynch
questions and discussed the upcoming meetings.
On September 8, 2010, Mr. Smith received a telephone
call from the president and chief executive officer of Party 3
confirming the meeting time and anticipated process.
Mr. Smith once again emphasized to the president and chief
executive officer of Party 3 that it was critical that he
structure his presentation so as to confirm to the board both
certainty of the price proposed and certainty of executing a
definitive agreement in respect of, and consummating, a
transaction.
On September 9 and 10, 2010, the board held meetings in New York
to receive the presentations of Fairfax and Party 3. Also in
attendance were representatives of BofA Merrill Lynch and
McDermott Will & Emery. On September 9, 2010,
Mr. Watsa and Mr. Barnard, on behalf of Fairfax, made
Fairfaxs presentation to the Companys board via
teleconference. Mr. Watsa provided an overview of Fairfax,
its operations and operating units, guiding principles, values,
financial condition and management style. Mr. Barnard then
provided the board with an overview of the diligence efforts to
date, areas of focus, remaining issues and current perspectives
on the proposed transaction. Mr. Barnard noted that Fairfax
was generally satisfied with the preliminary results of its due
diligence. Mr. Barnard identified the limited remaining
areas of focus. Mr. Barnard summed up his impressions by
stating the Company would fit well strategically with Fairfax.
Mr. Watsa then concluded by emphasizing Fairfaxs
25-year
history of and commitment to completing proposed transactions.
After this background, Mr. Watsa described the terms of
Fairfaxs proposed transaction whereby Fairfax was offering
$17.00 to $18.00 per share; was requesting a
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30 day exclusivity period; and was asking that
Messrs. Smith and Shaw agree to voting agreements requiring
them to vote in favor of a transaction with Fairfax.
Following this presentation, the board members asked
Messrs. Watsa and Barnard questions regarding the diligence
process, remaining diligence issues, whether Fairfax identified
any businesses that they were not comfortable with,
Fairfaxs level of confidence that they would enter into a
definitive agreement in respect of, and consummate, a
transaction, the terms of its proposal, any flexibility in the
terms of its proposal and likely timing of a transaction.
Messrs. Watsa and Barnard answered each of these questions
and specifically confirmed the offer was for cash without a
financing condition. Mr. Watsa again expressed confidence
that, although diligence remained to be completed, a transaction
was likely to be able to be agreed upon within the price range
proposed and consummated.
After the board members had asked their questions and discussed
the responses, Mr. Smith advised the board that he had just
received a written proposal from Fairfax that was consistent
with what had been described by Mr. Watsa and that copies
of the proposal would be distributed to the board members. The
board agreed to defer further discussion on the Fairfax proposal
until the meeting resumed the following day.
On September 10, 2010, the meeting of the Companys
board resumed. Mr. Smith gave an overview of the diligence
process that the Company had experienced in recent weeks. He
reminded the board that, in addition to Fairfax and Party 3,
Party 4 had also expressed an interest in the Company and had
undertaken fairly extensive diligence, although it ultimately
withdrew its participation in the process because it did not
believe it could get to a price that would be satisfactory to
the Company based on its diligence. Mr. Smith also
described Party 3s approach to the diligence process in
recent weeks, as compared to the approach of Fairfax and Party
4. Mr. Smith noted that Party 3s approach lacked the
urgency demonstrated by the other parties and that Party 3 did
not seem to be aggressively working to resolve any of the issues
that Party 3 had identified as critical. In
Mr. Smiths view, Party 3s diligence process
could continue for a significant period of time. Mr. Smith
also pointed out that both Fairfax and Party 4 had immediately
scheduled diligence meetings in the Companys offices and
visited with Company management. Party 3 on the other hand, had
not been to Southfield despite being provided the opportunity to
do so.
The board then had discussions with McDermott Will &
Emery regarding its fiduciary duties in this circumstance, which
included discussion of the factors the board could consider in
selecting one potential acquirer over another and its ability to
consider the conduct of the parties during the transaction
process in evaluating certainty of closing. The board held an
extensive discussion regarding the transaction process to date,
the specificity of the price or price range being offered, the
diligence efforts conducted and remaining to be conducted and
the general view of Mr. Smith and senior management of each
partys ability to execute a definitive agreement in
respect of, and consummate, a transaction.
Following this discussion, the president and chief executive
officer of Party 3 was invited to join the meeting. He described
Party 3, its operations, lines of business and business units
and described Party 3s plans for future growth. He
continued with a description of why Party 3 was interested in
the Company, noting in particular the strength and reputation of
the CoverX franchise and the breadth of its surplus lines
platform. He also reviewed Party 3s financial performance
and position, cash availability, operating cash flow and balance
sheet. BofA Merrill Lynch and the board then asked the president
and chief executive officer of Party 3 a series of questions. In
response to these questions, the president and chief executive
officer of Party 3 stated that Party 3 was not currently
viewing the purchase price as a fixed number, but rather as a
year-end book value number that would be determined by Party 3
following due diligence. Party 3 did not specify the actual
price it was willing to pay, but acknowledged that the Company
was expecting book value of greater than $18.00 per share at
December 31, 2010. The president and chief executive
officer of Party 3 also indicated that Party 3 had concerns
about the Companys contract underwriting, or program,
business and certain areas of the Companys underwriting.
The president and chief executive officer of Party 3 indicated
that he anticipated diligence taking 60 days to complete,
but indicated that process could be accelerated with proper
support from the Company.
In response to further questions from the board members, the
president and chief executive officer of Party 3 indicated that
he had kept his board apprised of the transaction and diligence
process and that they were generally supportive. He acknowledged
that the premium of the proposed purchase price over the current
share price was high, and of some concern to his board members,
but he did not view it as an impediment to the transaction.
27
The board members and BofA Merrill Lynch continued to question
the president and chief executive officer of Party 3 regarding
the status of diligence, and whether Party 3 would proceed
without exclusivity. In response, he indicated that Party 3
would not proceed further without exclusivity.
Following the presentation by the president and chief executive
officer of Party 3, the board members discussed Party 3s
presentation in comparison to the Fairfax presentation. It was
the general consensus of the board members that despite a head
start in the diligence process, specific direction from both
BofA Merrill Lynch and Mr. Smith to address price and clear
diligence issues, Party 3 had failed to present a proposal that
offered a firm price or resolved many of the diligence items it
had identified previously. As a result, although the board
members did not question Party 3s interest in a
transaction, the board was concerned that Party 3 had failed to
aggressively pursue the due diligence necessary to eliminate the
uncertainty in its proposal.
Following this discussion, the board considered whether it was
willing to grant exclusivity to Fairfax. There was considerable
discussion regarding the advisability of asking Fairfax to
increase the upper end of its price range above $18.00 per share
in exchange for exclusivity. The board determined that Fairfax
was unlikely to pay more than $18.00 per share. The board
concluded that BofA Merrill Lynch should request that Fairfax
raise the lower end of its price range.
The board authorized and directed BofA Merrill Lynch to request
that Fairfax modify its proposed price range to $17.50 to $18.00
per share. The board further authorized and directed the Company
to enter into an exclusivity agreement and to negotiate the
primary terms and conditions of a merger agreement with Fairfax
subject to further board input and approval. Fairfax orally
agreed to revise the lower end of its proposed range from $17.00
to $17.50 per share.
On September 11, 2010, Mr. Smith contacted the
president and chief executive officer of Party 3 to advise him
that the board had determined to grant exclusivity to another
party.
Also on September 11, 2010, Mr. Smith contacted
Mr. Watsa to advise him that the board had determined to
grant exclusivity to Fairfax for 30 days. Mr. Watsa
expressed his appreciation for the boards decision to
proceed with Fairfax and emphasized Fairfaxs commitment to
completing its due diligence and executing a definitive
agreement in respect of a transaction as promptly as possible.
On September 11, 2010, McDermott Will & Emery, in
consultation with the Companys general counsel, negotiated
an exclusivity agreement between Fairfax and the Company with
Shearman & Sterling LLP, which we refer to as
Shearman & Sterling, counsel to Fairfax. The
exclusivity agreement was signed on September 11, 2010 by
Fairfax, and on September 12, 2010 by the Company.
On September 13, 2010, Shearman & Sterling, on
behalf of Fairfax, delivered a form of merger agreement and a
form of voting agreement to McDermott Will & Emery.
In the following weeks after September 13, 2010, Fairfax
conducted additional due diligence focusing on claims and loss
and loss adjustment expense reserves, including a review of
files and meetings with management.
On September 16, 2010, Messrs. Smith, Marazza and
Roskiewicz met with McDermott Will & Emery via
teleconference to discuss the form of merger agreement delivered
by Fairfaxs counsel. McDermott Will & Emery led
the discussion and the group discussed major issues in the draft
merger agreement, including (i) the scope of the definition
of material adverse effect, (ii) concerns with
certain aspects of non-solicitation provisions in the agreement,
(iii) strengthening the director and officer
indemnification protection, (iv) the level of the
termination fee requested (4.50% of the aggregate merger
consideration), (v) trigger events requiring payment of the
termination fee, and (vi) whether a go shop
provision was warranted.
On September 21, 2010, following further review, discussion
and revision of the merger agreement with management and BofA
Merrill Lynch, McDermott Will & Emery delivered a
revised draft of the merger agreement to Shearman &
Sterling which included a notation that the Company expected the
termination fee to be significantly reduced or a go
shop provision added to the agreement.
On September 24, 2010, the Companys board met via
teleconference to discuss developments with respect to the
transaction proposal received from Fairfax since the
boards last meeting. Mr. Smith confirmed that Fairfax
had
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orally agreed to narrow its price range to $17.50 to $18.00 per
share and that Fairfax had quickly initiated its more detailed
diligence efforts. Mr. Smith noted that claims and loss and
loss adjustment expense reserves were the remaining outstanding
diligence items for Fairfax. The Companys senior vice
president of claims then provided an overview to the board of
the Fairfax diligence process with respect to claims.
Mr. Marazza gave an overview of the diligence process
related to finance, accounting and actuarial matters. The board
members asked questions and discussed the claims, financial and
actuarial due diligence process being conducted by Fairfax.
Mr. Roskiewicz then provided a summary of the current draft
terms, status and negotiation of the merger agreement. He noted
that the boards input was critical, in particular, with
respect to certain key issues, such as the termination fee, the
triggers for payment of the termination fee and whether a
go shop process should be included. Following
Mr. Roskiewiczs presentation, the board members asked
questions and discussed the merger agreement and the negotiation
process and provided guidance on certain positions with respect
to the merger agreement.
BofA Merrill Lynch then addressed the current status of the
discussions with Fairfax regarding the termination fee. BofA
Merrill Lynch indicated that a typical termination fee for
transactions of similar size would be between 3% and 4%, with an
average of approximately 3.5%, of the aggregate merger
consideration. BofA Merrill Lynch stated that Fairfax had asked
for 4.50% of the aggregate merger consideration in its initial
draft of the merger agreement and was currently requesting 3.75%
of the aggregate merger consideration while BofA Merrill Lynch
had suggested 3.00% to 3.25% might be acceptable to the Company.
Following BofA Merrill Lynchs comments, the board asked
Mr. Smith, McDermott Will & Emery and BofA
Merrill Lynch questions regarding negotiations, due diligence,
the termination fee and likely timing of a transaction.
On September 24, 2010, Shearman & Sterling
delivered a revised draft of the merger agreement to McDermott
Will & Emery.
On September 28, 2010, Messrs. Smith, Marazza,
Roskiewicz, BofA Merrill Lynch and McDermott Will &
Emery met by teleconference to discuss issues in the revised
draft of the merger agreement. McDermott Will & Emery
led a detailed discussion of the agreement, the issues it had
identified and the areas for which management and the board
would need to provide input.
On September 29, 2010, McDermott Will & Emery and
Shearman & Sterling held a conference call for a
comprehensive negotiation of the terms of the merger agreement.
Areas of specific focus included the rights of the board in the
event it received an unsolicited proposal, the Companys
rights and remedies upon a breach of the merger agreement by
Fairfax, and the circumstances in which the termination fee
would be paid. McDermott Will & Emery expressed the
boards unwillingness to proceed without a go
shop provision unless the termination fee was
substantially reduced. Shearman & Sterling advised
that Fairfax would not agree to a go shop provision.
On September 30, 2010, McDermott Will & Emery
sent a revised draft of the merger agreement to
Shearman & Sterling.
On September 29 and 30, 2010, Company management and BofA
Merrill Lynch had conversations with Fairfax regarding
Fairfaxs due diligence to date, including Fairfaxs
impressions regarding aspects of the Companys business
with construction defect exposure, which we refer to herein as
the construction defect business.
On October 1, 2010, the Companys board met by
teleconference to discuss the transaction with management,
counsel and its financial advisers. During this call,
Mr. Smith explained that Fairfax had substantially
completed its diligence, but had identified what it believed may
be a potentially significant issue involving the Companys
construction defect business. Mr. Smith advised the board
of the conversations with Fairfax regarding the construction
defect business and indicated that the Company had not yet
received input from Fairfax on the impact of the issue. He then
reviewed with the board the nature of the Companys
exposure to construction defect claims and the various studies,
reports and analyses that the Company uses and has used
historically to monitor this line of business. Mr. Smith
noted in particular the comprehensive reserves study undertaken
by the Companys internal actuarial department in 2008, as
well as other actuarial analyses completed in 2008 and 2009,
including a separate construction defect claims analysis in
2008. Based on the results of these studies, as well as an
analysis of claims frequency and severity, underwriting
methodologies and forms utilization. Mr. Smith indicated
that management was generally comfortable with the
Companys construction defect exposures and policy
protections and believed reserve levels were adequate but would
undertake further review of these issues. Mr. Smith
explained
29
that the Company had scheduled further meetings with Fairfax to
address its concerns. Mr. Smith indicated that management
would advise the board of any more detail or insight gained as a
result of these meetings. Thereafter, the board members asked
questions and discussed the Companys construction defect
business. Board members also asked questions about, and
commented on, the nature of Fairfaxs construction defect
business.
Mr. Roskiewicz then reported that negotiations had
continued on the merger agreement and that he believed the
parties had made significant progress in limiting the open
issues. He explained the open issues to the board, answered
questions and sought input. The board members asked McDermott
Will & Emery and Mr. Roskiewicz questions and
discussed the transaction process and terms and conditions of
the merger agreement.
On October 5, 2010, Messrs. Watsa, Barnard and
Mr. Doug Libby, President and Chief Executive Officer of
Crum & Forster Holdings Corp., a subsidiary of Fairfax
and a commercial property and casualty company, visited the
Companys offices in Southfield, Michigan for further due
diligence regarding the Companys construction defect
business. Messrs. Smith and Marazza, as well as the
Companys senior management in charge of the Companys
underwriting, claims and actuarial areas, attended the meetings
on behalf of the Company.
On October 6, 2010, Mr. Watsa called Mr. Smith
and outlined the remaining due diligence issues related to the
Companys construction defect business and the actions that
Fairfax would like to undertake to evaluate this line of
business. Mr. Watsa also requested that the Company extend
the exclusivity period from its original expiration on
October 12, 2010 until October 22, 2010.
Mr. Smith indicated that he would raise the request with
the Companys board.
The board met by conference call on October 7, 2010, and
Mr. Smith discussed Fairfaxs concerns regarding the
Companys construction defect business. Mr. Smith
advised the board that Mr. Watsa said that he was committed
to pursuing a transaction, but there was uncertainty arising
from the issues identified in due diligence. Mr. Smith
stated that Fairfax had requested an extension of the
exclusivity period from October 12, 2010 to
October 22, 2010. Mr. Smith recommended that the
extension be granted. The board members asked questions
regarding the specific action steps to be taken during the
extension period, whether a shorter period was appropriate, and
what remained to be completed given the extensive investigation
conducted to date. The board members also questioned and
discussed the nature of the differing views between the Company
and Fairfax with respect to the construction defect business and
whether this difference could be overcome in a manner acceptable
to the Company. Management contributed its views to the
discussion. Both Mr. Smith and BofA Merrill Lynch expressed
their belief that Fairfax remained committed to the transaction
and was working in good faith to resolve this issue but needed
more time. Following further discussion on this point, the board
resolved to extend the exclusivity period through
October 22, 2010. On October 7, 2010, the Company and
Fairfax executed an amendment to extend the exclusivity
agreement for 10 days to October 22, 2010.
From October 7, 2010 through approximately October 18,
2010, Fairfax made numerous information requests and conducted
numerous conference calls and meetings with senior managers,
third party administrators and professional advisers of the
Company regarding the Companys construction defect
business. Fairfax delivered to the Company an analysis of its
concerns. This analysis implied a potential reduction in the
book value of the Company of as much as $2.00 to $3.00 per
share. BofA Merrill Lynch communicated to Fairfax that a
proposal with a $2.00 to $3.00 dollar per share price reduction
would not be acceptable to the Company. During this period, the
Company reviewed and responded to Fairfaxs analysis and
identified to Fairfax inaccuracies or inconsistencies in
Fairfaxs methodologies, assumptions and results.
On October 18, 2010, Messrs. Smith and the primary
representative of BofA Merrill Lynch met in Toronto with
Mr. Watsa over dinner to determine whether they could reach
agreement on the terms of a transaction. Mr. Watsa and
Mr. Smith had an extensive discussion regarding the
differing views of the Company and Fairfax with respect to the
construction defect business, including the price Fairfax would
pay for the Company. Mr. Smith reiterated that the Company
would not proceed with a transaction at the price implied by
Fairfaxs analysis of the Companys construction
defect business. After further discussion, Mr. Watsa
advised Mr. Smith that given Fairfaxs views of the
Companys construction defect business it could not proceed
with the transaction within its original price range, but would
proceed with a transaction at $16.50 per share. Mr. Watsa
explained that this was Fairfaxs final proposal and
represented an effort to fairly bridge the differences between
the parties.
30
On October 19, 2010, Shearman & Sterling
delivered a revised draft of the merger agreement to McDermott
Will & Emery reflecting Fairfaxs comments to the
Companys September 30, 2010 draft.
On October 20, 2010, the Companys board met via
teleconference to discuss the transaction. Mr. Smith
reviewed in detail the transaction history and communications
with Fairfax since the last board meeting and the revised
proposal by Fairfax to acquire the Company for $16.50 per share.
BofA Merrill Lynch reported that Mr. Watsa acknowledged
that deal certainty was a significant factor in the boards
determination to proceed with Fairfax over other potential
buyers, but felt, given Fairfaxs views of the
Companys construction defect business, that if the Company
wished to proceed with a transaction with Fairfax it would be
necessary to make an adjustment to the price.
Following the remarks by Mr. Smith and BofA Merrill Lynch,
the board members discussed the proposal to modify the price,
the factors behind it, the results of diligence,
managements ongoing review of the construction defect
business, and whether the Company should terminate discussions,
continue to proceed with the transaction or negotiate further
with Fairfax on price to try to obtain an increase. The board
members also asked questions regarding next steps, process and
timing. The board questioned BofA Merrill Lynch regarding its
preliminary views on the price. BofA Merrill Lynch indicated
that it was preparing a full analysis of the price proposed in
light of the Companys financial position and performance
and would be in a position to present the results of that
analysis the following week. BofA Merrill Lynch noted that the
price proposed represented a 50% premium to current market price
of the Companys common stock, as well as a premium to the
52-week high trading price of the Companys common stock.
Following this discussion, Mr. Smith asked for the board
members views on proceeding to finalize a transaction with
Fairfax on the revised terms. The board members expressed
support of the transaction and directed the Company to proceed
to finalize documentation for the transaction, subject to
receipt of a fairness opinion from BofA Merrill Lynch.
On October 21, 2010, McDermott Will & Emery and
Shearman & Sterling met by teleconference to negotiate
outstanding open items in the terms of the merger agreement.
On October 22, 2010, McDermott Will & Emery
delivered a revised draft of the merger agreement to
Shearman & Sterling, which reflected, among other
items, (i) certain concessions that Fairfax had agreed to
with respect to the non-solicitation provision,
(ii) changes to the definition of material adverse
effect that would limit Fairfaxs ability to
terminate the agreement as a result of any issues related to
claims or reserves, and (iii) the agreement of the parties
to reduce the termination fee to approximately 3.00% of the
merger consideration, or $9,000,000.
On October 24 and 25, 2010, McDermott Will & Emery and
Shearman & Sterling had additional communications
about the terms and conditions of the merger agreement.
On October 25, 2010, McDermott Will & Emery and
Mr. Roskiewicz led a meeting of the board held by
teleconference during which they gave a detailed presentation of
the terms of the merger agreement. McDermott Will &
Emery noted provisions of particular interest or concern and
areas where the boards input was important. The board
members asked questions regarding and discussed various
provisions of the merger agreement. They discussed the
non-solicitation provision at great length. The board also
discussed the proposed termination fee and the circumstances
under which the fee would be payable. The board also noted that
Fairfax had originally proposed a fee of 4.5% of the merger
consideration and was now agreeing to a termination fee of
approximately 3.00% of the merger consideration and that the
termination fee was on the low end of the range for such fees in
transactions of similar size. Following further discussion, the
board members confirmed that they were supportive of the merger
agreement and its terms as presented and directed management and
counsel to proceed to finalize the agreement consistent with the
discussions and input that had just occurred. Given the size of
the termination fee and the other provisions of the merger
agreement, the board determined to proceed without a go
shop clause.
On October 26, 2010, the board met via teleconference for a
preliminary review of the Companys latest prospective
financial information and valuation analysis. Mr. Marazza
explained the prospective financial information was prepared by
or at the direction of and approved by Companys management
and that the Company had presented to BofA Merrill Lynch this
information in connection with its review and valuation of the
Company.
31
Mr. Marazza reviewed the assumptions used in preparing the
projections. BofA Merrill Lynch then presented its preliminary
view on the valuation of the Company and explained that the
transaction would be reviewed by the BofA Merill Lynch fairness
committee for a determination of the fairness of the merger
consideration from a financial point of view. It also outlined
various multiples represented by the purchase price offered by
Fairfax.
On October 27, 2010, in connection with the preparation of
the Companys operating results for the quarter ended
September 30, 2010, the Audit Committee met and reviewed
managements determination to record $17.3 million
(pre-tax) of adjustments for the unfavorable development of
prior years net loss and loss adjustment expense reserves
due to adverse claims development principally in the
Companys primary general liability and professional
liability lines of business and the related net reduction of
accrued profit sharing commissions due to the Company.
On October 27, 2010 following the audit committee meeting,
the board held a special meeting to continue its consideration
of a transaction with Fairfax. At the meeting, McDermott
Will & Emery reviewed the final proposed transaction
terms. Also at the meeting, BofA Merrill Lynch reviewed with the
board, among other things, its financial analysis of the merger
consideration and delivered to the Companys board an oral
opinion, which was confirmed by delivery of a written opinion
dated October 27, 2010, to the effect that, as of that date
and based on and subject to various assumptions and limitations
described in its opinion, the merger consideration to be
received by holders of the Companys common stock was fair,
from a financial point of view, to such holders (other than
Fairfax and its subsidiaries).
Following BofA Merrill Lynchs presentation, the board
discussed BofA Merrill Lynchs financial analysis and
whether it was advisable to sell the Company to Fairfax in the
current economic environment. The board reviewed the
Companys operating results for the three months ended
September 30, 2010 and considered how these results could
impact the market price of the Company common stock in light of
the $17.3 million (pre-tax) of adjustments for the
unfavorable development of prior years net loss and loss
adjustment expense reserves and the related net reduction of
accrued profit sharing commissions due to the Company. The board
considered the risks associated with deferring the decision to
sell the Company and concluded unanimously that, particularly in
light of the price being offered by Fairfax and the current
outlook for the economy and its impact on the Company and its
business, the decision to sell the Company should not be
deferred. In addition, BofA Merrill Lynch expressed its view
that it was unlikely that the termination fee would
significantly deter an interested third party from making an
offer to acquire the Company. McDermott Will & Emery
stated that, under the terms of the merger agreement, subject to
the non-solicitation provision, the board would have the ability
to review and accept any higher offer that constituted a
superior proposal as defined in the merger agreement. At the end
of the meeting, the board unanimously determined that the merger
agreement was advisable, fair to and in the best interests of
the Company and its stockholders and unanimously resolved to
approve the merger agreement and recommend that the stockholders
of the Company adopt the merger agreement. The board also
approved the merger agreement and authorized and directed
Mr. Smith to execute the merger agreement at the
appropriate time based on the schedule that had been presented
to the board.
On October 28, 2010, following the close of the markets and
the release by each of the Company and Fairfax of their
respective third quarter 2010 earnings results,
Messrs. Smith and Shaw executed voting agreements.
Thereafter the Company and Fairfax executed the merger
agreement, and the parties issued a joint press release
announcing the execution of the merger agreement.
Reasons
for the Merger
In evaluating the merger agreement and the merger, the board of
directors consulted with our senior management team and our
outside legal and financial advisers and considered a number of
factors weighing in favor of the merger, including, among
others, the material factors set forth below (the order in which
the following factors appear does not reflect any relative
significance).
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The Companys Business and Prospects
. The
board of directors believes that the merger maximizes value to
the Companys stockholders and is a more attractive option
for the Companys stockholders than any other reasonably
available option, including continuing to operate the Company on
an independent, stand-alone basis. In making this determination,
the board of directors considered, on a historical and
prospective basis, the Companys business, results of
operation (including, among other things, trends in specialty
commercial insurance, underwriting performance and return on
equity), earnings, financial condition and book value,
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and the market price and volatility of, and trading information
with respect to, the Companys common stock. The board also
considered the anticipated continuation of the downward pressure
on the Companys common stock that in the absence of the
announcement of the merger agreement would likely have resulted
from the September 30, 2010 earnings release.
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The Companys challenges 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 operating
as a relatively small, stand-alone public company, the Company
faces continuing, and sometimes conflicting, pressures from
customers, brokers, competitors, regulatory agencies, financial
analysts and independent rating agencies. The Companys
market capitalization is among the lowest of its peer group.
This limits the Companys ability to weather market
downturns or to grow significantly. The Company expects that
this merger will enable its shareholders to realize a
significant premium that is not likely to be achieved in the
near term as a stand-alone company.
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The Impact of Difficult Economic
Conditions
. The board of 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 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.
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BofA Merrill Lynchs Opinion
. The board
of directors considered the opinion of BofA Merrill Lynch, dated
October 27, 2010, to the Companys board of directors
as to the fairness, from a financial point of view and as of the
date of the opinion, of the merger consideration to be received
by holders of Companys common stock (other than Fairfax
and its subsidiaries), as more fully described below in the
section entitled Opinion of
BofA Merrill
Lynch
beginning on page 35.
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The Compelling Nature of the Merger
Consideration
. The board of directors considered
that the merger consideration represented a premium of 46.4% to
the closing price of the Companys common stock on
October 26, 2010, the last trading day prior to the
approval of the merger agreement, a 58.6% premium to the
30-day
average closing price of the Companys common stock for the
period ended on October 26, 2010 and a 67.3% premium to the
closing price 30 days prior to the approval of the merger
agreement. The board of directors also considered the fact that
the merger consideration will be paid entirely in cash, which
will provide liquidity and certainty of value to the
Companys stockholders.
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The Low Likelihood that a Third Party Would Propose an
Acquisition at a Higher Price.
The board of
directors discussed third parties most likely to be interested
in acquiring the Company, including parties that had made
non-binding acquisition proposals in the past and concluded that
the likelihood that any of such parties would make an all-cash
offer on better terms than those discussed with Fairfax was low.
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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 stockholders 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 Fairfax of a $9.0 million
break-up
fee. The board considered the provisions in the merger
agreement, including the non-solicitation provision, and
determined in their 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 approximately 3.0% of the equity
value of the transaction, it was reasonable in light of the
benefits of the merger and would not, in the directors
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 Fairfax will be
Completed.
The board of directors considered
Fairfaxs financial condition and the relatively limited
conditions to the closing of the merger, including the fact that
the merger agreement does not contain any financing contingency,
and determined
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that, in its judgment and assuming adoption of the merger
agreement by the Companys stockholders, there is a high
likelihood that the proposed transaction with Fairfax will be
completed. The board of directors further considered
Fairfaxs record in successfully completing acquisitions of
other companies.
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Stockholder Approval and Appraisal Rights.
The
board of directors considered the fact that the merger is
subject to the approval of the Companys stockholders, who
therefore have the option to reject the merger by voting against
the proposal to adopt the merger agreement as described in this
proxy statement. The board of directors also considered the fact
that the total number of shares of the Companys common
stock that would be subject to voting agreements would represent
only 16.6% of the Companys outstanding common stock. In
addition, the board of directors considered the fact that the
Companys stockholders will have the right to demand
appraisal of their shares in accordance with the procedures
established by Delaware law. See the section entitled
Appraisal Rights beginning on page 71.
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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
sophisticated parties in an arms-length negotiation.
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The board of directors also considered, among others, the
following potentially negative factors in determining whether to
approve the merger agreement (the order in which the following
factors appear does not reflect any relative significance).
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That the Merger Consideration Represents a Discount to the
Highest Price at which the Companys Common Stock has
Traded in Recent Years.
The board of directors
considered that the merger consideration represents a 34.4%
discount to the highest price at which the Companys common
stock has ever traded of $25.16 on December 28, 2007 and a
2.9% discount to the initial public offering of the
Companys common stock of $17.00 on October 17, 2006,
which does not reflect the $2.00 special dividend paid by the
Company on March 31, 2010.
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The Interests of Certain Individuals in the Merger.
The
board of directors considered that the Companys officers
and directors have interests in the merger that are different
from, or in addition to, the interests of the Companys
stockholders, including the vesting and cash-out of all unvested
restricted stock and options to purchase common stock held by
the Companys directors, the payment of severance to the
Companys executive officers and the interests of the
Companys directors and officers in being entitled to
continued indemnification and insurance coverage from the
surviving corporation under the merger agreement.
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The No Solicitation,
Break-up
Fee and Expense Reimbursement Provisions.
The
board of directors considered the restrictions contained in the
merger agreement on the Companys ability to solicit
competing proposals from third parties, the absence of a
go shop provision in the merger agreement that would
have permitted the Company to solicit takeover proposals from
third parties for a period of time after the execution of the
merger agreement and the possibility that the $9.0 million
break-up
fee may discourage an interested third party from submitting a
competing, higher proposal to acquire the Company.
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The Risk that the Merger will be Delayed or will not be
Completed.
The board of directors considered the
risk that the merger will be delayed or will not be completed,
including the risk that the affirmative vote of the
Companys stockholders or the required regulatory approvals
may not be obtained, as well as the potential loss of value to
the Companys stockholders and the potential negative
impact on the operations and prospects of the Company if the
merger were delayed or were not completed for any reason.
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The Significant Costs Involved.
The board of
directors considered the significant costs involved in
connection with negotiating the merger agreement and completing
the merger, the substantial management time and effort required
to effectuate the merger and the related disruption to the
Companys
day-to-day
operations during the pendency of the merger. If the merger is
not consummated, the Company may be required to bear such costs
and expenses.
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34
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The Potential Impact of the Announcement of the Merger
Agreement.
The board of directors considered the
risk that the pendency of the merger could adversely affect the
relationship of the Company and its subsidiaries with their
respective employees, agents, policyholders and others with whom
they have business dealings.
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The Interests of the Companys Stockholders in the
Future of the Company.
The board of directors
considered the fact that, following the merger, the
Companys public stockholders will cease to participate in
any future earnings growth of the Company or benefit from any
future increase in the Companys value.
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The Discount to the Companys Book Value Reflected by
the Merger Consideration.
The board of directors
considered the fact that the merger consideration represented a
discount of 2.4% to the fully diluted book value per share of
the Companys common stock as of September 30, 2010.
|
The above discussion of the information and factors considered
by the board of directors includes the principal information and
factors, both positive and negative, considered by the board of
directors in its evaluation of the merger agreement and the
merger. The above discussion is not intended to be exhaustive
and may not include all of the information and factors
considered by the board of directors. After considering the
above factors, the board of directors concluded that, in the
aggregate, the positive factors relating to the merger agreement
and merger significantly outweighed the potential negative
factors.
In view of the variety of factors considered in connection with
its evaluation, and the complexity of these matters, the board
of directors did not quantify or assign relative or specific
weights to the factors considered in reaching its conclusion,
nor did it consider it practical to do so. Rather, the board of
directors made its recommendation based on the totality of the
information presented to and considered by it and the
investigations it conducted. In addition, individual directors
may have given different weights to different factors.
It should be noted that this explanation of the reasoning of the
board of directors and certain information presented in this
section is forward-looking in nature and should be read in light
of the factors discussed in the section titled Cautionary
Statement Concerning Forward-Looking Information beginning
on page 15 of this proxy statement.
Recommendation
of the Board of Directors
The board of directors unanimously recommends that you vote
FOR the proposal to adopt the merger agreement and
FOR the proposal to adjourn the special meeting, if
necessary or appropriate, to solicit additional proxies.
Opinion
of BofA Merrill Lynch
The Company has retained BofA Merrill Lynch to act as the
Companys financial adviser in connection with the merger.
BofA Merrill Lynch is an internationally recognized investment
banking firm which is regularly engaged in the valuation of
businesses and securities in connection with mergers and
acquisitions, negotiated underwritings, secondary distributions
of listed and unlisted securities, private placements and
valuations for corporate and other purposes. The Company
selected BofA Merrill Lynch to act as the Companys
financial adviser in connection with the merger on the basis of
BofA Merrill Lynchs experience in transactions similar to
the merger, its reputation in the investment community and its
familiarity with the Company and its business.
On October 27, 2010, at a meeting of the Companys
board of directors held to evaluate the merger, BofA Merrill
Lynch delivered to the Companys board of directors an oral
opinion, which was confirmed by delivery of a written opinion
dated October 27, 2010, to the effect that, as of the date
of the opinion and based on and subject to various assumptions
and limitations described in its opinion, the merger
consideration to be received by holders of the Company common
stock was fair, from a financial point of view, to such holders
(other than Fairfax and its subsidiaries).
The full text of BofA Merrill Lynchs written opinion to
the Companys board of directors, which describes, among
other things, the assumptions made, procedures followed, factors
considered and limitations on the review undertaken, is attached
as Annex B to this document and is incorporated by
reference
35
herein in its entirety. The following summary of BofA Merrill
Lynchs opinion is qualified in its entirety by reference
to the full text of the opinion. BofA Merrill Lynch delivered
its opinion to the Companys board of directors for the
benefit and use of the Companys board of directors in
connection with and for purposes of its evaluation of the merger
consideration from a financial point of view. BofA Merrill
Lynchs opinion does not address any other aspect of the
merger and does not constitute a recommendation to any
stockholder as to how to vote or act in connection with the
proposed merger.
In connection with rendering its opinion, BofA Merrill Lynch:
(1) reviewed certain publicly available business and
financial information relating to the Company;
(2) reviewed certain internal financial and operating
information with respect to the business, operations and
prospects of the Company furnished to or discussed with BofA
Merrill Lynch by the management of the Company, including
certain financial forecasts relating to the Company prepared by,
or prepared at the direction of and approved by, the management
of the Company (such forecasts, the Company management
forecasts);
(3) discussed the past and current business, operations,
financial condition and prospects of the Company with members of
senior management of the Company;
(4) reviewed the trading history for the Company common
stock and a comparison of that trading history with the trading
histories of other companies BofA Merrill Lynch deemed relevant;
(5) compared certain financial and stock market information
of the Company with similar information of other companies BofA
Merrill Lynch deemed relevant;
(6) compared certain financial terms of the merger to
financial terms, to the extent publicly available, of other
transactions BofA Merrill Lynch deemed relevant;
(7) reviewed a draft of the merger agreement dated
October 26, 2010 (the Draft Agreement); and
(8) performed such other analyses and studies and
considered such other information and factors as BofA Merrill
Lynch deemed appropriate.
In arriving at its opinion, BofA Merrill Lynch assumed and
relied upon, without independent verification, the accuracy and
completeness of the financial and other information and data
publicly available or provided to or otherwise reviewed by or
discussed with it and relied upon the assurances of the
management of the Company that they were not aware of any facts
or circumstances that would make such information or data
inaccurate or misleading in any material respect. With respect
to the Company management forecasts, BofA Merrill Lynch was
advised by the Company, and assumed, that they were reasonably
prepared on bases reflecting the best currently available
estimates and good faith judgments of the management of the
Company as to the future financial performance of the Company.
BofA Merrill Lynch neither made nor was provided with any
independent evaluation or appraisal of the assets or liabilities
(contingent or otherwise) of the Company, nor did it make any
physical inspection of the properties or assets of the Company.
BofA Merrill Lynch did not evaluate the solvency or fair value
of the Company or Fairfax under any state, federal or other laws
relating to bankruptcy, insolvency or similar matters. BofA
Merrill Lynch is not an expert in the evaluation of reserves for
property and casualty insurance losses and loss adjustment
expenses and BofA Merrill Lynch did not make an independent
evaluation of the adequacy of the reserves of the Company. In
that regard, BofA Merrill Lynch made no analysis of, and
expressed no opinion as to, the adequacy of the losses and loss
adjustment expense reserves of the Company. BofA Merrill Lynch
assumed, at the direction of the Company, that the merger would
be consummated in accordance with its terms, without waiver,
modification or amendment of any material term, condition or
agreement and that, in the course of obtaining the necessary
governmental, regulatory and other approvals, consents, releases
and waivers for the merger, no delay, limitation, restriction or
condition, including any divestiture requirements or amendments
or modifications, would be imposed that would have an adverse
effect on the Company or the contemplated benefits of the
merger. BofA Merrill Lynch also assumed, at the direction of the
Company, that the final executed merger agreement would not
differ in any material respect from the Draft Agreement reviewed
by BofA Merrill Lynch.
