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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) February 10,
1997
OLD GUARD GROUP, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 0-21611 23-2852984
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Ident. No.)
2929 Lititz Pike, Lancaster, Pennsylvania 17601
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (717) 569-5361
N/A
(Former name or former address, if changed since last report.)
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Item 5. Other Events.
On February 11, 1997, Old Guard Group, Inc. (the "Company")
and Old Guard Mutual Insurance Company, Old Guard Mutual
Insurance Company and Goschenhoppen-Home Mutual Insurance Company
(the "Insurance Companies") completed the mutual to stock
conversion contemplated by their Joint Plan of Conversion (the
"Plan"). The Plan was adopted by the Company and the Insurance
Companies on May 31, 1996, amended on July 19, 1996 and
January 10, 1997, and approved by the Insurance Department of the
Commonwealth of Pennsylvania on December 27, 1996. At special
meetings of policyholders held on February 11, 1997, the Plan was
approved by the Insurance Companies' policyholders.
Pursuant to the Plan, among other things: (i) the Insurance
Companies converted from mutual to stock form, (ii) the Company
simultaneously purchased all of the authorized capital stock of
each Insurance Company, and (iii) the Company sold approximately
3,955,000 shares of common stock at $10 per share to
policyholders and an Employee Stock Ownership Plan. The
conversion of the Insurance Companies to stock form, the issuance
of capital stock of the Insurance Companies to the Company and
the offer and sale of the common stock of the Company pursuant to
the Plan are collectively referred to herein as the "Conversion."
The Conversion is the first conversion of a financially sound
mutual insurance company to stock form under Pennsylvania's new
Mutual to Stock Conversion Act.
Prior to completion of the Conversion, on November 22, 1996,
the Company and the Insurance Companies received an unsolicited
request from Donegal Group, Inc., a holding company of property
and casualty insurance companies located, like the Company and
the Insurance Companies, in Lancaster County, Pennsylvania
("Donegal") to merge with Donegal. Donegal is the largest local
competitor of the Insurance Companies. Donegal proposed that the
Company and the Insurance Companies amend the Plan to provide for
the merger of the Company into Donegal in exchange for an
aggregate payment of $27.5 million to all policyholders of the
Insurance Companies, or less than $200 per policyholder, assuming
equal distribution to all policyholders. Because the Donegal
proposal did not provide additional capital to the Insurance
Companies and was inconsistent with their strategic plan of
continued independence, the Boards of Directors of the Company
and the Insurance Companies determined that the request was
contrary to the best interests of the Insurance Companies and
declined to consider the request. The Department of Insurance of
the Commonwealth of Pennsylvania subsequently denied Donegal's
application to acquire Old Guard.
On January 7, 1997, the President of Donegal, Donald
Nikolaus, purportedly in his individual capacity as a
policyholder of Old Guard Mutual Insurance Company, and through
the same law firm that represents Donegal, filed in the
Commonwealth Court of Pennsylvania a Petition for Review of the
approval of the Plan by the Insurance Department of the
Commonwealth of Pennsylvania. The suit was filed against the
Insurance Department of the Commonwealth of Pennsylvania, the
Honorable Linda Kaiser, the Pennsylvania Insurance Commissioner,
the Company and the Insurance Companies. Mr. Nikolaus contends
that the Pennsylvania Insurance Company Mutual to Stock
Conversion Act (the "Act"), which was passed overwhelmingly by
the Pennsylvania General Assembly and which permits the
Conversion, is constitutionally defective for procedural reasons
and because the Plan does not provide for compensation to
policyholders. Mr. Nikolaus asked the Commonwealth Court to
(1) declare the Act unconstitutional, (2) enjoin the holding of
the special meetings of policyholders to vote upon the Plan (the
"Special Meetings"), and (3) direct the Insurance Department of
the Commonwealth of Pennsylvania to rescind its approval of the
Plan.
On February 6, 1997, the Commonwealth Court denied
Mr. Nikolaus' request to enjoin the holding of the Special
Meetings and the litigation is expected to proceed. Final
adjudication of the case by the Commonwealth Court could take a
year or more and the parties then could appeal any decision to
the Pennsylvania Supreme Court and possibly to the United States
Supreme Court. Such appeals, if made, could take an additional
two to four years. The Insurance Department of the Commonwealth
of Pennsylvania, the Honorable Linda Kaiser, the Company and the
Insurance Companies, believing that the Act is constitutional,
intend to defend this action vigorously. Moreover, the Company
and the Insurance Companies believe that the Company and the
Insurance Companies will ultimately prevail on the merits of the
case. This belief results principally from (i) the existence of
court decisions which have consistently upheld the
constitutionality of a similar federal statutory provision
providing for the conversion to stock form of mutual savings and
loan associations pursuant to which over 1,000 mutual to stock
conversions have been completed, and (ii) a court decision
upholding the constitutionality of a similar Pennsylvania
statutory provision providing for the conversion to stock form of
a Pennsylvania mutual savings bank. However, no assurance can be
given that the Company and the Insurance Companies will
ultimately prevail on the merits.
