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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
RULE 13E-3/A TRANSACTION STATEMENT
(Pursuant to Section 13(e) of the Securities Exchange Act of 1934)
------------------------
Capital Re Corporation
(Name of the Issuer)
Capital Re Corporation
ACE Limited
(Name of Person(s) Filing Statement)
Common Stock
par value $0.01 per share
(Title of Class of Securities)
140432 105
(CUSIP Number of Class of Securities)
Alan S. Roseman Peter N. Mear
Capital Re Corporation General Counsel & Secretary
1325 Avenue of the Americas The ACE Building
New York, New York 10019 30 Woodbourne Avenue
(212) 974-0100 Hamilton HM 08, Bermuda
(441) 295-5200
(Name, Address and Telephone Number of Person Authorized to
Receive Notices and Communications on Behalf of Persons Filing Statement)
with copies to:
Michael J. Silver Edward S. Best
Hogan & Hartson L.L.P. Mayer, Brown & Platt
111 South Calvert Street 190 South LaSalle Street
Baltimore, Maryland 21202 Chicago, Illinois 60603
(410) 659-2700 (312) 782-0600
This statement is filed in connection with (check the appropriate box):
a. [x] The filing of solicitation materials or an information statement
subject to Regulation 14A, Regulation 14C or Rule 13e-3(c) under the
Securities Act of 1934.
b. [X] The filing of a registration statement under the Securities Act of
1933.
c. [_] A tender offer.
d. [_] None of the above.
Check the following box if the soliciting materials or information statement
referred to in checking box (a) are preliminary copies: [X]
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INTRODUCTION
This Amendment No. 1 to Schedule 13E-3 Transaction Statement (the
"Statement") is being filed by Capital Re Corporation, a Delaware corporation
(the "Company") and ACE Limited ("Purchaser"), a Cayman Islands company whose
stock is traded on the NYSE. Purchaser holds approximately 15.9% of the
outstanding shares of common stock, par value $0.01 per share (the "Shares"), of
the Company. This Statement relates to a proposed merger (the "Merger") in which
the Company would merge with a wholly owned subsidiary of Purchaser and the
Shares, other than those Shares held by Purchaser, would be converted into 0.65
of a Purchaser ordinary share plus a cash payment equal to the difference
between the market value of 0.65 of a Purchaser ordinary share and $14.00. In no
event will the cash payment be less than $1.30, or more than $4.68, per Share.
This Amendment No. 1 amends and restates the Schedule 13E-3 Transaction
Statement filed by Purchaser on November 12, 1999.
The following cross reference sheet is being supplied pursuant to General
Instruction F to the Statement and shows the location in the Proxy
Statement/Prospectus contained in Amendment No. 1 to the Registration Statement
on Form S-4 (the "Proxy Statement") filed by the Purchaser with the Securities
and Exchange Commission on November 29, 1999, of the information required to be
included in response to the items of this Statement. The information set forth
in the Proxy Statement, which is attached hereto as Exhibit (d)(1), is hereby
expressly incorporated herein by reference and the responses to each item are
qualified in their entirety by the applicable provisions of the Proxy
Statement.