36
BofA Merrill Lynch expressed no view or opinion as to any terms
or other aspects of the merger (other than the merger
consideration to the extent expressly specified in its opinion),
including, without limitation, the form or structure of the
merger. BofA Merrill Lynch was not requested to, and it did not,
solicit indications of interest or proposals from third parties
regarding a possible acquisition of all or any part of the
Company or any alternative transaction. BofA Merrill
Lynchs opinion was limited to the fairness, from a
financial point of view, of the merger consideration to be paid
to the holders of the Company common stock and no opinion or
view was expressed with respect to any consideration received in
connection with the merger by the holders of any other class of
securities, creditors or other constituencies of any party. In
addition, no opinion or view was expressed with respect to the
fairness (financial or otherwise) of the amount, nature or any
other aspect of any compensation to any of the officers,
directors or employees of any party to the merger, or class of
such persons, relative to the merger consideration. Furthermore,
no opinion or view was expressed as to the relative merits of
the merger in comparison to other strategies or transactions
that might be available to the Company or in which the Company
might engage or as to the underlying business decision of the
Company to proceed with or effect the merger. In addition, BofA
Merrill Lynch expressed no opinion or recommendation as to how
any stockholder should vote or act in connection with the merger
or any related matter. Except as described above, the Company
imposed no other limitations on the investigations made or
procedures followed by BofA Merrill Lynch in rendering its
opinion.
BofA Merrill Lynchs opinion was necessarily based on
financial, economic, monetary, market and other conditions and
circumstances as in effect on, and the information made
available to BofA Merrill Lynch as of, the date of its opinion.
It should be understood that subsequent developments may affect
its opinion, and BofA Merrill Lynch does not have any obligation
to update, revise, or reaffirm its opinion. The issuance of BofA
Merrill Lynchs opinion was approved by BofA Merrill
Lynchs Americas Fairness Opinion Review Committee.
The following represents a brief summary of the material
financial analyses presented by BofA Merrill Lynch to the
Companys board of directors in connection with its
opinion.
The financial analyses summarized below include
information presented in tabular format. In order to fully
understand the financial analyses performed by BofA Merrill
Lynch, 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 performed by BofA Merrill
Lynch. Considering the data set forth in the tables 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 the financial analyses performed by BofA Merrill
Lynch.
First
Mercury Financial Analyses.
Historical Trading Analysis.
BofA Merrill
Lynch reviewed the historical trading performance of the Company
common stock as reported by FactSet, an online investment
research database service used by financial institutions, as
well as the Company management forecasts for fiscal year 2010
and 2011, and calculated for the Companys board of
directors various multiples and premiums resulting from the
merger consideration. The following table presents the results
of BofA Merrill Lynchs calculations:
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Merger Consideration
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|
|
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of $16.50
|
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|
Implied Multiples:
|
|
|
|
|
Price/ 6/30/10 Book Value per Share(1)
|
|
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0.99x
|
|
Price/ 6/30/10 Tangible Book Value per Share(1)
|
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|
1.19x
|
|
Price/ 9/30/10 Book Value per Share(1)
|
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|
0.98x
|
|
Price/ 9/30/10 Tangible Book Value per Share(1)
|
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|
1.17x
|
|
Price/2009 Earnings Per Share(2)
|
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|
11.2x
|
|
Price/2010 Estimated Earnings Per Share (Management)(2)
|
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|
24.6x
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|
Price/2011 Estimated Earnings Per Share (Management)(2)
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|
|
10.4x
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|
Price/ 2010 Estimated Earnings Per Share (FactSet)(2)
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|
12.1x
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|
37
|
|
|
|
|
|
|
Merger Consideration
|
|
|
|
of $16.50
|
|
|
Price/2011 Estimated Earnings Per Share (FactSet)(2)
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|
10.0x
|
|
Implied Premium to:
|
|
|
|
|
Closing price 1 day prior (10/26/10)(2)
|
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|
46.4%
|
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1 week average closing price
|
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|
49.2%
|
|
30 day average closing price
|
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|
58.6%
|
|
90 day average closing price
|
|
|
65.4%
|
|
52 week high closing price(3)
|
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|
24.5%
|
|
52 week low closing price
|
|
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93.0%
|
|
10 day volume weighted average price
|
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|
52.4%
|
|
30 day volume weighted average price
|
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61.8%
|
|
90 day volume weighted average price
|
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|
59.0%
|
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(1)
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Calculated based on fully diluted shares outstanding using the
treasury stock method.
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(2)
|
|
Based on fully diluted operating earnings per share, which
excludes after-tax realized gains and losses and other
non-recurring amounts.
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(3)
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|
Based on Company closing price of $15.25 on 03/05/10, which has
been reduced by the $2.00 per share special dividend paid on
03/31/10 (ex dividend date of 3/10/10)
|
Among other comparisons, BofA Merrill Lynch compared the
Companys 46.4% premium over its one day closing price to
an average one day prior premium of 27.9% for public market
transactions involving U.S. public targets having an
aggregate transaction equity value between $200 million and
$400 million since 2005, and to an average one day prior
premium of 28.5% for public market transactions involving U.S.
public targets having an aggregate transaction equity value
between $200 million and $400 million during the
period from January 1, 2010 to October 26, 2010, in
each case, as reported by Dealogic.
Selected Publicly Traded Companies
Analysis.
BofA Merrill Lynch reviewed publicly
available financial and stock market information for the Company
and the following 12 publicly traded companies in the specialty
insurance industry:
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W. R. Berkeley Corporation
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Markel Corporation
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American Financial Group, Inc.
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HCC Insurance Holdings, Inc.
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Allied World Assurance Company Holdings, Ltd
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ProAssurance Corporation
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RLI Corp.
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Tower Group, Inc.
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Argo Group International Holdings, Ltd.
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The Navigators Group, Inc.
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National Interstate Corporation
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American Safety Insurance Holdings, Ltd.
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38
BofA Merrill Lynch reviewed, among other things, the prices per
share, based on closing stock prices on October 26, 2010,
of the selected publicly traded companies as a multiple of
calendar years 2010 and 2011 estimated operating earnings per
share, commonly referred to as EPS, the estimated operating
return on average equity of the selected publicly traded
companies for calendar years 2010 and 2011, and the prices per
share, based on closing stock prices on October 26, 2010,
of the selected publicly traded companies as a multiple of
primary book value per share as of June 30, 2010. BofA
Merrill Lynch then applied a range of selected multiples of 7.0x
to 9.0x derived from the selected publicly traded companies to
the Companys 2011 estimated operating EPS based on both
analyst estimates and the Company management forecasts, and
applied a range of selected multiples of 0.65x to 0.85x derived
from the selected publicly traded companies to the
Companys estimated primary book value per share as of
September 30, 2010. Estimated financial data of the
selected publicly traded companies were based on publicly
available research analysts estimates. Estimated financial
data of the Company were based on the Company management
forecasts. This analysis indicated the following implied per
share equity value reference ranges for the Company, as compared
to the merger consideration:
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|
|
|
|
Implied Per Share Equity Value Reference Ranges for the
Company
|
|
Merger Consideration
|
|
|
Price/Earnings
|
|
Price/Earnings
|
|
|
Price/Book Value
|
|
(Analyst Estimates)
|
|
(Management Forecasts)
|
|
|
|
$11.05 to $14.45
|
|
$11.55 to $14.85
|
|
$10.92 to $14.04
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$16.50
|
No company used in this analysis is identical or directly
comparable to the Company. Accordingly, an evaluation of the
results of this analysis is not entirely mathematical. Rather,
this analysis involves complex considerations and judgments
concerning differences in financial and operating
characteristics and other factors that could affect the public
trading or other values of the companies to which the Company
was compared.
Selected Precedent Transactions Analysis.
BofA
Merrill Lynch reviewed, to the extent publicly available,
financial information relating to the following 26 selected
transactions involving companies in the insurance industry:
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Announcement Date
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Acquirer
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Target
|
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September 14, 2010
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ACE Limited
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Rain and Hail Insurance Service Incorporated
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July 15, 2010
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ProSight Specialty Insurance Holdings Inc.
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NYMAGIC, INC.
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July 12, 2010
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Markel Corporation
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Aspen Holdings Inc.
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July 1, 2010
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First Mercury Financial Corporation
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Valiant Insurance Group, Inc.
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June 9, 2010
|
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Old Republic International Corporation
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PMA Capital Corporation
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April 26, 2010
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National Interstate Corporation
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Vanliner Group, Inc.
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April 16, 2010
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QBE Insurance Group Limited
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NAU Holding Company, LLC
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March 3, 2010
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Max Capital Group Ltd.
|
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Harbor Point Limited
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February 17, 2010
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Fairfax Financial Holdings Limited
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Zenith National Insurance Corp.
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September 18, 2009
|
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Fairfax Financial Holdings Limited
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Odyssey Re Holdings Corp.
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July 9, 2009
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Validus Holdings, Ltd.
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IPC Holdings, Ltd.
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July 4, 2009
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PartnerRe Ltd.
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PARIS RE Holdings Limited
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December 21, 2008
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Münchener Rückversicherungs-Gesellschaft
|
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HSB Group, Inc.
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August 4, 2008
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Tower Group, Inc.
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CastlePoint Holdings, Ltd.
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July 23, 2008
|
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Tokio Marine Holdings, Inc.
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Philadelphia Consolidated Holding Corp.
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June 27, 2008
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Allied World Assurance Company Holdings, Ltd
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Darwin Professional Underwriters, Inc.
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39
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Announcement Date
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|
Acquirer
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Target
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|
April 23, 2008
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Liberty Mutual Holding Company Inc.
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Safeco Corporation
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March 8, 2008
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Berkshire Hathaway Inc.
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Commercial Casualty Insurance Company and International American
Group Incorporated
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May 6, 2007
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Liberty Mutual Holding Company Inc.
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Ohio Casualty Corporation
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January 4, 2007
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QBE Insurance Group Limited
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Winterthur U.S. Holdings, Inc.
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December 12, 2006
|
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QBE Insurance Group Limited
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Praetorian Financial Group Inc
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May 5, 2005
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Berkshire Hathaway Inc.
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Medical Protective Corporation
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December 9, 2003
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White Mountains Insurance Group, Ltd.
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Sirius International Group
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November 16, 2003
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The St. Paul Companies, Inc.
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Travelers Property Casualty Corp
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May 22, 2003
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Liberty Mutual Holding Company Inc.
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Prudential Commercial Insurance Company; Prudential General
Insurance Company; and Prudential Property and Casualty
Insurance Company
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February 15, 2001
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XL Capital Ltd
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Winterthur International Insurance Company, Ltd.
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BofA Merrill Lynch reviewed, among other things, the equity
value for the target company based on the consideration payable
in the selected transaction, as a multiple of the target
companys book value. BofA Merrill Lynch then applied a
range of selected multiples of 0.90x to 1.00x derived from the
selected transactions to the Companys estimated primary
book value per share as of September 30, 2010. Estimated
financial data of the selected transactions were based on
publicly available information. Estimated financial data of the
Company were based on the Company management forecasts. This
analysis indicated an implied per share equity value reference
range for the Company of $15.30 to $17.00.
No company, business or transaction used in this analysis is
identical or directly comparable to the Company or the merger.
Accordingly, an evaluation of the results of this analysis is
not entirely mathematical. Rather, this analysis involves
complex considerations and judgments concerning differences in
financial and operating characteristics and other factors that
could affect the acquisition or other values of the companies,
business segments or transactions to which the Company and the
merger were compared.
Discounted Cash Flow Analysis.
BofA Merrill
Lynch performed a discounted cash flow analysis of the Company
to estimate a range of present values for the Company common
stock as of September 30, 2010. The analysis was based on
the Company management forecasts for the fiscal years 2010
through 2015. The cash flows were modeled assuming that the
Company continues to operate as an independent entity. The
valuation range was determined by adding (i) the present
value of the Company cash available for dividends during fiscal
years 2010 through 2015 and (ii) the present value of the
terminal value of the Company common stock. In
calculating the terminal value of the Company common stock, BofA
Merrill Lynch used a book value multiple range of 0.75x to 0.95x
to the Companys estimated December 31,
2015 shareholders equity. The dividend stream and the
terminal value were discounted to present value using discount
rates ranging from 11.0% to 13.0%. This analysis indicated the
following implied per share equity value reference range for the
Company as compared to the merger consideration:
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|
|
|
|
Implied Per Share Equity Value Reference Range for the
Company
|
|
Merger Consideration
|
|
$
12.36
to $
16.35
|
|
|
$
16.50
|
|
40
Analyst Stock Price Targets.
BofA Merrill
Lynch reviewed four research analyst reports which had price
targets for the Company that were publicly available on
October 26, 2010, and observed the range of the research
analyst share price targets was $10.50 to $16.00. BofA Merrill
Lynch noted that the merger consideration represented
approximately a 23% premium to the average of the research
analyst share price targets of $13.38.
Other
Factors.
In rendering its opinion, BofA Merrill Lynch also reviewed and
considered other factors, including:
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|
the historical trading (including the low and high trading
price, the price to book multiple, historical trading price and
volume) of the Company common stock for various periods ended on
October 26, 2010;
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|
|
the indexed price to book multiples of the Company and selected
publicly traded specialty insurance companies BofA Merrill Lynch
deemed to be relevant, and the indexed historical stock price
performance of the Company common stock, the
Standard & Poors 500 and selected publicly
traded specialty insurance companies BofA Merrill Lynch deemed
to be relevant, in each case, for various periods ended on
October 26, 2010;
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the historical financial performance (including combined ratios,
operating return on average equity, book value per share growth
and gross premiums written) of the Company and selected publicly
traded specialty insurance companies BofA Merrill Lynch deemed
to be relevant; and
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|
|
a historical regression correlation analysis between the return
on average equity to the average price/book value multiple for
the Company and selected publicly traded specialty insurance
companies BofA Merrill Lynch deemed to be relevant, for various
periods ending on October 26, 2010.
|
Miscellaneous
As noted above, the discussion set forth above is a summary of
the material financial analyses presented by BofA Merrill Lynch
to the Companys board of directors in connection with its
opinion and is not a comprehensive description of all analyses
undertaken by BofA Merrill Lynch in connection with its opinion.
The preparation of a financial opinion is a complex analytical
process involving various determinations as to the most
appropriate and relevant methods of financial analysis and the
application of those methods to the particular circumstances
and, therefore, a financial opinion is not readily susceptible
to partial analysis or summary description. BofA Merrill Lynch
believes that its analyses summarized above must be considered
as a whole. BofA Merrill Lynch further believes that selecting
portions of its analyses and the factors considered 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 BofA Merrill Lynchs analyses and
opinion. The fact that any specific analysis has been referred
to in the summary above is not meant to indicate that such
analysis was given greater weight than any other analysis
referred to in the summary.
In performing its analyses, BofA Merrill Lynch considered
industry performance, general business and economic conditions
and other matters, many of which are beyond the control of the
Company and Fairfax. The estimates of the future performance of
the Company and Fairfax in or underlying BofA Merrill
Lynchs analyses are not necessarily indicative of actual
values or actual future results, which may be significantly more
or less favorable than those estimates or those suggested by
BofA Merrill Lynchs analyses. These analyses were prepared
solely as part of BofA Merrill Lynchs analysis of the
fairness, from a financial point of view, of the merger
consideration and were provided to the Companys board of
directors in connection with the delivery of BofA Merrill
Lynchs opinion. The analyses do not purport to be
appraisals or to reflect the prices at which a company might
actually be sold or the prices at which any securities have
traded or may trade at any time in the future. Accordingly, the
estimates used in, and the ranges of valuations resulting from,
any particular analysis described above are inherently subject
to substantial uncertainty and should not be taken to be BofA
Merrill Lynchs view of the actual values of the Company or
Fairfax.
The type and amount of consideration payable in the merger was
determined through negotiations between the Company and Fairfax,
rather than by any financial adviser, and was approved by the
Companys board of directors. The decision to enter into
the merger agreement was solely that of the Companys board
of directors. As described
41
above, BofA Merrill Lynchs opinion and analyses were only
one of many factors considered by the Companys board of
directors in its evaluation of the proposed 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 merger consideration.
The Company has agreed to pay BofA Merrill Lynch for its
services in connection with the merger an aggregate fee of
$5 million, a portion of which was payable in connection
with rendering its opinion and a significant portion of which is
contingent upon the completion of the merger. The Company also
has agreed to reimburse BofA Merrill Lynch for its expenses
incurred in connection with BofA Merrill Lynchs engagement
and to indemnify BofA Merrill Lynch, any controlling person of
BofA Merrill Lynch and each of their respective directors,
officers, employees, agents and affiliates against specified
liabilities, including liabilities under the federal securities
laws.
BofA Merrill Lynch and its affiliates comprise a full service
securities firm and commercial bank engaged in securities,
commodities and derivatives trading, foreign exchange and other
brokerage activities, and principal investing as well as
providing investment, corporate and private banking, asset and
investment management, financing and financial advisory services
and other commercial services and products to a wide range of
companies, governments and individuals. In the ordinary course
of their businesses, BofA Merrill Lynch and its affiliates
invest on a principal basis or on behalf of customers or manage
funds that invest, make or hold long or short positions, finance
positions or trade or otherwise effect transactions in the
equity, debt or other securities or financial instruments
(including derivatives, bank loans or other obligations) of the
Company, Fairfax and certain of their respective affiliates.
BofA Merrill Lynch and its affiliates in the past have provided,
currently are providing, and in the future may provide
investment banking, commercial banking and other financial
services to the Company and have received or in the future may
receive compensation for the rendering of these services,
including having acted as financial adviser to the Company in
connection with the Companys acquisition of Valiant
Insurance Group, Inc. completed in November 2010.
In addition, BofA Merrill Lynch and its affiliates in the past
have provided, currently are providing, and in the future may
provide, investment banking, commercial banking and other
financial services to Fairfax and have received or in the future
may receive compensation for the rendering of these services. In
the past two years, such services have included having acted as
(i) financial adviser in connection with Fairfaxs
acquisition of the outstanding minority interest in Odyssey Re
Holdings Corp. announced in September 2009,
(ii) joint-bookrunner in connection with Fairfaxs
$1.0 billion equity offering completed in September 2009,
(iii) co-manager for Fairfaxs C$400 million
senior notes offering completed in August 2009,
(iv) corporate broker for Fairfaxs purchase of the
outstanding minority ownership of Advent Capital (Holdings) PLC
in August 2009 and (v) adviser to Fairfax in connection
with its unsolicited cash offer for a portion of Advent Capital
(Holdings) PLC in July 2008. Fairfax has advised the Company
that it paid fees to BofA Merrill Lynch and certain of its
affiliates of approximately $10 million in the aggregate in
respect of services provided by BofA Merrill Lynch in the past
two years.
Company
Unaudited Prospective Financial Information
The Company does not, as a matter of course, prepare financial
projections about the Companys future financial
performance, earnings or other results, except that senior
management of the Company prepares estimates of financial
results for the remainder of the current year and the next one
or two succeeding year(s) solely as information for Company
management to conduct budget and capital planning and to
evaluate various strategic or business opportunities and as
information for the board of directors. The Company does not, as
a matter of course, disclose forward-looking information about
the Companys future financial performance, earnings or
other results, except that the Company has previously disclosed
guidance related to gross written premiums, operating return on
average equity, operating earnings per share and the anticipated
earnings accretion and impact on book value per share from the
Valiant acquisition. However, the Company is including this
prospective financial information in this proxy statement to
provide its stockholders access to certain non-public unaudited
forward-looking financial information that was made available to
the Companys board of directors and the Companys
financial adviser in connection with the approval of the merger
agreement. The inclusion of this information in this proxy
statement should not be regarded as an indication that the
Company, the board of directors, the Companys financial
adviser or
42
any other recipient of this information considered, or now
considers, them to be reliable predictions of future results,
and they should not be relied upon as such.
The prospective financial information is subjective in many
respects and reflects numerous judgments, estimates and
assumptions that are inherently uncertain, many of which are
beyond the Companys control, including estimates and
assumptions regarding general economic conditions, premium rate
levels, loss ratios, loss cost trends, reinsurance costs,
capital adequacy, investment yields and other financial metrics.
Important factors that may affect actual results and cause this
information not to be accurate include, but are not limited to,
general economic trends, risks and uncertainties relating to the
Companys business (including its ability to achieve
strategic goals, objectives and targets over the applicable
periods), industry performance, the regulatory environment,
premium rate levels, property and casualty insurance industry
loss cost trends, competition, reinsurance costs, capital
adequacy and other factors described under Cautionary
Statement Concerning Forward-Looking Information beginning
on page 15 of this proxy statement and also described in
the Risk Factors sections of our annual report on
Form 10-K
for the year ended December 31, 2009 and the quarterly
reports on
Form 10-Q
thereafter. In addition, the prospective financial information
does not reflect any events that could affect the Companys
prospects, changes in general business or economic conditions or
any other transaction or event that has occurred since, or that
may occur and that was not anticipated at, the time the
financial projections were prepared. The prospective financial
information also covers multiple years and by its nature becomes
subject to greater uncertainty with each successive year.
Furthermore, and for the same reasons, this information should
not be construed as commentary by the Companys management
as to how the Companys management expects the
Companys actual results to compare to research
analysts estimates. There can be no assurance that the
prospective financial information is or will be accurate or that
the Companys future financial results will not vary, even
materially, from this information. None of the Company, its
affiliates, representatives or agents undertakes any obligation
to update or otherwise to revise the prospective financial
information to reflect circumstances existing or arising after
the date such information were generated or to reflect the
occurrence of future events, even if any or all of the
underlying estimates and assumptions are shown to be in error.
Set forth below is a summary of selected unaudited prospective
financial information for the fiscal years ending 2010 through
2015.
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2011
|
|
|
2012
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|
|
2013
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|
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2014
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|
|
2015
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|
|
|
(Dollars in millions)
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|
|
Net premium earned
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$
|
205.1
|
|
|
$
|
231.2
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|
|
$
|
241.3
|
|
|
$
|
239.4
|
|
|
$
|
243.0
|
|
|
$
|
250.3
|
|
Loss ratio
|
|
|
69.1
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%
|
|
|
63.0
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%
|
|
|
66.7
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%
|
|
|
67.5
|
%
|
|
|
67.5
|
%
|
|
|
67.5
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%
|
Combined ratio
|
|
|
109.5
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%
|
|
|
95.8
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%
|
|
|
98.1
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%
|
|
|
98.6
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%
|
|
|
98.3
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%
|
|
|
98.0
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%
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Operating net income(1)
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|
$
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12.3
|
|
|
$
|
28.7
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|
|
$
|
27.6
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|
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$
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27.8
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|
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$
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29.2
|
|
|
$
|
30.6
|
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Stockholders equity
|
|
$
|
321.4
|
|
|
$
|
353.0
|
|
|
$
|
383.4
|
|
|
$
|
397.3
|
|
|
$
|
411.9
|
|
|
$
|
427.2
|
|
|
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|
(1)
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|
Operating net income consists of net income adjusted to exclude
the impact of net realized gains (losses) on investments, other
than temporary impairment losses on investments, the change in
fair value of derivative instruments, restructuring charges,
acquisition-related transaction costs, and taxes related to
these adjustments.
|
The prospective financial information should be read together
with the historical financial statements of the Company, which
have been filed with the SEC. See Where You Can Find More
Information on page 75. The prospective financial
information was not prepared with a view toward public
disclosure or compliance with published guidelines of the SEC,
the Public Company Accounting and Oversight Board or 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 accountant has
compiled, examined or performed any procedures with respect to
the prospective financial information, nor have they expressed
any opinion or given any form of assurance on the prospective
financial information or their achievability, and accordingly
assume no responsibility for them. The report of the
Companys independent registered public accounting firm
incorporated into this proxy statement by reference relates to
the Companys historical financial information. It does not
extend to the prospective financial information and should not
be read to do so.
43
There can be no assurance that any prospective financial
information will be, or are likely to be, realized, or that the
assumptions on which they are based will prove to be, or are
likely to be, correct. You are cautioned not to place undue
reliance on this information in making a decision as to whether
to vote for the proposal to adopt the merger agreement.
Financing
of the Merger
The merger is not subject to any financing condition. We
anticipate that the total funds needed to complete the merger
will be approximately $294 million. Fairfax has informed us
that it will fund this amount with its available cash.
Effective
Time of Merger
The closing of the merger is expected to take place no later
than the third business day following the date on which the last
of the conditions to the closing of the merger (described under
The Merger Agreement Conditions to the
Merger) has been satisfied or waived (other than the
conditions that by their nature are to be satisfied at the
closing of the merger, but subject to the satisfaction or
written waiver of those conditions).
The effective time of the merger will occur as soon as
practicable following the closing of the merger upon the filing
of a certificate of merger with the Secretary of State of the
State of Delaware (or at such later date as we and Fairfax may
agree and specify in the certificate of merger).
Payment
of Merger Consideration and Surrender of Stock
Certificates
Each record holder of shares of our common stock (other than
shares of the Companys common stock held by Fairfax,
shares held by the Company in treasury or shares held by any of
their respective subsidiaries, shares of the Companys
common stock held by stockholders who properly exercise
appraisal rights under the DGCL with respect to such shares and
shares of Company restricted stock) will receive shortly after
the completion of the merger a letter of transmittal describing
how such holder may exchange shares of the Companys common
stock for the merger consideration.
You should not return your stock certificates with the
enclosed proxy card, and you should not forward your stock
certificates to the paying agent without a letter of
transmittal.
You will not be entitled to receive the merger consideration
until you deliver a duly completed and executed letter of
transmittal to the paying agent. If your shares are
certificated, you must also surrender your stock certificate or
certificates to the paying agent. If ownership of your shares is
not registered in the transfer records of the Company, a check
for any cash to be delivered will only be issued if the
applicable letter of transmittal is accompanied by all documents
reasonably required to evidence and effect transfer and to
evidence that any applicable stock transfer taxes have been paid
or are not applicable. With respect to shares of our common
stock held by The Depository Trust Company, or DTC, the
paying agent will transmit to DTC an amount in cash in
immediately available funds equal to the number of shares of our
common stock held of record by DTC immediately prior to the
effective time, multiplied by the per share merger
consideration. DTC will then appropriately credit the accounts
of the holders of our common stock that is held by DTC.
Interests
of Certain Persons in the Merger
In considering the recommendation of the board of directors that
you vote to approve the proposal to adopt the merger agreement,
you should be aware that our directors and officers have
interests in the merger that are different from, or in addition
to, those of our stockholders generally. The board of directors
was aware of and considered these interests, among other
matters, in evaluating and negotiating the merger agreement and
the merger, and in recommending that the merger agreement be
adopted by the stockholders of the Company. For the purposes of
all of the agreements and plans described below, the completion
of the transactions contemplated by the merger agreement will
constitute a change in control.
44
Restricted
Stock and Stock Options
Our compensation committee has granted long-term equity
compensation awards, consisting of restricted shares and stock
options, under the Companys Amended and Restated Omnibus
Incentive Plan of 2006 and the Companys 1998 Stock
Compensation Plan, which we refer to as the Company incentive
plans. As of October 28, 2010, 1,350,700 shares of
common stock were subject to outstanding awards of restricted
shares and options. At the effective time, the Company will
terminate the Company incentive plans.
At the effective time of the merger, each restricted share of
the Companys common stock issued and outstanding and
subject to forfeiture will become fully vested without
restrictions and will be treated as an unrestricted share of the
Companys common stock. Each director or officer who holds
any restricted shares will be entitled to receive the merger
consideration with respect thereto, without interest, less any
applicable withholding taxes.
At the effective time, each outstanding option to purchase
shares of the common stock of the Company granted under a
Company incentive plan that is outstanding and unexercised,
whether or not vested or exercisable, shall become fully vested
and exercisable. The Company will also cancel each outstanding
and unexercised stock option granted under the Company incentive
plans. Each holder of a stock option of the Company that is
outstanding and unexercised immediately prior to the effective
time and that has an exercise price per share of common stock of
the Company that is less than the per-share consideration being
paid in the merger agreement will be entitled to be paid by the
Company, a per share amount in cash equal to the excess, if any,
of the per share merger consideration over the applicable per
share exercise price of such stock option, less any applicable
withholding taxes. Fairfax will provide the Company with
sufficient cash to pay the aggregate amount of such payments
promptly after the effective time, and promptly thereafter the
Company will make such payments.
The following table sets forth the numbers of restricted shares
of the Companys common stock and options to purchase the
Companys common stock held by the Companys directors
and officers as of the date of this proxy statement, including
the amounts to which such directors and officers will be
entitled at the effective time with respect to the acceleration
of vesting of such restricted stock and stock options:
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|
|
|
|
|
|
|
|
|
|
|
Number of Shares of
|
|
|
Resulting
|
|
|
Number of Stock
|
|
|
Resulting
|
|
Insider
|
|
Restricted Stock
|
|
|
Consideration
|
|
|
Options
|
|
|
Consideration
|
|
|
John A. Marazza
|
|
|
48,333
|
|
|
$
|
797,495
|
|
|
|
145,000
|
|
|
$
|
62,800
|
|
E. Edward Camp
|
|
|
68,333
|
|
|
$
|
1,127,495
|
|
|
|
37,000
|
|
|
$
|
20,940
|
|
Each of the persons listed in the above table will also receive
the merger consideration in respect of the shares of the
Companys common stock beneficially owned by them. See
Security Ownership of Certain Beneficial Owners and
Management beginning on page 70 below for more
information.
Employee
Plans
In 2007, we introduced our Supplemental Executive Retirement
Plan (the SERP), pursuant to which we can make cash
contributions on behalf of our named executive officers as a
long-term retention incentive. The SERP also permits our named
executive officers to defer the receipt of income that would
otherwise be payable in the calendar year. The contributions
made under the SERP do not begin to vest until seven years after
the contribution is made with full vesting occurring ten years
after the contribution date, subject to earlier vesting in the
event of death, disability, or attaining age sixty while
employed by our Company. Mr. Smith is the only named
executive officer that currently participates in the SERP. In
March 2009, the Compensation Committee authorized an award of
$1,250,000 under the SERP as Mr. Smiths 2008
long-term incentive compensation. Mr. Smith also received
an award of $1,000,000 under the SERP as Mr. Smiths
2007 long-term incentive compensation. In March 2010, the
Compensation Committee authorized an award of $1,250,000 as
Mr. Smiths 2009 long-term incentive compensation. In
the case of Mr. Smith, contributions to the SERP will vest
in four years, when he reaches age sixty-four. Amounts
contributed to the SERP will not be distributed until
Mr. Smiths separation from service with the Company.
In March 2009, the Compensation Committee authorized an award of
$125,000 of Mr. Marazzas compensation for 2008
through a nonqualified deferred compensation arrangement
pursuant to the terms of an incentive
45
compensation agreement between the Company and Mr. Marazza.
In March 2010, the Compensation Committee authorized an award of
$150,000 of Mr. Marazzas compensation for 2009
through such deferred compensation arrangement. Under the terms
of this incentive compensation agreement, the deferred
compensation awards vest in three equal installments beginning
on March 5, 2010, subject to earlier vesting upon
termination of Mr. Marazzas employment (other than by
the Company for Cause, as defined in Mr. Marazzas
employment agreement) or a change of control of the Company.
Mr. Marazza is entitled to receive payment of the vested
portion of the award as of the date of his termination of
employment (other than by the Company for Cause, as defined in
Mr. Marazzas employment agreement) or a change of
control of the Company.
Employment
Agreements
Agreement with Mr. Smith.
On
August 21, 2007, we entered into an employment agreement
with Mr. Smith. The employment agreement became effective
as of August 1, 2007 and continues for a period of five
years with automatic renewal for successive twelve month
periods. Under the employment agreement, Mr. Smith serves
as our Chairman, President and Chief Executive Officer and
performs such duties as are traditionally associated with such
positions. The employment agreement provides for Mr. Smith
to receive an annual base salary of $750,000, subject to review
at least annually by the Compensation Committee. Mr. Smith
is also eligible to (i) participate in our
Performance-Based Annual Incentive Plan (or other short-term
incentive plan), (ii) receive awards under our Omnibus
Incentive Plan of 2006 and (iii) participate in the SERP.
In the event of termination by us for Cause or by Mr. Smith
other than for Good Reason, Mr. Smith will be entitled to
(a) any accrued base salary, vacation or bonus payment,
(b) benefits in accordance with the terms of the applicable
employee benefit plans until the date of termination, and
(c) the rights to any equity awards and to the SERP as
determined in accordance with the terms of such plans. In the
event of Mr. Smiths termination of employment due to
death, Mr. Smiths estate or personal representative
shall be entitled to receive (i) any accrued base salary,
vacation or pro rata bonus, (ii) benefits in accordance
with the terms of the applicable employee benefit plans until
the date of termination, and (iii) the rights to any equity
awards and to the SERP as determined in accordance with the
terms of such plans.
In addition to termination in the event of death or disability,
Mr. Smiths employment may be terminated by us for
Cause, by Mr. Smith for Good Reason or by us without Cause
or by Mr. Smith without Good Reason. In the event of
termination by us without Cause or by Mr. Smith for Good
Reason, Mr. Smith will be entitled to (i) payment of
any accrued base salary, accrued vacation and a pro rata bonus
in a lump sum within ninety (90) days of the date of
termination, (ii) benefits in accordance with the terms of
the applicable employee benefit plans through the date of
termination and (iii) his rights with respect to any equity
awards as determined under the terms of the plan and any grant
agreement under which such awards were granted and his rights
with respect to our Supplemental Executive Retirement Plan as
determined in accordance with the terms of such plan. In
addition to the foregoing benefits, if Mr. Smith executes a
release of claims against us in connection with a termination by
us without Cause or by Mr. Smith for Good Reason,
Mr. Smith will be entitled to receive (1) an amount
equal to the sum of (x) thirty (30) months of base
salary plus (y) an amount equal to the sum of the actual
annual incentive bonuses paid to Mr. Smith in the two
fiscal years immediately preceding the fiscal year in which the
termination occurs multiplied by 1.25 (the sum of (x) and
(y) being the Separation Amount), and
(2) in the event Mr. Smith makes a timely election of
COBRA continuation coverage, we shall either pay directly or
reimburse Mr. Smith for all related COBRA premiums due with
respect to such continuation coverage for the lesser of the term
of such coverage or thirty (30) months;
provided
,
that if the statutory term of such coverage is less than thirty
(30) months, the Company shall pay Mr. Smith an amount
equal to the amount of the COBRA premium that would have been
payable had such coverage been continued for the balance of such
thirty (30) month period in monthly installments.
Notwithstanding the foregoing, the Companys obligation to
pay COBRA premiums or amounts in lieu thereof shall terminate
when Mr. Smith first becomes eligible to participate in any
other employer sponsored major medical benefit plan. In the
event that we elect to terminate Mr. Smiths
employment without Cause or Mr. Smith elects to terminate
his employment for Good Reason and the date of termination
occurs within a certain period prior to or following the
effective date of a change in control event (as defined in the
Agreement), any and all equity awards which are not vested on
the termination date shall be deemed to have vested on the
termination date and the Separation Amount shall be paid in a
lump sum promptly following the later of the termination date or
the effective
46
date of the change in control event. Mr. Smith is subject
to perpetual obligations of confidentiality under the Agreement
as well as to customary non-competition and non-solicitation
covenants which continue for a period of twenty-four
(24) months following termination of employment.
Good Reason as used in Mr. Smiths
employment agreement means any of the following conditions (not
consented to in advance by Mr. Smith in writing or ratified
subsequently by Mr. Smith in writing), but only if
Mr. Smith provides the Company with written notice of such
condition within ninety (90) days of the initial existence
of such condition and only if such condition remain(s) in effect
thirty (30) days after written notice to the board from
Mr. Smith of his intention to terminate his employment for
Good Reason which specifically identifies such condition:
(i) A material diminution in Mr. Smiths base
compensation; or
(ii) Any action or inaction which constitutes a material
breach by the Company of the employment agreement with respect
to any of its obligation to Mr. Smith; or
(iii) Any material diminution in Mr. Smiths
authority, duties or responsibilities as measured against his
authority, duties or responsibilities immediately prior to such
change; or
(iv) Requiring Mr. Smith to report other than to the
board or its chair; or
(v) Following a change in control event, any material
change in the geographic location at which Mr. Smith is
normally required to perform his duties and responsibilities
under the employment agreement.
Cause as used in Mr. Smiths employment
agreement means a termination of Mr. Smiths
employment by formal action of the board for any of the
following reasons:
(i) embezzlement, fraud or any other illegal or unethical
act or omission in connection with the performance of
Mr. Smiths duties under the employment agreement or
as an employee of the Company that demonstrably and materially
injures or reasonably could demonstrably and materially injure
the Company or any affiliate or that the board determines does
demonstrably and materially impairs Mr. Smiths
ability to satisfactorily perform his duties under the
employment agreement;
(ii) conviction of (or plea of nolo contendere to) any
(A) felony or (B) other crime involving moral
turpitude or any other conviction (or plea of nolo contendere)
that demonstrably and materially impairs or reasonably could
demonstrably and materially impair Mr. Smiths ability
to satisfactorily perform his duties under the employment
agreement;
(iii) any willful and demonstrably material breach by
Mr. Smith of the terms of the employment agreement or any
other willful act or omission that demonstrably and materially
injures or reasonably could be expected to demonstrably and
materially injure the Company or any affiliate or that
demonstrably and materially impairs or reasonably could
demonstrably and materially impair Mr. Smiths ability
to satisfactorily perform his duties hereunder.
(iv) improper, willful and material disclosure or use of
the Companys or any affiliates proprietary
information or other willful material breach of
Mr. Smiths fiduciary obligation to the Company or any
affiliate of the Company; or
(v) Mr. Smiths willful failure or refusal to
follow the lawful and good faith directions of the board. For
purposes of this definition, no act or failure to act on the
part of Mr. Smith shall be considered willful
unless done, or omitted to be done, by him in bad faith or
without a reasonable belief that his action or omission are in
the best interests of the Company or its Affiliates. Any act or
omission, based upon directions given pursuant to a resolution
duly adopted by the board or based upon the advice of counsel
for the Company or its affiliates shall be conclusively presumed
to be done, or omitted to be done, in good faith and in the best
interests of the Company or its affiliates.
Notwithstanding anything in this Agreement to the contrary, in
no event shall Mr. Smiths inability to perform the
essential functions of his job with or without reasonable
accommodation as a result of a physical or mental condition
constitute Cause.
47
Agreement with Mr. Marazza.
On
December 10, 2009, we entered into an employment agreement
with John A. Marazza, our Executive Vice President, Chief
Financial Officer and Corporate Secretary. Under the employment
agreement, which replaces and supersedes Mr. Marazzas
July 2006 letter agreement, Mr. Marazza will continue to
serve in the same capacities and perform such duties as are
traditionally associated with such positions. The employment
agreement provides that Mr. Marazza will be paid an annual
base salary of $375,000, subject to annual review under
direction of our board. Mr. Marazza will also be eligible
to participate in our Performance-Based Annual Incentive Plan
(or other short-term incentive plan) and receive awards under
the Companys Omnibus Incentive Plan (or any successor
equity based compensation plan).