On February 10, 1997, the Company, the Insurance Companies
and each of their respective directors were served with an eleven
count combination class action and derivative lawsuit, filed in
the United States District Court for the Eastern District of
Pennsylvania against the Company, the Insurance Companies and
their directors (the "Class Action"). Two of the named
plaintiffs hold a policy in Old Guard Mutual and the other two
hold a policy in Goschenhoppen-Home. By filing the class action
portion of the lawsuit, these four policyholders purport to
represent all 141,000 policyholders of the Insurance Companies.
Seven of the eleven counts are similar to the claims by
Mr. Nikolaus challenging the constitutionality of the Act,
although certain counts advance a different theory alleging
unconstitutional impairment of contract. The remainder of the
class action claims assert theories regarding purported
violations of the Act, principally relating to the description of
the Plan in the proxy statement approved by the Insurance
Department of the Commonwealth of Pennsylvania and mailed to
policyholders. The derivative claim was brought against the
directors of Insurance Companies, purportedly on behalf of the
Insurance Companies, alleging breach of the fiduciary duty of
care in approving and implementing the Plan and the fiduciary
duty of loyalty, presumably in approving the stock-based
compensation plans which are contemplated by the Plan. The
stock-based compensation plans are expressly permitted by the Act
and were approved by the Insurance Department of the Commonwealth
of Pennsylvania. The suit seeks such compensatory damages as may
be allowed by law, a declaration that the Plan violates the Act
and the United States and Pennsylvania Constitutions and the
rights of the plaintiffs thereunder, and such other relief as the
court deems appropriate. The Company, the Insurance Companies
and their directors believe they have meritorious defenses to the
action and intend to defend this action vigorously. However, no
assurance can be given that the Company, the Insurance Companies
and the directors will ultimately prevail on the merits. In
addition, there can be no assurance that additional suits arising
out of, or related to, the Conversion will not be filed.
If the plaintiffs prevail in the litigation described above
or in similar additional litigation, the remedy a court would
grant or the amount of damages it might award is uncertain. A
court has broad discretion to fashion a fair and equitable remedy
in light of the nature of the constitutional or other violation,
the relative harm to the parties, and the public interest. In
some cases, relief is applied on a prospective basis only; in
other cases, relief is applied on a retroactive basis. No
prediction can be made concerning the remedy a court would
fashion or the amount of damages it might award. However, two of
the more far-reaching possibilities include:
- A requirement that the Company pay all purchasers of
common stock, either on a mandatory basis or at the
election of the purchaser, as damages or otherwise,
(i) the Purchase Price paid per share of common stock
acquired in the Conversion, plus interest, (ii) the
market value per share of common stock acquired, or
(iii) the greater of (i) or (ii), less, in each case,
any proceeds received by such purchaser from the sale
of the common stock. No assurance can be given that
the Company would have sufficient funds at that time to
honor any such obligation; or
- The Company could be required to pay or distribute to
all or some policyholders of the Insurance Companies,
either on a mandatory basis or at the election of the
policyholders, an amount equal to the surplus of the
Insurance Companies as of the date of the Conversion
(approximately $38 million), as damages or otherwise.
Such distribution could be required to be made in cash,
common stock or other debt or equity securities. No
assurance can be given that the Company would have
sufficient funds, or the capacity to borrow sufficient
funds, at that time to honor any such obligation. Any
required distribution of common stock or other equity
securities would materially dilute the interests of
existing holders of the common stock.
In the event that the Company could not honor its obligations
under any remedy imposed by a court, the Company could be forced
to seek the protection of the bankruptcy laws and the Insurance
Companies could be deemed insolvent and seized by the Department
of Insurance. In addition, the existence of litigation could
have a material adverse impact on the market price of the common
stock during the pendency of the litigation and an adverse
determination of such litigation would have such a material
adverse effect.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned hereunto duly authorized.
OLD GUARD GROUP, INC.
Dated: February 13, 1997
By /s/ David E. Hosler
David E. Hosler,
Chairman, President and Chief
Executive Officer