<TABLE>
<CAPTION>
CROSS REFERENCE SHEET
Item in Schedule 13E-3 Location in Proxy Statement
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<S> <C>
Item 1(a)................................... "The Parties" in the Summary of
the Proxy Statement and "The
Special Meeting -- Record Date;
Quorum; Vote Required"
Item 1(b)................................... "The Special Meeting -- Record
Date; Quorum; Vote Required"
Item 1(c)................................... "Comparative Market Price and
Dividend Information" in the
Summary of the Proxy Statement
Item 1(d)................................... "Dividends" in the Summary of
the Proxy Statement
Item 1(e)................................... *
Item 1(f)................................... "Special Factors -- Background
of the Merger"
Item 2(a)-(g)............................... *
Item 3(a)-(b)............................... "Special Factors -- Background
of the Merger"
Item 4(a)................................... "Special Factors" and "The
Merger Agreement"
Item 4(b)................................... "The Stockholder Support
Agreements"
Item 5(a)-(e)............................... "Special Factors -- Purpose,
Alternatives, Reasons
and Effects of the Merger" and
"Special Factors -- Plans or
Proposals"
Item 5(f)-(g)............................... "Special Factors -- Delisting
and Deregistration of Capital
Re Common Stock; Cessation of
Capital Re Periodic Reporting"
Item 6(a)-(d)............................... "Special Factors -- The Merger,"
"Special Factors -- Source and
Amount of Funds" and "Special
Factors -- Fees and Expenses"
Item 7(a)................................... "Special Factors -- Purpose,
Alternatives, Reasons and
Effects of the Merger,"
"Special Factors -- Capital Re's
Reasons for the Merger;
Recommendation of the Board of
Directors of Capital Re" and
"Special Factors -- Purpose,
Alternatives, Reasons and
Effects of the Merger"
Item 7(b)................................... "Special Factors -- Background
of the Merger"
Item 7(c)................................... "Special Factors -- Accounting
Treatment," "Special Factors--
Background of the Merger,"
"Special Factors --Material
United States Federal Income Tax
Consequences" and "Special
Factors -- Purpose,
Alternatives, Reasons and
Effects of the Merger"
Item 7(d)................................... "Special Factors"
Item 8(a)-(b)............................... "Special Factors -- Position of
ACE Regarding Fairness of the
Merger," "Special Factors --
Capital Re's Reasons for the
Merger; Recommendation of the
Board of Directors of Capital
Re" and "Special Factors --
Background of the Merger"
Item 8(c)................................... "The Special Meeting -- Record
Date; Quorum; Vote Required"
Item 8(d)-(e)............................... "Special Factors -- Capital Re's
Reasons for the Merger; Recom-
mendation of the Board of
Directors of Capital Re"
Item 8(f)................................... "Special Factors -- Background
of the Merger"
Item 9(a)-(c)............................... "Special Factors -- Capital Re's
Reasons for the Merger;
Recommendation of the Board of
Directors of Capital Re" and
"Special Factors --
Presentation of the Financial
Advisor to ACE"
Item 10(a).................................. "Information Regarding
Directors, Executive Officers
and Five Percent Stockholders"
and "The Stockholder Support
Agreements"
Item 10(b).................................. *
Item 11..................................... "The Merger Agreement," "The
Capital Support Agreement," "The
Stock Option Agreement" and "The
Stockholder Support Agreements"
Item 12(a)-(b).............................. "Special Factors -- Capital Re's
Reasons for the Merger;
Recommendation of the Board of
Directors of Capital Re,"
"The Special Meeting -- Record
Date; Quorum; Vote Required" and
"The Stockholder Support
Agreements"
Item 13(a).................................. "Special Factors -- Dissenters'
Rights" and "Comparison of
Stockholders' Rights and
Description of the Share Capital
of ACE Following the Merger --
Appraisal Rights"
Item 13(b)-(c).............................. *
Item 14(a)-(b).............................. "Unaudited ProForma Condensed
Consolidated Financial
Information of ACE," "Unaudited
ProForma Condensed Consolidated
Balance Sheet," "ProForma
Balance Sheet Footnotes,"
"Unaudited ProForma Condensed
Consolidated Statements of
Operations," "ProForma Footnotes
for the Year Ended September 30,
1998" and "Where You Can Find
More Information"
Item 15(a)-(b).............................. "Special Factors -- Background
of the Merger," "The Merger --
Capital Re's Reasons for the
Merger" and "Special Factors --
Recommendation of the Board of
Directors of Capital Re"
Item 16..................................... *
Item 17(a)-(e).............................. Separately included herewith
Item 17(f).................................. *
</TABLE>
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* This information is provided only in this Schedule 13E-3.
1
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Item 1. Issuer and Class of Security Subject to the Transaction.
(a) The information set forth in "The Parties" in the Summary of the
Proxy Statement and in "The Special Meeting -- Record Date; Quorum; Vote
Required" of the Proxy Statement is incorporated herein by reference.
(b) The information set forth in "The Special Meeting -- Record Date;
Quorum; Vote Required" of the Proxy Statement is incorporated herein by
reference.
(c) The information set forth in "Comparative Market Price and Dividend
Information" in the Summary of the Proxy Statement is incorporated herein by
reference.
(d) The information set forth in "Dividends" in the Summary of the
Proxy Statement is incorporated herein by reference.
(e) In a registered underwritten public offering on April 14, 1998,
Purchaser sold 16.5 million of its ordinary shares for $36.75 per share for net
proceeds of approximately $606 million.
(f) The information set forth in "Special Factors -- Background of
the Merger" of the Proxy Statement is incorporated herein by reference.
Item 2. Identity and Background.