In the event of termination by us for Cause or by
Mr. Marazza other than for Good Reason, Mr. Marazza
will be entitled to (a) any accrued base salary through the
termination date, and (b) any annual incentive bonus award
earned and payable in accordance with any performance period
that ended prior to the termination date, and (c) his
rights with respect to any equity awards as determined under the
terms of the plan and any grant agreement under which such
awards were granted. In the event of Mr. Marazzas
termination of employment due to death, Mr. Marazzas
estate or personal representative shall be entitled to receive
(i) any accrued base salary through the termination date,
(ii) any annual incentive bonus award earned and payable in
accordance with any performance period that ended prior to the
termination date, and (iii) a pro rated bonus for the
performance period that included the termination date.
In the event of termination by (a) mutual agreement of us
and Mr. Marazza, (b) us without Cause or due to
Mr. Marazzas disability, or (c) Mr. Marazza
for Good Reason, then Mr. Marazza will be entitled to
(i) payment of any accrued base salary, (ii) any
annual incentive bonus award earned and payable in accordance
with any performance period that ended prior to the termination
date, (iii) a pro rated bonus for the performance period
that included the termination date, (iv) an amount equal to
the sum of the actual annual incentive bonuses awarded and paid
to Mr. Marazza with respect to the two years immediately
preceding the fiscal year in which termination of employment
occurs and (v) a continuation of his then current base
salary and benefits for the twenty-four (24) month period
following the date of termination or resignation. In addition,
for certain termination events, all equity awards outstanding at
the time of Mr. Marazzas termination shall
immediately vest and be exercisable for the shorter of the
remaining term of the award and one year. We may require
Mr. Marazza to execute a general release of claims and
provide transition services in order to receive certain of the
payments that Mr. Marazza is entitled to upon his
termination. Mr. Marazza is subject to perpetual
obligations of confidentiality under the Agreement as well as to
customary non-competition and non-solicitation covenants which
continue for a period of twenty-four (24) months following
termination of employment.
Good Reason as defined in Mr. Marazzas
employment agreement means if, prior to his resignation, any of
the following shall have occurred and Mr. Marazza shall
have given notice of his resignation for Good Reason within
sixty (60) days after he has knowledge of the occurrence of
such event:
(1) Mr. Marazza, without his consent, ceases to hold
the positions and titles of Executive Vice President, Chief
Financial Officer and Corporate Secretary (other than upon death
or disability or in connection with an event that permits a
termination for Cause which the Company exercises);
(2) Mr. Marazza is assigned, without his consent,
authority or responsibility materially inconsistent with the
authority and responsibility contemplated by the employment
agreement, including without limitation any material diminution
of his authority and responsibility or change in reporting
requirements;
(3) Mr. Marazzas base salary is materially
reduced, or there is any material delay in the payment of his
base salary, or there is any material reduction in the nature
and amount of benefits (including benefits under any incentive
Plan or equity plan or any successor plans thereto) theretofore
provided to Mr. Marazza pursuant to the employment
agreement (provided that a change in Company plans applicable to
senior executives generally or a reduction in the Companys
stock price shall not constitute a reduction in benefits);
(4) Any requirement is imposed for Mr. Marazza to
reside outside of the Detroit, Michigan metropolitan area;
(5) The Company commits a material breach of the employment
agreement, with limited exceptions, which breach is not cured
within 30 days after written notice thereof is given by
Mr. Marazza;
48
(6) Richard H. Smith is no longer Chief Executive
Officer; or
(7) A change in control event occurs.
Cause for the purposes of Mr. Marrazas
employment agreement shall exist in the event of
Mr. Marazzas:
(1) embezzlement, fraud, theft or other illegal or
unethical act or omission that adversely affects (or that could
reasonably be expected to adversely affect) the Company, its
affiliates or any of their respective employees, producers,
insurers, reinsurers, agents, customers or other persons doing
business with the Company or its affiliates;
(2) conviction of, or plea of guilty or nolo contendere to:
(A) a felony, or
(B) other crime involving moral turpitude that
(i) materially impairs (or could reasonably be expected to
materially impair) Mr. Marazzas ability to perform
his duties under the employment agreement or (ii) otherwise
results in death or substantial bodily or psychological harm to
any person;
(3) bar or suspension for a period of more than
60 days by any court or regulatory agency of competent
jurisdiction from performing employment duties for, engaging in
any activities on behalf of, or otherwise being associated with,
the Company or its affiliates;
(4) material breach of the terms of the employment
agreement or of Mr. Marazzas fiduciary obligation to
the Company or any of its affiliates or other conduct undertaken
with deliberate intent to cause harm or injury, or undertaken
with reckless disregard to the harm or injury that would be
caused, to the Company, any of its affiliates or any employee,
producer, insurer, reinsurer, agent, customer or other person
doing business with the Company other than conduct taken
pursuant to advice of legal counsel to the Company; or
(5) willful failure or refusal to follow the lawful and
good faith directions of the board or the Chief Executive
Officer. For purposes of this definition, no act or failure to
act on the part of Mr. Marazza shall be considered
willful unless done, or omitted to be done, by him
in bad faith or without a reasonable belief that his action or
omission is in the best interests of the Company or its
affiliates. Any act or omission, based upon directions given
pursuant to a resolution duly adopted by the board or based
upon the advice of counsel for the Company or its affiliates
shall be conclusively presumed to be done, or omitted to be
done, in good faith and in the best interests of the Company or
its affiliates.
The following table indicates the estimated cash severance
amounts (not including amounts payable with respect to
restricted stock or stock options which is discussed above)
payable to the executive officers under the employment
agreements assuming that the executive officers employment
is terminated as of December 31, 2010 either by the Company
without cause or by the executive officer for good reason:
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Officers
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Estimated Severance
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Richard H. Smith
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$
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4,723,726
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John A. Marazza
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$
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1,512,807
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E. Edward Camp
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$
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None of the members of our board of directors will continue as
members of the board of directors following the merger.
Indemnification;
Directors and Officers Insurance
From and after the effective time, Fairfax shall cause the
surviving corporation to, and the surviving corporation will,
indemnify, defend and hold harmless, to the fullest extent
permitted by law, our present and former officers and directors,
and our subsidiaries present and former officers and
directors, against 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 may not be unreasonably withheld or
delayed) of or in connection with any action (as defined in the
merger agreement) based on or arising out of the fact that such
person is or was a director or officer of the Company or any of
its subsidiaries at or prior to the effective
49
time, including any such losses, liabilities and amounts arising
out of our pertaining to the merger agreement or the
transactions contemplated thereby. In addition, the surviving
corporation will pay all expenses of each such indemnified party
in advance of the final disposition of any such action to the
fullest extent permitted by law and to advance such expenses,
upon receipt of an undertaking to repay such advances if it is
ultimately determined in accordance with applicable law that
such party is not entitled to indemnification. The surviving
corporation is also required under the merger agreement to
maintain in its organizational documents for a period of six
years after the effective time provisions with respect to the
exculpation and indemnification of the current and former
directors and officers of the Company that are the same as those
currently set forth in the Companys certificate of
incorporation and by-laws.
Under the merger agreement, we have the right, immediately prior
to the effective time, to purchase a six year prepaid tail
policy on terms and conditions (in both amount and scope)
providing substantially equivalent benefits, and from a carrier
or carriers with comparable credit ratings, as the current
policies of directors and officers liability
insurance maintained by us and our subsidiaries with respect to
matters arising on or before the effective time and covering the
transactions contemplated by the merger agreement for a price
not to exceed 250% of the annual premium amount we are currently
paying for such policy.
Material
U.S. Federal Income Tax Consequences of the Merger
The following is a summary of the material U.S. federal
income tax consequences of the merger to U.S. holders and
non-U.S. holders
(as defined below) whose shares of common stock are converted
into the right to receive cash in the merger. This summary does
not purport to consider all aspects of U.S. federal income
taxation that might be relevant to our stockholders. For
purposes of this discussion, we use the term
U.S. holder to mean a beneficial owner of
shares of the Companys common stock that is, for
U.S. federal income tax purposes:
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an individual who is a citizen or resident of the United States;
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a corporation (or other entity taxable as a corporation for
U.S. federal income tax purposes) created or organized
under the laws of the United States or any of its political
subdivisions;
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a trust that (i) is subject to the supervision of a court
within the United States and the control of one or more
U.S. persons or (ii) has a valid election in effect
under applicable U.S. Treasury regulations to be treated as
a U.S. person; or
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an estate that is subject to U.S. federal income tax on its
income regardless of its source.
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For purposes of this discussion, we use the term
non-U.S. holder
to mean a beneficial owner of shares of the Companys
common stock that is not a U.S. holder or a partnership or
other entity treated as a partnership for U.S. federal
income tax purposes.
If a partnership (including an entity treated as a partnership
for U.S. federal income tax purposes) holds common stock,
the tax treatment of a partner generally will depend on the
status of the partner and the activities of the partnership. A
partner of a partnership holding common stock should consult the
partners tax adviser regarding the U.S. federal
income tax consequences of the merger to such partner.
This discussion is based on the provisions of the Internal
Revenue Code of 1986, as amended, U.S. Treasury regulations
promulgated thereunder, judicial authorities, and administrative
rulings, all of which are subject to change, possibly with
retroactive effect. The discussion applies only to beneficial
owners who hold shares of common stock as capital assets, and
does not apply to stockholders who hold an equity interest,
actually or constructively, in Fairfax or the surviving
corporation after the merger, stockholders who validly exercise
their rights under the DGCL to object to the merger or to
certain types of beneficial owners who may be subject to special
rules (such as insurance companies, banks, tax-exempt
organizations, financial institutions, broker-dealers in
securities or currencies, partnerships, S corporations or
other pass-through entities, mutual funds, traders in securities
who elect the
mark-to-market
method of accounting, stockholders subject to the alternative
minimum tax, U.S. expatriates, stockholders that have a
functional currency other than the U.S. dollar or
stockholders who hold common stock as part of a hedge, straddle,
constructive sale or conversion transaction). This discussion
also does not address the receipt of cash in connection with the
vesting of shares of restricted stock and options to purchase
50
common stock, or any other matters relating to equity
compensation or benefit plans. This discussion does not address
any aspect of state, local or foreign tax laws, nor does it
address any aspect of estate or gift taxation.
U.S.
Holders
Exchange
of Shares of Common Stock for Cash Pursuant to the Merger
Agreement.
The receipt of cash in exchange for the Companys common
stock in the merger will be a taxable transaction for
U.S. federal income tax purposes. In general, a
U.S. holder whose shares of our common stock are converted
into the right to receive cash in the merger will recognize
capital gain or loss for U.S. federal income tax purposes
equal to the difference, if any, between the amount of cash
received with respect to such shares (determined before the
deduction of any applicable withholding taxes) and the
U.S. holders adjusted tax basis in such shares. A
U.S. holders adjusted tax basis will generally equal
the price the U.S. holder paid for such shares. Gain or
loss will be determined separately for each block of shares of
common stock (i.e., shares of common stock acquired at the same
cost in a single transaction). Such gain or loss will be
long-term capital gain or loss provided that the
U.S. holders holding period for such shares of common
stock is more than 12 months at the effective time.
Short-term capital gains are subject to U.S. federal income
tax at the same rates as ordinary income. Long-term capital
gains of non-corporate U.S. holders currently are eligible
for reduced rates of taxation. There are limitations on the
deductibility of capital losses.
Backup
Withholding and Information Reporting.
Backup withholding of tax may apply to cash payments to which a
non-corporate U.S. holder is entitled under the merger
agreement, unless the U.S. holder or other payee provides a
taxpayer identification number and otherwise complies with the
backup withholding rules. Each of our U.S. holders should
complete the Substitute
Form W-9
included as part of the letter of transmittal and return it to
the paying agent, in order to provide the information necessary
to avoid backup withholding, unless an exemption applies and is
established in a manner satisfactory to the paying agent.
Backup withholding is not an additional tax. Any amounts
withheld from cash payments to a U.S. holder pursuant to
the merger under the backup withholding rules will be allowable
as a refund or a credit against such U.S. holders
U.S. federal income tax liability provided the required
information is timely furnished to the Internal Revenue Service.
Cash payments made pursuant to the merger will also be subject
to information reporting unless an exemption applies.
Non-U.S.
Holders
Exchange
of Shares of Common Stock for Cash Pursuant to the Merger
Agreement.
Any gain realized upon the receipt of cash in exchange for the
Companys common stock in the merger by a
non-U.S. holder
generally will not be subject to U.S. federal income tax
unless: (i) the gain is effectively connected with the
non-U.S. holders
conduct of a trade or business in the United States, and, if
required by an applicable income tax treaty, is attributable to
a permanent establishment maintained by the
non-U.S. holder
in the United States, (ii) the
non-U.S. holder
is a nonresident alien individual who will be present in the
United States for 183 days or more during the taxable year
of the merger, and certain other requirements are met, or
(iii) the common stock constitutes a United States
real property interest for U.S. federal income tax
purposes with respect to the
non-U.S. holder
by reason of the Companys status as a United States
real property holding corporation (a USRPHC)
at any time within the shorter of the five-year period preceding
the merger or the
non-U.S. holders
holding period for the common stock. Even if the Company is or
has been a USRPHC, a
non-U.S. holder
would not be subject to U.S. federal income tax as long as
the
non-U.S. holder
actually or constructively holds or held, during the applicable
period, 5% or less of the Companys common stock. A
non-U.S. holder
that actually or constructively holds or has held more than 5%
of the Companys common stock should consult its own tax
adviser regarding any U.S. federal income tax consequences
applicable to it with respect to the USRPHC rules.
51
Unless an applicable income tax treaty provides otherwise, gain
described in (i) in the preceding paragraph will be subject
to U.S. federal income tax on a net income basis in the
same manner as if the
non-U.S. holder
recognizing such gain were a U.S. holder. A
non-U.S. holder
that is a corporation also may be subject to a branch profits
tax equal to 30% (or such lower rate specified by an applicable
income tax treaty) of a portion of its effectively connected
earnings and profits for the taxable year. Gain recognized by an
individual
non-U.S. holder
described in (ii) in the preceding paragraph will be
subject to U.S. federal income tax at a flat 30% rate
(unless an applicable income tax treaty provides otherwise), but
may be offset by U.S. source capital losses (even though
the individual is not considered a resident of the United States
for U.S. federal income tax purposes).
Backup
Withholding and Information Reporting.
Backup withholding of tax may apply to cash payments to which a
non-U.S. holder
is entitled under the merger agreement unless the
non-U.S. holder
furnishes the required certification as to its
non-U.S. status
by providing the applicable Internal Revenue Service
Form W-8
or by otherwise establishing that such
non-U.S. holder
is not subject to backup withholding.
Backup withholding is not an additional tax. Any amounts
withheld from cash payments to a
non-U.S. holder
pursuant to the merger under the backup withholding rules will
be allowable as a refund or a credit against such
non-U.S. holders
U.S. federal income tax liability, if any, provided the
required information is timely furnished to the Internal Revenue
Service.
Cash payments made pursuant to the merger may also be subject to
information reporting unless an exemption applies.
The U.S. federal income tax consequences described above
are not intended to constitute a complete description of all tax
consequences relating to the merger. Because individual
circumstances may differ, each stockholder should consult the
stockholders tax adviser regarding the applicability of
the rules discussed above to the stockholder and the particular
tax effects to the stockholder of the merger in light of such
stockholders particular circumstances, the application of
state, local and foreign tax laws, and, if applicable, the tax
consequences of the receipt of cash in connection with the
vesting of restricted stock and options to purchase common
stock.
Regulatory
Approvals
The Company has insurance company subsidiaries domiciled in the
States of Arkansas, Delaware, Illinois and Minnesota. The
insurance laws of each such state require an acquiring person to
obtain the approval of the relevant insurance regulatory
authority in such state prior to the direct or indirect
acquisition of control of an insurance company domiciled in such
state. On November 8, 2010, Fairfax and certain of its
affiliates filed applications for such approval with the
Arkansas Insurance Department, the Delaware Insurance
Department, the Illinois Department of Insurance and the
Minnesota Department of Commerce. Although the Company and
Fairfax do not expect any of the Arkansas Insurance Department,
the Delaware Insurance Department, the Illinois Department of
Insurance or the Minnesota Department of Commerce to withhold
its approval of Fairfaxs application, there is no
assurance that such approval will be obtained or that such
approval will not be delayed.
The insurance laws and regulations of certain U.S. states
require that, prior to an acquisition of an insurance company
doing business in that state or licensed by that state (or the
acquisition of its holding company), a notice filing that
discloses certain market share data in that jurisdiction must be
made and an applicable waiting period must expire or be
terminated.
Under the HSR Act, and the rules promulgated thereunder by the
FTC, the merger cannot be completed until each of the Company
and Fairfax file 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. Each
of the Company and Fairfax filed such a notification and report
form on November 5, 2010 and each requested early
termination of the applicable waiting period. At any time before
or after consummation of the merger, notwithstanding the
termination of the waiting period under the HSR Act, the
Antitrust Division of the DOJ or the FTC could take such action
under the antitrust laws as it deems necessary or desirable in
the public interest, including seeking to enjoin the completion
52
of the merger or seeking divestiture of substantial assets of
the Company or Fairfax. Private parties may also seek to take
legal action under the antitrust laws under certain
circumstances.
There can be no assurance that all of the regulatory approvals
described above will be obtained and, if obtained, there can be
no assurance as to the timing of any approvals or the absence of
any litigation challenging such approvals.
LITIGATION
RELATING TO THE MERGER
A putative class action lawsuit relating to the merger has been
filed in the United States District Court Eastern District of
Michigan Southern Division. The complaint, which purports to be
brought as class action on behalf of all of the Companys
stockholders, excluding the defendants and their affiliates,
alleges that the consideration that stockholders will receive in
connection with the merger is inadequate and that the
Companys directors breached their fiduciary duties to
stockholders in negotiating and approving the merger agreement.
The complaint further alleges that the Company and Fairfax aided
and abetted the alleged breaches by the Companys
directors. The complaint seeks various forms of relief,
including injunctive relief that would, if granted, prevent the
merger from being consummated in accordance with the
agreed-upon
terms. The defendants believe that the complaints are without
merit and intend to defend the actions vigorously.
A copy of the complaint relating to the class action lawsuit was
filed as an exhibit to the Current Report on
Form 8-K
filed by the Company with the SEC on November 12, 2010 and
such report is incorporated herein by reference. The foregoing
summary is qualified in its entirety by reference to such
exhibits.
53
THE
MERGER AGREEMENT
This section describes the material terms of the merger
agreement. The description in this section and elsewhere in this
proxy statement is qualified in its entirety by reference to the
complete text of the merger agreement, a copy of which is
attached as Annex A and is incorporated by reference into
this proxy statement. 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 the merger agreement carefully and in its entirety. This
section is not intended to provide you with any factual
information about us. Such information can be found elsewhere in
this proxy statement and in the public filings we make with the
SEC, as described in the section entitled, Where You Can
Find More Information, beginning on page 75.
Explanatory
Note Regarding the Merger Agreement
The merger agreement is included to provide you with information
regarding its terms. Factual disclosures about the Company
contained in this proxy statement or in the Companys
public reports filed with the SEC may supplement, update or
modify the factual disclosures about the Company contained in
the merger agreement. The representations, warranties and
covenants made in the merger agreement by the Company, Fairfax
and Merger Sub were qualified and subject to important
limitations agreed to by the Company, Fairfax and Merger Sub in
connection with negotiating the terms of the merger agreement.
In particular, in your review of the representations and
warranties contained in the merger agreement and described in
this summary, it is important to bear in mind that the
representations and warranties were negotiated with the
principal purposes of establishing the circumstances in which a
party to the merger agreement may have the right not to close
the merger if the representations and warranties of the other
party prove to be untrue due to a change in circumstance or
otherwise, and allocating risk between the parties to the merger
agreement, rather than establishing matters as facts. The
representations and warranties may also be subject to a
contractual standard of materiality different from those
generally applicable to stockholders and to reports and
documents filed with the SEC and, in some cases, were qualified
by disclosures that were made by each party to the other that
were not reflected in the merger agreement. Moreover,
information concerning the subject matter of the representations
and warranties, which is not purported to be accurate as of the
date of this proxy statement, may have changed since the date of
the merger agreement, and subsequent developments or new
information qualifying a representation or warranty may have
been included in or incorporated by reference into this proxy
statement.
Effects
of the Merger; Directors and Officers; Certificate of
Incorporation; Bylaws
The merger agreement provides for the merger of Merger Sub with
and into the Company upon the terms, and subject to the
conditions, set forth in the merger agreement. As the surviving
corporation, the Company will continue to exist following the
merger as a subsidiary of Fairfax.
The board of directors of the surviving corporation will, from
and after the effective time, consist of the directors of Merger
Sub until their successors have been duly elected or appointed
and qualified or until the earlier of their death, resignation
or removal. The officers of the Company at the effective time
will, from and after the effective time, be the officers of the
surviving corporation until their successors have been duly
elected or appointed and qualified or until the earlier of their
death, resignation or removal.
Except as described below, the certificate of incorporation of
the surviving corporation will be in the form of the certificate
of incorporation of Merger Sub (except with respect to the name
of the Company), until amended in accordance with its terms or
by applicable law. Also, except as described below, unless
otherwise determined by Fairfax prior to the effective time, the
bylaws of the surviving corporation will be in the form of the
bylaws of Merger Sub (except with respect to the name of the
Company) until amended in accordance with its terms, the terms
of the certificate of incorporation of the surviving corporation
or applicable law. The certificate of incorporation and bylaws
of the surviving corporation will include provisions with
respect to the exculpation and indemnification of the current
and former directors and officers of the Company that are the
same as those currently set forth in the Companys
certificate of incorporation for a period of six years after the
effective time.
Following the completion of the merger, the common stock of the
Company will be delisted from the NYSE and deregistered under
the Exchange Act, and will cease to be publicly traded.
54
Closing
and Effective Time of the Merger
The closing of the merger is expect to occur no later than the
third business day following the date on which the last of the
conditions to the closing of the merger (described under
Conditions to the Merger) have been
satisfied or waived (other than the conditions that by their
nature are to be satisfied at the closing of the merger, but
subject to the satisfaction or written waiver of those
conditions).
The effective time of the merger will occur as soon as
practicable following the closing of the merger upon the filing
of a certificate of merger with the Secretary of State of the
State of Delaware (or at such later date as the Company and
Fairfax may agree and specify in the certificate of merger).
Treatment
of Equity Interests
Common
Stock
At the effective time, each issued and outstanding share of the
Companys common stock immediately prior thereto (other
than shares of the Companys common stock held by Fairfax,
shares held by the Company in treasury or shares held by any of
their respective subsidiaries, shares of the Companys
common stock held by stockholders who properly exercise
appraisal rights under the DGCL with respect to such shares and
shares of the Companys restricted stock) will be cancelled
and converted into the right to receive the merger
consideration, without interest, less any applicable withholding
taxes. Common stock owned by Fairfax, Merger Sub or any other
subsidiary of Fairfax will remain issued and outstanding after
the effective time, but no merger consideration will be paid
with respect to such common stock. Common stock owned by the
Company or any of its wholly owned subsidiaries will be
cancelled without payment of any merger consideration with
respect thereto. Common stock owned by stockholders who have
perfected and not withdrawn a demand for, or lost the right to,
appraisal rights under the DGCL will not be converted into the
right to receive merger consideration. Such stockholders will
instead be entitled to the appraisal rights provided under the
DGCL as described under Appraisal Rights.
Employee
Stock Options
At the effective time, the Company will terminate the
Companys Amended and Restated Omnibus Incentive Plan of
2006 and the Companys 1998 Stock Compensation Plan, which
we refer to as the Company incentive plans. At the effective
time, each outstanding option to purchase shares of the common
stock of the Company granted under a Company incentive plan that
is outstanding and unexercised, whether or not vested or
exercisable, shall become fully vested and exercisable. The
Company will also cancel each outstanding and unexercised stock
option granted under the Company incentive plans. Each holder of
a stock option of the Company that is outstanding and
unexercised immediately prior to the effective time and that has
an exercise price per share of common stock of the Company that
is less than the per-share consideration being paid in the
merger agreement will be entitled to be paid by the Company, a
per share amount in cash equal to the excess, if any, of the per
share merger consideration over the applicable per share
exercise price of such stock option, less any applicable
withholding taxes. Fairfax will provide the Company with
sufficient cash to pay the aggregate amount of such payments
promptly after the effective time, and promptly thereafter the
Company will make such payments. The Company will take all
necessary action to approve the cancellation and payment in
respect of the stock options by virtue of the merger to the
extent necessary to exempt any such deemed dispositions and
acquisitions under
Rule 16b-3
of the Exchange Act.
Restricted
Stock
At the effective time, each issued and outstanding share of
common stock of the Company granted under the Company incentive
plans that is subject to forfeiture prior to the effective time
shall be canceled and shall be converted automatically into the
right to receive the merger consideration, less any applicable
withholding taxes. Fairfax will provide the Company with
sufficient cash to pay the aggregate amount of such payments in
respect of such shares of restricted common stock of the
Company, and promptly thereafter, the Company will make such
payments, less any applicable withholding taxes. The Company
will take all necessary action to approve the cancellation and
payment in respect of the restricted stock by virtue of the
Merger to the extent necessary to exempt any such deemed
dispositions and acquisitions under
Rule 16b-3
of the Exchange Act.
55
Exchange
and Payment Procedures
At the effective time, Fairfax will deposit, or will cause to be
deposited, with the paying agent, an amount in immediately
available funds necessary for the paying agent to pay the
aggregate merger consideration to the holders of shares of the
Companys common stock.
Each record holder of shares of the Companys common stock
(other than shares of the Companys common stock held by
Fairfax, shares held by the Company in treasury or shares held
by any of their respective subsidiaries, shares of the
Companys common stock held by stockholders who properly
exercise appraisal rights under the DGCL with respect to such
shares and shares of the Companys restricted stock) will
receive a letter of transmittal describing how it may exchange
its shares of common stock for the merger consideration shortly
after the completion of the merger. With respect to shares of
the Companys common stock held by The Depository
Trust Company, or DTC, the paying agent will transmit to
DTC an amount in cash in immediately available funds equal to
the number of shares of the Companys common stock held of
record by DTC immediately prior to the effective time,
multiplied by the per share merger consideration. DTC will then
appropriately credit the accounts of the holders of the
Companys common stock that is held by DTC.
You should not return your stock certificates with the
enclosed proxy card, and you should not forward your stock
certificates to the paying agent without a letter of
transmittal.
You will not be entitled to receive the merger consideration
until you deliver a duly completed and executed letter of
transmittal to the paying agent. If your shares are
certificated, you must also surrender your stock certificate or
certificates to the paying agent. If ownership of your shares is
not registered in the transfer records of the Company, a check
for any cash to be delivered will only be issued if the
applicable letter of transmittal is accompanied by all documents
reasonably required to evidence and effect transfer and to
evidence that any applicable stock transfer taxes have been paid
or are not applicable.
No interest will be paid or accrued on the cash payable as the
merger consideration as provided above. Fairfax, the surviving
corporation and the paying agent will be entitled to deduct and
withhold any applicable taxes from the merger consideration. Any
sum that is withheld will be deemed to have been paid to the
person with regard to whom it is withheld.
From and after the effective time, there will be no transfers on
our stock transfer books of shares of common stock that were
outstanding immediately prior to the effective time. If, after
the effective time, any person presents to the surviving
corporation, Fairfax or the paying agent, any certificates or
any transfer instructions relating to shares cancelled in the
merger, such person will be given a copy of the letter of
transmittal and told to comply with the instructions in that
letter of transmittal in order to receive the cash to which such
person is entitled.
Any portion of the merger consideration deposited with the
paying agent that remains unclaimed by former record holders of
our common stock for one year after the effective time may be
delivered to the surviving corporation. After such delivery,
record holders of our common stock who have not complied with
the
above-described
exchange and payment procedures will thereafter only look to the
surviving corporation for payment of the merger consideration.
Neither the surviving corporation nor the paying agent will be
liable to any former record holders of our common stock for any
cash delivered to a public official pursuant to any applicable
abandoned property, escheat or similar laws.
If you have lost a certificate, or if it has been stolen or
destroyed, then before you will be entitled to receive the
merger consideration, you will have to complete an affidavit of
the loss, theft or destruction, and, if required by the
surviving corporation, post a bond in a reasonable amount as
indemnity against any claim that may be made against the
surviving corporation with respect to such certificate. These
procedures will be described in the letter of transmittal that
you will receive, which you should read carefully in its
entirety.
No
Financing Covenants or Conditions
The merger is not subject to any financing condition. We
anticipate that the total funds needed to complete the merger
will be approximately $294 million. Fairfax has informed us
that it will fund this amount with cash on hand.
56
Representations
and Warranties
The Company made customary representations and warranties in the
merger agreement that are subject to matters the Company
disclosed in certain documents filed with the SEC and to
specified exceptions and qualifications contained in the merger
agreement or in the disclosure letter the Company delivered to
Fairfax in connection therewith. These representations and
warranties relate to, among other things:
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the organization, existence, good standing and authority to
carry on our and our subsidiaries businesses;
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the accuracy and validity of and compliance with our certificate
of incorporation and our by-laws;
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our capitalization;
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our corporate power and authority to enter into, and consummate
the transactions under, the merger agreement, and the
enforceability of the merger agreement against us;
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the absence of violations of, or conflicts with, our governing
documents, applicable law and certain agreements as a result of
our entering into and performing our obligations under the
merger agreement;
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any required governmental permits, consents and approvals;
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compliance with applicable laws, licenses, permits and
agreements;
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our SEC filings since December 31, 2009 and the financial
statements included therein;
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the absence of material undisclosed liabilities;
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our disclosure controls and procedures and internal controls
over financial reporting;
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the absence of a material adverse effect (as described below)
and the absence of certain other changes or events since
December 31, 2009;
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the absence of legal proceedings and governmental orders against
us and our subsidiaries;
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employee benefit plans;
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labor and employment matters;
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real and personal property owned or leased by us or our
subsidiaries;
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tax matters;
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the absence of any stockholders rights plan;
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material contracts;
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the approval of the merger agreement by our board of directors
and the required adoption of the same by our stockholders;
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the receipt of the fairness opinion from BofA Merrill Lynch;
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the absence of any undisclosed brokers, finders or
investment bankers fees.
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matters related to the maintenance of insurance
coverage; and
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the accuracy of certain information contained in this proxy
statement.
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Many of our representations and warranties are qualified by,
among other things, exceptions relating to the absence of a
material adverse effect. The phrase material
adverse effect is defined in the merger agreement to mean
any event, circumstance, change, state of facts or effect that,
alone or in combination, has had, or is reasonably likely to
have, (i) a material adverse effect to the business,
financial condition or results of operations of the Company and
its subsidiaries, taken as a whole; or (ii) would have a
material adverse effect on the Companys ability to perform
its obligations under the merger agreement. For purposes of
clause (i) of the previous sentence, however, to the extent
that any such event, circumstance, change, state of facts or
effect,
57
results, alone or in combination, from any of the following
factors, it will not be deemed to have or contribute to a
material adverse effect:
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changes in the economy in general or in financial, credit or
securities markets (including changes in interest or exchange
rates) in general, to the extent such changes do not have a
materially disproportionate impact on the Company and its
subsidiaries, taken as a whole, compared to other companies in
the United States in the same industry;
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changes generally affecting any of the industries in which the
Company or its subsidiaries operate, to the extent such changes
do not have a materially disproportionate impact on the Company
and its subsidiaries, taken as a whole, compared to other
companies in the United States in the same industry;
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changes in law or applicable accounting regulations, or
principles or interpretations thereof to the extent such changes
do not have a materially disproportionate impact on the Company
and its subsidiaries, taken as a whole, compared to other
companies in the United States in the same industry;
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any change in the Companys stock price or trading volume
or any failure, in and of itself, by the Company to meet
internal or published revenue or earnings projections (but not
any event, circumstance, change, state of facts or effect
underlying such change or failure);
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the announcement of the execution of the merger agreement,
including the identity of Fairfax;
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any legal proceedings relating to the merger agreement, the
merger or the other transactions contemplated by the merger
agreement by or before any governmental authority (including
those described under The Merger Litigation
Related to the Merger);
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acts of war (whether or not declared), armed hostilities,
sabotage or terrorism, or any escalation or worsening thereof,
to the extent such changes do not have a materially
disproportionate impact on the Company and its subsidiaries,
taken as a whole, compared to other companies in the United
States in the same industry;
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earthquakes, hurricanes, floods or other natural disasters, to
the extent such changes do not have a materially
disproportionate impact on the Company and its subsidiaries,
taken as a whole, compared to other companies in the United
States in the same industry;
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the volume, frequency, severity or handling of claims arising
under insurance policies issued by certain of the Companys
subsidiaries;
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any deficiency in the Companys loss and loss adjustment
expense reserves; and
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any action taken by Fairfax or any of its affiliates or by the
Company at the request of Fairfax or any of its affiliates.
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Additionally, a decrease in total stockholders equity of
the Company of less than $50,000,000 as compared to
stockholders equity of $301,699,000 as of
September 30, 2010 shall not be deemed to be a material
adverse effect.
The merger agreement also contains customary representations and
warranties made by Fairfax and Merger Sub that are subject, in
some cases, to specified exceptions and qualifications contained
in the merger agreement. The representations and warranties of
Fairfax and Merger Sub relate to, among other things:
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their organization, existence, good standing and authority to
carry on their businesses;
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their corporate power and authority to enter into, and
consummate the transactions under, the merger agreement, and the
enforceability of the merger agreement against them;
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the absence of violations of, or conflicts with, their governing
documents, applicable law and certain agreements as a result of
entering into and performing their obligations under the merger
agreement and completing the merger;
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any required governmental consents and approvals;
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the absence of legal proceedings and governmental orders against
Fairfax or its subsidiaries that would reasonable be expected to
prevent or materially delay the consummation of the merger;
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the ownership by Fairfax of the Companys common stock;
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the financial ability of Fairfax to permit the Merger Sub to
consummate the merger;
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the absence of any undisclosed brokers, finders or
investment bankers fees; and
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the accuracy of certain information contained in this proxy
statement.
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Neither the Company, on the one hand, nor Fairfax and Merger
Sub, on the other hand, make any other express or implied
representations or warranties to the other, except as set forth
in the merger agreement. The representations and warranties in
the merger agreement of each of the Company, Fairfax and Merger
Sub will terminate upon the consummation of the merger or the
termination of the merger agreement pursuant to its terms.
Conduct
of Our Business Pending the Merger
Under the merger agreement, we have agreed that, subject to
certain exceptions in the merger agreement and in the disclosure
letter we delivered to Fairfax in connection with the merger
agreement, between the date of the merger agreement and the
effective time, unless required by applicable law, or unless
Fairfax gives its prior written approval (which cannot be
unreasonably withheld or delayed), (i) we and our
subsidiaries will conduct our businesses, and not take any
action except in, the ordinary course of business and in a
manner consistent with past practice, (ii) we will use our
reasonable best efforts to preserve substantially intact our and
our subsidiaries business organizations and commercially
reasonable efforts to keep available the services of our and our
subsidiaries officers, employees and consultants and
(iii) neither the Company nor any of its subsidiaries will,
directly or indirectly, do or propose to do any of the following
without the prior written consent of Fairfax (such consent not
to be unreasonably withheld or delayed:
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amend or otherwise change its organizational documents;
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issue, sell or encumber any of its equity securities or rights
to acquire such securities (other than in connection with the
exercise or previously issued Company stock awards or any of its
assets (other than in the ordinary course of business and in a
manner consistent with past practice);
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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 subsidiary to the Company
or any of its subsidiaries;
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reclassify, combine, split, subdivide, or redeem, or purchase or
acquire any of its capital stock;
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(a) acquire any corporation, partnership, other business
organization or any division thereof or, except in the ordinary
course of business and consistent with past practice, any
material amount of assets; (b) incur indebtedness for
borrowed money in excess of $1,000,000 in the aggregate or issue
any debt securities or assume, guarantee or endorse, or
otherwise become responsible for, debt for borrowed money of any
person, or make any loans or advances, or grant any security
interest in any of its assets except in the ordinary course of
business and consistent with past practice; (c) authorize,
or make any commitment with respect to, any single capital
expenditure which is in excess of $250,000 or capital
expenditures which are, in the aggregate, in excess of $500,000
for the Company and its Subsidiaries taken as a whole; or
(d) enter into or amend any contract, agreement, commitment
or arrangement with respect to any matter of such matters;
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(a) increase the compensation payable or to become payable
or the benefits provided to, its current or former directors,
officers, employees or independent contractors (except
(1) in accordance with the terms of an employee benefit
plan currently in effect and (2) for increases in the
ordinary course of business consistent with past practice to
employees who are not executive officers or directors, or
(b) grant any retention, severance or termination payments
to or enter into any employment bonus, change in control or
severance agreement with any current or former director, officer
or other employee of the Company or one of its subsidiaries, or
(c) establish, adopt, enter into, terminate or amend any
collective bargaining plan or employee benefit plan or grant any
equity based awards;
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Except as required by GAAP or statutory accounting principles,
materially change its accounting policies or procedures;
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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 tax claim or assessment 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;
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enter into, amend, modify, waive or consent to the termination
of any material contract or material right thereunder, other
than in the ordinary course of business and consistent with past
practice;
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commence or settle any material legal proceeding;
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fail to make in a timely manner any filings with the SEC
required under the Securities Act or the Exchange Act or the
rules and regulations promulgated thereunder;
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enter into, renew, amend or modify any managing general agent or
insurance producer agreement or third party administrator
agreement;
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enter into any contract, agreement, arrangement or understanding
that materially restrains or limits the ability of the Company
or any of its subsidiaries to conduct any part of its business;
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enter into, renew, modify or consent to the termination of any
reinsurance contract to which the Company or one of its Company
subsidiaries is a party or amend, waive, modify or consent to
the termination of any material rights of the Company or any of
its subsidiaries thereunder; or
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announce an intention, enter into any formal or informal
agreement or otherwise make a commitment, to do any of the
foregoing.
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No
Solicitation of Other Offers
The merger agreement provides that the Company will not, nor
will it permit any of its subsidiaries to, nor will it authorize
or permit any of its directors, officers, employees, investment
bankers, financial advisers, attorneys, accountants or other
representatives to, except as described below:
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solicit, initiate, encourage (including by way of furnishing
information not previously publicly disseminated), or take any
other action designed to facilitate, any inquiries or the making
of any proposal which constitutes, or may reasonably be expected
to lead to, any takeover proposal (as described below); or
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participate in any discussions or negotiations regarding a
takeover proposal.
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The Company may, however, in response to a takeover proposal
that is made after the date of the merger agreement in
circumstances not otherwise involving a breach of this provision
of the merger agreement, and which proposal is either a superior
proposal (as described below) or is reasonably expected to lead
to a superior proposal, if 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:
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request information from the party making that takeover proposal
for the purpose of informing the board of directors of the
Company about the takeover proposal and the party making it;
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furnish information regarding the Company to the person making
that takeover proposal pursuant to a customary confidentiality
agreement, provided that (i) such confidentiality agreement
may not include any provision calling for an exclusive right to
negotiate with the Company and (ii) promptly after
delivering the information, the Company advises Fairfax of all
such nonpublic information it delivers to such person (not
previously provided or made available to Fairfax ); and
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participate in negotiations with the party making that takeover
proposal regarding that takeover proposal.
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In addition, the Company has agreed that neither the board of
directors nor any committee thereof will, except as described
below:
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withdraw or modify, or propose publicly to withdraw or modify,
in a manner adverse to Fairfax, the board of directors
recommendation that the Companys stockholders adopt the
merger agreement, or approve
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determine to be advisable or recommend, or propose publicly to
approve, determine to be advisable or recommend, any takeover
proposal, any of which we refer to as an adverse recommendation
change; or
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cause the Company to enter into any letter of intent, agreement
in principle, acquisition agreement or other similar agreement
related to any takeover proposal (other than a customary
confidentiality agreement, as described above).
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However, in response to a takeover proposal that was not made in
breach of the merger agreement and that is made after the date
of the merger agreement that the board of directors determines
in good faith constitutes a superior proposal, which was
otherwise not in breach of the Companys non-solicitation
obligations under the merger agreement, if the board of
directors determines in good faith, after consultation with
outside counsel, that the failure to do so would be inconsistent
with its fiduciary duties under applicable law, the board of
directors may take any of the following actions:
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make an adverse recommendation change;
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cause the Company to enter into an agreement related to the
superior proposal, provided that the Company simultaneously pays
or had previously paid to Fairfax the termination fee described
in Termination Fee below; or
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postpone or adjourn the stockholder meeting called in connection
with the approval of the merger agreement.
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provided, that in each case, such action may be taken only after
the second business day following Fairfaxs receipt of
written notice from the Company that describes, among other
things, which of the foregoing actions the board of directors
has determined to take.
In addition, the board of directors may make an adverse
recommendation change if it determines in good faith after
consulting with outside counsel that a failure to do so would be
inconsistent with its fiduciary duties under applicable law, so
long as the Company has given Fairfax two business days
prior written notice of the board of directors intention
to take any such action and its reasons for doing so and pays
the termination fee to Fairfax described in
Termination Fee.
The Company has also agreed to cease any discussion or
negotiations with any third parties that may have been ongoing
on the date of the merger agreement with respect to a takeover
proposal, and to seek to have returned to the Company (or
destroyed) any confidential information that has been provided
in any such discussions or negotiations. In addition, the
Company has agreed to notify Fairfax orally and in writing as
promptly as reasonably practicable 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 and the identity of the
party making such request or takeover proposal, and to keep
Fairfax promptly informed of all developments that could lead to
the board of directors making an adverse recommendation change
or exercising any of its rights under these provisions of the
merger agreement.
For purposes of this discussion, the term takeover
proposal means any inquiry, proposal or offer from any
person (other than Fairfax or any of its affiliates or
representatives) relating to:
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any direct or indirect acquisition or purchase (pursuant to a
merger, consolidation, share exchange, business combination,
recapitalization, liquidation, dissolution or similar
transaction), of 10% or more of the consolidated assets
(including equity interests in subsidiaries) of the Company and
its subsidiaries, taken as a whole, or 10% or more of any class
of equity securities of the Company; or
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any tender offer or exchange offer that if consummated would
result in any person beneficially owning 10% or more of any
class of equity securities of the Company (other than the
transactions contemplated by the merger agreement).
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For purposes of this discussion, the term superior
proposal means a bona fide written takeover proposal, that
was not solicited in violation of the merger agreement, from any
person for
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a direct or indirect acquisition or purchase (pursuant to a
merger, consolidation, share exchange, business combination,
recapitalization, liquidation, dissolution or similar
transaction) of 50% or more of the consolidated assets
(including equity interests in subsidiaries) of the Company and
its subsidiaries, taken as a whole, or 50% or more of the issues
and outstanding common stock of the Company; or
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any tender offer or exchange offer that if consummated would
result in any person beneficially owning 50% or more of the
issued and outstanding common stock of the Company, (other than
the transactions contemplated by the merger agreement); in each
case, that, considering all relevant factors (including whether
financing for such offer is fully committed or is reasonably
likely to be obtained and whether such takeover proposal is
reasonably likely to be consummated), the board of directors
determines in its good faith judgment (after receiving the
advice of the Companys financial adviser and outside
counsel), is more favorable to the Company and its stockholders
than the merger.
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Stockholders
Meeting
Subject to the provisions of the merger agreement described
above under No Solicitation of Other
Offers, we are required to convene and hold a meeting of
our stockholders as promptly as practicable after the execution
of the merger agreement to in order to obtain the approval of
our stockholders of the merger agreement. Subject to the
provisions of the merger agreement discussed above under
No Solicitation of Other Offers, we must
use our reasonable best efforts to solicit from our stockholders
proxies in favor of the adoption of the merger agreement.
Filings;
Other Actions; Notification
We and Fairfax will (i) promptly (within ten business days
of entering into the merger agreement) make our respective
regulatory filings described under The Merger
Regulatory Approvals 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 our respective
reasonable best efforts to take, or cause to be taken, all
appropriate actions, and do, or cause to be done, all things
necessary, proper or advisable under applicable law to
consummate the merger and the other transactions contemplated by
the merger, including using our reasonable best efforts to
promptly obtain all permits, consents, approvals,
authorizations, qualifications and orders of governmental
authorities (including the approval of the Arkansas Insurance
Department, the Delaware Insurance Department, the Illinois
Department of Insurance and the Minnesota Department of
Commerce, (which we collectively refer to as insurance
regulatory approvals) and parties to contracts with the Company
and its subsidiaries as are necessary for the consummation of
the merger and to fulfill the conditions to the merger. However,
neither Merger Sub nor Fairfax will be required to take any
action, including entering into any consent decree, hold
separate orders or other arrangements, that (A) requires
the divestiture of any assets of any of Merger Sub, Fairfax, the
Company or any of their respective subsidiaries or
(B) limits Fairfaxs freedom of action with respect
to, or its ability to retain, the Company and its subsidiaries
or any portion thereof or any of Fairfaxs or its
affiliates other assets or businesses. Without limiting
the foregoing, Fairfax will use its reasonable best efforts to
file or submit the insurance regulatory approvals within ten
(10) business days after the date hereof and to respond
promptly to any request by any governmental authority for any
additional information and documentary material in connection
therewith. Fairfax shall give the Company and its counsel a
reasonable opportunity to review and comment on the insurance
regulatory approvals, and all amendments or supplements thereto
prior to their being filed or submitted. Each of Parent and the
Company shall promptly forward to the other all notices,
inquiries and other written communications received by it from
any governmental authority relating to the Merger. Each of
Fairfax and the Company will defend vigorously against any
actions, suits or proceedings in which either party or its
subsidiaries is named as defendant which seeks to enjoin,
restrain or prohibit the Transactions. Additionally, none of the
Company, Fairfax or Merger Sub will until the effective time of
the Merger, directly or indirectly, take any action or fail to
take any action that is intended to, or that would reasonably be
likely to, materially delay or prevent the consummation of the
Merger.
The Company and Fairfax have agreed to give each other prompt
notice of
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the occurrence, or non-occurrence, of any event the occurrence,
or non-occurrence, of which reasonably could be expected to
cause any representation or warranty contained in the merger
agreement to be untrue or inaccurate in any material respect;
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any failure of the Company, Fairfax or Merger Sub, as the case
may be, to comply with or satisfy any material covenant or
agreement to be complied with or satisfied by it under the
merger agreement;
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any other development that would constitute a material adverse
effect; and
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any notice or other communication from any governmental
authority in connection with the transactions contemplated by
the merger agreement or from any person alleging that the
consent of such person is or may be required in connection with
the merger agreement or the transactions contemplated thereby.
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Employee
Benefits Matters
Following the consummation of the Merger, Fairfax has agreed,
pursuant to the merger agreement, to cause the surviving
corporation and our subsidiaries to honor in accordance with
their terms, all contracts, agreements, arrangements, policies,
plans and commitments of the Company and its subsidiaries as in
effect immediately prior to the merger that are applicable to
any current or former officers, employees or directors of the
surviving corporation or any of our subsidiaries, including
without limitation, payment of incentive bonuses thereunder for
the calendar year ending December 31, 2010. In addition,
Fairfax has agreed to grant employees of the Company or any of
its subsidiaries credit for all periods of employment with the
Company and any of its subsidiaries for purposes of eligibility
to participate and vesting (but not for benefit accruals) under
any employee benefit plan, program or arrangement established or
maintained by the Company or any of its subsidiaries for service
accrued or deemed accrued prior to the merger with the Company
or any of its subsidiaries.
Investments
Pursuant to the merger agreement, the Company will use
commercially reasonable efforts beginning promptly after the
date of the merger agreement to sell all of its and its
subsidiaries non-cash investments for proceeds consisting solely
of cash or treasury bills (but the Company has no obligation to
sell such investments for an amount less than their book value
as of September 30, 2010). If the proceeds to be realized
from such a sale with respect to any non-cash investment with a
book value in excess of $1,000,000 as of September 30, 2010
would be less than the book value of such non-cash investment as
of September 30, 2010, the Company will obtain
Fairfaxs consent prior to effecting such sale. After the
date of the merger agreement, the Company is not permitted to
acquire any investment assets other than treasury bills without
the prior written consent of Fairfax.
Insurance
Prior to the effective time, the Company is required to purchase
one year prepaid tail policies on terms and
conditions (in both amount and scope) providing substantially
equivalent benefits, and from a carrier or carriers with
comparable credit ratings, as the current policies of fiduciary
liability insurance, insurance company professional liability
insurance, agents and brokers professional liability insurance
and employment practices liability insurance maintained by the
Company and its subsidiaries with respect to matters arising on
or before the effective time, but the Company will not purchase
any such tail policy unless it obtains Fairfaxs consent
with respect to the premium payable by the Company or its
subsidiary for each such policy.
Conditions
to the Merger
The respective obligations of the Company, Fairfax and Merger
Sub to consummate the merger are subject to the satisfaction or
waiver of the following mutual conditions:
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the merger agreement must have been duly adopted by our
stockholders;
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the waiting period applicable to the consummation of the merger
under the HSR Act must have expired or have been early
terminated;
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certain insurance regulatory approvals and consents required to
consummate the merger, including the insurance regulatory
approvals noted above, must have been obtained, and
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no court or governmental entity of competent jurisdiction in the
U.S. or Canada has enacted, issued, promulgated, enforced
or entered any law that makes illegal the acquisition of shares
of the Companys
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common stock by Fairfax, Merger Sub, or any affiliate of either,
or otherwise prevents or prohibits the consummation of the
merger.
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The obligations of Fairfax and Merger Sub to effect the merger
are also subject to the satisfaction or (where permissible)
waiver by Fairfax at or prior to the effective time of the
following additional conditions:
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(i) our representations and warranties regarding
(a) certain aspects of our capitalization must be true and
correct, except for de minimis errors and (b) our corporate
power and authority to enter into the merger agreement and
consummate the merger must be true and correct in all respects;
and (ii) all other representations and warranties contained
in the merger agreement must be true and correct, except as
would not constitute a material adverse effect (but without
regard to materiality qualifiers contained therein), in each
case, as of the effective time, as though made on and as of such
date (except to the extent expressly made as of an earlier date,
in which case, as of such earlier date);
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we 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 us on or prior to the effective
time;
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we have delivered to Fairfax a certificate, dated as of the date
of the closing of the merger, signed by an authorized officer of
the Company, certifying on our behalf that the two conditions
above have been satisfied; and
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no material adverse effect shall have occurred with respect to
the Company between the date of the merger agreement and the
closing date.
|
Our obligation to effect the merger is subject to the
satisfaction or (where permissible) waiver by us at or prior to
the effective time of the following additional conditions:
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(i) the representations and warranties of Fairfax and
Merger Sub relating to their financial ability to complete the
merger must be true and correct in all respects and
(ii) all other representations and warranties must be true
and correct, except as would not, individually or in the
aggregate, be reasonably likely to constitute a material adverse
effect on the ability of Fairfax and Merger Sub to consummate
the merger (but without regard to materiality qualifiers
contained therein), in each case, as of the effective time, as
though made on and as of such time (except to the extent
expressly made as of an earlier date, in which case as of such
earlier date);
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each of Fairfax and Merger Sub 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 Fairfax
and Merger Sub on or prior to the effective time; and
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|
Fairfax has delivered to us a certificate, dated as of the date
of the closing of the merger, signed by an authorized officer of
Fairfax, certifying that the two conditions above have been
satisfied.
|
Termination
The merger agreement may be terminated at any time prior to the
effective time, notwithstanding the adoption of the merger
agreement by the Companys stockholders, by mutual written
consent of the Company and Fairfax.
The merger agreement may also be terminated at any time prior to
the completion of the merger, notwithstanding the adoption of
the merger agreement, by the Companys stockholders by
either the Company or Fairfax if:
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|
the merger is not completed on or before June 30, 2011,
which date, as we refer to as the outside date, except that this
right to terminate the merger agreement will not be available to
any party whose failure to comply with the merger agreement
results in the failure of the merger to be completed by that
date;
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any final, non-appealable governmental injunction, order, decree
or ruling (whether temporary, preliminary or permanent) has been
enacted, issued, enforced or entered by any governmental
authority in the U.S. or Canada, which has the effect of
preventing, prohibiting or making illegal the completion of the
merger, except that the right to terminate under this provision
shall not be available to any party whose failure to
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64
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fulfill any material obligations under the merger agreement has
been the cause of, or resulted in, the failure of the effective
time to occur on or before the outside date; or
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the Companys stockholders fail to adopt the merger
agreement at the special meeting of the Companys
stockholders;
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by Fairfax if:
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the Company has breached any of its representations, warranties,
covenants or agreements under the merger agreement and such
breach would give rise to the failure of the related conditions
to Fairfaxs obligation to close to be satisfied and has
not or cannot be cured within 30 days after Fairfax gives
the Company written notice of such breach; or
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our board of directors or any committee thereof makes an adverse
recommendation change; and
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the Company shall have failed to include in this proxy statement
its recommendation to stockholders to adopt the merger
agreement; and
|
by the Company if:
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|
|
Fairfax has breached any of its representations, warranties,
covenants or agreements under the merger agreement and such
breach would give rise to the failure of the related conditions
to the Companys obligation to close to be satisfied and
has not or cannot be cured within 30 days after the Company
gives Fairfax written notice of such breach; or
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|
|
concurrently with such termination, the Company enters into a
definitive agreement providing for a superior proposal, provided
that prior to or simultaneously with the entry into such
definitive agreement, the Company has paid to Fairfax the
termination fee described below.
|
In the event that the merger agreement is terminated as
described above, the merger agreement will (subject to certain
exceptions) become void, and there will be no liability under
the merger agreement on the part of any party to the merger
agreement, except for the parties obligations with respect
to expense reimbursement described below under
Expenses and except that no party will
be relieved from liability for any willful breach of the merger
agreement prior to the date of such termination.
Termination
Fee
The Company has agreed to pay Fairfax a termination fee of
$9.0 million, which amount represents approximately 3.0% of
the equity value of the transaction, if the merger agreement is
terminated under any of the following circumstances:
(i) Fairfax terminates the merger agreement because the
board of directors or any committee thereof makes an adverse
recommendation change;
(ii) the Company terminates the merger agreement because it
enters into a definitive agreement providing for a superior
proposal;
(iii) if Fairfax or the Company terminates the merger
agreement because the effective time shall not have occurred
before the outside date or if Fairfax terminates the merger
agreement because the Company has breached one or more of its
representations, warranties, covenants or agreements under the
merger agreement and such breach would give rise to the failure
of the related conditions to Fairfaxs obligation to close
to be satisfied and has not or cannot be cured within
30 days after Fairfax gives the Company written notice of
such breach; and
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|
|
prior to the time of such termination a takeover proposal shall
have been publicly announced with respect to the
Company; and
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|
|
within 12 months after the date of such termination, the
Company enters into a definitive agreement with respect to (and
subsequently consummates the contemplated transaction), or
consummates, a
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65
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|
|
transaction contemplated by a takeover proposal (provided that
all references to 10% in the definition of takeover
proposal shall be replaced with 50%); or
|
(iv) if Fairfax or the Company terminates the merger
agreement because the Companys stockholders fail to adopt
the merger agreement at the special meeting of the
Companys stockholders; and
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|
|
prior to the time of such failure to adopt the merger agreement
a takeover proposal shall have been publicly announced with
respect to the Company; and
|
|
|
|
within 12 months after the date of such termination, the
Company enters into a definitive agreement with respect to (and
subsequently consummates the contemplated transaction), or
consummates, a transaction contemplated by a takeover proposal
(provided that all references to 10% in the definition of
takeover proposal shall be replaced with 50%).
|
If the merger agreement is terminated as a result of
clause (i) above, the termination fee will be payable by
the Company to Fairfax no later than two business days following
such termination. If the merger agreement is terminated as a
result of clause (ii) above, the termination fee will be
payable by the Company to Fairfax prior to or simultaneously
with such termination. If the merger is terminated as a result
of clauses (iii) or (iv) above, the termination fee
will be payable by the Company to Fairfax no later than two
business days following the consummation of such transaction.
Expenses
Except as otherwise set forth below, all expenses (as defined in
the merger agreement) incurred in connection with the merger
agreement and the transactions contemplated thereby will be paid
by the party incurring such expenses, whether or not the merger
is consummated.
However, if Fairfax or the Company terminates the merger
agreement as a result of the Companys stockholders failure
to adopt the merger agreement at the special meeting of the
Companys stockholders, or the others breach of any
representation, warranty, covenant or agreement in the merger
agreement under the circumstances described above under
Termination, (provided that, in such
case, the terminating party is not in material breach of any of
its representations, warranties, covenants or agreements in the
merger agreement), then the breaching party (or in the event of
a failure to adopt the merger agreement, the Company) will
reimburse the terminating party (or in the event of a failure to
adopt the merger agreement, Fairfax) for all of its expenses, up
to $1.5 million, provided, however, that if the Company is
required to pay the termination fee described above under
Termination Fee, then the Company may
reduce any termination fee owed to Fairfax by the full amount of
any expense reimbursement paid to Fairfax pursuant to this
provision.
Remedies
If Fairfax is entitled to terminate the merger agreement and
receive a termination fee from the Company, Fairfaxs
receipt of such termination fee will be the sole and exclusive
remedy of Fairfax and Merger Sub against the Company, regardless
of the circumstances of such termination.
The parties are entitled to specific performance of the terms of
the merger agreement in addition to any other remedy at law or
in equity.
Indemnification;
Directors and Officers Insurance
From and after the effective time, Fairfax shall cause the
surviving corporation to, and the surviving corporation will,
indemnify, defend and hold harmless, to the fullest extent
permitted by law, our present and former officers and directors,
and our subsidiaries present and former officers and
directors, against 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 may not be unreasonably withheld or
delayed) of or in connection with any action (as defined in the
merger agreement) based on or arising out of the fact that such
person is or was a director or officer of the Company or any of
its subsidiaries at or prior to the effective time, including
any such losses, liabilities and amounts arising out of our
pertaining to the merger agreement or the
66
transactions contemplated thereby. In addition, the surviving
corporation will pay all expenses of each such indemnified party
in advance of the final disposition of any such action to the
fullest extent permitted by law and to advance such expenses,
upon receipt of an undertaking to repay such advances if it is
ultimately determined in accordance with applicable law that
such party is not entitled to indemnification. The surviving
corporation is also required under the merger agreement to
maintain in its organizational documents for a period of six
years after the effective time provisions with respect to the
exculpation and indemnification of the current and former
directors and officers of the Company that are the same as those
currently set forth in the Companys certificate of
incorporation and by-laws.
Under the merger agreement, we have the right, immediately prior
to the effective time, to purchase a six year prepaid tail
policy on terms and conditions (in both amount and scope)
providing substantially equivalent benefits, and from a carrier
or carriers with comparable credit ratings, as the current
policies of directors and officers liability
insurance maintained by us and our subsidiaries with respect to
matters arising on or before the effective time and covering the
transactions contemplated by the merger agreement for a price
not to exceed 250% of the annual premium amount we are currently
paying for such policy.
Access
Subject to certain limitations, we have agreed to afford
Fairfax, Merger Sub and their authorized representatives,
reasonable access to the Company (including our officers,
employees, offices and other facilities and our books and
records) and to furnish Fairfax with our financial, operating
and other data and information, as may reasonably be requested.
Modification
or Amendment
At any time prior to the effective time, the parties to the
merger agreement may modify or amend the merger agreement in
writing, by action taken by their respective boards of
directors. After the approval and adoption of the merger
agreement and the merger by the stockholders of the Company,
however, no amendment may be made that would require further
approval of the stockholders of the Company under applicable law
without such further approval.
67
VOTING
AGREEMENTS
This section describes the voting agreements among Fairfax and
each of Jerome M. Shaw, a member of the board of directors of
the Company, and Richard H. Smith, Chairman, the President and
Chief Executive Officer of the Company. The description is not
complete, and you should read the forms of voting agreements for
a more complete understanding of its terms. The complete text of
the forms of voting agreements are attached to this proxy
statement as Annexes C and D and are incorporated by
reference into this proxy statement.
Concurrently with the execution of the merger agreement, each of
Messrs. Shaw and Smith, solely in his capacity as a
stockholder, entered into a voting agreement with Fairfax under
which he has irrevocably agreed to appear at every meeting of
the Companys stockholders and every postponement or
adjournment thereof, and to vote all of his shares of Company
common stock (and any other such shares he may acquire after the
date of the merger agreement):
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|
in favor of the proposal to approve the merger agreement and the
consummation of the transactions contemplated thereby,
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|
against any action, agreement, transaction or proposal
(including a takeover proposal) that would result in a material
breach by the Company under the merger agreement or could result
in any condition to the Companys obligations thereunder
not being fulfilled, and
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|
in favor of any other matter necessary to the consummation of
the transactions contemplated by the merger agreement.
|
Messrs. Shaw and Smith also have granted Fairfax an
irrevocable proxy to vote their shares in accordance with the
foregoing if and to the extent he fails to do so. As of [RECORD
DATE], 2010, the record date for the special meeting, such
directors and executive officers collectively were entitled to
vote 2,940,330 shares, or approximately 16.6% of the
Companys outstanding common stock.
Messrs. Shaw and Smith also have agreed among other things
that, except as contemplated by the merger agreement, they will
not, directly or indirectly, on or after the date of the merger
agreement:
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sell, assign, transfer (including by operation of law), lien,
pledge, dispose of or otherwise encumber (referred to in the
voting agreement as a transfer) any of their shares, other than
a transfer of any such shares to any person who executes and
delivers to Fairfax a joinder to the transferors voting
agreement, pursuant to which such person will be bound by all of
the terms and provisions of such voting agreement,
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|
deposit any of their shares into a voting trust or enter into a
voting agreement or arrangement or grant any proxy or power of
attorney with respect thereto that is inconsistent with the
voting agreements,
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|
enter into any contract, option or other arrangement or
undertaking with respect to the direct or indirect acquisition,
sale, assignment, transfer or other disposition of their
shares, or
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|
take any action that would make any representation or warranty
he made untrue or incorrect in any material respect or have the
effect of preventing or disabling him from performing his
obligations under the voting agreements.
|
Messrs. Shaw and Smith also have agreed that they will:
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|
|
not, except as expressly permitted by the provisions of the
merger agreement described above under Merger
Agreement No Solicitation of Other Offers,
directly or indirectly, engage in any action that the Company is
prohibited from taking under such provisions (and will cause
their respective representatives and agents not to engage in any
action prohibited under such provisions), and
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promptly advise the Company orally and in writing of any
takeover proposal (as defined in the merger agreement) or any
request for information with respect thereto, and the material
terms and conditions of, and identity of the person making, such
takeover proposal or request, and any material changes therein.
|
The voting agreements will terminate upon the earliest to occur
of:
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|
|
the termination of the merger agreement in accordance with its
terms, and
|
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|
|
the effective time of the merger.
|
Notwithstanding the foregoing, Messrs. Shaw and Smith have
entered into voting agreements solely in their capacities as
stockholders of the Company and nothing in the voting agreements
will limit or affect any action or inaction by them in their
capacities as directors or executive officers and as fiduciaries
of the Company (or the Companys subsidiaries), and any
such action or inaction will not be deemed to be a breach of the
voting agreements.
68
MARKET
PRICE OF COMMON STOCK
The common stock is listed for trading on the NYSE under the
symbol FMR. The table below shows, for the periods
indicated, the price range of the common stock, as reported by
Bloomberg L.P., and the dividends per share declared during each
of the calendar quarters of 2007, 2008 and 2009 and the first
three quarters of 2010. The merger agreement does not permit the
Company to pay any additional dividends on its common stock
without the prior written consent of Fairfax.
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|
Common Stock Price
|
|
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Dividends
|
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|
High
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Low
|
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Declared
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended March 31
|
|
$
|
23.35
|
|
|
$
|
19.64
|
|
|
|
|
|
Quarter ended June 30
|
|
$
|
21.61
|
|
|
$
|
18.68
|
|
|
|
|
|
Quarter ended September 30
|
|
$
|
21.92
|
|
|
$
|
17.98
|
|
|
|
|
|
Quarter ended December 31
|
|
$
|
25.02
|
|
|
$
|
20.00
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended March 31
|
|
$
|
23.66
|
|
|
$
|
14.75
|
|
|
|
|
|
Quarter ended June 30
|
|
$
|
19.02
|
|
|
$
|
15.80
|
|
|
|
|
|
Quarter ended September 30
|
|
$
|
18.58
|
|
|
$
|
12.17
|
|
|
|
|
|
Quarter ended December 31
|
|
$
|
14.46
|
|
|
$
|
8.53
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended March 31
|
|
$
|
14.91
|
|
|
$
|
9.98
|
|
|
|
|
|
Quarter ended June 30
|
|
$
|
16.20
|
|
|
$
|
11.65
|
|
|
$
|
0.025
|
|
Quarter ended September 30
|
|
$
|
14.80
|
|
|
$
|
12.34
|
|
|
$
|
0.025
|
|
Quarter ended December 31
|
|
$
|
14.08
|
|
|
$
|
12.68
|
|
|
$
|
0.025
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ending March 31
|
|
$
|
15.25
|
|
|
$
|
11.46
|
|
|
$
|
2.00
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.025
|
|
Quarter ending June 30
|
|
$
|
14.16
|
|
|
$
|
11.51
|
|
|
$
|
0.025
|
|
Quarter ending September 30
|
|
$
|
12.30
|
|
|
$
|
8.55
|
|
|
$
|
0.025
|
|
Quarter ending December 31 (through [ ], 2010)
|
|
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|
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The closing price of the common stock on the NYSE on
October 28, 2010, the last trading day prior to the public
announcement of the execution of the merger agreement, was
$11.36 per share of common stock. On
[ ],
2010, the most recent practicable date before this proxy
statement was mailed to our stockholders, the closing price for
the common stock on the NYSE was
$[ ]
per share of common stock. You are encouraged to obtain current
market quotations for our common stock in connection with voting
your shares of common stock at the special meeting.
69
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table contains certain information as of
October 31, 2010 as to: (i) all persons who, to our
knowledge, were the beneficial owners of more than 5% of the
outstanding shares of the Companys common stock;
(ii) each of our named executive officers; (iii) each
of our directors; and (iv) all of our executive officers
and directors as a group. The persons named hold sole voting and
investment power with respect to the shares shown opposite their
respective names, unless otherwise indicated. The information
with respect to each person specified is as supplied or
confirmed by such person.
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Beneficial Ownership
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Number
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|
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Percentage
|
|
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Jerome M. Shaw
|
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1,937,522
|
(2)
|
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10.9
|
%
|
FMR LLC
|
|
|
1,597,689
|
(3)
|
|
|
9.0
|
%
|
TCW Group, Inc.
|
|
|
1,555,880
|
(4)
|
|
|
8.8
|
%
|
Richard H. Smith
|
|
|
1,002,808
|
(5)
|
|
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5.6
|
%
|
John A. Marazza
|
|
|
272,267
|
(6)
|
|
|
1.5
|
%
|
E. Edward Camp
|
|
|
99,000
|
(7)
|
|
|
*
|
|
George R. Boyer III
|
|
|
9,263
|
|
|
|
*
|
|
Thomas B. Kearney
|
|
|
28,685
|
|
|
|
*
|
|
Louis J. Manetti
|
|
|
8,693
|
|
|
|
*
|
|
Bradley J. Pickard
|
|
|
4,763
|
|
|
|
*
|
|
Hollis W. Rademacher
|
|
|
13,385
|
|
|
|
*
|
|
Steven A. Shapiro
|
|
|
48,866
|
|
|
|
*
|
|
William C. Tyler
|
|
|
12,385
|
|
|
|
*
|
|
All directors and executive officers as a group (11 persons)
|
|
|
3,437,637
|
|
|
|
19.2
|
%
|
|
|
|
(1)
|
|
Represents the percent of ownership of total outstanding shares
of capital stock (the * indicates that the amount of ownership
is less than 1% of outstanding capital stock).
|
|
(2)
|
|
Includes 1,929,137 shares held by The Jerome M. Shaw
Revocable Trust, which is controlled by Mr. Shaw. Pursuant
to a voting agreement, dated as of October 28, 2010,
between Fairfax and Mr. Shaw, Mr. Shaw, solely in his
capacity as a stockholder, agreed, among other things, to vote
in favor of the proposal to approve the merger agreement and
against any action, agreement, transaction or proposal that
would result in a material breach by the Company under the
merger agreement. See Voting Agreements on
page 68.
|
|
(3)
|
|
The address of this stockholder is 82 Devonshire Street, Boston,
MA 02109.
|
|
(4)
|
|
The address of this stockholder is 865 South Figueroa Street,
Los Angeles, CA 90017.
|
|
(5)
|
|
Pursuant to a voting agreement, dated as of October 28,
2010, between Fairfax and Mr. Smith, Mr. Smith, solely
in his capacity as a stockholder, agreed, among other things, to
vote in favor of the proposal to approve the merger agreement
and against any action, agreement, transaction or proposal that
would result in a material breach by the Company of any
provision of the merger agreement. See Voting
Agreements on page 68.
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|
(6)
|
|
Includes 48,333 shares of unvested restricted stock and
options to purchase 131,667 shares that are currently
exercisable or exercisable within 60 days of
October 31, 2010.
|
|
(7)
|
|
Includes 68,333 shares of unvested restricted stock and
options to purchase 28,000 shares that are currently
exercisable or exercisable within 60 days of
October 31, 2010.
|
70
APPRAISAL
RIGHTS
Under the DGCL, and as more fully described below, if you do not
wish to accept the merger consideration provided for in the
merger agreement and the merger is consummated, you have the
right to seek appraisal of your shares of the Companys
common stock and to receive payment in cash for the fair value
of your common stock, exclusive of any element of value arising
from the accomplishment or expectation of the merger, as
determined by the Delaware Court of Chancery, together with
interest, if any, to be paid upon the amount determined to be
fair value. The fair value of your shares of common
stock as determined by the Delaware Court of Chancery may be
more or less than, or the same as, the $16.50 per share that you
are otherwise entitled to receive under the terms of the merger
agreement. These rights are known as appraisal rights. The
Companys stockholders who elect to exercise appraisal
rights must not vote in favor of the proposal to adopt the
merger agreement and must comply with the provisions of
Section 262 of the DGCL, which we refer to as
Section 262, in order to perfect their rights. Strict
compliance with the statutory procedures in Section 262 is
required. Failure to follow precisely any of the statutory
requirements will result in the loss of your appraisal rights.
This section is intended as a brief summary of the material
provisions of the Delaware statutory procedures that a
stockholder must follow in order to seek and perfect appraisal
rights. This summary, however, is not a complete statement of
all applicable requirements, and it is qualified in its entirety
by reference to Section 262, the full text of which appears
in Annex E to this proxy statement. The following summary
does not constitute any legal or other advice, nor does it
constitute a recommendation that stockholders exercise their
appraisal rights under Section 262.
Section 262 requires that, where a merger agreement is to
be submitted for adoption at a meeting of stockholders, the
stockholders must be notified not less than 20 days before
the meeting to vote on the merger that appraisal rights will be
available. A copy of Section 262 must be included with such
notice. This proxy statement constitutes the Companys
notice to our stockholders that appraisal rights are available
in connection with the merger, in compliance with the
requirements of Section 262. If you wish to consider
exercising your appraisal rights, you should carefully review
the text of Section 262 contained in Annex E. Failure
to comply timely and properly with the requirements of
Section 262 will result in the loss of your appraisal
rights under the DGCL.
If you elect to demand appraisal of your shares of common stock,
you must deliver to the Company a written demand for appraisal
of your shares of common stock before the vote is taken to
approve the proposal to adopt the merger agreement. That demand
must be executed by or on behalf of the stockholder of record
and must reasonably inform us of the identity of the holder of
record of the Companys common stock and the intention of
such stockholder to demand appraisal of his, her or its shares
of common stock. Holders of the Companys common stock who
desire to exercise their appraisal rights must not vote or
submit a proxy in favor of the proposal to adopt the merger
agreement. Voting against or failing to vote for the proposal to
adopt the merger agreement by itself does not constitute a
demand for appraisal within the meaning of Section 262. The
written demand for appraisal must be in addition to and separate
from any proxy or vote on the proposal to adopt the merger
agreement.
A holder of shares of the Companys common stock wishing to
exercise appraisal rights must hold of record the shares of
common stock on the date the written demand for appraisal is
made and must continue to hold the shares of common stock of
record through the effective time of the merger, because
appraisal rights will be lost if the shares of common stock are
transferred prior to the effective time. If you fail to comply
with these conditions and the merger is completed, you will be
entitled to receive payment for your shares of the
Companys common stock as provided for in the merger
agreement, but you will have no appraisal rights with respect to
your shares of the Companys common stock. A proxy that is
submitted and does not contain voting instructions will, unless
revoked, be voted in favor of the proposal to adopt the merger
agreement, and it will constitute a waiver of the
stockholders right of appraisal and will nullify any
previously delivered written demand for appraisal. Therefore, a
stockholder who submits a proxy and who wishes to exercise
appraisal rights must either submit a proxy containing
instructions to vote against the proposal to adopt the merger
agreement or abstain from voting on the proposal to adopt the
merger agreement. All demands for appraisal should be addressed
to First Mercury Financial Corporation, Attn: Corporate
Secretary, 29110 Inkster Road, Suite 100, Southfield,
Michigan 48034.
To be effective, a demand for appraisal by a holder of the
Companys common stock must be made by, or in the name of,
the record stockholder, fully and correctly, as the
stockholders name appears on the stockholders stock
certificate(s) or, in the case of uncertificated shares, in the
transfer agents records. The demand cannot be made by
71
the beneficial owner if he or she does not also hold the shares
of the Companys common stock of record. The beneficial
holder must, in such cases, have the registered owner, such as a
bank, broker or other nominee, submit the required demand in
respect of those shares of common stock.
If you hold your
shares of the Companys common stock through a bank,
brokerage firm or other nominee and you wish to exercise
appraisal rights, you should consult with your bank, broker or
the other nominee to determine the appropriate procedures for
the making of a demand for appraisal by the nominee.
If shares of the Companys common stock are owned of record
by a person other than the beneficial owner, including a broker,
fiduciary (such as a trustee, guardian or custodian) or other
nominee, a demand for appraisal must be executed by or for such
record holder. If the shares of the Companys common stock
are owned of record by more than one person, as in a joint
tenancy or tenancy in common, the demand should be executed by
or for all joint owners. An authorized agent, including an
authorized agent for two or more joint owners, may execute the
demand for appraisal for a stockholder of record; however, the
agent must identify the record owner or owners and expressly
disclose the fact that, in executing the demand, he or she is
acting as agent for the record owner. If a stockholder holds
shares of the Companys common stock through a broker who
in turn holds the shares through a central securities depository
nominee such as Cede & Co. (the nominee for The
Depository Trust Company), a demand for appraisal of such
shares must be made by or on behalf of the depository nominee
and must identify the depository nominee as a record holder. A
record owner, such as a broker, who holds shares of the
Companys common stock as a nominee for others, may
exercise his or her right of appraisal with respect to the
shares of common stock held for one or more beneficial owners,
while not exercising this right for other beneficial owners. In
that case, the written demand should state the number of shares
of common stock as to which appraisal is sought. Where no number
of shares of common stock is expressly mentioned, the demand
will be presumed to cover all shares of common stock held in the
name of the record owner.
Within ten days after the effective time of the merger, the
surviving corporation in the merger must give notice that the
merger has become effective to each of the Companys
stockholders who did not vote in favor of the proposal to adopt
the merger agreement and otherwise complied with
Section 262. At any time within 60 days after the
effective time of the merger, any stockholder who has not
commenced an appraisal proceeding or joined a proceeding as a
named party may withdraw the demand and accept the merger
consideration for that stockholders shares of the
Companys common stock by delivering to the surviving
corporation a written withdrawal of the demand for appraisal.
However, any such attempt to withdraw the demand made more than
60 days after the effective time will require written
approval of the surviving corporation. Unless the demand is
properly withdrawn by the stockholder within 60 days after
the effective date of the merger, no appraisal proceeding in the
Delaware Court of Chancery will be dismissed as to any
stockholder without the approval of the Delaware Court of
Chancery, and such approval may be conditioned upon such terms
as the Court deems just. If the surviving corporation does not
approve a request to withdraw a demand for appraisal when that
approval is required, or if the Delaware Court of Chancery does
not approve the dismissal of an appraisal proceeding, the
stockholder will be entitled to receive only the appraised value
determined in any such appraisal proceeding, which value could
be less than, equal to or more than the consideration offered
pursuant to the merger agreement.