(a)-(g) This Schedule 13E-3 is filed by the Company and Purchaser.
With respect to the Company, (i) the information set forth in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1998 under the
heading "Business of Capital Re - Executive Officers" is hereby incorporated by
reference pursuant to General Instruction D of Schedule 13E-3, (ii) the
information set forth in the Company's 1999 Definitive Proxy Statement is hereby
incorporated by reference pursuant to General Instruction D of Schedule 13E-3,
(iii) the information set forth in the Proxy Statement under the heading
"Information Regarding Directors, Executive Officers and Five Percent
Stockholders" is incorporated herein by reference, and (iv) with respect to
Messrs. Frederico and Kramer, the information pertaining to such individuals set
forth in Schedule I to the Proxy Statement is incorporated herein by reference.
With respect to Purchaser, the information set forth in Schedule I to the
Proxy Statement is incorporated herein by reference.
To the best of the undersigneds' knowledge, none of the persons with
respect to whom information is provided in response to this item was during the
last five years (i) convicted in a criminal proceeding (excluding traffic
violations or similar misdemeanors) or (ii) a party to a civil proceeding of a
judicial or administrative body of competent jurisdiction and as a result of
such proceeding was or is subject to a judgment, decree or final order enjoining
further violations of, prohibiting activities subject to, federal or state
securities laws or finding any violation of such laws.
Item 3. Past Contacts, Transactions or Negotiations.
(a)-(b) The information set forth in "Special Factors -- Background of
the Merger" of the Proxy Statement is incorporated herein by reference.
Item 4. Terms of the Transaction.
(a) The information set forth in "Special Factors" and "The Merger
Agreement" of the Proxy Statement is incorporated herein by reference.
(b) The information set forth in "The Stockholder Support Agreements"
of the Proxy Statement is incorporated herein by reference.
Item 5. Plans or Proposals of the Issuer or Affiliate.
(a)-(e) The information set forth in "Special Factors -- ACE's
Reasons for the Merger" and "Special Factors -- Plans or Proposals" of the
Proxy Statement is incorporated herein by reference.
(f)-(g) The information set forth in "Special Factors -- Delisting and
Deregistration of Capital Re Common Stock; Cessation of Capital Re Periodic
Reporting" of the Proxy Statement is incorporated herein by reference.
Item 6. Source and Amounts of Funds or Other Consideration.
(a)-(d) The information set forth in "Special Factors -- The Merger,"
"Special Factors -- Source and Amount of Funds" and "Special Factors --
Fees and Expenses" of the Proxy Statement is incorporated herein by reference.
2
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Item 7. Purpose(s), Alternatives, Reasons and Effects.
(a) The information set forth in "Special Factors -- ACE's Reasons for
the Merger," "Special Factors -- Capital Re's Reasons for the Merger;
Recommendation of the Board of Directors of Capital Re" and "Special Factors
- -- Purpose, Alternatives, Reasons and Effects of the Merger" of the Proxy
Statement is incorporated herein by reference.
(b) The information set forth in "Special Factors -- Background of
the Merger" of the Proxy Statement is incorporated herein by reference.
(c) The information set forth in "Special Factors -- Accounting
Treatment," "Special Factors -- Background of the Merger," "Special Factors
- -- Material United States Federal Income Tax Consequences" and "Special Factors
- -- Purpose, Alternatives, Reasons and Effects of the Merger" of the Proxy
Statement is incorporated herein by reference.
(d) The information set forth in "Special Factors" of the Proxy
Statement is incorporated herein by reference.
Item 8. Fairness of the Transaction.
(a)-(b) The information set forth in "Special Factors -- Position of
ACE Regarding Fairness of the Merger," "Special Factors -- Capital Re's
Reasons for the Merger; Recommendation of the Board of Directors of Capital Re"
and "Special Factors -- Background of the Merger" of the Proxy Statement is
incorporated herein by reference.
(c) The information set forth in "The Special Meeting -- Record Date;
Quorum; Vote Required" of the Proxy Statement is incorporated herein by
reference.
(d)-(e) The information set forth in "Special Factors -- Capital Re's
Reasons for the Merger; Recommendation of the Board of Directors of Capital Re"
of the Proxy Statement is incorporated herein by reference.
(f) The information set forth in "Special Factors -- Background of
the Merger" of the Proxy Statement is incorporated herein by reference.
Item 9. Reports, Opinions, Appraisals and Certain Negotiations.