Within 120 days after the effective time, but not
thereafter, either the surviving corporation or any stockholder
who has complied with the requirements of Section 262 and
is entitled to appraisal rights under Section 262 may
commence an appraisal proceeding by filing a petition in the
Delaware Court of Chancery demanding a determination of the fair
value of the shares of common stock held by all stockholders
entitled to appraisal. Upon the filing of such a petition by a
stockholder, service of a copy of such petition shall be made
upon the surviving corporation. Fairfax has no present intent to
file such a petition and has no obligation to file such a
petition, and holders should not assume that the surviving
corporation will file a petition. Accordingly, the failure of a
stockholder to file such a petition within the period specified
could nullify the stockholders previous written demand for
appraisal. In addition, within 120 days after the effective
time of the merger, any stockholder who has properly filed a
written demand for appraisal and who did not vote in favor of
the merger agreement, upon written request, will be entitled to
receive from the surviving corporation, a statement setting
forth the aggregate number of shares of the Companys
common stock not voted in favor of the merger agreement and with
respect to which demands for appraisal have been received and
the aggregate number of holders of such shares. The statement
must be mailed within 10 days after such written request
has been received by the surviving corporation. A person who is
72
the beneficial owner of shares of the Companys common
stock held either in a voting trust or by a nominee on behalf of
such person may, in such persons own name, file a petition
or request from the surviving corporation such statement.
If a petition for appraisal is duly filed by a stockholder and a
copy of the petition is delivered to the surviving corporation,
then the surviving corporation will be obligated, within
20 days after receiving service of a copy of the petition,
to file with the Delaware Register in Chancery a duly verified
list containing the names and addresses of all stockholders who
have demanded payment for their shares of the Companys
common stock and with whom agreements as to the value of their
shares of the Companys common stock have not been reached.
After notice to stockholders who have demanded appraisal, if
such notice is ordered by the Delaware Court of Chancery, the
Delaware Court of Chancery is empowered to conduct a hearing
upon the petition and to determine those stockholders who have
complied with Section 262 and who have become entitled to
the appraisal rights provided by Section 262. The Delaware
Court of Chancery may require stockholders who have demanded
payment for their shares of the Companys common stock and
who hold stock represented by certificates to submit their stock
certificates to the Register in Chancery for notation of the
pendency of the appraisal proceedings; and if any stockholder
fails to comply with that direction, the Delaware Court of
Chancery may dismiss the proceedings as to that stockholder.
After determination of the stockholders entitled to appraisal of
their shares of the Companys common stock, the Delaware
Court of Chancery will appraise the shares of common stock,
determining their fair value as of the effective time after
taking into account all relevant factors exclusive of any
element of value arising from the accomplishment or expectation
of the merger, together with interest, if any, to be paid upon
the amount determined to be the fair value. When the value is
determined, the Delaware Court of Chancery will direct the
payment of such value upon surrender by those stockholders of
the certificates representing their shares of common stock.
Unless the Court in its discretion determines otherwise for good
cause shown, interest from the effective date of the merger
through the date of payment of the judgment shall be compounded
quarterly and shall accrue at 5% over the Federal Reserve
discount rate (including any surcharge) as established from time
to time during the period between the effective time and the
date of payment of the judgment.
You should be aware that an investment banking opinion as to
fairness from a financial point of view is not necessarily an
opinion as to fair value under Section 262. Although we
believe that the merger consideration is fair, no representation
is made as to the outcome of the appraisal of fair value as
determined by the Court and stockholders should recognize that
such an appraisal could result in a determination of a value
higher or lower than, or the same as, the merger consideration.
Moreover, we do not anticipate offering more than the merger
consideration to any stockholder exercising appraisal rights and
reserve the right to assert, in any appraisal proceeding, that,
for purposes of Section 262, the fair value of
a share of the Companys common stock is less than the
merger consideration. In determining fair value, the
Delaware Court is required to take into account all relevant
factors. In Weinberger v. UOP, Inc., the Delaware Supreme
Court discussed the factors that could be considered in
determining fair value in an appraisal proceeding, stating that
proof of value by any techniques or methods which are
generally considered acceptable in the financial community and
otherwise admissible in court should be considered and
that [f]air price obviously requires consideration of all
relevant factors involving the value of a company. The
Delaware Supreme Court has stated that in making this
determination of fair value the court must consider market
value, asset value, dividends, earnings prospects, the nature of
the enterprise and any other facts that could be ascertained as
of the date of the merger which throw any light on future
prospects of the merged corporation. Section 262 provides
that fair value is to be exclusive of any element of value
arising from the accomplishment or expectation of the
merger. In Cede & Co. v. Technicolor, Inc.,
the Delaware Supreme Court stated that such exclusion is a
narrow exclusion [that] does not encompass known elements
of value, but which rather applies only to the speculative
elements of value arising from such accomplishment or
expectation. In Weinberger, the Delaware Supreme Court construed
Section 262 to mean that elements of future value,
including the nature of the enterprise, which are known or
susceptible of proof as of the date of the merger and not the
product of speculation, may be considered.
Costs of the appraisal proceeding (which do not include
attorneys fees or the fees and expenses of experts) may be
determined by the Delaware Court of Chancery and imposed upon
the surviving corporation and the stockholders participating in
the appraisal proceeding by the Delaware Court of Chancery, as
it deems equitable in
73
the circumstances. Each stockholder seeking appraisal is
responsible for his or her attorneys and expert witness
expenses, although, upon the application of a stockholder, the
Delaware Court of Chancery may order all or a portion of the
expenses incurred by any stockholder in connection with the
appraisal proceeding, including, without limitation, reasonable
attorneys fees and the fees and expenses of experts used
in the appraisal proceeding, to be charged pro rata against the
value of all shares of the Companys common stock entitled
to appraisal. Any stockholder who duly demanded appraisal in
compliance with Section 262 will not, after the effective
time of the merger, be entitled to vote shares of common stock
subject to that demand for any purpose or to receive payments of
dividends or any other distribution with respect to those shares
of common stock, other than with respect to payment as of a
record date prior to the effective time. However, if no petition
for appraisal is filed within 120 days after the effective
time, or if the stockholder otherwise fails to perfect his, her
or its appraisal rights, successfully withdraws his, her or its
demand for appraisal or loses his, her or its right to
appraisal, then the right of that stockholder to appraisal will
cease and that stockholder will be entitled to receive the
$16.50 per share cash payment (without interest) for his, her or
its shares of the Companys common stock pursuant to the
merger agreement.
In view of the complexity of Section 262 of the DGCL,
the Companys stockholders who may wish to pursue appraisal
rights should consult their legal and financial advisers.
74
DELISTING
AND DEREGISTRATION OF COMMON STOCK
If the merger is completed, the Companys common stock will
be delisted from the NYSE and deregistered under the Exchange
Act and we will no longer file periodic reports with the SEC on
account of our common stock.
STOCKHOLDER
PROPOSALS
If the merger is completed, we will not have public stockholders
and there will be no public participation in any future meeting
of stockholders. As of the date of this proxy statement, the
2011 annual meeting of stockholders has been indefinitely
postponed. However, if the merger is not completed, or if we are
otherwise required to do so under applicable law, we will hold a
2011 annual meeting of stockholders. Any stockholder nominations
or proposals for other business intended to be presented at our
next annual meeting must be submitted to us as set forth below.
As the rules of the SEC make clear, merely submitting a proposal
does not guarantee its inclusion. Under our bylaws, and as
permitted by SEC rules, certain procedures are provided that a
stockholder must follow to nominate persons for election as
directors or to introduce an item of business at an annual
meeting of stockholders. These procedures provide that
nominations for director nominees
and/or
an
item of business to be introduced at an annual meeting of
stockholders must be submitted in writing to our Corporate
Secretary, First Mercury Financial Corporation, 29110 Inkster
Road, Suite 100, Southfield, Michigan 48034.
Under the rules of the SEC, if a stockholder wants us to include
a proposal in our proxy statement (and form of proxy) for
presentation at our 2011 annual meeting of stockholders, the
proposal must have been received by us, marked to the attention
of our Corporate Secretary at our principal executive offices by
December 13, 2010 (i.e., 120 days prior to the first
anniversary of the April 14, 2010 proxy materials). In
addition, our bylaws provide that any stockholder wishing to
propose any other business at the annual meeting must give us
written notice by February 11, 2011 (i.e. 90 days
prior to the first anniversary of the 2010 annual meeting) but
after January 12, 2011 (i.e. 120 days prior to the
first anniversary of the 2010 annual meeting.) That notice must
include certain other information as described in our bylaws.
Our bylaws are available online at www.firstmercury.com by
clicking Investor Relations and then Corporate
Governance.
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
document we file at the SEC public reference room located at
100 F Street, N.E., Room 1580,
Washington, D.C. 20549. Please call the SEC at 800-SEC-0330
for further information on the public reference room. Our SEC
filings are also available to the public at the SEC website at
www.sec.gov. You also may obtain free copies of the documents we
file with the SEC, including this proxy statement, by going to
the Investor Relations page of our corporate website
at www.firstmercury.com. The information provided on our
website, other than copies of the documents listed below that
have been filed with the SEC, is not part of this proxy
statement, and therefore is not incorporated herein by reference.
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 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, 2009 (filed with the
SEC on March 16, 2010);
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Quarterly Reports on
Form 10-Q
for the quarter ended March 31, 2010 (filed with the SEC on
May 10, 2010), the quarter ended June 30, 2010 (filed
with the SEC on August 6, 2010), and the quarter ended
September 30, 2010 (filed with the SEC on November 9,
2010);
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Current Reports on
Form 8-K
filed with the SEC on February 22, 2010, April 28,
2010, May 3, 2010, May 4, 2010, May 5, 2010,
May 13, 2010, May 14, 2010, August 3 2010,
August 24, 2010; November 1, 2010, and
November 12, 2010, and
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Definitive Proxy Statement for our 2009 Annual Meeting filed
with the SEC on April 12, 2010.
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Any person, including any beneficial owner, 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, without charge, by
written or telephonic request directed to First Mercury
Financial Corporation, Attn: Corporate Financial Reporting,
29110 Inkster Road, Suite 100, Southfield, Michigan 48034,
Telephone
(248) 358-4010,
on the Investor Relations page of our corporate
website at www.firstmercury.com; or from our proxy solicitor,
[ ]
toll-free at
[ ]
(banks and brokers call collect 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.
THIS PROXY STATEMENT DOES NOT CONSTITUTE THE SOLICITATION OF A
PROXY IN ANY JURISDICTION TO OR FROM ANY PERSON TO WHOM OR FROM
WHOM IT IS UNLAWFUL TO MAKE SUCH PROXY SOLICITATION IN THAT
JURISDICTION. YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED
OR INCORPORATED BY REFERENCE IN THIS PROXY STATEMENT TO VOTE
YOUR SHARES OF COMMON STOCK AT THE SPECIAL MEETING. 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
[ ],
2010. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN
THIS PROXY STATEMENT IS ACCURATE AS OF ANY DATE OTHER THAN THAT
DATE, AND THE MAILING OF THIS PROXY STATEMENT TO STOCKHOLDERS
DOES NOT CREATE ANY IMPLICATION TO THE CONTRARY.
76
Annex A
EXECUTION
COPY
AGREEMENT
AND PLAN OF MERGER
among
FAIRFAX FINANCIAL HOLDINGS LIMITED,
FAIRFAX INVESTMENTS III USA CORP.
and
FIRST MERCURY FINANCIAL CORPORATION
dated as of October 28, 2010
TABLE OF
CONTENTS
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Page
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ARTICLE I
DEFINITIONS
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Section 1.01
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Definitions
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A-1
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ARTICLE II
THE MERGER
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Section 2.01
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The Merger
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A-4
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Section 2.02
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Effective Time; Closing
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A-4
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Section 2.03
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Effect of the Merger
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A-5
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Section 2.04
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Certificate of Incorporation; By-laws
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A-5
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Section 2.05
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Directors and Officers
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A-5
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Section 2.06
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Conversion of Securities
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A-5
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Section 2.07
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Employee Stock Options
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A-6
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Section 2.08
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Restricted Stock
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A-6
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Section 2.09
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Dissenting Shares
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A-6
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Section 2.10
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Surrender of Shares; Stock Transfer Books
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A-6
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ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
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Section 3.01
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Organization and Qualification; Company Subsidiaries
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A-8
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Section 3.02
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Certificate of Incorporation and By-laws
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A-8
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Section 3.03
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Capitalization
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A-8
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Section 3.04
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Authority Relative to This Agreement
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A-9
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Section 3.05
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No Conflict; Required Filings and Consents
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A-10
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Section 3.06
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Permits; Compliance
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A-10
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Section 3.07
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SEC Filings; Financial Statements
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A-10
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Section 3.08
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Absence of Certain Changes or Events
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A-12
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Section 3.09
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Absence of Litigation
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A-12
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Section 3.10
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Employee Benefit Plans
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A-12
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Section 3.11
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Labor and Employment Matters
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A-14
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Section 3.12
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Real Property; Title to Assets
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A-14
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Section 3.13
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Taxes
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A-15
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Section 3.14
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No Rights Agreement
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A-16
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Section 3.15
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Material Contracts
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A-16
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Section 3.16
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Board Approval; Vote Required
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A-16
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Section 3.17
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Fairness Opinion
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A-16
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Section 3.18
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Brokers
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A-17
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Section 3.19
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Insurance
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A-17
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Section 3.20
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Information Supplied
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A-17
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Section 3.21
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No Other Representations or Warranties
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A-17
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A-i
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Page
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
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Section 4.01
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Corporate Organization
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A-17
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Section 4.02
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Authority Relative to This Agreement
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A-17
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Section 4.03
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No Conflict; Required Filings and Consents
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A-18
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Section 4.04
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Legal Proceedings
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A-18
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Section 4.05
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Ownership of Company Common Stock
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A-18
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Section 4.06
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Financing
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A-18
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Section 4.07
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Brokers
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A-18
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Section 4.08
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Information Supplied
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A-18
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Section 4.09
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No Other Representations or Warranties
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A-18
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ARTICLE V
CONDUCT OF BUSINESS PENDING THE MERGER
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Section 5.01
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Conduct of Business by the Company Pending the Merger
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A-19
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ARTICLE VI
ADDITIONAL AGREEMENTS
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Section 6.01
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Stockholders Meeting
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A-20
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Section 6.02
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Proxy Statement
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A-20
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Section 6.03
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Access to Information; Confidentiality
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A-21
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Section 6.04
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No Solicitation of Transactions
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A-21
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Section 6.05
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Employee Benefits Matters
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A-23
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Section 6.06
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Directors and Officers Indemnification and Insurance
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A-23
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Section 6.07
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Notification of Certain Matters
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A-24
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Section 6.08
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Further Action; Reasonable Best Efforts
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A-25
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Section 6.09
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Subsequent Financial Statements
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A-25
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Section 6.10
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Public Announcements
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A-25
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Section 6.11
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Confidentiality Agreement
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A-25
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Section 6.12
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Section 16 Matters
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A-25
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Section 6.13
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Takeover Statutes
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A-26
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Section 6.14
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Resignations
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A-26
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Section 6.15
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Investments
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A-26
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Section 6.16
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Other Insurance
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A-26
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ARTICLE VII
CONDITIONS TO THE MERGER
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Section 7.01
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Conditions to the Obligations of Each Party
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A-26
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Section 7.02
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Conditions to the Obligations of Parent and Merger Sub
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Section 7.03
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Conditions to the Obligations of the Company
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ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
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Section 8.01
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Termination
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A-27
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Section 8.02
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Effect of Termination
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A-28
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Section 8.03
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Fees and Expenses
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A-28
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Section 8.04
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Amendment
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A-29
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Section 8.05
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Waiver
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A-ii
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Page
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ARTICLE IX
GENERAL PROVISIONS
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Section 9.01
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Notices
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A-29
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Section 9.02
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Severability
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A-30
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Section 9.03
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Entire Agreement; Assignment
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A-30
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Section 9.04
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Parties in Interest
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A-31
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Section 9.05
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Specific Performance
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A-31
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Section 9.06
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Governing Law
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A-31
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Section 9.07
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Non Survival of Representation, Warranties and
Agreements
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A-31
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Section 9.08
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Waiver of Jury Trial
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A-31
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Section 9.09
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Interpretation and Rules of Construction
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A-32
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Section 9.10
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Counterparts
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A-32
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A-iii
AGREEMENT AND PLAN OF MERGER, dated as of October 28, 2010
(this
Agreement
), among Fairfax Financial
Holdings Limited, a Canadian corporation
(
Parent
), Fairfax Investments III USA
Corp., a Delaware corporation and an indirect, wholly-owned
subsidiary of Parent (
Merger Sub
), and First
Mercury Financial Corporation, a Delaware corporation (the
Company
).
WHEREAS, the Board of Directors of the Company (the
Company Board
) (i) has approved and
adopted this Agreement and deems it advisable and in the best
interests of the stockholders of the Company that the parties
consummate the transactions contemplated hereby (the
Transactions
), upon the terms and subject to
the conditions set forth herein; and (ii) has resolved to
recommend the adoption of this Agreement by the stockholders of
the Company at the Company Stockholders Meeting;
WHEREAS, the Board of Directors of each of Parent and Merger Sub
has approved and adopted this Agreement and deems it advisable
and, in the case of Merger Sub, in the best interests of its
stockholders, that the parties consummate the Transactions, upon
the terms and subject to the conditions set forth herein;
WHEREAS, upon the terms and subject to the conditions of this
Agreement and in accordance with the General Corporation Law of
the State of Delaware (the
DGCL
), Merger Sub
will merge with and into the Company (the
Merger
); and
WHEREAS, Parent, Merger Sub and certain stockholders of the
Company (the
Stockholders
) have entered into
Voting Agreements, dated as of the date hereof (the
Voting Agreements
), providing that each of
the Stockholders will vote his shares of Company Common Stock in
favor of the Merger;
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.
Agency Subsidiary
means a Company
Subsidiary that carries on business as an insurance producer,
including as an agent, broker, producer, managing general agent
or general agent.
beneficial owner
,
with respect to any
shares of Company Common Stock, has the meaning ascribed to such
term under
Rule 13d-3(a)
of the Exchange Act.
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 or Toronto, Canada.
Cash
means United States dollars.
control
(including the terms
controlled by
and
under common
control with
) means the possession, directly or
indirectly, or as trustee or executor, of the power to direct or
cause the direction of the management and policies of a person,
whether through the ownership of voting securities, as trustee
or executor, by contract or credit arrangement or otherwise;
ERISA Affiliate
means, with respect to
a person in question, any other person that is (i) a member
of a controlled group with such person in question for purposes
of Section 414(b) of the Code or (ii) under common
control with such person in question for purposes of
Section 414(c) of the Code.
Exchange Act
means the Securities
Exchange Act of 1934, as amended.
HSR Act
means the
Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended.
Insurance Subsidiary
means a Company
Subsidiary that carries on business as an insurer.
A-1
Investments
means all items that are
or would be classified as investments on a consolidated balance
sheet of the Company prepared in accordance with GAAP.
knowledge
means, when used in respect
of any person, the actual knowledge of any executive officer of
such person after reasonable inquiry.
Material Adverse Effect
means any
event, circumstance, change, state of facts or effect that,
alone or in combination, has had, or is reasonably likely to
have, (i) a materially adverse effect to the business,
financial condition 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 economy in general or in
financial, credit or securities markets (including changes in
interest or exchange rates) in general, (B) changes
generally affecting any of the industries in which the Company
or the Company Subsidiaries operate, (C) changes in Law or
applicable accounting regulations, or principles or
interpretations (whether administrative or judicial) thereof,
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 trading volume or any failure, in
and of itself, by the Company to meet internal or published
revenue or earnings projections (but not any event,
circumstance, change, state of facts or effect underlying such
change or failure), (E) the announcement of the execution
of this Agreement, including the identity of Parent,
(F) any Actions relating to this Agreement, the Merger or
the Transactions by or before any Governmental Authority,
(G) acts of war (whether or not declared), armed
hostilities, sabotage or terrorism, or any escalation or
worsening thereof, (H) earthquakes, hurricanes, floods or
other natural disasters, (I) the volume, frequency,
severity or handling of claims arising under insurance policies
issued by the Insurance Subsidiaries, (J) any deficiency in
the Companys loss and loss adjustment expense reserves,
and (K) any action taken by Parent or any of its affiliates
or by the Company at the request of Parent or any of its
affiliates;
provided
,
however
, that with respect
to clauses (A), (B), (C), (G) and (H), solely to the extent
that such changes do not have a materially disproportionate
impact on the Company and the Company Subsidiaries, taken as a
whole, compared to other companies in the United States in the
same industry; or (ii) would have a material adverse effect
on the Companys ability to perform its obligations under
this Agreement;
provided
,
further
, that
notwithstanding anything contained herein to the contrary, a
decrease in Total Stockholders Equity of less than
$50,000,000 shall not be deemed to be a Material Adverse Effect.
MGA Agreement
means any contract,
agreement, arrangement or understanding with or in respect of a
managing general agent or any other insurance producer with
binding authority.
Non-Cash Investments
means Investments
that are not Treasury Bills.
person
means an individual,
corporation, partnership, limited partnership, limited liability
company, sole proprietorship, syndicate, person (including a
person as defined in Section 13(d)(3) of the
Exchange Act), trust, association or other entity or government,
political subdivision, agency or instrumentality of a government.
SAP
means statutory accounting
principles prescribed or permitted by applicable states.
SEC
means the Securities and Exchange
Commission.
Securities Act
means the Securities
Act of 1933, as amended.
subsidiary
or
subsidiaries
when used with respect to
any party means any corporation, limited liability company,
partnership, association, trust or other entity (i) the
accounts of which would be consolidated with those of such party
in such partys consolidated financial statements if such
financial statements were prepared in accordance with GAAP or
(ii) of which securities or other ownership interests
representing fifty percent (50%) or more of the equity or fifty
percent (50%) or more of the ordinary voting power (or, in the
case of a partnership, fifty percent (50%) or more of the
general partnership interests) are as of such date, owned by
such party (either alone, directly, or indirectly through, or
together with, one or more of its subsidiaries).
Taxes
means any and all taxes, fees,
levies, 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
A-2
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, 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.
Total Stockholders Equity
means
the consolidated total stockholders equity of the Company
and the consolidated Company Subsidiaries as of
September 30, 2010, which is $301,699,000.
TPA Agreement
means any contract,
agreement, arrangement or understanding with or in respect of a
third party administrator or other person that processes
insurance claims.
Treasury Bills
means securities issued
by the Government of the United States of America, having
maturities of not more than one year from the date of
acquisition, for which the full faith and credit of the
Government of the United States of America is pledged to provide
for the payment thereof.
(b) The following terms have the meaning set forth in the
Sections set forth below:
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Defined Term
|
|
Location of Definition
|
|
Acquisition Agreement
|
|
|
SECTION 6.04(b)
|
|
Adverse Recommendation Change
|
|
|
SECTION 6.04(b)
|
|
Action
|
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|
SECTION 3.09
|
|
Agreement
|
|
|
Preamble
|
|
Blue Sky Laws
|
|
|
SECTION 3.05(b)
|
|
Certificate of Merger
|
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SECTION 2.02
|
|
Certificate
|
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SECTION 2.06(a)
|
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Closing
|
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SECTION 2.02
|
|
Code
|
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|
SECTION 3.10(a)
|
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Company
|
|
|
Preamble
|
|
Company Board
|
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|
Recitals
|
|
Company Common Stock
|
|
|
SECTION 2.06(a)
|
|
Company Incentive Plans
|
|
|
SECTION 2.07
|
|
Company Preferred Stock
|
|
|
SECTION 3.03(a)
|
|
Company Restricted Stock
|
|
|
SECTION 2.08
|
|
Company Recommendation
|
|
|
SECTION 3.16
|
|
Company SEC Reports
|
|
|
SECTION 3.07(a)
|
|
Company Stock Award
|
|
|
SECTION 3.03(a)
|
|
Company Stock Options
|
|
|
SECTION 2.07
|
|
Company Subsidiary
|
|
|
SECTION 3.01(a)
|
|
Confidentiality Agreement
|
|
|
SECTION 6.03(b)
|
|
Contingent Worker
|
|
|
SECTION 3.11(a)
|
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DGCL
|
|
|
Recitals
|
|
Disclosure Letter
|
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Article III
|
|
Dissenting Shares
|
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SECTION 2.09
|
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Effective Time
|
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SECTION 2.02
|
|
Enforceability Exceptions
|
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|
SECTION 3.04
|
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ERISA
|
|
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SECTION 3.10(a)
|
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Exchange Fund
|
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|
SECTION 2.10
|
|
Expenses
|
|
|
SECTION 8.03
|
|
Form A Approvals
|
|
|
SECTION 6/08
|
|
A-3
|
|
|
|
|
Defined Term
|
|
Location of Definition
|
|
GAAP
|
|
|
SECTION 3.07(b)
|
|
Governmental Authority
|
|
|
SECTION 3.05(b)
|
|
Indemnified Liabilities
|
|
|
SECTION 6.06(a)
|
|
Indemnified Parties
|
|
|
SECTION 6.06(a)
|
|
IRS
|
|
|
SECTION 3.10(a)
|
|
Law
|
|
|
SECTION 3.05(a)
|
|
Lease Documents
|
|
|
SECTION 3.12(b)
|
|
Liens
|
|
|
SECTION 3.12(a)
|
|
Material Contracts
|
|
|
SECTION 3.15(a)
|
|
Maximum Amount
|
|
|
SECTION 6.06(c)
|
|
Merger
|
|
|
Recitals
|
|
Merger Consideration
|
|
|
SECTION 2.06(a)
|
|
Merger Sub
|
|
|
Preamble
|
|
Multiemployer Plan
|
|
|
SECTION 3.10(b)
|
|
Multiple Employer Plan
|
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|
SECTION 3.10(b)
|
|
Option Payment
|
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|
SECTION 2.07
|
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Outside Date
|
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|
SECTION 8.01(b)
|
|
Parent
|
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|
Preamble
|
|
Paying Agent
|
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|
SECTION 2.10
|
|
Permits
|
|
|
SECTION 3.06
|
|
Permitted Liens
|
|
|
SECTION 3.12(a)
|
|
Plans
|
|
|
SECTION 3.10(a)
|
|
Proxy Statement
|
|
|
SECTION 6.02(a)
|
|
Restricted Stock Payment
|
|
|
SECTION 2.08
|
|
Stockholders
|
|
|
Recitals
|
|
Stockholder Approval
|
|
|
SECTION 3.16
|
|
Stockholders Meeting
|
|
|
SECTION 6.01(a)
|
|
Superior Proposal
|
|
|
SECTION 6.04(e)(ii)
|
|
Surviving Corporation
|
|
|
SECTION 2.03
|
|
Takeover Proposal
|
|
|
SECTION 6.04(e)(i)
|
|
Termination Fee
|
|
|
SECTION 8.03(b)
|
|
Transactions
|
|
|
Recitals
|
|
Voting Agreements
|
|
|
Recitals
|
|
2009 Balance Sheet
|
|
|
SECTION 3.07(c)
|
|
ARTICLE II
THE
MERGER
Section
2.01
The
Merger
.
Upon the terms and subject to the
conditions set forth in Article VII, and in accordance with
the DGCL, at the Effective Time Merger Sub shall be merged with
and into the Company.
Section
2.02
Effective
Time; Closing
.
As promptly as practicable,
but in no event later than the third business day after the
satisfaction or written waiver (where permissible) of the
conditions set forth in Article VII (other than those
conditions that by their terms are to be satisfied at the
Closing, but subject to the satisfaction or written waiver
(where permissible) of those conditions at the Closing), the
parties hereto shall cause the Merger to be consummated by
filing a certificate of merger (the
Certificate of
Merger
) with the Secretary of State of the
A-4
State of Delaware, in such form as is required by, and executed
in accordance with, the relevant provisions of the DGCL (the
date and time of such filing of the Certificate of Merger (or
such later time as may be agreed by each of the parties hereto
and specified in the Certificate of Merger) being the
Effective Time
). Immediately prior to such
filing of the Certificate of Merger, a closing (the
Closing
) shall be held at the offices of
Shearman & Sterling LLP, 599 Lexington Avenue, New
York, New York 10022, 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
.
As a result of the Merger, the
separate corporate existence of Merger Sub shall cease and the
Company shall continue as the surviving corporation of the
Merger (the
Surviving Corporation
). At the
Effective Time, the effect of the Merger shall be as provided in
the applicable provisions of the DGCL. 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.
Section
2.04
Certificate
of Incorporation; By-laws
.
(a) At the
Effective Time, the Certificate of Incorporation of Merger Sub,
as in effect immediately prior to the Effective Time, shall be
the Certificate of Incorporation of the Surviving Corporation
until thereafter amended as provided by Law and such Certificate
of Incorporation;
provided
,
however
, that, at the
Effective Time, Article I of the Certificate of
Incorporation of the Surviving Corporation shall be amended to
read as follows: The name of the corporation is First
Mercury Financial Corporation.
(b) 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 Certificate of Incorporation of the
Surviving Corporation and such By-laws.
(c) Notwithstanding anything in this Agreement to the
contrary, the Certificate of Incorporation and the By-Laws of
the Surviving Corporation will include the provisions required
by
Section 6.06 (a);
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 Certificate 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.
Section
2.06
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) Each share of common stock, par value $0.01 per share,
of the Company (
Company Common Stock
) issued
and outstanding immediately prior to the Effective Time (other
than any shares of Company Common Stock to be canceled pursuant
to
Section 2.06(b)
or to remain outstanding pursuant
to
Section 2.06(c)
and other than any Dissenting
Shares and shares of Company Restricted Stock) shall be canceled
and shall be converted automatically into the right to receive
an amount in Cash equal to $16.50 per share of Company Common
Stock (the
Merger Consideration
), payable,
without interest, to the holder of such share of Company Common
Stock, upon surrender, in the manner provided in
Section 2.10
, of the certificate that formerly
evidenced such share of Company Common Stock or such share of
Company Common Stock in non-certificated book-entry form (either
case being referred to herein, to the extent applicable, as a
Certificate
);
(b) Each share of Company Common Stock held in the treasury
of the Company or owned immediately prior to the Effective Time
by any Company Subsidiary shall be canceled without any
conversion thereof and no payment or distribution shall be made
with respect thereto;
(c) Each share of Company Common Stock held of record or
beneficially owned by Parent or any of its subsidiaries shall
remain outstanding as a share of common stock, par value $0.01
per share, of the Surviving Corporation; and
A-5
(d) Each share of common stock, par value $0.01 per share,
of Merger Sub issued and outstanding immediately prior to the
Effective Time shall be converted into and exchanged for one
validly issued, fully paid and nonassessable share of common
stock, par value $0.01 per share, of the Surviving Corporation.
Section
2.07
Employee
Stock Options
.
Effective as of the Effective
Time, the Company shall take all necessary action to
(i) terminate the Companys Amended and Restated
Omnibus Incentive Plan of 2006 and the Companys 1998 Stock
Compensation Plan, each as amended through the date of this
Agreement (the
Company Incentive Plans
), and
(ii) provide that each outstanding option to purchase
shares of Company Common Stock granted under the Company
Incentive Plans (each, a
Company Stock
Option
) that is outstanding and unexercised, whether
or not vested or exercisable, as of such date shall become fully
vested and exercisable and (iii) cancel each outstanding
and unexercised Company Stock Option. Each holder of a Company
Stock Option that is outstanding and unexercised immediately
prior to the Effective Time and that has an exercise price per
share of Company Common Stock that is less than the Merger
Consideration shall be entitled to be paid by the Surviving
Corporation, with respect to each share of Company Common Stock
subject to the Company Stock Option, an amount in Cash equal to
the excess, if any, of the Merger Consideration over the
applicable per share exercise price of such Company Stock Option
(the
Option Payment
). Parent shall provide
the Surviving Corporation with Cash in an amount sufficient to
pay the aggregate amount of the Option Payments as promptly as
practicable after the Effective Time. The Surviving Corporation
shall make each such Option Payment as promptly as practicable
after the Effective Time. The Company shall take all necessary
action to approve the cancellation and payment in respect of the
Company Stock Options by virtue of the Merger to the extent
necessary to exempt any such deemed dispositions and
acquisitions under
Rule 16b-3
of the Exchange Act.
Section
2.08
Restricted
Stock
.
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 shares of Company Restricted
Stock, each issued and outstanding share of Company Common Stock
granted under the Company Incentive Plans that is subject to
forfeiture prior to the Effective Time (
Company
Restricted Stock
) shall be canceled and shall be
converted automatically into the right to receive the Merger
Consideration (the
Restricted Stock Payment
).
Parent shall provide the Surviving Corporation with Cash in an
amount sufficient to pay the aggregate amount of the Restricted
Stock Payments as promptly as practicable after the Effective
Time. The Surviving Corporation shall make each such Restricted
Stock Payment as promptly as practicable after the Effective
Time. The Company shall take all necessary action to approve the
cancellation and payment in respect of the Restricted Stock by
virtue of the Merger to the extent necessary to exempt any such
deemed dispositions and acquisitions under
Rule 16b-3
of the Exchange Act.
Section
2.09
Dissenting
Shares
.
(a) Notwithstanding any provision of
this Agreement to the contrary, shares of Company Common Stock
that are outstanding immediately prior to the Effective Time and
that are held by stockholders who shall have neither voted in
favor of the Merger nor consented thereto in writing and who
shall have demanded properly in writing appraisal for such
shares of Company Common Stock in accordance with
Section 262 of the DGCL (collectively, the
Dissenting Shares
) shall not be converted
into, or represent the right to receive, the Merger
Consideration. Such stockholders shall be entitled to receive
payment of the appraised value of such shares of Company Common
Stock held by them in accordance with the provisions of such
Section 262, except that all Dissenting Shares held by
stockholders who shall have failed to perfect or who effectively
shall have withdrawn or lost their rights to appraisal of such
shares of Company Common Stock under such Section 262 shall
thereupon be deemed to have been converted into, and to have
become exchangeable for, as of the Effective Time, the right to
receive the Merger Consideration, without any interest thereon,
upon surrender, in the manner provided in
Section 2.10
, of the Certificate or Certificates
that formerly evidenced such shares of Company Common Stock.
(b) The Company shall give Parent (i) prompt notice of
any demands for appraisal received by the Company, withdrawals
of such demands, and any other instruments served pursuant to
the DGCL and received by the Company and (ii) the
opportunity to direct all negotiations and proceedings with
respect to demands for appraisal under the DGCL. The Company
shall not, except with the prior written consent of Parent, make
any payment with respect to any demands for appraisal or offer
to settle or settle any such demands.
Section
2.10
Surrender
of Shares; Stock Transfer Books
.
(a) Prior to
the Effective Time, the Company shall designate a bank or trust
company (reasonably acceptable to the Parent) to act as agent
(the
Paying Agent
) for the
A-6
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 2.06(a)
. Prior to the Effective
Time, Parent or Merger Sub shall enter into a paying agent
agreement, in form and substance reasonably acceptable to the
Company with such Paying Agent. 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 the 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 shall be
invested by the Paying Agent as directed by the Parent solely in
Cash and Treasury Bills.
(b) Promptly, but in any event within 5 days after the
Effective Time, the Surviving Corporation shall cause to be
mailed to each person who was, at the Effective Time, a holder
of record of shares of Company Common Stock entitled to receive
the Merger Consideration pursuant to
Section 2.06(a)
a form of letter of transmittal (which shall be in customary
form and specify that delivery shall be effected, and risk of
loss and title to the Certificates shall pass, only upon proper
delivery of the Certificates to the Paying Agent) and
instructions for use in effecting the surrender of the
Certificates pursuant to such letter of transmittal. Upon
surrender to the Paying Agent of a Certificate, together with
such letter of transmittal, duly completed and validly executed
in accordance with the instructions thereto, and such other
documents as may be required pursuant to such instructions, the
holder of such Certificate shall be entitled to receive in
exchange therefor the Merger Consideration for each share of
Company Common Stock formerly evidenced by such Certificate, and
such Certificate shall then be canceled. No interest shall
accrue or be paid on the Merger Consideration payable upon the
surrender of any Certificate for the benefit of the holder of
such Certificate. If the payment equal to the Merger
Consideration is to be made to a person other than the person in
whose name the surrendered certificate formerly evidencing
shares of Company Common Stock is registered on the stock
transfer books of the Company, it shall be a condition of
payment that the certificate so surrendered shall be endorsed
properly or otherwise be in proper form for transfer and that
the person requesting such payment shall have paid all transfer
and other taxes required by reason of the payment of the Merger
Consideration to a person other than the registered holder of
the certificate surrendered, or shall have established to the
satisfaction of Merger Sub that such taxes either have been paid
or are not applicable.
(c) 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 (including Company Restricted
Stock) or Company Stock Options, as the case may be, such amount
or amounts as it reasonably believes is the minimum 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 deducted and withheld and properly paid to the
relevant Government Authority, 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 (including
Company Restricted Stock) or Company Stock Options, as the case
may be, in respect of which such deduction and withholding was
made.
(d) At any time following the one year 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 and the Surviving Corporation
shall remain liable for payment of the Merger Consideration
(subject to abandoned property, escheat and other similar laws).
Notwithstanding the foregoing, neither the Surviving Corporation
nor the Paying Agent shall be liable to any holder of a share of
Company Common Stock for any Merger Consideration delivered in
respect of such share of Company Common Stock to a public
official pursuant to any abandoned property, escheat or other
similar Law.
(e) 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.
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(f) 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 2.06(a)
.
ARTICLE III
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
Companys SEC Reports (excluding any risk factor
disclosures 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), and (ii) the items set forth in the letter (the
Disclosure Letter
) delivered by the Company
to Parent concurrently with the execution and delivery of this
Agreement (with specific reference to the particular section or
subsection of this Agreement to which the information set forth
in the Disclosure Letter relates, it being acknowledged and
agreed by Parent that any matter set forth in any section or
subsection of the Disclosure Letter will be deemed to be
disclosure for all purposes of this Agreement and all other
sections and subsections of the Disclosure Letter to which its
relevance is reasonably apparent, 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, alone
or in combination, rises to the level of a Material Adverse
Effect or is otherwise material for purposes of this Agreement
or the Disclosure Letter):
Section
3.01
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 corporate
power or authority would not constitute 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 constitute a Material Adverse Effect.
(b) A true and complete list of all the Company
Subsidiaries, together with the form of legal entity and the
jurisdiction of incorporation or organization of each Company
Subsidiary, and the percentage of the outstanding capital stock
or other equity interest of each Company Subsidiary owned by the
Company and each other Company Subsidiary, is set forth in
Section 3.01(b) of the Disclosure Letter. The Company has
provided Parent with the names of the directors and officers of
each Company Subsidiary. 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 corporation, limited
liability company, partnership, joint venture or other business
association or entity.
Section
3.02
Certificate
of Incorporation and By-laws
.
The Amended and
Restated Certificate of Incorporation of the Company and the
Amended and Restated 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 Amended and Restated
Certificate of Incorporation or its Amended and Restated
By-laws, and none of the Company Subsidiaries is in violation of
any of the provisions of its Certificate of Incorporation or its
By-laws or equivalent organizational documents.
Section
3.03
Capitalization
.
(a)
The authorized capital stock of the Company consists of one
hundred million (100,000,000) shares of Company Common Stock and
ten million (10,000,000) shares of preferred stock, par value
$0.01 per share (
Company Preferred Stock
). As
of the date of this Agreement, (i) 17,752,360 shares
of
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Company Common Stock are issued and outstanding, all of which
are validly issued, fully paid and nonassessable (which includes
277,995 shares of Company Restricted Stock that will vest
in accordance with
Section 2.08
), (ii) no
shares of Company Common Stock are held in the treasury of the
Company, (iii) no shares of Company Common Stock are held
by the Company Subsidiaries, and (iv) 1,072,705 shares
of Company Common Stock are reserved for future issuance
pursuant to outstanding Company Stock Options and other purchase
rights granted pursuant to the Company Incentive Plans (the
Company Stock Awards
). As of the date of this
Agreement, no shares of Company Preferred Stock are issued and
outstanding. Since and including the date of this Agreement, the
Company has not issued any Company Common Stock (other than the
issuance of shares of Company Common Stock upon the exercise of
Company Stock Awards issued prior to the date of this
Agreement), Company Preferred Stock or Company Stock Awards.
Except as set forth in this
Section 3.03
, 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. Section 3.03 of
the Disclosure Letter sets forth the following information with
respect to each Company Stock Award outstanding on the date of
this Agreement: (i) the number of shares of Company Common
Stock subject to such Company Stock Award; and (ii) the
exercise or purchase price of such Company Stock Award. The
Company has provided Parent with the name of the holder of each
Company Stock Award. All shares of Company Common Stock subject
to issuance as aforesaid, upon issuance on the terms and
conditions specified in the instruments pursuant to which they
are issuable, will be duly authorized, validly issued, fully
paid and nonassessable. Except as set forth in this
Section 3.03
, 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
make any investment (in the form of a loan, capital contribution
or otherwise) in, any Company Subsidiary or any other person.
(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 having the right to
vote (or convertible into or exercisable for securities having
the right to vote) on any matters on which stockholders of the
Company may vote are issued or outstanding.
(d) Neither the Company nor any Company Subsidiary is a
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.
Section
3.04
Authority
Relative to This Agreement
.
The Company has
all necessary corporate power and authority to execute and
deliver this Agreement, to perform its obligations hereunder and
to consummate the Merger (other than, with respect to the
Merger, the Stockholder Approval, and the filing and recordation
of appropriate merger documents as required by the DGCL). The
execution and delivery of this Agreement by the Company and the
consummation by the Company of the Merger have been duly and
validly authorized by all necessary corporate action on the part
of the Company, and 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 Stockholder Approval, and the filing and recordation of
appropriate merger documents as required by the DGCL). 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 a legal, valid
and binding obligation of the Company, enforceable against the
Company in accordance with its terms, except as such
enforceability may be limited by applicable bankruptcy
(including all Laws related to fraudulent transfer), insolvency,
reorganization or similar 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
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brought (the
Enforceability Exceptions
). The
Company Board has unanimously approved this Agreement and the
Merger and such approvals are sufficient so that the
restrictions on business combinations set forth in
Section 203 of the DGCL shall not apply to the Merger. No
other state takeover statute is applicable to the Merger.
Section
3.05
No
Conflict; Required Filings and Consents
.
(a)
The execution and delivery of this Agreement by the Company do
not, 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 Amended and Restated
Certificate of Incorporation of the Company, the Amended and
Restated By-laws of the Company or any equivalent organizational
documents of any Company Subsidiary, (ii) assuming that all
consents, approvals and other authorizations described in
Section 3.05(b)
have been obtained, that all filings
and other actions described in
Section 3.05(b)
have
been made or taken and the Stockholder Approval has been
obtained, conflict with or violate any United States or
non-United
States national, 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, 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 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 subject, 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, constitute a Material Adverse Effect.
(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 United
States or
non-United
States national, state, 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 or, if any, state securities or
blue sky laws (
Blue Sky Laws
),
(ii) the pre-merger notification requirements of the HSR
Act, (iii) the filing and recordation of appropriate merger
documents as required by the DGCL, (iv) the consents,
filings, approvals or notifications listed in
Section 3.05(b) of the Disclosure Letter and (v) where
the failure to obtain such consents, approvals, authorizations
or permits, or to make such filings or notifications, would not
constitute a Material Adverse Effect.
Section
3.06
Permits;
Compliance
.
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
). No suspension or cancellation of
any of the Permits is pending or, to the knowledge of the
Company, threatened. Neither the Company nor any Company
Subsidiary is in conflict with, or in default, breach or
violation of, (a) any 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, 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 would not constitute a Material Adverse Effect.
Section 3.06(a) of the Disclosure Letter lists all grants,
authorizations, licenses, permits, consents, certificates,
approvals and orders of any Governmental Authority maintained by
each Insurance Subsidiary in connection with its business as an
insurer. Section 3.06(b) of the Disclosure Letter lists all
grants, authorizations, licenses, permits, consents,
certificates, approvals and orders of any Governmental Authority
maintained by each Agency Subsidiary in connection with its
business as an insurance producer, including as an agent,
broker, producer, managing general agent or general agent.
Section
3.07
SEC
Filings; Financial Statements
.
(a) The
Company has filed all forms, reports and documents required to
be filed by it with the SEC since December 31, 2009,
including (i) its Annual Report on
Form 10-K
for the fiscal year ended December 31, 2009, (ii) its
Quarterly Reports on
Form 10-Q
for the periods
A-10
ended March 31, 2010 and June 30, 2010, (iii) all
proxy statements relating to the Companys meetings of
stockholders (whether annual or special) held since
December 31, 2009 and (iv) all other forms, reports
and other registration statements filed by the Company with the
SEC since December 31, 2009 (the forms, reports and other
documents referred to in clauses (i), (ii), (iii) and
(iv) above being, collectively, the
Company SEC
Reports
). The Company SEC Reports (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, 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 subject to the reporting requirements of
Section 13(a) or 15(d) of the Exchange Act. To the
knowledge of the Company, as of the date hereof, the Company is
not the subject of an ongoing review by the SEC, an outstanding
SEC comment or outstanding SEC investigation.
(b) Each of the consolidated financial statements
(including, in each case, any notes thereto) contained in the
Company SEC Reports was prepared in accordance, in all material
respects, 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
Company 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).
(c) Except as and to the extent set forth on the
consolidated balance sheet of the Company and the consolidated
Company Subsidiaries as of December 31, 2009, including the
notes thereto (the
2009 Balance Sheet
),
neither the Company nor any Company Subsidiary has any liability
or obligation of a nature required to be reflected on a balance
sheet prepared in accordance with GAAP, except for liabilities
and obligations, incurred (i) since December 31, 2009,
which would not constitute a Material Adverse Effect or
(ii) in connection with the Transactions and as
contemplated by this Agreement.
(d) The Company maintains disclosure controls and
procedures required by
Rule 13a-15
or
Rule 15d-15
under the Exchange Act. Such disclosure controls and procedures
are designed to ensure that material information relating to the
Company, including its consolidated Company Subsidiaries, is
made known to the Chief Executive Officer and the Chief
Financial Officer of the Company by others within those
entities; and such disclosure controls and procedures are
effective to ensure that information required to be disclosed in
the reports that the Company files or submits under the Exchange
Act is recorded, processed, summarized and reported, within the
time periods specified in the SECs rules and forms, and
that such information is accumulated and communicated to the
Companys management, including the Companys Chief
Executive Officer and Chief Financial Officer, as appropriate,
to allow timely decisions regarding financial disclosures. The
Company has designed and maintains a system of internal
accounting controls sufficient to provide reasonable assurances
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with GAAP and includes those policies and procedures
that: (i) pertain to the maintenance of records that in
reasonable detail accurately and fairly reflect the transactions
and dispositions of the assets of the Company; (ii) provide
reasonable assurance that transactions are recorded as necessary
to permit preparation of financial statements in accordance with
GAAP, and that receipts and expenditures of the Company are
being made only in accordance with authorizations of management
and directors of the Company; and (iii) provide reasonable
assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the
Companys assets that could have a material effect on the
financial statements. Management of the Company has disclosed,
based on its most recent evaluation of the Companys
internal control over financial reporting prior to the date of
this Agreement, to the Companys auditors and the audit
committee of the Company Board (x) any significant
deficiencies and material weaknesses in the design or operation
of internal control over financial reporting (as defined in
Rule 13a-15(f)
of the Exchange Act) which are reasonably likely to adversely
affect the Companys ability to record, process, summarize
and report financial information and (y) 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.
A-11
Section
3.08
Absence
of Certain Changes or Events
.
Since
December 31, 2009, except as expressly contemplated by this
Agreement, (a) the Company and the Company Subsidiaries
have conducted their businesses only in the ordinary course and
in a manner consistent with past practice, (b) there has
not been any Material Adverse Effect, and (c) none of the
Company or any Company Subsidiary has taken any action that, if
taken after the date of this Agreement, would constitute a
breach of any of the covenants set forth in
Section 5.01
.
Section
3.09
Absence
of Litigation
.
There is no material
litigation, suit, claim, action, proceeding or investigation
(
Action
) pending against or, to the knowledge
of the Company, threatened against the Company or any Company
Subsidiary, or any property or asset of the Company or any
Company Subsidiary, before any Governmental Authority;
provided
,
however
, that solely for the purpose of
this Section 3.09 the term Action does not include
litigation, suits, claims, actions, proceedings or
investigations that seek money damages of less that $250,000 (or
in the case of claims made in the ordinary course of business
with respect to insurance policies issued by the Insurance
Subsidiaries, that have case reserves of less than $250,000) and
do not seek to restrain, enjoin or otherwise limit the Company
or any Company Subsidiarys ability to conduct its
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 that would constitute a Material Adverse Effect.
Section
3.10
Employee
Benefit Plans
.
(a) Section 3.10(a) of
the Disclosure Letter lists (i) each material employee
benefit plan (as defined in Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended
(
ERISA
)) and all material bonus, stock
option, stock purchase, restricted stock, incentive, deferred
compensation, retiree medical or life insurance, supplemental
retirement, severance or other benefit plans, programs or
arrangements, and all material employment, termination, change
in control, golden parachute, severance or other
contracts or agreements, to which the Company or any Company
Subsidiary is a party, with respect to which the Company or any
Company Subsidiary has any obligation or which are maintained,
contributed to or sponsored by the Company or any Company
Subsidiary for the benefit of any current or former employee,
officer or director of, or consultant to, the Company or any
Company Subsidiary, (ii) each employee benefit plan for
which the Company or any Company Subsidiary could incur
liability under Section 4069 of ERISA in the event such
plan has been or were to be terminated, (iii) any plan in
respect of which the Company or any Company Subsidiary could
incur liability under Section 4212(c) of ERISA, and
(iv) any material contracts, arrangements or understandings
between the Company or any Company Subsidiary and any current or
former employee, officer or director of, or consultant to, the
Company or any Company Subsidiary including any contracts,
arrangements or understandings relating in any way to a sale of
the Company or any Company Subsidiary (collectively, the
Plans
). The Company has made available to
Parent a true and complete copy of each Plan and a true and
complete copy of each material document, if any, prepared in
connection with each such Plan, including a copy of (if
applicable) (i) each trust or other funding arrangement,
(ii) each summary plan description and summary of material
modifications, (iii) the most recently filed Internal
Revenue Service (
IRS
) Form 5500,
(iv) the most recently received IRS determination letter
for each such Plan, and (v) the most recently prepared
actuarial report and financial statement in connection with each
such Plan, if any. Each Plan is in writing, or if not in
writing, a material description of such Plan is set forth on
Section 3.10(a) of the Disclosure Letter. Except as set
forth in Section 3.10(a) of the Disclosure Letter, neither
the Company nor any Company Subsidiary has any express or
implied commitment, (A) to create or incur liability with
respect to or cause to exist any other employee benefit plan,
program or arrangement, (B) to enter into any contract or
agreement to provide compensation or benefits to any individual,
or (C) to modify, change or terminate any Plan, other than
with respect to a modification, change or termination required
by ERISA or the Internal Revenue Code of 1986, as amended (the
Code
).
(b) None of the Company, the Company Subsidiaries or an
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 past six years, contributed to,
sponsored or maintained a multiemployer plan (within the meaning
of Section 3(37) or 4001(a)(3) of ERISA) (a
Multiemployer Plan
) or 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
). Except as set forth
on Section 3.10(b) of the Disclosure Letter, none of the
Plans (i) provides for the payment of separation,
severance, change in control,
A-12
golden parachute, termination or similar-type
benefits to any person or (ii) obligates the Company or any
Company Subsidiary to pay separation, severance, change in
control, golden parachute, termination or
similar-type benefits solely or partially as a result of any
transaction contemplated by this Agreement. Except as set forth
in Section 3.10(b) of the Disclosure Letter, none of the
Plans provides for or promises retiree medical, disability, life
insurance or similar 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). Each
of the Plans is subject only to the Laws of the United States or
a political subdivision thereof.
(c) Each Plan is now and always has been operated in all
material respects in accordance with its terms and the
requirements of all applicable Laws including ERISA and the Code
and has always been administered, operated and managed in all
material respects in accordance with its governing documents. No
Action is pending or, to the knowledge of the Company,
threatened with respect to any Plan (other than claims for
benefits in the ordinary course) or any fiduciaries thereof.
(d) Each Plan that is intended to be qualified under
Section 401(a) of the Code or Section 401(k) of the
Code has timely received a favorable determination letter from
the IRS or can rely on a favorable opinion letter issue to a
prototype plan sponsor covering all of the provisions applicable
to the Plan for which determination letters or opinion letters
are currently available. Each such Plan is so qualified and each
trust established in connection with any Plan which is intended
to be exempt from federal income taxation under
Section 501(a) of the Code has received a determination
letter from the IRS or can rely on a favorable opinion letter
issued to a prototype plan sponsor that it is so exempt, and, to
the knowledge of the Company, no fact or event has occurred
since the date of such determination letter or opinion letters
or letters from the IRS to materially adversely affect the
qualified status of any such Plan or the exempt status of any
such trust or that would reasonably be expected to result in a
revocation of the trusts exemption from federal income
taxation.
(e) No material liability under Title IV or
Section 302 of ERISA has been incurred by the Company, any
Company Subsidiary or any ERISA Affiliate that has not been
satisfied in full, nor do any circumstances exist that would
reasonably be expected to result in any material liabilities
under (i) Title IV of ERISA,
(ii) Section 302 of ERISA or
(iii) Sections 412 or 4971 of Code, in each case, that
would reasonably be expected to be a liability of the Surviving
Corporation following the Closing.
(f) All contributions, premiums or payments required to be
made with respect to any Plan have been made on or before their
due dates.
(g) Except as set forth in Section 3.10(g) of the
Disclosure Letter, neither the execution of this Agreement or
the consummation of the Transactions will, either alone or in
combination with any other event, (i) entitle any current
or former employee, officer, director or independent contractor
of the Company or any Company Subsidiary to severance pay, or
any other payment or benefit, (ii) result in the payment to
any current or former employee, officer, director or independent
contractor of the Company or any Company Subsidiary of any money
or property, (iii) accelerate the time of payment, vesting
or funding (through a grantor trust or otherwise) or increase
the amount of compensation due any such employee, officer,
director or independent contractor or (iv) cause any
amounts payable under the Plans to fail to be deductible for
federal income tax purposes by virtue of Section 280G of
the Code.
(h) Except as provided on Schedule 3.10(h) of the
Disclosure Letter, (i) all Plans subject to
Section 409A of the Code that provide for contributions,
accruals or vesting of accruals after December 31, 2004
have been timely amended to comply in all material respects with
the requirements of the final regulations under
Section 409A, and the Company and the Company Subsidiaries
have complied in all material respects in practice and operation
with all applicable requirements of Section 409A,
(ii) the Company has not elected to or is not required to
defer payment of amounts from a foreign entity which shall be
subject to the provisions of Section 457A of the Code and
(iii) the Company does not have any obligation to
gross-up,
indemnify or otherwise reimburse any person for any income,
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excise or other tax incurred by such person pursuant to any
applicable federal, state, local or
non-United
States Law related to the collection and payment of taxes.
(i) Neither the Company nor any Company Subsidiary has any
obligation to
gross-up,
indemnify or otherwise reimburse any employee for any income,
excise or other tax incurred by such employee pursuant to any
applicable federal, state, local or non-US. Law related to the
collection and payment of taxes.
Section
3.11
Labor
and Employment Matters
.
(a) Neither the
Company nor any Company Subsidiary is, has ever been, 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
with respect to employees of the Company or any Company
Subsidiary. Except as set forth on Section 3.11(a) of the
Disclosure Letter, (i) there are no 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 such strike, slowdown or
work stoppage within the past five years; (ii) 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; (iii) the Company and each Company Subsidiary
are currently in compliance with all Laws relating to the
employment of labor, including those related to wages, hours,
collective bargaining and the payment and withholding of Taxes;
(iv) 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 has
been asserted or is now pending or, to the Knowledge of the
Company, threatened 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 (v) 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 or any other unpaid
workers.
(b) Company has furnished to Parent a complete and correct
list of the name, place of employment, the current annual salary
rates, bonuses, deferred or contingent compensation, pension,
accrued vacation, golden parachute and other like
benefits paid or payable (in Cash or otherwise) in 2010, the
date of employment and a description of position and job
function of each current salaried employee, officer, director,
consultant or agent of the Company and each Company Subsidiary
whose annual compensation in 2010 is expected to exceed $150,000.
Section
3.12
Real
Property; Title to Assets
.
(a)
Section 3.12(a) of the Disclosure Letter lists each parcel
of real property currently owned by the Company or any Company
Subsidiary. Each parcel of real property currently owned by the
Company or any Company Subsidiary (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 any
option, right of first refusal, or right of first offer or
similar right (collectively,
Liens
), other
than (A) Liens for current Taxes and assessments not yet
past due (or which are being contested in good faith) 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, and
(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
(collectively,
Permitted Liens
), and
(ii) is neither subject to any governmental decree or order
to be sold nor being condemned or 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) Section 3.12(b) of the Disclosure Letter lists
each parcel of real property currently leased or subleased by
the Company or any Company Subsidiary, with the name of the
lessor and the date of the lease, sublease, assignment of the
lease, and each amendment to any of the foregoing (collectively,
the
Lease Documents
). All such current
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leases and subleases are in full force and effect, are valid and
effective in accordance with their respective terms, and there
is not, under any of such leases, any existing material default
or event of default (or event which, with notice or lapse of
time, or both, would constitute a material default) by the
Company or any Company Subsidiary or, to the Companys
knowledge, by the other party to such lease or sublease.
(c) 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.
(d) 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).
Section
3.13
Taxes
.
The
Company and the Company Subsidiaries have filed all United
States federal and state income and all material United States
federal and state non-income, local and
non-United
States Tax returns and reports required to be filed by them and
have paid or discharged all Taxes required to be paid or
discharged, 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. The
Company and the Company Subsidiaries have withheld and paid all
material Taxes required to have been withheld and paid in
connection with amounts paid or owing to any employee,
independent contractor, creditor, shareholder or other third
party. Neither the IRS nor any other United States or
non-United
States taxing authority or agency is now asserting 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. Neither the Company nor any Company
Subsidiaries have constituted either a distributing
corporation or a controlled corporation
(within the meaning of section 355(a)(1)(A) of the Code) in
a distribution of stock qualifying for tax-free treatment under
section 355 or 361 of the Code (A) in the two
(2) years prior to the date of this Agreement or
(B) in a distribution which could otherwise constitute part
of a plan or series of related
transactions (within the meaning of section 355(e) of
the Code) in conjunction with the transactions contemplated by
this Agreement. Neither the Company nor any Company Subsidiaries
have participated or engaged in any reportable
transaction within the meaning of Treasury Regulations
section 1.6011-4
(or any corresponding or similar provision of Applicable Law).
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. The
accruals and reserves for Taxes reflected in the 2009 Balance
Sheet are adequate to cover all Taxes accruable through such
date (including interest and penalties, if any, thereon) 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. 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 constitute a Material Adverse Effect. Neither the Company
nor any of the Company Subsidiaries has entered into a material
transaction with respect to any open Tax year which is being
accounted for under the installment method of Section 453
of the Code. Neither the Company nor any Company Subsidiary is
liable for Taxes of any other person (other than members of the
affiliated group that includes the Company and the Company
Subsidiaries), or is currently under any contractual obligation
to indemnify any person with respect to Taxes (except for
customary agreements with lenders, security holders, customers,
vendors, lessors or the like). Neither the Company nor any
Company Subsidiary has distributed the stock of another entity
or had its stock distributed by another entity in a transaction
that was purported or intended to be governed in whole or in
part by Section 355 or Section 361 of the Code. The
Company is not a United States real property holding corporation
within the meaning of Section 897(c)(2) of the Code. There
are no outstanding rulings or requests for rulings with the IRS
or any other United States or
non-United
States taxing authority or agency with respect to Taxes of the
Company or any Company Subsidiary. Neither the Company nor any
of the Company Subsidiaries has any material intercompany items
(as defined in Treas. Reg. 1.1502-13(b)(2) or any corresponding
or similar provision of state, local or
non-United
States Tax Law) or material deferred intercompany gain or loss
arising under the provisions of the
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applicable consolidated return regulations (or any corresponding
or similar provision of state, local or
non-United
States Tax Law) in effect for transactions occurring in taxable
years beginning before July 12, 1995 that are attributable
to a transfer or other disposition of stock of a Company
Subsidiary, and none of the shares of stock of any Company
Subsidiary has an excess loss account within the meaning Treas.
Reg. 1.1502-19(a)(2) (or any corresponding or similar provision
of state, local or
non-United
States Tax Law).
Section
3.14
No
Rights Agreement
.
The Company has not adopted
any stockholders rights plan.
Section
3.15
Material
Contracts
.
(a)
Section 3.15(a)
of
the Disclosure Letter lists the following types of contracts and
agreements to which the Company or any Company Subsidiary is a
party (such contracts and agreements as are required to be set
forth in
Section 3.15(a)
of the Disclosure Letter
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 its Company
Subsidiaries; (ii) all contracts and agreements evidencing
indebtedness for borrowed money; (iii) all joint venture,
partnership, strategic alliance and business acquisition or
divestiture agreements under which the Company or a Company
Subsidiary has any material obligation; (iv) all contracts
and agreements relating to issuances of securities of the
Company or any Company Subsidiary (other than the Company Stock
Awards); (v) all contracts to which the Company or any
Company Subsidiary is a party that contain exclusivity or
most favored nation provisions that restrict the
activities of the Company or a Company Subsidiary in any
material respect; (vi) all contracts and agreements with
any Governmental Authority to which the Company or any Company
Subsidiary is a party; (vii) all contracts and agreements
that limit, or purport to limit the ability of the Company or
any Company Subsidiary to compete in any line of business or
with any person or entity or in any geographic area or during
any period of time; (viii) all reinsurance contracts listed
in Section 3.15(a)(viii) of the Disclosure Letter;
(ix) all of the contracts listed in
Section 3.15(a)(ix) of the Disclosure Letter; and
(x) all other contracts and agreements, whether or not made
in the ordinary course of business, which are material to the
Company and the Company Subsidiaries, taken as a whole, or the
conduct of their respective businesses, or the absence of which
would constitute a Material Adverse Effect. Except as expressly
described in the preceding sentence, Material Contracts shall
not include (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.
(b) Except as would not constitute a Material Adverse
Effect, (i) each Material Contract is a legal, valid and
binding agreement, (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
Transactions 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
3.16
Board
Approval; Vote Required
.
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, has duly (a) determined that the Merger is fair to
and in the best interests of the Company and its stockholders,
(b) approved this Agreement and declared its advisability,
and (c) resolved to recommend that the stockholders of the
Company adopt this Agreement and directed that this Agreement be
submitted for consideration by the Companys stockholders
at the Stockholders Meeting (collectively, the
Company Recommendation
). The only vote of the
holders of any class or series of capital stock of the Company
necessary to adopt this Agreement is the adoption of this
Agreement at the Stockholders Meeting by holders of a
majority of the outstanding shares of Company Common Stock in
accordance with the DGCL and the Companys Amended and
Restated Certificate of Incorporation and Amended and Restated
By-laws (the
Stockholder Approval
).
Section
3.17
Fairness
Opinion
.
The Company Board has received the
written opinion of Merrill Lynch, Pierce, Fenner &
Smith Incorporated, dated as of October 27, 2010, to the
effect that, as of the date of such opinion and subject to the
assumptions, qualifications and limitations set forth therein,
the Merger Consideration to be received in the Merger by the
holders of the Company Common Stock is fair, from a financial
point of view, to such stockholders (other than Parent and its
subsidiaries).
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Section
3.18
Brokers
.
No
broker, finder or investment banker (other than Merrill Lynch,
Pierce, Fenner & Smith Incorporated) 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 concurrently with the
execution hereof furnished to Parent a complete and correct copy
of all agreements between the Company and Merrill Lynch, Pierce,
Fenner & Smith Incorporated pursuant to which such
firm would be entitled to any payment relating to the Merger.
Section
3.19
Insurance
.
The
Company and the Company Subsidiaries maintain insurance coverage
with reputable insurers in such amounts and covering such risks
as are in accordance with normal industry practice for companies
engaged in businesses similar to that of the Company and its
Company Subsidiaries (taking into account the cost and
availability of such insurance).
Section
3.20
Information
Supplied
.
The Proxy Statement will not, at
the date the Proxy Statement (or any amendment or supplement
thereto) is first mailed to stockholders of the Company and at
the time of the Stockholders 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
3.21
No
Other Representations or Warranties
.
Except
for the representations and warranties contained in this
Agreement, 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 IV
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
4.01
Corporate
Organization
.
Parent is a corporation duly
organized, validly existing and in good standing under the laws
of Canada and Merger Sub is a corporation duly organized,
validly existing and in good standing under the laws of the
State of Delaware. Each of Parent and Merger Sub has the
requisite corporate power and authority and all necessary
governmental approvals to own, lease and operate its properties
and to carry on its business as it is now being conducted,
except where the failure to be so organized, existing or in good
standing or to have such power, authority or governmental
approvals would not, individually or in the aggregate, prevent
or materially delay consummation of the Transactions (including
the Merger) or otherwise prevent Parent or Merger Sub from
performing its obligations under this Agreement. Merger Sub was
formed solely for the purpose of engaging in the Transactions
and has not engaged in any business activities or conducted any
operations other than in connection with the Transactions. All
the issued and outstanding shares of capital stock of Merger Sub
are beneficially owned by Parent.
Section
4.02
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
Transactions 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 Transactions (other than, with respect to the
Merger, the filing and recordation of appropriate merger
documents as required by the DGCL). 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
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Parent and Merger Sub enforceable against each of Parent and
Merger Sub in accordance with its terms, subject to the
Enforceability Exceptions.
Section
4.03
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
Transactions 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 4.03(b)
have been obtained and that all
filings and other actions described in
Section 4.03(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 subject, 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 Transactions 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 and, if any, Blue Sky Laws,
(ii) the pre-merger notification requirements of the HSR
Act, (iii) the filing and recordation of appropriate merger
documents as required by the DGCL, (iv) the insurance
regulatory filings and approvals listed in Section 3.05(b)
of the Disclosure Letter 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 Transactions, or otherwise prevent Parent or Merger Sub from
performing its obligations under this Agreement.
Section
4.04
Legal
Proceedings
.
Except insofar as do not, and as
would not reasonably be expected to, individually in the
aggregate, prevent or materially delay the consummation of the
Transactions, (i) there are no pending or, to the knowledge
of Parent, threatened Actions against Parent or any of its
subsidiaries before any Governmental Authority and
(ii) none of Parent, its subsidiaries or any their property
or assets is subject to any continuing order of, consent decree,
settlement agreement or similar written agreement with, or, to
the knowledge of Parent, continuing investigation by, any
Governmental Authority, or any order, writ, judgment,
injunction, decree, determination or award of any Governmental
Authority.
Section
4.05
Ownership
of Company Common Stock
.
As of the date of
this Agreement, neither Parent nor any of its Subsidiaries,
including Merger Sub, is the beneficial owner of any shares of
Company Common Stock.
Section
4.06
Financing
.
Parent
has and, at the Effective Time, will have sufficient funds to
permit Merger Sub to consummate the Merger.
Section
4.07
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
4.08
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 stockholders of the
Company and at the time of the Stockholders 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 there were made, not misleading.
Section
4.09
No
Other Representations or Warranties
.
Except
for the representations and warranties contained in this
Agreement, none of Parent, Merger Sub or any of their Affiliates
or any other person on behalf of
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Parent, Merger Sub or any of their Affiliates makes any other
express or implied representation or warranty with respect to
Parent, Merger Sub or any of their Affiliates or any information
provided to the Company or any of the Company Subsidiaries with
respect to Parent, Merger Sub or any of their Affiliates.
ARTICLE V
CONDUCT
OF BUSINESS PENDING THE MERGER
Section
5.01
Conduct
of Business by the Company Pending the
Merger
.
Except as required by Law or
contemplated by this Agreement and Section 5.01 of the
Disclosure Letter, the Company agrees that, between the date of
this Agreement and the Effective Time, unless Parent shall
otherwise consent in writing (such consent not to be
unreasonably withheld or delayed), the businesses of the Company
and the Company Subsidiaries shall be conducted only in, and the
Company and the Company Subsidiaries shall not take any action
except in, the ordinary course of business and in a manner
consistent with past practice; and the Company shall
(i) use its reasonable best efforts to preserve
substantially intact the business organization of the Company
and the Company Subsidiaries, and (i) use its commercially
reasonable efforts, subject to Section 5.01(f), to keep
available the services of the current officers, employees and
consultants of the Company and the Company Subsidiaries. By way
of amplification and not limitation, except as expressly
contemplated by this Agreement and Section 5.01 of the
Disclosure Letter, neither the Company nor any Company
Subsidiary shall, between the date of this Agreement and the
Effective Time, directly or indirectly, do, or propose to do,
any of the following without the prior written consent of Parent
(such consent not to be unreasonably withheld or delayed):
(a) amend or otherwise change its Certificate of
Incorporation or By-laws or equivalent organizational documents;
(b) issue, sell, pledge, dispose of, grant or encumber, or
authorize the issuance, sale, pledge, disposition, grant or
encumbrance of, (i) 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 (other than issuance of shares of Company
Common Stock upon the exercise of Company Stock Awards entered
into prior to the date of this Agreement) or (ii) any
assets of the Company or any Company Subsidiary, other than
assets of
de minimis
value, except in the ordinary course
of business and in a manner consistent with past practice;
(c) 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;
(d) reclassify, combine, split, subdivide or redeem, or
purchase or otherwise acquire, directly or indirectly, any of
its capital stock;
(e) (i) acquire (including by merger, consolidation,
or acquisition of stock or assets or any other business
combination) any corporation, partnership, other business
organization or any division thereof or, except in the ordinary
course of business and consistent with past practice, any
material amount of assets; (ii) incur indebtedness for
borrowed money in excess of $1,000,000 in the aggregate or issue
any debt securities or assume, guarantee or endorse, or
otherwise become responsible for, debt for borrowed money of any
person, or make any loans or advances, or grant any security
interest in any of its assets except in the ordinary course of
business and consistent with past practice;
(iii) authorize, or make any commitment with respect to,
any single capital expenditure which is in excess of $250,000 or
capital expenditures which are, in the aggregate, in excess of
$500,000 for the Company and the Company Subsidiaries taken as a
whole; or (iv) enter into or amend any contract, agreement,
commitment or arrangement with respect to any matter set forth
in this
Section 5.01(e)
;
(f) (i) increase the compensation payable or to become
payable or the benefits provided to its current or former
directors, officers, employees or independent contractors,
except for increases (A) in accordance with the terms of
any Plan in effect as of the date hereof or (B) in the
ordinary course of business and consistent with
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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, or
(ii) grant any retention, severance or termination pay to,
or enter into any employment bonus, change in control or
severance agreement with, any current or former director,
officer or other employee of the Company or of any Company
Subsidiary, or (iii) establish, adopt, enter into,
terminate or amend any collective bargaining plan, Plan or any
plan, agreement, policy or program, trust or other arrangement
that would be a Plan if it were in existence as of the date of
this Agreement for the benefit of any current or former
director, officer or employee or grant any equity based awards;
(g) except as required by GAAP or SAP, materially change
its accounting policies or procedures;
(h) 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);
(i) enter into, 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 and consistent with past practice;
(j) commence or settle any material Action (including the
Actions listed in
Section 5.01(j)
of the Disclosure
Letter);
(k) fail to make in a timely manner any filings with the
SEC required under the Securities Act or the Exchange Act or the
rules and regulations promulgated thereunder;
(l) enter into, renew, amend or modify any MGA Agreement or
TPA Agreement;
(m) enter into any contract, agreement, arrangement or
understanding that materially restrains or limits the ability of
the Company or any Company Subsidiary to conduct any part of its
business;
(n) enter into, renew, modify or consent to the termination
of any reinsurance contract to which the Company or a Company
subsidiary is a party or amend, waive, modify or consent to the
termination of any material rights of the Company or any Company
Subsidiary thereunder; or
(o) announce an intention, enter into any formal or
informal agreement or otherwise make a commitment, to do any of
the foregoing.
ARTICLE VI
ADDITIONAL
AGREEMENTS
Section
6.01
Stockholders
Meeting
.
(a) Subject to
Section 6.04
, the Company, acting through the
Company Board, shall, in accordance with applicable law and the
Companys Amended and Restated Certificate of Incorporation
and Amended and Restated By-laws, duly call, give notice of,
convene and hold an annual or special meeting of its
stockholders as promptly as practicable following execution of
this Agreement for the purpose of obtaining Stockholder Approval
(the
Stockholders Meeting
). At the
Stockholders 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.
(b) Subject to
Section 6.04
, the Company shall
use its reasonable best efforts to solicit from its stockholders
proxies in favor of the adoption of this Agreement.
Section
6.02
Proxy
Statement
.
(a) As promptly as practicable,
and in any event within ten (10) business days following
the execution of this Agreement, the Company shall file a
preliminary proxy statement to be sent to the stockholders of
the Company in connection with the Stockholders Meeting
(such proxy statement together with, as the context dictates,
any ancillary documents to be sent to such stockholders, each as
amended or supplemented, being referred to herein as the
Proxy Statement
) with the SEC under the
Exchange Act, and shall
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use its reasonable best efforts to have the Proxy Statement
cleared by the SEC as promptly as practicable. 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 Stockholders
Meeting at the earliest practicable time. If at any time prior
to the Stockholders Meeting there shall occur any event
(including discovery of any fact, circumstance or event by any
party hereto) that should be set forth in an amendment or
supplement to the Proxy Statement, the party which discovers
such information shall promptly notify the other parties hereto
and the Company shall promptly prepare and mail to its
stockholders an amendment or supplement, in each case to the
extent required by applicable Law. Parent shall, and shall cause
its Affiliates to, cooperate with the Company in the preparation
of the Proxy Statement or any amendment or supplement thereto,
including supplying information for inclusion or incorporation
by reference in the Proxy Statement or filing information
required by the Exchange Act requested by the SEC in a timely
manner.
(b) Subject to
Section 6.04
, the Proxy
Statement shall (i) include the Company Recommendation
(except to the extent that the Company Board withdraws or
modifies its approval, determination of advisability or
recommendation in accordance with
Section 6.04
) and
(ii) unless such opinion is withdrawn or rescinded, include
the written opinion of Merrill Lynch, Pierce, Fenner &
Smith Incorporated, to the effect that, as of the date of this
Agreement and subject to the assumptions, qualifications and
limitations set forth therein, the Merger Consideration to be
received in the Merger by the holders of the Company Common
Stock is fair, from a financial point of view, to such
stockholders (other than Parent and its subsidiaries). Except to
the extent permitted by
Section 6.04
, the Company
shall not make an Adverse Recommendation Change.
Section
6.03
Access
to Information; Confidentiality
.
(a) From the
date hereof until the Effective Time, 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 and
agents of Parent and Merger Sub reasonable access during normal
business hours to the officers, employees, agents, properties,
offices and other facilities, books and records 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.
(b) All information obtained by Parent or Merger Sub
pursuant to this
Section 6.03
shall be kept
confidential in accordance with the letter agreement, dated
August 9, 2010 (the
Confidentiality
Agreement
), between Parent and the Company.
(c) No investigation pursuant to this
Section 6.03
shall affect any representation or
warranty in this Agreement of any party hereto or any condition
to the obligations of the parties hereto.
Section
6.04
No
Solicitation of Transactions
.
(a) The Company
shall immediately cease any discussions or negotiations with any
parties that may be ongoing with respect to a Takeover Proposal
and shall seek to have returned to the Company (or destroyed)
any confidential information that has been provided in any such
discussions or negotiations. From the date hereof, the Company
shall not, nor shall it permit any Company Subsidiary to, nor
shall it authorize or permit any of its officers, directors or
employees, investment bankers, financial advisors, attorneys,
accountants or other representatives retained by it or any
Company Subsidiary to, directly or indirectly, (i) solicit,
initiate, encourage (including by way of furnishing information
which has not been previously publicly disseminated), or take
any other action designed to facilitate, any inquiries or the
making of any proposal which constitutes, or may reasonably be
expected to lead to, any Takeover Proposal or
(ii) participate in any discussions or
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negotiations regarding any Takeover Proposal;
provided
,
however
, notwithstanding anything contained herein to the
contrary, that if, following the receipt of a Takeover Proposal
that is or is reasonably expected to lead to a Superior Proposal
that in either case was unsolicited and made after the date
hereof in circumstances not otherwise involving a breach of this
Section 6.04
, 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, in response to such Takeover
Proposal and subject to compliance with
Section 6.04(c)
, (A) request information from
the party making such Takeover Proposal for the purpose of the
Company Board informing itself about the Takeover Proposal that
has been made and the party that made it, (B) furnish
information with respect to the Company to the party making such
Takeover Proposal pursuant to a customary confidentiality
agreement, provided, that (1) such confidentiality
agreement may not include any provision calling for an exclusive
right to negotiate with the Company and (2) the Company
advises Parent of all such nonpublic information delivered to
such person (not previously provided or made available to
Parent) promptly after its delivery to the requesting party, and
(C) participate in negotiations with such party regarding
such Takeover Proposal. It is agreed that any violation of the
restrictions set forth in the preceding sentence by any
executive officer, director or investment banker, attorney or
other advisor or representative of the Company or any Company
Subsidiary shall be deemed to be a breach of this
Section 6.04(a)
by the Company.
(b) Except as permitted in this
Section 6.04(b)
, neither the Company Board nor any
committee thereof shall (i) withdraw or modify, or propose
publicly to withdraw or modify, in a manner adverse to Parent,
the Company Recommendation, (ii) approve, determine to be
advisable, or recommend, or propose publicly to approve,
determine to be advisable, or recommend, any Takeover Proposal
(each of clauses (i) and (ii) being an
Adverse Recommendation Change
) or
(iii) cause the Company to enter into any letter of intent,
agreement in principle, acquisition agreement or other similar
agreement (each, an
Acquisition Agreement
)
related to any Takeover Proposal (other than a customary
confidentiality agreement referred to in clause (B) of the
proviso to
Section 6.04(a)
). Notwithstanding the
foregoing, in the event that the Company Board determines in
good faith, in response to a Takeover Proposal (that was not
solicited in breach of
Section 6.04(a)
) that
constitutes a Superior Proposal, which was made after the date
hereof in circumstances not otherwise involving a breach of this
Agreement, after consultation with outside counsel, that the
failure to do so would be inconsistent with its fiduciary duties
under applicable Law, the Company Board may (subject to
compliance with this sentence and to compliance with
Sections 6.04(a)
and
6.04(c)
) (x) make
an Adverse Recommendation Change, (y) cause the Company to
enter into an Acquisition Agreement, or (z) postpone or
adjourn the Stockholder Meeting;
provided
,
however
, that any actions described in clause (x),
(y) or (z) may be taken only at a time that is after
the second business day following Parents receipt of
written notice from the Company advising Parent that the Company
Board has received a Superior Proposal, specifying the material
terms and conditions of such Superior Proposal, identifying the
person making such Superior Proposal and providing notice of the
determination of the Company Board of what actions described in
clause (x), (y) or (z) the Company Board has
determined to take, and provided further, that the action
described in clause (y) may be taken only upon compliance
by the Company with
Section 8.01 (d)(ii)
and
Section 8.03.
In addition, and
notwithstanding anything in this Agreement to the contrary, the
Company Board may also make an Adverse Recommendation Change as
contemplated by clause (i) of the definition of
Adverse Recommendation Change , if it determines in
good faith, after consulting with outside counsel, that a
failure to do so would be inconsistent with its fiduciary duties
under applicable Law, provided that the Company has given Parent
two business days prior written notice of its intention to
take such action, specifying in reasonable detail the reasons
for such action.
(c) In addition to the obligations of the Company set forth
in
Section 6.04(a)
and
6.04(b)
, the Company
shall promptly 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 the Takeover Proposal
and the identity of the person making such request or Takeover
Proposal and shall keep Parent promptly informed of all
developments that could lead to the Company Board making an
Adverse Recommendation Change or exercising any of its other
rights under
Section 6.04
(a) or (b).
(d) Nothing contained in this
Section 6.04
or
Section 6.10
shall prohibit the Company from taking
and disclosing to its stockholders a position contemplated by
Rule 14e-2(a),
Rule 14d-9
or Item 1012(a) of
Regulation M-A
promulgated under the Exchange Act or from making any disclosure
to the Companys stockholders;
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provided
,
however
, that neither the Company nor
the Company Board nor any committee thereof shall, except as in
accordance with
Section 6.04(b)
, make an Adverse
Recommendation Change and further provided that in no event
shall any stop, look and listen or
similar communication of the type contemplated by
Rule 14d-1(f)
under the Exchange Act be deemed to deemed to be an Adverse
Recommendation Change or violate
Section 6.04.
(e) For purposes of this Agreement:
(i)
Takeover Proposal
means
any inquiry, proposal or offer from any person (other than
Parent or any of its affiliates or representatives) relating to
any direct or indirect acquisition or purchase (pursuant to a
merger, consolidation, share exchange, business combination,
recapitalization, liquidation, dissolution or similar
transaction) of 10% or more of the consolidated assets
(including equity interests in subsidiaries) of the Company and
Company Subsidiaries, taken as a whole, or 10% or more of any
class of equity securities of the Company, any tender offer or
exchange offer that if consummated would result in any person
beneficially owning 10% or more of any class of equity
securities of the Company, other than the Transactions.
(ii)
Superior Proposal
means a bona fide written Takeover Proposal that was not
solicited in violation of
Section 6.04(a)
from any
person for a direct or indirect acquisition or purchase
(pursuant to a merger, consolidation, share exchange, business
combination, recapitalization, liquidation, dissolution or
similar transaction) of 50% or more of the consolidated assets
(including equity interests in subsidiaries) of the Company and
Company Subsidiaries, taken as a whole, or 50% or more of the
issued and outstanding Company Common Stock, any tender offer or
exchange offer that if consummated would result in any person
beneficially owning 50% or more of the issued and outstanding
Company Common Stock, (other than the Transactions) which,
considering all relevant factors (including whether financing
for such Takeover Proposal is fully committed or reasonably
likely to be obtained and whether such Takeover Proposal is
reasonably likely to be consummated) the Company Board
determines in its good faith judgment (after receiving the
advice of the Companys financial advisor and outside
counsel), is more favorable to the Company and its stockholders
than the Merger.
Section
6.05
Employee
Benefits Matters.
From and after the
Effective Time, Parent shall cause the Surviving Corporation and
its subsidiaries to honor in accordance with their terms, all
contracts, agreements, arrangements, policies, plans and
commitments of the Company and the Company Subsidiaries as in
effect immediately prior to the Effective Time that are
applicable to any current or former officers, employees or
directors of the Company or any Company Subsidiary, including
without limitation, payment of incentive bonuses thereunder for
the calendar year ending December 31, 2010. In addition,
Parent shall grant employees of the Company or any Company
Subsidiary credit for all periods of employment with the Company
and any Company Subsidiary for purposes of eligibility to
participate and vesting (but not for benefit accruals) under any
employee benefit plan, program or arrangement established or
maintained by the Surviving Corporation or any of its
subsidiaries for service accrued or deemed accrued prior to the
Effective Time with the Company or any Company Subsidiary;
provided
,
however
, that such crediting of service
shall not be recognized to the extent that such recognition
would result in the duplication of benefits.
Section
6.06
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 fullest extent permitted by Law, 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 whether 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 pay all expenses of each Indemnified Party in
advance of the final disposition of any such Action to the
fullest extent permitted by Law to advance such expenses upon
receipt of an undertaking to repay such advances if it is
ultimately
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determined in accordance with applicable Law that such
Indemnified Party is not entitled to indemnification. Without
limiting the foregoing, in the event any Action is brought
against any Indemnified Party (whether arising before or after
the Effective Time) or an Indemnified Party is required to be a
witness in any Action: (i) the Indemnified Parties may
retain counsel satisfactory to them and reasonably satisfactory
to the Surviving Corporation; (ii) the Surviving
Corporation shall pay all reasonable fees and expenses of such
counsel for the Indemnified Parties promptly as statements
therefor are received; and (iii) the Surviving Corporation
shall use its reasonable best efforts to assist in the vigorous
defense of any such matter; provided, that the Surviving
Corporation shall not be liable for any settlement of any Action
effected without its written consent, which consent shall not be
unreasonably withheld or delayed. Any Indemnified Party wishing
to claim indemnification under this
Section 6.06
,
upon learning of any such Action shall notify the Surviving
Corporation (but the failure so to notify the Surviving
Corporation shall not relieve the Surviving Corporation from any
liability which it may have under this
Section 6.06
except to the extent such failure materially prejudices the
Surviving Corporation), and shall deliver to the Surviving
Corporation an undertaking of the kind described above. The
Indemnified Parties as a group may retain only one law firm (in
addition to local counsel in each applicable jurisdiction if
reasonably required) to represent them with respect to each such
matter unless there is, under applicable standards of
professional conduct, a conflict on any significant issue
between the positions of any two or more Indemnified Parties.
(b) For a period of six years from and after the Effective
Time, the organizational documents of the Surviving Corporation
shall contain the same provisions with respect to exculpation
and indemnification contained in Article SIXTH of the
Amended and Restated Certificate of Incorporation of the Company
and Article VI of the By-Laws of the Company, which
provisions shall not be amended, repealed or otherwise modified
for a period of six years from and after the Effective Time in
any manner that would affect adversely the rights thereunder of
individuals who, at or prior to the Effective Time, were
directors, officers, employees, fiduciaries or agents of the
Company, unless such modification is required by applicable Law,
and then only to the minimum extent required by applicable Law.
(c) The Company shall purchase, prior to the Effective
Time, a six year prepaid tail policy on terms and
conditions (in both amount and scope) providing substantially
equivalent benefits, and from a carrier or carriers with
comparable credit ratings, as the current policies of
directors and officers liability insurance
maintained by the Company and the Company Subsidiaries with
respect to matters arising on or before the Effective Time and
covering the Transactions;
provided
,
however
, that
in no event shall the Company pay more than 250% of the current
annual premium payable by the Company for such insurance (the
Maximum Amount
);
provided
,
further
, that if the Company is unable to obtain the
insurance required by this
Section 6.06(c)
for an
amount less than or equal to the Maximum Amount, it shall obtain
as much comparable insurance as possible for the Maximum Amount.
(d) In the event the Company or the Surviving Corporation
or any of their respective successors or assigns
(i) consolidates with or merges with or into any other
person and is not the continuing or surviving corporation or
entity of such consolidation or merger or (ii) transfers
all or substantially all of its properties and assets to any
person, then, and in each such case, proper provision shall be
made so that the successors and assigns of the Company or the
Surviving Corporation, as the case may be, or at Parents
option, Parent, shall assume the obligations set forth in this
Section 6.06
.
(e) Nothing in this Agreement is intended to or shall be
construed to waive or impair the rights of any director or
officer of the Company or any Company Subsidiary to make a claim
under any directors and officers liability insurance
that is or has been in existence with respect to the Company or
any of the Company Subsidiaries prior to the Effective Time, it
being understood and agreed that the indemnification provided
for in this
Section 6.06
is not prior to or in
substitution for any such claims under such insurance.
Section
6.07
Notification
of Certain Matters
.
The Company shall give
prompt notice to Parent, and Parent shall give prompt notice to
the Company, of (a) the occurrence, or non-occurrence, of
any event the occurrence, or non-occurrence, of which reasonably
could be expected to cause any representation or warranty
contained in this Agreement to be untrue or inaccurate in any
material respect, (b) any failure of the Company, Parent or
Merger Sub, as the case may be, to comply with or satisfy any
material covenant or agreement to be complied with or satisfied
by it hereunder, (c) any other development that would
constitute a Material Adverse Effect, and (d) any notice or
other
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communication from any Governmental Authority in connection with
the Transactions or from any person alleging that the consent of
such person is or may be required in connection with this
Agreement or the Transactions;
provided
,
however
,
that the delivery of any notice pursuant to this
Section 6.07
shall not limit or otherwise affect the
remedies available hereunder to the party receiving such notice.
Section
6.08
Further
Action; Reasonable Best Efforts
.
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 ten (10) business 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
promptly obtain all Permits, consents, approvals,
authorizations, qualifications and orders of Governmental
Authorities (including the approval of the Delaware Insurance
Department, the Illinois Department of Insurance, the Minnesota
Department of Commerce and the Arkansas Insurance Department,
(collectively, the
Form A Approvals
))
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; provided that
neither Merger Sub nor Parent will be required by this
Section 6.08
to take any action, including entering
into any consent decree, hold separate orders or other
arrangements, that (A) requires the divestiture of any
assets of any of Merger Sub, Parent, the Company or any of their
respective subsidiaries or (B) limits Parents freedom
of action with respect to, or its ability to retain, the Company
and the Company Subsidiaries or any portion thereof or any of
Parents or its affiliates other assets or
businesses. Without limiting the foregoing, Parent shall use its
reasonable best efforts to file or submit the Form A
Approvals within ten (10) business days after the date
hereof and to respond promptly to any request by any
Governmental Authority for any additional information and
documentary material in connection therewith. Parent shall give
the Company and its counsel a reasonable opportunity to review
and comment on the Form A Approvals, and all amendments or
supplements thereto prior to their being filed or submitted.
Each of Parent and the Company shall promptly forward to the
other all notices, inquiries and other written communications
received by it from any Governmental Authority relating to the
Transactions. Each of Parent and the Company agrees to defend
vigorously against any actions, suits or proceedings in which
either party or its subsidiaries is named as defendant which
seeks to enjoin, restrain or prohibit the Transactions. In case,
at any time after the Effective Time, any further action is
necessary or desirable to carry out the purposes of this
Agreement, the proper officers and directors of each party to
this Agreement shall use their reasonable best efforts to take
all such action. Subject to Section 6.04 and the
termination rights provided in Article VIII, none of the
Company, Parent or Merger Sub shall until the Effective Time,
directly or indirectly, take any action or fail to take any
action that is intended to, or that would reasonably be likely
to, materially delay or prevent the consummation of the
Transactions.
Section
6.09
Subsequent
Financial Statements
.
The Company shall make
available to Parent prior to making publicly available its
financial results for any period after the date of this
Agreement and prior to filing any report or document with the
SEC after the date of this Agreement, it being understood that
Parent shall have no liability by reason thereof.
Section
6.10
Public
Announcements
.
Parent, Merger Sub and the
Company agree that, other than as contemplated by
Section 6.04
, 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 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.
Section
6.11
Confidentiality
Agreement
.
Each of Parent and the Company
hereby waives the provisions of the Confidentiality Agreement as
and to the extent necessary to permit the consummation of the
Merger.
Section
6.12
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
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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 Stock Award pursuant to this Agreement in connection
with the Merger shall be an exempt transaction for purposes of
Section 16 of the Exchange Act.
Section
6.13
Takeover
Statutes
.
If any takeover statute is or may
become applicable to the Merger, the Company and the Company
Board shall grant such approvals and take such reasonable
actions as are within their power so as to eliminate or minimize
the effects of such statue or regulation on the Transactions.
Section
6.14
Resignations
.
The
Company shall request letters of resignation, effective as of
the Effective Time, from each of the members of the Company
Board.
Section
6.15
Investments.
(a)
The Company shall use commercially reasonable efforts to,
beginning as promptly as reasonably practicable after the date
hereof, sell on an orderly basis all Non-Cash Investments held
by the Company and the Company Subsidiaries for proceeds
consisting solely of Cash or Treasury Bills but the Company
shall have no obligation to sell any Non-Cash Investment for an
amount less than the book value of such Non-Cash Investment as
of September 30, 2010.
(b) If the proceeds to be realized from the sale pursuant
to
Section 6.15(a)
of any Non-Cash Investment with a
book value in excess of $1,000,000 as of September 30, 2010
would be less than the book value of such Non-Cash Investment as
of September 30, 2010, the Company shall obtain
Parents consent prior to effecting such sale.
(c) After the date hereof, the Company shall not, without
the prior written consent of Parent, acquire any Investments
other than Treasury Bills.
Section
6.16
Other
Insurance
.
The Company shall purchase, prior
to the Effective Time, one year prepaid tail
policies on terms and conditions (in both amount and
scope) providing substantially equivalent benefits, and from a
carrier or carriers with comparable credit ratings, as the
current policies of fiduciary liability insurance, insurance
company professional liability insurance, agents and brokers
professional liability insurance and employment practices
liability insurance maintained by the Company and the Company
Subsidiaries with respect to matters arising on or before the
Effective Time;
provided
,
however
, the Company
shall not purchase, or be required to purchase, any such tail
policy unless it obtains Parents consent with respect to
the premium payable by the Company or a Company Subsidiary for
each such insurance policy.
ARTICLE VII
CONDITIONS
TO THE MERGER
Section
7.01
Conditions
to the Obligations of Each Party
.
The
obligations of each party to effect the Merger shall be subject
to the satisfaction, at or prior to the Effective Time, of the
following conditions:
(a)
Stockholder Approval
.
The
Stockholder 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;
(c)
Insurance Regulatory
Approvals
.
All approvals or consents listed
in Section 3.05(b) of the Disclosure Letter shall have been
received; and
(d)
No Order
.
No Governmental
Authority in the United States or Canada 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.
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Section
7.02
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 (where permissible) of the following additional
conditions:
(a)
Representations and
Warranties
.
(i) The representations and
warranties of the Company contained in
Section 3.03(a)
shall be true and correct except for
de minimis
errors, (ii) the representations and
warranties of the Company contained in
Section 3.04
(excluding the last sentence thereof) shall be true and correct
in all respects, and (iii) all other representations and
warranties of the Company contained in this Agreement shall be
true and correct (without giving effect to any limitation as to
materiality or Material Adverse Effect set forth therein) except
as would not constitute a Material Adverse Effect, in the case
of each of (i), (ii) and (iii), 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 on behalf of the Company as to the
satisfaction of the conditions specified in
Sections 7.02(a)
and
7.02(b).
(d)
Material Adverse Effect
.
No
Material Adverse Effect shall have occurred since the date of
this Agreement.
Section
7.03
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 contained in
Section 4.02
shall
be true and correct in all respects, and (ii) all other
representations and warranties of Parent contained in this
Agreement shall be true and correct (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 constitute 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.
(c)
Officer Certificate
.
Parent
shall have delivered to the Company a certificate, dated the
date of the Closing, signed by a duly authorized officer of
Parent, certifying on behalf of Parent as to the satisfaction of
the conditions specified in
Sections 7.03(a)
and
(b).
ARTICLE VIII
TERMINATION,
AMENDMENT AND WAIVER
Section
8.01
Termination
.
This
Agreement may be terminated and the Merger may be abandoned at
any time prior to the Effective Time by action taken or
authorized by the Board of Directors of the terminating party,
notwithstanding any requisite approval and adoption of this
Agreement and the Merger by the stockholders of the Company:
(a) By mutual written consent of each of Parent and the
Company; or
(b) By either Parent or the Company if (i) the
Effective Time shall not have occurred on or before
June 30, 2011 (the
Outside Date
);
provided
,
however
, that the right to terminate
this Agreement under this
Section 8.01(b) (i)
shall
not be available to any party whose failure to fulfill any
obligation under this
A-27
Agreement has been the cause of, or resulted in, the failure of
the Effective Time to occur on or before the Outside Date,
(ii) any Governmental Authority in the United States or
Canada shall have enacted, issued, promulgated, enforced or
entered any injunction, order, decree or ruling (whether
temporary, preliminary or permanent) which has become final and
non-appealable and has the effect of making consummation of the
Merger illegal or otherwise preventing or prohibiting
consummation of the Merger,
provided
,
however
,
that the right to terminate under this
Section 8.01(b)(ii)
shall not be available to any
party whose failure to fulfill any material 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 (iii) the Stockholder Approval shall not have been
obtained at the Stockholders Meeting; or
(c) By Parent (i) 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 7.02(a)
and
Section 7.02(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, and such breach has not been waived by Parent
pursuant to the provisions hereof; (ii) if the Company
Board or any committee thereof shall have made an Adverse
Recommendation Change, or (iii) if the Company shall have
failed to include in the Proxy Statement the Company
Recommendation; or
(d) 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 7.03(a)
and
Section 7.03(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, and such breach has not
been waived by the Company pursuant to the provisions hereof; or
(ii) if it concurrently enters into a definitive agreement
providing for a Superior Proposal in accordance with
Section 6.04
, provided that prior thereto or
simultaneously therewith the Company has paid the Termination
Fee to Parent in accordance with
Section 8.03.
Section
8.02
Effect
of Termination
.
In the event of the
termination of this Agreement pursuant to
Section 8.01
, this Agreement (except for this
Section 8.02
,
Section 8.03
and
Article IX) shall forthwith become void, and there
shall be no liability on the part of any party hereto, except
(a) as set forth in
Section 8.03
and
(b) that nothing herein shall relieve any party from
liability for any willful breach hereof prior to the date of
such termination;
provided
,
however
, that the
Confidentiality Agreement shall survive any termination of this
Agreement.
Section
8.03
Fees
and Expenses.
(a) Except as otherwise set
forth in this
Section 8.03
, all Expenses incurred in
connection with this Agreement and the Transactions 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
out-of-pocket
expenses (including all 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 stockholder 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.
(b) The Company agrees that:
(i) if Parent shall terminate this Agreement pursuant to
Section 8.01(c)(ii)
, then the Company shall pay to
Parent promptly (but in any event no later than two business
days after such termination shall have occurred) a fee of
$9,000,000 in immediately available funds (the
Termination Fee
); or
(ii) if the Company shall terminate this Agreement pursuant
to
Section 8.01(d)(ii)
, then the Company shall pay
to Parent the Termination Fee prior to or simultaneously with
such termination; or
(iii) if (A) Parent or the Company shall terminate
this Agreement pursuant to
Section 8.01(b)(i)
or
Parent shall terminate this Agreement pursuant to
Section 8.01(c)(i)
, (B) prior to the time of
such termination a Takeover Proposal shall have been publicly
announced with respect to the Company, and (C) within
12 months after the date of such termination the Company
enters into a definitive agreement with respect to (and
subsequently consummates the contemplated transaction), or
consummates, a transaction contemplated by a Takeover Proposal
(provided that for purposes of this Section 8.03(b)(iii),
all references to 10% in the
A-28
definition of Takeover Proposal shall be replaced
with references to 50%), then the Company shall pay to Parent
the Termination Fee, less any Expenses of the Parent paid by the
Company pursuant to Section 8.3(c), within two business
days of the consummation of the transaction contemplated by such
Takeover Proposal; or
(iv) if (A) Parent or the Company shall terminate this
Agreement pursuant to
Section 8.01(b)(iii)
,
(B) prior to the time of such failure to so adopt this
Agreement a Takeover Proposal shall have been publicly announced
with respect to the Company, and (C) within 12 months
after the date of such termination the Company enters into a
definitive agreement with respect to (and subsequently
consummates the contemplated transaction), or consummates, a
transaction contemplated by a Takeover Proposal;
provided
, that for purposes of this
Section 8.03(b)(iii)
, all references to 10% in the
definition of Takeover Proposal shall be replaced
with references to 50%), then the Company shall pay to Parent
the Termination Fee, less any Expenses of the Parent paid by the
Company pursuant to Section 8.3(c), within two business
days of the consummation of the transaction contemplated by such
Takeover Proposal.
(c) The Company agrees that if Parent or the Company shall
terminate this Agreement pursuant to
Section 8.01(b)(iii)
or Parent shall terminate this
Agreement pursuant to
Section 8.01(c)(i)
(provided
that in respect of
Section 8.01(c)(i)
neither Parent
nor Merger Sub is in material breach of any of its
representations, warranties, covenants or agreements set forth
in this Agreement) then the Company shall, if no payment is made
pursuant to
Section 8.03(b),
reimburse Parent for
all of its reasonable Expenses, up to a maximum of $1,500,000
(not later than three business days after submission of
statements therefore). Parent agrees that if the Company shall
terminate this Agreement pursuant to
Section 8.01(d)(i)
(provided that the Company is not
in material breach of any of its representations, warranties,
covenants or agreements set forth in this Agreement) then Parent
shall reimburse the Company for all of its Expenses, up to a
maximum of $1,500,000 (not later than three business days after
submission of statements therefore).
(d) Notwithstanding anything to the contrary in this
Agreement, if Parent receives a Termination Fee, such
Termination Fee will constitute liquidated damages and be the
sole and exclusive remedy of Parent and Merger Sub regardless of
the circumstances of such termination.
(e) The Company and Parent acknowledge that the agreements
contained in this
Section 8.03
are an integral part
of the transactions contemplated by this Agreement.
Section
8.04
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 approval and adoption of this
Agreement and the Merger by the stockholders of the Company, no
amendment may be made that would require further approval of the
stockholders 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
8.05
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. 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.
ARTICLE IX
GENERAL
PROVISIONS
Section
9.01
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
A-29
overnight courier, by facsimile or email 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 9.01
):
if to Parent or Merger Sub:
Fairfax Financial Holdings Limited
95 Wellington Street West, Suite 800
Toronto, ON M5J 2N7
Canada
Facsimile No:
416-367-2201
Attention: Paul Rivett, Esq.
Vice President and Chief Legal Officer
Email: p_rivett@fairfax.ca
with a copy (which shall not constitute notice) to:
Shearman & Sterling LLP
Commerce Court West
Suite 4405, P.O. Box 247
Toronto, ON M5L 1E8
Facsimile No:
416-360-2958
Attention: Adam M. Givertz, Esq.
Email: agivertz@shearman.com
if to the Company:
First Mercury Financial Corporation
29110 Inkster Road, Suite 100
Southfield, MI 48034
Facsimile
No: 248-353-5879
Attention: General Counsel
Email: mroskiewicz@firstmercury.com
with a copy (which shall not constitute notice) to:
McDermott Will & Emery LLP
227 West Monroe Street
Chicago, IL
60606-5096
Facsimile No: 312 984 7700
Attention: Scott M. Williams, Esq.
Email: swilliams@mwe.com
Section
9.02
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 so
long as the economic or legal substance of the Merger is not
affected in any manner materially adverse to any party. 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
9.03
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 6.03(b
) and
Section 6.11
, all
prior agreements and undertakings, both written and oral,
A-30
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
that no such assignment shall relieve the assigning party of its
obligations hereunder if such assignee does not perform such
obligations.
Section
9.04
Parties
in Interest
.
This Agreement shall be binding
upon and inure solely to the benefit of each party hereto, 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
Section 6.06
(which is intended to be for the benefit of the persons covered
thereby and may be enforced by such persons).
Section
9.05
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 the terms hereof on a timely basis and that the parties,
without the necessity of posting bond or other undertaking,
shall be entitled to specific performance of the terms hereof,
in addition to any other remedy at law or in equity. 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. A partys right to terminate this
Agreement pursuant to
Section 8.01
shall not (unless
the party has exercised such right to terminate) negate any
right such party may have to specific performance under this
Section 9.05.
Section
9.06
Governing
Law
.
This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Delaware
applicable to contracts executed in and to be performed in that
State. Each of the parties hereto hereby irrevocably and
unconditionally submits, for itself and its property, to the
jurisdiction of the Court of Chancery of the State of Delaware
and any appellate court thereof, in any action or proceeding
arising out of or relating to this Agreement or the agreements
delivered in connection herewith or the Transactions 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 9.01
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.
Section
9.07
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
termination of this Agreement or after the Effective Time, as
the case may be.
Section
9.08
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 9.08.
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Section
9.09
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 Schedule, such reference is to the corresponding Article,
Section or
sub-Section
of, or 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 term executive officer has
the meaning given to such term in
Rule 3b-7
under the Exchange Act; (f) all terms defined in this
Agreement have the defined meanings when used in any certificate
or other document made or delivered pursuant hereto, unless
otherwise defined therein; (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) references to a person are also to its
successors and permitted assigns; (j) the use of
or is not intended to be exclusive unless expressly
indicated otherwise; and (k) 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
9.10
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]
A-32
IN WITNESS WHEREOF, Parent, Merger Sub and the Company have
caused this Agreement to be executed as of the date first
written above.
FAIRFAX FINANCIAL HOLDINGS LIMITED
|
|
|
|
By
|
/s/ John
Varnell
Name: John
Varnell
Title: Vice President and Chief Financial
Officer
|
FAIRFAX INVESTMENTS III USA CORP.
|
|
|
|
By
|
/s/ Paul
Rivett
Name: Paul
Rivett
Title: Vice President
|
FIRST MERCURY FINANCIAL CORPORATION
|
|
|
|
By
|
/s/ Richard
H. Smith
Name: Richard
H. Smith
|
|
|
|
|
Title:
|
Chairman, President and Chief Executive Officer
|
[Merger
Agreement Signature Page]
A-33
Annex B
OPINION
OF MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
October 27, 2010
The Board of Directors
First Mercury Financial Corporation
29110 Inkster Road
Suite 100
Southfield, Michigan 48034
Members of the Board of Directors:
We understand that First Mercury Financial Corporation
(First Mercury) proposes to enter into an Agreement
and Plan of Merger (the Agreement), among First
Mercury, Fairfax Financial Holdings Limited
(Fairfax) and Fairfax Investments III USA
Corp., an indirect wholly owned subsidiary of Fairfax
(Merger Sub), pursuant to which, among other things,
Merger Sub will merge with and into First Mercury (the
Merger) and each outstanding share of the common
stock, par value $0.01 per share, of First Mercury (First
Mercury Common Stock) will be converted into the right to
receive $16.50 in cash (the Consideration). The
terms and conditions of the Merger are more fully set forth in
the Agreement.
You have requested our opinion as to the fairness, from a
financial point of view, to the holders of First Mercury Common
Stock (other than Fairfax and its subsidiaries) of the
Consideration to be received by such holders in the Merger.
In connection with this opinion, we have, among other things:
(1) reviewed certain publicly available business and
financial information relating to First Mercury;
(2) reviewed certain internal financial and operating
information with respect to the business, operations and
prospects of First Mercury furnished to or discussed with us by
the management of First Mercury, including certain financial
forecasts relating to First Mercury prepared by, or prepared at
the direction of and approved by, the management of First
Mercury (such forecasts, First Mercury Forecasts);
(3) discussed the past and current business, operations,
financial condition and prospects of First Mercury with members
of senior management of First Mercury;
(4) reviewed the trading history for First Mercury Common
Stock and a comparison of that trading history with the trading
histories of other companies we deemed relevant;
(5) compared certain financial and stock market information
of First Mercury with similar information of other companies we
deemed relevant;
(6) compared certain financial terms of the Merger to
financial terms, to the extent publicly available, of other
transactions we deemed relevant;
(7) reviewed a draft Agreement and Plan of Merger dated
October 26, 2010 (the Draft Agreement); and
(8) performed such other analyses and studies and
considered such other information and factors as we deemed
appropriate.
In arriving at our opinion, we have assumed and relied upon,
without independent verification, the accuracy and completeness
of the financial and other information and data publicly
available or provided to or otherwise reviewed by or discussed
with us and have relied upon the assurances of the management of
First Mercury that they are not aware of any facts or
circumstances that would make such information or data
inaccurate or misleading in any material respect. With respect
to the First Mercury Forecasts, we have been advised by First
Mercury, and have assumed, that they have been reasonably
prepared on bases reflecting the best currently available
estimates and good faith judgments of the management of First
Mercury as to the future financial performance of First Mercury.
B-1
We have not made or been provided with any independent
evaluation or appraisal of the assets or liabilities (contingent
or otherwise) of First Mercury, nor have we made any physical
inspection of the properties or assets of First Mercury. We have
not evaluated the solvency or fair value of First Mercury or
Fairfax under any state, federal or other laws relating to
bankruptcy, insolvency or similar matters. We are not experts in
the evaluation of reserves for property and casualty insurance
losses and loss adjustment expenses and we have not made an
independent evaluation of the adequacy of the reserves of First
Mercury. In that regard, we have made no analysis of, and
express no opinion as to, the adequacy of the losses and loss
adjustment expense reserves of First Mercury. We have assumed,
at the direction of First Mercury, that the Merger will be
consummated in accordance with its terms, without waiver,
modification or amendment of any material term, condition or
agreement and that, in the course of obtaining the necessary
governmental, regulatory and other approvals, consents, releases
and waivers for the Merger, no delay, limitation, restriction or
condition, including any divestiture requirements or amendments
or modifications, will be imposed that would have an adverse
effect on First Mercury or the contemplated benefits of the
Merger. We also have assumed, at the direction of First Mercury,
that the final executed Agreement will not differ in any
material respect from the Draft Agreement reviewed by us.
We express no view or opinion as to any terms or other aspects
of the Merger (other than the Consideration to the extent
expressly specified herein), including, without limitation, the
form or structure of the Merger. As you are aware, we were not
requested to, and we did not, solicit indications of interest or
proposals from third parties regarding a possible acquisition of
all or any part of First Mercury or any alternative transaction.
Our opinion is limited to the fairness, from a financial point
of view, of the Consideration to be received by holders of First
Mercury Common Stock and no opinion or view is expressed with
respect to any consideration received in connection with the
Merger by the holders of any other class of securities,
creditors or other constituencies of any party. In addition, no
opinion or view is expressed with respect to the fairness
(financial or otherwise) of the amount, nature or any other
aspect of any compensation to any of the officers, directors or
employees of any party to the Merger, or class of such persons,
relative to the Consideration. Furthermore, no opinion or view
is expressed as to the relative merits of the Merger in
comparison to other strategies or transactions that might be
available to First Mercury or in which First Mercury might
engage or as to the underlying business decision of First
Mercury to proceed with or effect the Merger. In addition, we
express no opinion or recommendation as to how any stockholder
should vote or act in connection with the Merger or any related
matter.
We have acted as financial advisor to the Board of Directors of
First Mercury in connection with the Merger and will receive a
fee for our services, a portion of which is payable upon the
rendering of this opinion, and a significant portion of which is
contingent upon consummation of the Merger. In addition, First
Mercury has agreed to reimburse our expenses and indemnify us
against certain liabilities arising out of our engagement.
We and our affiliates comprise a full service securities firm
and commercial bank engaged in securities, commodities and
derivatives trading, foreign exchange and other brokerage
activities, and principal investing as well as providing
investment, corporate and private banking, asset and investment
management, financing and financial advisory services and other
commercial services and products to a wide range of companies,
governments and individuals. In the ordinary course of our
businesses, we and our affiliates may invest on a principal
basis or on behalf of customers or manage funds that invest,
make or hold long or short positions, finance positions or trade
or otherwise effect transactions in equity, debt or other
securities or financial instruments (including derivatives, bank
loans or other obligations) of First Mercury, Fairfax and
certain of their respective affiliates.
We and our affiliates in the past have provided, currently are
providing, and in the future may provide, investment banking,
commercial banking and other financial services to First Mercury
and have received or in the future may receive compensation for
the rendering of these services, including acting as financial
advisor to First Mercury in connection with First Mercurys
pending acquisition of Valiant Insurance Group, Inc. announced
in July 2010.
In addition, we and our affiliates in the past have provided,
currently are providing, and in the future may provide,
investment banking, commercial banking and other financial
services to Fairfax and have received or in the future may
receive compensation for the rendering of these services. In the
past two years, such services have included having acted as
(i) financial advisor in connection with Fairfaxs
acquisition of the outstanding minority interest in Odyssey Re
Holdings Corp. announced in September 2009,
(ii) joint-bookrunner in connection with
B-2
Fairfaxs $1.0 billion equity offering completed in
September 2009, (iii) co-manager for Fairfaxs
C$400 million senior notes offering completed in August
2009, (iv) corporate broker for Fairfaxs purchase of
the outstanding minority ownership of Advent Capital (Holdings)
PLC in August 2009 and (v) advisor to Fairfax in connection
with its unsolicited cash offer for a portion of Advent Capital
(Holdings) PLC in July 2008.
It is understood that this letter is for the benefit and use of
the Board of Directors of First Mercury in connection with and
for purposes of its evaluation of the Merger.
Our opinion is necessarily based on financial, economic,
monetary, market and other conditions and circumstances as in
effect on, and the information made available to us as of, the
date hereof. It should be understood that subsequent
developments may affect this opinion, and we do not have any
obligation to update, revise, or reaffirm this opinion. The
issuance of this opinion was approved by our Americas Fairness
Opinion Review Committee.
Based upon and subject to the foregoing, including the various
assumptions and limitations set forth herein, we are of the
opinion on the date hereof that the Consideration to be received
in the Merger by holders of First Mercury Common Stock is fair,
from a financial point of view, to such holders (other than
Fairfax and its subsidiaries).
Very truly yours,
/s/ Merrill Lynch, Pierce, Fenner & Smith Incorporated
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
B-3
Annex C
SMITH
VOTING AGREEMENT
VOTING
AGREEMENT
THIS VOTING AGREEMENT, dated as of October 28, 2010 (this
Agreement
), between Fairfax Financial
Holdings Limited, a Canadian corporation
(
Parent
), and Richard H. Smith (the
Stockholder
), solely in
Stockholders capacity as an owner of common stock, par
value $0.01 per share (
Company Common Stock
)
of the Company.
WHEREAS, on October 28, 2010, Parent, First Mercury
Financial Corporation, a Delaware corporation (the
Company
), and Fairfax Investments III
USA Corp., a Delaware corporation and a wholly owned subsidiary
of Parent (
Merger Sub
), entered into an
Agreement and Plan of Merger (the
Merger
Agreement
; capitalized terms used but not otherwise
defined herein shall have the respective meanings ascribed to
such terms in the Merger Agreement); and
WHEREAS, as a condition to the willingness of Parent and Merger
Sub to enter into the Merger Agreement, Parent and Merger Sub
have required that the Stockholder enter into this Agreement,
and in order to induce Parent and Merger Sub to enter into the
Merger Agreement, the Stockholder has agreed to enter into this
Agreement.
NOW, THEREFORE, in consideration for the mutual covenants
contained herein, and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged,
the parties hereto, intending to be legally bound, agree as
follows:
1.
Agreement to Vote
.
At every
meeting of the stockholders of the Company, and at every
postponement or adjournment thereof, the Stockholder irrevocably
agrees to appear at such meeting and vote (in person or by
proxy) all of the Voting Shares (as hereinafter defined )
entitled to be voted thereat or to cause all of the Voting
Shares to be voted (i) in favor of the approval of the
Merger Agreement and the transactions contemplated thereby;
(ii) against any action, agreement or transaction (other
than the Merger Agreement or the transactions contemplated
thereby) or proposal (including a Takeover Proposal) that would
result in a breach of any material covenant, representation or
warranty or any other material obligation or agreement of the
Company under the Merger Agreement or that would reasonably be
expected to result in any of the conditions to the
Companys obligations under the Merger Agreement not being
fulfilled, and (iii) in favor of any other matter necessary
to the consummation of the transactions contemplated by the
Merger Agreement that is voted upon by the stockholders of the
Company. The Stockholder acknowledges receipt and review of a
copy of the Merger Agreement.
2.
Grant of Proxy
.
In furtherance
of the agreements contained in Section 1 of this Agreement
and as security for such agreements, the Stockholder hereby
irrevocably appoints Parent, the executive officers of Parent,
and each of them individually, as the sole and exclusive
attorneys-in-fact and proxies of the Stockholder, for and in the
name, place and stead of the Stockholder, with full power of
substitution and resubstitution, to vote, grant a consent or
approval in respect of, or execute and deliver a proxy to vote,
if and to the extent the Stockholder fails to comply with the
agreements contained in Section 1 of this Agreement, the
Voting Shares, (i) in favor of the approval of the Merger
Agreement and the transactions contemplated thereby;
(ii) against any Takeover Proposal (regardless of whether
it is a Superior Proposal); (iii) against any action,
agreement or transaction (other than the Merger Agreement or the
transactions contemplated thereby) or proposal (including a
Takeover Proposal) that would reasonably be expected to result
in a breach of any material covenant, representation or warranty
or any other material obligation or agreement of the Company
under the Merger Agreement or that would reasonably be expected
to result in any of the conditions to the Companys
obligations under the Merger Agreement not being fulfilled, and
(iv) in favor of any other matter necessary to the
consummation of the transactions contemplated by the Merger
Agreement and considered voted upon by the stockholders of the
Company. THIS PROXY IS IRREVOCABLE AND COUPLED WITH AN INTEREST.
C-1
3.
Representations and
Warranties
.
Stockholder represents and
warrants that:
(a) (i) Schedule I to this Agreement sets forth
the number of shares of Company Common Stock (
Voting
Shares
), of which Stockholder owns of record or
otherwise has the power to vote, (ii) Stockholder owns
the Voting Shares, free and clear of any claims, liens, charges,
encumbrances, voting agreements and commitments of any kind
(other than this Agreement) and (iii) Stockholder has the
power to vote all the Voting Shares without restriction (other
than as contemplated by this Agreement) and (iv) no proxies
heretofore given in respect of any or all of the Voting Shares
are irrevocable and that any such proxies have heretofore been
revoked. If, after the date of this Agreement, Stockholder
acquires the power to votes shares of Company Common Stock not
set forth in Schedule I, such shares of Company Common
Stock shall be deemed to be Voting Shares for all purposes of
this Agreement.
(b) (i) Stockholder has all necessary power and
authority to enter into this Agreement; (ii) this Agreement
has been duly and validly executed and delivered by Stockholder
and, assuming due authorization, execution and delivery by
Parent, constitutes a legal, valid and binding obligation of
Stockholder, enforceable against Stockholder in accordance with
its terms (subject to applicable bankruptcy, insolvency,
reorganization, moratorium, fraudulent transfer and other
similar laws affecting creditors rights generally and, by
general principles of equity, including good faith and fair
dealing, regardless whether in a proceeding at equity or at
law); and (iii) the failure of the spouse, if any, of such
Stockholder to be a party or signatory to this Agreement shall
not (x) prevent such Stockholder from performing such
Stockholders obligations contemplated hereunder or
(y) prevent this Agreement from constituting the legal,
valid and binding obligation of Stockholder in accordance with
its terms; and
(c) (i) no filing with, and no permit, authorization,
consent or approval of any state, federal or foreign
governmental authority is necessary on the part of Stockholder
for the execution and delivery of this Agreement by Stockholder
and, except as contemplated by the Merger Agreement, the
consummation by Stockholder of the transactions contemplated
hereby and (ii) neither the execution and delivery of this
Agreement by Stockholder nor the consummation by Stockholder of
the transactions contemplated hereby nor compliance by
Stockholder with any of the provisions hereof shall
(x) result in the creation of a lien on any of the Voting
Shares or (y) violate any order, writ, injunction, decree,
statute, rule or regulation applicable to Stockholder or any of
the Voting Shares, except in the case of (x) or
(y) for violations, breaches or defaults that would not in
the aggregate materially impair the ability of Stockholder to
perform Stockholders obligations hereunder.
4.
Remedies
.
Each party
acknowledges and agrees that each party hereto will be
irreparably damaged in the event any of the provisions of this
Agreement are not performed by the parties in accordance with
their specific terms or are otherwise breached. Accordingly, it
is agreed that each party hereto shall be entitled to an
injunction to prevent breaches of this Agreement, and to
specific enforcement of this Agreement and its terms and
provisions in any action instituted in any court of the United
States or any state having subject matter jurisdiction. All
remedies, either under this Agreement or by law or otherwise
afforded to any party, shall be cumulative and not alternative.
5.
Termination
.
This Agreement and
all of the rights and obligations of the parties hereunder
(except Section 9) shall terminate and cease to have
any force or effect, without any further action by any party,
upon the earliest of (i) the termination of the Merger
Agreement in accordance with its terms and (ii) the
Effective Time. Section 9 shall survive the termination of
this Agreement. Nothing in this Section 5 shall relieve any
party of liability for any breach of this Agreement.
6.
Transfer of Shares
.
The
Stockholder agrees that it shall not, directly or indirectly,
(a) sell, assign, transfer (including by operation of law),
lien, pledge, dispose of or otherwise encumber any of the Voting
Shares or otherwise agree to do any of the foregoing,
(b) deposit any Voting Shares into a voting trust or enter
into a voting agreement or arrangement or grant any proxy or
power of attorney with respect thereto that is inconsistent with
this Agreement, (c) enter into any contract, option or
other arrangement or undertaking with respect to the direct or
indirect acquisition or sale, assignment, transfer (including by
operation of law) or other disposition of any Voting Shares or
(d) take any action that would make any representation or
warranty of the Stockholder herein untrue or incorrect in any
material respect or have the effect of preventing or disabling
the
C-2
Stockholder from performing Stockholders obligations
hereunder;
provided
,
however
, Stockholder may
transfer any or all of the Voting shares to any person who shall
have prior to such transfer executed and delivered to Parent a
joinder to this Agreement pursuant to which such person shall be
bound by all of the terms and provisions of this Agreement,
which joinder shall be reasonably acceptable to Parent. Any
transfer in breach of this Section 6 shall be void.
7.
No Solicitation of
Transactions
.
The Stockholder shall
(a) not, directly or indirectly, through any officer,
director, agent or otherwise, engage in any action prohibited by
Section 6.04 of the Merger Agreement, and (b) direct
or cause Stockholders representatives and agents to not to
engage in any action prohibited by Section 6.04 of the
Merger Agreement. The Stockholder shall promptly advise the
Company orally and in writing of (a) any Takeover Proposal
or any request for information with respect to any Takeover
Proposal, the material terms and conditions of such Takeover
Proposal or request and the identity of the person making such
Takeover Proposal or request and (b) any changes in any
such Takeover Proposal or request.
8.
Agreement Solely as
Stockholder
.
The Stockholder is entering into
this Agreement solely in the Stockholders capacity as
record holder or beneficial owner of the Voting Shares and
nothing herein shall limit or affect any actions taken by the
Stockholder or any employee, officer, director, partner or other
affiliate of the Stockholder, in Stockholders capacity as
a director or officer of the Company (or a Company Subsidiary).
9.
Miscellaneous
.
(a)
Successors and Assigns
.
The
terms and conditions of this Agreement shall inure to the
benefit of and be binding upon the respective successors and
assigns of the parties. Nothing in this Agreement, express or
implied, is intended to confer upon any party other than the
parties hereto or their respective successors and assigns any
rights, remedies, obligations, or liabilities under or by reason
of this Agreement, except as expressly provided in this
Agreement.
(b)
Governing Law
.
This Agreement
will be governed by and construed in accordance with the laws of
the State of Delaware applicable to contracts made and to be
performed entirely within such State.
(c)
Counterparts; Facsimile
.
For
the convenience of the parties hereto, this Agreement may be
executed in any number of separate counterparts, each such
counterpart being deemed to be an original instrument, and all
such counterparts will together constitute the same agreement.
Executed signature pages to this Agreement may be delivered by
facsimile and such facsimiles will be deemed as sufficient as if
actual signature pages had been delivered.
(d)
Titles and Subtitles
.
The
titles and subtitles used in this Agreement are used for
convenience only and are not to be considered in construing or
interpreting this Agreement.
(e)
Amendment
.
This Agreement may
not be amended except by an instrument in writing signed by each
of the parties hereto.
(f)
Severability
.
If any provision
of this Agreement or the application thereof to any person
(including, the officers and directors of the Company) or
circumstance is determined by a court of competent jurisdiction
to be invalid, void or unenforceable, the remaining provisions
hereof, or the application of such provision to persons or
circumstances other than those as to which it has been held
invalid or unenforceable, will remain in full force and effect
and shall in no way be affected, impaired or invalidated
thereby, so long as the economic or legal substance of the
transactions contemplated hereby is not affected in any manner
materially adverse to any party. Upon such determination, the
parties shall negotiate in good faith in an effort to agree upon
a suitable and equitable substitute provision to effect the
original intent of the parties.
(g)
Parent Acknowledgement
.
Parent
acknowledges that other than as set forth in Section 3
Stockholder has made no representation or warranty, whether
express or implied.
(h)
Entire Agreement
.
This
Agreement constitutes the full and entire understanding and
agreement between the parties with respect to the subject matter
hereof, and any other written or oral agreement relating to the
subject matter hereof existing between the parties is expressly
canceled.
[signature page follows]
C-3
IN WITNESS WHEREOF, Parent and Stockholder have caused this
Agreement to be executed as of the date first written above.
FAIRFAX FINANCIAL HOLDINGS LIMITED
|
|
|
|
By:
|
/s/ John
Varnell
Name: John
Varnell
Title: Vice President and Chief Financial
Officer
|
RICHARD H. SMITH
[Signature Page to Voting Agreement]
C-4
Schedule I
1,002,808 shares of Company Common Stock
C-5
Annex D
SHAW
VOTING AGREEMENT
VOTING
AGREEMENT
THIS VOTING AGREEMENT, dated as of October 28, 2010 (this
Agreement
), between Fairfax Financial
Holdings Limited, a Canadian corporation
(
Parent
), and Jerome M. Shaw (the
Stockholder
), solely in
Stockholders capacity as an owner of common stock, par
value $0.01 per share (
Company Common Stock
)
of the Company.
WHEREAS, on October 28, 2010, Parent, First Mercury
Financial Corporation, a Delaware corporation (the
Company
), and Fairfax Investments III
USA Corp., a Delaware corporation and a wholly owned subsidiary
of Parent (
Merger Sub
), entered into an
Agreement and Plan of Merger (the
Merger
Agreement
; capitalized terms used but not otherwise
defined herein shall have the respective meanings ascribed to
such terms in the Merger Agreement); and
WHEREAS, as a condition to the willingness of Parent and Merger
Sub to enter into the Merger Agreement, Parent and Merger Sub
have required that the Stockholder enter into this Agreement,
and in order to induce Parent and Merger Sub to enter into the
Merger Agreement, the Stockholder has agreed to enter into this
Agreement.
NOW, THEREFORE, in consideration for the mutual covenants
contained herein, and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged,
the parties hereto, intending to be legally bound, agree as
follows:
1.
Agreement to Vote
.
At every
meeting of the stockholders of the Company, and at every
postponement or adjournment thereof, the Stockholder irrevocably
agrees to appear at such meeting and vote (in person or by
proxy) all of the Voting Shares (as hereinafter defined )
entitled to be voted thereat or to cause all of the Voting
Shares to be voted (i) in favor of the approval of the
Merger Agreement and the transactions contemplated thereby;
(ii) against any action, agreement or transaction (other
than the Merger Agreement or the transactions contemplated
thereby) or proposal (including a Takeover Proposal) that would
result in a breach of any material covenant, representation or
warranty or any other material obligation or agreement of the
Company under the Merger Agreement or that would reasonably be
expected to result in any of the conditions to the
Companys obligations under the Merger Agreement not being
fulfilled, and (iii) in favor of any other matter necessary
to the consummation of the transactions contemplated by the
Merger Agreement that is voted upon by the stockholders of the
Company. The Stockholder acknowledges receipt and review of a
copy of the Merger Agreement.
2.
Grant of Proxy
.
In furtherance
of the agreements contained in Section 1 of this Agreement
and as security for such agreements, the Stockholder hereby
irrevocably appoints Parent, the executive officers of Parent,
and each of them individually, as the sole and exclusive
attorneys-in-fact and proxies of the Stockholder, for and in the
name, place and stead of the Stockholder, with full power of
substitution and resubstitution, to vote, grant a consent or
approval in respect of, or execute and deliver a proxy to vote,
if and to the extent the Stockholder fails to comply with the
agreements contained in Section 1 of this Agreement, the
Voting Shares, (i) in favor of the approval of the Merger
Agreement and the transactions contemplated thereby;
(ii) against any Takeover Proposal (regardless of whether
it is a Superior Proposal); (iii) against any action,
agreement or transaction (other than the Merger Agreement or the
transactions contemplated thereby) or proposal (including a
Takeover Proposal) that would reasonably be expected to result
in a breach of any material covenant, representation or warranty
or any other material obligation or agreement of the Company
under the Merger Agreement or that would reasonably be expected
to result in any of the conditions to the Companys
obligations under the Merger Agreement not being fulfilled, and
(iv) in favor of any other matter necessary to the
consummation of the transactions contemplated by the Merger
Agreement and considered voted upon by the stockholders of the
Company. THIS PROXY IS IRREVOCABLE AND COUPLED WITH AN INTEREST.
D-1
3.
Representations and
Warranties
.
Stockholder represents and
warrants that:
(a) (i) Schedule I to this Agreement sets forth
the number of shares of Company Common Stock (
Voting
Shares
), of which Stockholder owns of record or
otherwise has the power to vote, (ii) Stockholder owns the
Voting Shares, free and clear of any claims, liens, charges,
encumbrances, voting agreements and commitments of any kind
(other than this Agreement) and (iii) Stockholder has the
power to vote all the Voting Shares without restriction (other
than as contemplated by this Agreement) and (iv) no proxies
heretofore given in respect of any or all of the Voting Shares
are irrevocable and that any such proxies have heretofore been
revoked. If, after the date of this Agreement, Stockholder
acquires the power to votes shares of Company Common Stock not
set forth in Schedule I, such shares of Company Common
Stock shall be deemed to be Voting Shares for all purposes of
this Agreement.
(b) (i) Stockholder has all necessary power and
authority to enter into this Agreement; (ii) this Agreement
has been duly and validly executed and delivered by Stockholder
and, assuming due authorization, execution and delivery by
Parent, constitutes a legal, valid and binding obligation of
Stockholder, enforceable against Stockholder in accordance with
its terms (subject to applicable bankruptcy, insolvency,
reorganization, moratorium, fraudulent transfer and other
similar laws affecting creditors rights generally and, by
general principles of equity, including good faith and fair
dealing, regardless whether in a proceeding at equity or at
law); and (iii) the failure of the spouse, if any, of such
Stockholder to be a party or signatory to this Agreement shall
not (x) prevent such Stockholder from performing such
Stockholders obligations contemplated hereunder or
(y) prevent this Agreement from constituting the legal,
valid and binding obligation of Stockholder in accordance with
its terms; and
(c) (i) no filing with, and no permit, authorization,
consent or approval of any state, federal or foreign
governmental authority is necessary on the part of Stockholder
for the execution and delivery of this Agreement by Stockholder
and, except as contemplated by the Merger Agreement, the
consummation by Stockholder of the transactions contemplated
hereby and (ii) neither the execution and delivery of this
Agreement by Stockholder nor the consummation by Stockholder of
the transactions contemplated hereby nor compliance by
Stockholder with any of the provisions hereof shall
(x) result in the creation of a lien on any of the Voting
Shares or (y) violate any order, writ, injunction, decree,
statute, rule or regulation applicable to Stockholder or any of
the Voting Shares, except in the case of (x) or
(y) for violations, breaches or defaults that would not in
the aggregate materially impair the ability of Stockholder to
perform Stockholders obligations hereunder.
4.
Remedies
.
Each party
acknowledges and agrees that each party hereto will be
irreparably damaged in the event any of the provisions of this
Agreement are not performed by the parties in accordance with
their specific terms or are otherwise breached. Accordingly, it
is agreed that each party hereto shall be entitled to an
injunction to prevent breaches of this Agreement, and to
specific enforcement of this Agreement and its terms and
provisions in any action instituted in any court of the United
States or any state having subject matter jurisdiction. All
remedies, either under this Agreement or by law or otherwise
afforded to any party, shall be cumulative and not alternative.
5.
Termination
.
This Agreement and
all of the rights and obligations of the parties hereunder
(except Section 9) shall terminate and cease to have
any force or effect, without any further action by any party,
upon the earliest of (i) the termination of the Merger
Agreement in accordance with its terms and (ii) the
Effective Time. Section 9 shall survive the termination of
this Agreement. Nothing in this Section 5 shall relieve any
party of liability for any breach of this Agreement.
6.
Transfer of Shares
.
The
Stockholder agrees that it shall not, directly or indirectly,
(a) sell, assign, transfer (including by operation of law),
lien, pledge, dispose of or otherwise encumber any of the Voting
Shares or otherwise agree to do any of the foregoing,
(b) deposit any Voting Shares into a voting trust or enter
into a voting agreement or arrangement or grant any proxy or
power of attorney with respect thereto that is inconsistent with
this Agreement, (c) enter into any contract, option or
other arrangement or undertaking with respect to the direct or
indirect acquisition or sale, assignment, transfer (including by
operation of law) or other disposition of any Voting Shares or
(d) take any action that would make any representation or
warranty of the Stockholder herein untrue or incorrect in any
material respect or have the effect of preventing or disabling
the
D-2
Stockholder from performing Stockholders obligations
hereunder;
provided
,
however
, Stockholder may
transfer any or all of the Voting shares to any person who shall
have prior to such transfer executed and delivered to Parent a
joinder to this Agreement pursuant to which such person shall be
bound by all of the terms and provisions of this Agreement,
which joinder shall be reasonably acceptable to Parent. Any
transfer in breach of this Section 6 shall be void.
7.
No Solicitation of
Transactions
.
The Stockholder shall
(a) not, directly or indirectly, through any officer,
director, agent or otherwise, engage in any action prohibited by
Section 6.04 of the Merger Agreement, and (b) direct
or cause Stockholders representatives and agents to not to
engage in any action prohibited by Section 6.04 of the
Merger Agreement. The Stockholder shall promptly advise the
Company orally and in writing of (a) any Takeover Proposal
or any request for information with respect to any Takeover
Proposal, the material terms and conditions of such Takeover
Proposal or request and the identity of the person making such
Takeover Proposal or request and (b) any changes in any
such Takeover Proposal or request.
8.
Agreement Solely as
Stockholder
.
The Stockholder is entering into
this Agreement solely in the Stockholders capacity as
record holder or beneficial owner of the Voting Shares and
nothing herein shall limit or affect any actions taken by the
Stockholder or any employee, officer, director, partner or other
affiliate of the Stockholder, in Stockholders capacity as
a director or officer of the Company (or a Company Subsidiary).
9.
Miscellaneous
.
(a)
Successors and Assigns
.
The
terms and conditions of this Agreement shall inure to the
benefit of and be binding upon the respective successors and
assigns of the parties. Nothing in this Agreement, express or
implied, is intended to confer upon any party other than the
parties hereto or their respective successors and assigns any
rights, remedies, obligations, or liabilities under or by reason
of this Agreement, except as expressly provided in this
Agreement.
(b)
Governing Law
.
This Agreement
will be governed by and construed in accordance with the laws of
the State of Delaware applicable to contracts made and to be
performed entirely within such State.
(c)
Counterparts; Facsimile
.
For
the convenience of the parties hereto, this Agreement may be
executed in any number of separate counterparts, each such
counterpart being deemed to be an original instrument, and all
such counterparts will together constitute the same agreement.
Executed signature pages to this Agreement may be delivered by
facsimile and such facsimiles will be deemed as sufficient as if
actual signature pages had been delivered.
(d)
Titles and Subtitles
.
The
titles and subtitles used in this Agreement are used for
convenience only and are not to be considered in construing or
interpreting this Agreement.
(e)
Amendment
.
This Agreement may
not be amended except by an instrument in writing signed by each
of the parties hereto.
(f)
Severability
.
If any provision
of this Agreement or the application thereof to any person
(including, the officers and directors of the Company) or
circumstance is determined by a court of competent jurisdiction
to be invalid, void or unenforceable, the remaining provisions
hereof, or the application of such provision to persons or
circumstances other than those as to which it has been held
invalid or unenforceable, will remain in full force and effect
and shall in no way be affected, impaired or invalidated
thereby, so long as the economic or legal substance of the
transactions contemplated hereby is not affected in any manner
materially adverse to any party. Upon such determination, the
parties shall negotiate in good faith in an effort to agree upon
a suitable and equitable substitute provision to effect the
original intent of the parties.
(g)
Parent Acknowledgement
.
Parent
acknowledges that other than as set forth in Section 3
Stockholder has made no representation or warranty, whether
express or implied.
(h)
Entire Agreement
.
This
Agreement constitutes the full and entire understanding and
agreement between the parties with respect to the subject matter
hereof, and any other written or oral agreement relating to the
subject matter hereof existing between the parties is expressly
canceled.
[signature page follows]
D-3
IN WITNESS WHEREOF, Parent and Stockholder have caused this
Agreement to be executed as of the date first written above.
FAIRFAX FINANCIAL HOLDINGS LIMITED
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|
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By:
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/s/ John
Varnell
Name: John
Varnell
Title: Vice President and Chief Financial
Officer
|
JEROME M. SHAW
[Signature Page to Voting Agreement]
D-4
Schedule I
1,937,522 shares of Company Common Stock
D-5
Annex E
SECTION 262
OF THE GENERAL CORPORATION LAW OF THE STATE OF
DELAWARE
Section 262.
Appraisal rights
(a) Any stockholder of a corporation of this State who
holds shares of stock on the date of the making of a demand
pursuant to subsection (d) of this section with respect to
such shares, who continuously holds such shares through the
effective date of the merger or consolidation, who has otherwise
complied with subsection (d) of this section and who has
neither voted in favor of the merger or consolidation nor
consented thereto in writing pursuant to § 228 of this
title shall be entitled to an appraisal by the Court of Chancery
of the fair value of the stockholders shares of stock
under the circumstances described in subsections (b) and
(c) of this section. As used in this section, the word
stockholder means a holder of record of stock in a
corporation; the words stock and share
mean and include what is ordinarily meant by those words; and
the words depository receipt mean a receipt or other
instrument issued by a depository representing an interest in 1
or more shares, or fractions thereof, solely of stock of a
corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of
any class or series of stock of a constituent corporation in a
merger or consolidation to be effected pursuant to
§ 251 (other than a merger effected pursuant to
§ 251(g) of this title), § 252,
§ 254, § 255, § 256,
§ 257, § 258, § 263 or
§ 264 of this title:
(1) Provided, however, that no appraisal rights under this
section shall be available for the shares of any class or series
of stock, which stock, or depository receipts in respect
thereof, at the record date fixed to determine the stockholders
entitled to receive notice of the meeting of stockholders to act
upon the agreement of merger or consolidation, were either
(i) listed on a national securities exchange or
(ii) held of record by more than 2,000 holders; and further
provided that no appraisal rights shall be available for any
shares of stock of the constituent corporation surviving a
merger if the merger did not require for its approval the vote
of the stockholders of the surviving corporation as provided in
§ 251(f) of this title.
(2) Notwithstanding paragraph (1) of this subsection,
appraisal rights under this section shall be available for the
shares of any class or series of stock of a constituent
corporation if the holders thereof are required by the terms of
an agreement of merger or consolidation pursuant to
§§ 251, 252, 254, 255, 256, 257, 258, 263 and 264
of this title to accept for such stock anything except:
a. Shares of stock of the corporation surviving or
resulting from such merger or consolidation, or depository
receipts in respect thereof;
b. Shares of stock of any other corporation, or depository
receipts in respect thereof, which shares of stock (or
depository receipts in respect thereof) or depository receipts
at the effective date of the merger or consolidation will be
either listed on a national securities exchange or held of
record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional
depository receipts described in the foregoing subparagraphs a.
and b. of this paragraph; or
d. Any combination of the shares of stock, depository
receipts and cash in lieu of fractional shares or fractional
depository receipts described in the foregoing subparagraphs a.,
b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware
corporation party to a merger effected under § 253 or
§ 267 of this title is not owned by the parent
immediately prior to the merger, appraisal rights shall be
available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of
incorporation that appraisal rights under this section shall be
available for the shares of any class or series of its stock as
a result of an amendment to its certificate of incorporation,
any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all
of the assets of the corporation. If the certificate of
incorporation contains such a provision, the procedures of this
section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is
practicable.
E-1
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which
appraisal rights are provided under this section is to be
submitted for approval at a meeting of stockholders, the
corporation, not less than 20 days prior to the meeting,
shall notify each of its stockholders who was such on the record
date for notice of such meeting (or such members who received
notice in accordance with § 255(c) of this title) with
respect to shares for which appraisal rights are available
pursuant to subsection (b) or (c) of this section that
appraisal rights are available for any or all of the shares of
the constituent corporations, and shall include in such notice a
copy of this section and, if 1 of the constituent corporations
is a nonstock corporation, a copy of § 114 of this
title. Each stockholder electing to demand the appraisal of such
stockholders shares shall deliver to the corporation,
before the taking of the vote on the merger or consolidation, a
written demand for appraisal of such stockholders shares.
Such demand will be sufficient if it reasonably informs the
corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of such
stockholders shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder
electing to take such action must do so by a separate written
demand as herein provided. Within 10 days after the
effective date of such merger or consolidation, the surviving or
resulting corporation shall notify each stockholder of each
constituent corporation who has complied with this subsection
and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has
become effective; or
(2) If the merger or consolidation was approved pursuant to
§ 228, § 253 or § 267 of this
title, then either a constituent corporation before the
effective date of the merger or consolidation or the surviving
or resulting corporation within 10 days thereafter shall
notify each of the holders of any class or series of stock of
such constituent corporation who are entitled to appraisal
rights of the approval of the merger or consolidation and that
appraisal rights are available for any or all shares of such
class or series of stock of such constituent corporation, and
shall include in such notice a copy of this section and, if 1 of
the constituent corporations is a nonstick corporation, a copy
of § 114 of this title. Such notice may, and, if given
on or after the effective date of the merger or consolidation,
shall, also notify such stockholders of the effective date of
the merger or consolidation. Any stockholder entitled to
appraisal rights may, within 20 days after the date of
mailing of such notice, demand in writing from the surviving or
resulting corporation the appraisal of such holders
shares. Such demand will be sufficient if it reasonably informs
the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of such
holders shares. If such notice did not notify stockholders
of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second
notice before the effective date of the merger or consolidation
notifying each of the holders of any class or series of stock of
such constituent corporation that are entitled to appraisal
rights of the effective date of the merger or consolidation or
(ii) the surviving or resulting corporation shall send such
a second notice to all such holders on or within 10 days
after such effective date; provided, however, that if such
second notice is sent more than 20 days following the
sending of the first notice, such second notice need only be
sent to each stockholder who is entitled to appraisal rights and
who has demanded appraisal of such holders shares in
accordance with this subsection. An affidavit of the secretary
or assistant secretary or of the transfer agent of the
corporation that is required to give either notice that such
notice has been given shall, in the absence of fraud, be prima
facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice,
each constituent corporation may fix, in advance, a record date
that shall be not more than 10 days prior to the date the
notice is given, provided, that if the notice is given on or
after the effective date of the merger or consolidation, the
record date shall be such effective date. If no record date is
fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next
preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the
merger or consolidation, the surviving or resulting corporation
or any stockholder who has complied with subsections (a)
and (d) of this section hereof and who is otherwise
entitled to appraisal rights, may commence an appraisal
proceeding by filing a petition in the Court of Chancery
demanding a determination of the value of the stock of all such
stockholders. Notwithstanding the foregoing, at any time within
60 days after the effective date of the merger or
consolidation, any stockholder who has not commenced an
appraisal proceeding or joined that proceeding as a named party
shall have the right to withdraw such stockholders demand
for appraisal and to accept the terms offered upon the merger or
consolidation.
E-2
Within 120 days after the effective date of the merger or
consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) of this
section hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting
from the consolidation a statement setting forth the aggregate
number of shares not voted in favor of the merger or
consolidation and with respect to which demands for appraisal
have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the
stockholder within 10 days after such stockholders
written request for such a statement is received by the
surviving or resulting corporation or within 10 days after
expiration of the period for delivery of demands for appraisal
under subsection (d) of this section hereof, whichever is
later. Notwithstanding subsection (a) of this section, a
person who is the beneficial owner of shares of such stock held
either in a voting trust or by a nominee on behalf of such
person may, in such persons own name, file a petition or
request from the corporation the statement described in this
subsection.
(f) Upon the filing of any such petition by a stockholder,
service of a copy thereof shall be made upon the surviving or
resulting corporation, which shall within 20 days after
such service file in the office of the Register in Chancery in
which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded
payment for their shares and with whom agreements as to the
value of their shares have not been reached by the surviving or
resulting corporation. If the petition shall be filed by the
surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in
Chancery, if so ordered by the Court, shall give notice of the
time and place fixed for the hearing of such petition by
registered or certified mail to the surviving or resulting
corporation and to the stockholders shown on the list at the
addresses therein stated. Such notice shall also be given by 1
or more publications at least 1 week before the day of the
hearing, in a newspaper of general circulation published in the
City of Wilmington, Delaware or such publication as the Court
deems advisable. The forms of the notices by mail and by
publication shall be approved by the Court, and the costs
thereof shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall
determine the stockholders who have complied with this section
and who have become entitled to appraisal rights. The Court may
require the stockholders who have demanded an appraisal for
their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery
for notation thereon of the pendency of the appraisal
proceedings; and if any stockholder fails to comply with such
direction, the Court may dismiss the proceedings as to such
stockholder.
(h) After the Court determines the stockholders entitled to
an appraisal, the appraisal proceeding shall be conducted in
accordance with the rules of the Court of Chancery, including
any rules specifically governing appraisal proceedings. Through
such proceeding the Court shall determine the fair value of the
shares exclusive of any element of value arising from the
accomplishment or expectation of the merger or consolidation,
together with interest, if any, to be paid upon the amount
determined to be the fair value. In determining such fair value,
the Court shall take into account all relevant factors. Unless
the Court in its discretion determines otherwise for good cause
shown, interest from the effective date of the merger through
the date of payment of the judgment shall be compounded
quarterly and shall accrue at 5% over the Federal Reserve
discount rate (including any surcharge) as established from time
to time during the period between the effective date of the
merger and the date of payment of the judgment. Upon application
by the surviving or resulting corporation or by any stockholder
entitled to participate in the appraisal proceeding, the Court
may, in its discretion, proceed to trial upon the appraisal
prior to the final determination of the stockholders entitled to
an appraisal. Any stockholder whose name appears on the list
filed by the surviving or resulting corporation pursuant to
subsection (f) of this section and who has submitted such
stockholders certificates of stock to the Register in
Chancery, if such is required, may participate fully in all
proceedings until it is finally determined that such stockholder
is not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of
the shares, together with interest, if any, by the surviving or
resulting corporation to the stockholders entitled thereto.
Payment shall be so made to each such stockholder, in the case
of holders of uncertificated stock forthwith, and the case of
holders of shares represented by certificates upon the surrender
to the corporation of the certificates representing such stock.
The Courts decree may be enforced as other decrees in the
Court of Chancery may be enforced, whether such surviving or
resulting corporation be a corporation of this State or of any
state.
E-3
(j) The costs of the proceeding may be determined by the
Court and taxed upon the parties as the Court deems equitable in
the circumstances. Upon application of a stockholder, the Court
may order all or a portion of the expenses incurred by any
stockholder in connection with the appraisal proceeding,
including, without limitation, reasonable attorneys fees
and the fees and expenses of experts, to be charged pro rata
against the value of all the shares entitled to an appraisal.
(k) From and after the effective date of the merger or
consolidation, no stockholder who has demanded appraisal rights
as provided in subsection (d) of this section shall be
entitled to vote such stock for any purpose or to receive
payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of
record at a date which is prior to the effective date of the
merger or consolidation); provided, however, that if no petition
for an appraisal shall be filed within the time provided in
subsection (e) of this section, or if such stockholder
shall deliver to the surviving or resulting corporation a
written withdrawal of such stockholders demand for an
appraisal and an acceptance of the merger or consolidation,
either within 60 days after the effective date of the
merger or consolidation as provided in subsection (e) of
this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal
proceeding in the Court of Chancery shall be dismissed as to any
stockholder without the approval of the Court, and such approval
may be conditioned upon such terms as the Court deems just;
provided, however that this provision shall not affect the right
of any stockholder who has not commenced an appraisal proceeding
or joined that proceeding as a named party to withdraw such
stockholders demand for appraisal and to accept the terms
offered upon the merger or consolidation within 60 days
after the effective date of the merger or consolidation, as set
forth in subsection (e) of this section.
(l) The shares of the surviving or resulting corporation to
which the shares of such objecting stockholders would have been
converted had they assented to the merger or consolidation shall
have the status of authorized and unissued shares of the
surviving or resulting corporation.
(8 Del. C. 1953, § 262; 56 Del. Laws, c. 50; 56
Del. Laws, c. 186, § 24; 57 Del. Laws, c. 148,
§§ 27-29;
59 Del. Laws, c. 106, § 12; 60 Del. Laws, c. 371,
§§ 3-12; 63 Del. Laws, c. 25, § 14; 63
Del. Laws, c. 152, §§ 1, 2; 64 Del. Laws, c. 112,
§§ 46-54;
66 Del. Laws, c. 136,
§§ 30-32;
66 Del. Laws, c. 352, § 9; 67 Del. Laws, c. 376,
§§ 19, 20; 68 Del. Laws, c. 337,
§§ 3, 4; 69 Del. Laws, c. 61, § 10; 69
Del. Laws, c. 262, §§ 1-9; 70 Del. Laws, c. 79,
§ 16; 70 Del. Laws, c. 186, § 1; 70 Del.
Laws, c. 299, §§ 2, 3; 70 Del. Laws, c. 349,
§ 22; 71 Del. Laws, c. 120, § 15; 71 Del.
Laws, c. 339,
§§ 49-52;
73 Del. Laws, c. 82, § 21; 76 Del. Laws, c. 145,
§§ 11-16;
77 Del. Laws, c. 14, §§ 12, 13; 77 Del. Laws, c.
253,
§§ 47-50;
77 Del. Laws, c. 290, §§ 16, 17.)
E-4
P R O X Y
FIRST MERCURY FINANCIAL CORPORATION
This proxy is solicited on behalf of the Board of Directors for the Special Meeting on [, 2011].
The undersigned hereby makes, constitutes and appoints Richard H. Smith and John A. Marazza, and
each of them, proxies for the undersigned, with full power of substitution, to vote on behalf of
the undersigned in accordance with the instructions on the reverse side of this card all shares of
common stock of First Mercury Financial Corporation (the Company) that the undersigned is
entitled to vote at the Special Meeting of Stockholders of the Company, to be held at [], on [],
2011, at [] (Local Time), or any adjournments thereof.
This Proxy, when properly executed, will be voted in the manner the undersigned stockholder directs
on the reverse side of this card. If you sign and return this Proxy but do not specify otherwise,
this Proxy will be voted FOR each of the proposals listed on the reverse side of this card.
Therefore, to direct a vote FOR each of the proposals, you need not mark any box. Simply sign, date
and return this Proxy. Each share of common stock has one vote.
If this Proxy is not returned, or if you do not vote [via the telephone or the Internet], then the
shares of the Company common stock you own will not be voted.
Please be sure to sign on the reverse side of this card exactly as your name appears above the
signature line.
(continued and to be signed on other side)
PLEASE SEE REVERSE SIDE FOR INFORMATION ON VOTING YOUR PROXY BY TELEPHONE OR INTERNET.
IF YOU HAVE NOT VOTED BY TELEPHONE OR THE INTERNET, PLEASE VOTE, DATE AND SIGN
THIS PROXY ON THE OTHER SIDE AND RETURN PROMPTLY IN THE ENCLOSED
ENVELOPE.
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Electronic Voting Instructions
You can vote by Internet or telephone!
Available 24 hours a day, 7 days a week!
Instead of mailing your proxy, you may choose one of
the two voting methods outlined below to vote your
proxy.
VALIDATION DETAILS ARE LOCATED BELOW IN THE TITLE BAR.
Proxies submitted by the Internet or telephone must be
received by
Vote by Internet
Log on to the Internet and go to
www.investorvote.com
Follow the steps outlined on the secured
website.
Vote by telephone
Call toll free
1-800-
within the United States,
Canada & Puerto Rico any
time on a touch tone
telephone. There is NO
CHARGE to you for the
call.
Follow the instructions
provided by the recorded
message.
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ý
Please mark your vote as in this sample.
The Board of Directors recommends a vote FOR each of the proposals below:
1. To consider For Against Abstain
and vote on a
proposal to adopt
the Agreement and
Plan of Merger,
dated as of October
28, 2010, as it may
be amended from
time to time, among
Fairfax Financial
Holdings Limited,
Fairfax Investments
III USA Corp. and
First Mercury
Financial
Corporation.
2. To For Against Abstain
consider and vote
on 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 Agreement
and Plan of Merger
referenced in
Proposal 1 above.
3. To For Against Abstain
transact any other
business that may
properly come
before the special
meeting, or any
adjournment or
postponement of the
special meeting, by
or at the direction
of the board of
directors of the
Company.
[address]
Indicate changes below:
Address Change? Name Change?
Check appropriate box
Date:
Signature(s)
PLEASE SIGN PERSONALLY AS NAME APPEARS ON THIS CARD. When signing as attorney,
executor, administrator, personal representative, trustee or guardian, give full title
as such. If name of two or more persons, all should sign.
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