(a)-(c) The information set forth in "Special Factors -- Capital Re's
Reasons for the Merger; Recommendation of the Board of Directors of Capital Re"
and "Special Factors -- Presentation of the Financial Advisor to ACE" of the
Proxy Statement is incorporated herein by reference.
Item 10. Interest in Securities of the Issuer.
(a) The information set forth in "Information Regarding Directors,
Executive Officers and Five Percent Stockholders" and "The Stockholder Support
Agreements" of the Proxy Statement is incorporated herein by reference.
(b) None.
Item 11. Contracts, Arrangements or Understandings with Respect to the
Issuer's Securities.
The information set forth in "The Merger Agreement," "The Capital Support
Agreement," "The Stock Option Agreement" and "The Stockholder Support
Agreements" of the Proxy Statement is incorporated herein by reference.
Item 12. Present Intention and Recommendation of Certain Persons with Regard
to the Transaction.
3
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(a)-(b) The information set forth in "Special Factors -- Capital Re's
Reasons for the Merger; Recommendation of the Board of Directors of Capital Re",
"The Special Meeting -- Record Date; Quorum; Vote Required" and "The
Stockholder Support Agreements" of the Proxy Statement is incorporated herein by
reference.
Item 13. Other Provisions of the Transaction.
(a) The information set forth in "Special Factors -- Dissenters'
Rights" and "Comparison of Stockholders' Rights and Description of the Share
Capital of ACE Following the Merger -- Appraisal Rights" of the Proxy Statement
is incorporated herein by reference.
(b)-(c) Not applicable.
Item 14. Financial Information.
(a)-(b) The information set forth in "Unaudited ProForma Condensed
Consolidated Financial Information of ACE," "Unaudited ProForma Condensed
Consolidated Balance Sheet," "ProForma Balance Sheet Footnotes," "Unaudited
ProForma Condensed Consolidated Statements of Operations," and "ProForma
Footnotes for the Year Ended September 30, 1998" of the Proxy Statement, "Ratio
of Earnings to Fixed Charges and Preferred Share Dividends of ACE" of the
Purchaser's Prospectus dated August 17, 1999, the Company's Annual Report on
Form 10-K for the year ended December 31, 1998, and the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1999, is incorporated herein
by reference.
Item 15. Persons and Assets Employed, Retained or Utilized.
(a) The information set forth in the Proxy Statement under "Special
Factors--Background of the Merger," "The Merger--Capital Re's Reasons for the
Merger," and "Special Factors--Recommendation of the Board of Directors of
Capital Re" is incorporated herein by reference.
(b) The information set forth in the Proxy Statement under "Special
Factors--Opinion of Capital Re's Financial Advisor" is incorporated herein by
reference. The Bank of New York has been retained as the paying agent in
connection with the Merger and will be paid reasonable and customary
compensation for its services in connection with the Merger, plus reimbursement
for out-of-pocket expenses and indemnification against certain liabilities and
expenses in connection therewith, including certain liabilities under the
Federal securities laws.
Item 16. Additional Information.
Additional information concerning the Merger is set forth in the Proxy
Statement and the entirety of the Proxy Statement is incorporated herein by
reference.
Item 17. Material to be Filed as Exhibits.
(a)-(e) The Exhibit Index attached to this Transaction Statement is
incorporated herein by reference.
(f) Not applicable.
4
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SIGNATURES
After due inquiry and to the best of my knowledge and belief, I certify
that the information set forth in this Statement is true, complete and correct.
Dated: November 29, 1999. CAPITAL RE CORPORATION
By: /s/ Alan S. Roseman
Name: Alan S. Roseman
Title: Executive Vice President,
General Counsel and Secretary
ACE LIMITED
By /s/ Peter Mear
Name: Peter Mear
Title: General Counsel and Secretary
5
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequentially
Exhibit No. Description Numbered Page
- ----------- ----------- -------------
<C> <S> <C>
(a) Not Applicable
(b)(1) Opinion of Goldman, Sachs & Co. (attached
as Appendix C to the Proxy Statement/Prospectus)
(b)(2) Written Presentation Materials of Credit Suisse
First Boston Corporation*
(c)(1) Stock Option Agreement (attached as Appendix B to the
Proxy Statement/Prospectus)
(c)(2) Capital Support Agreement
(c)(3) Agreement and Plan of Merger, as amended (attached as Appendix A
to the Proxy Statement/Prospectus)
(c)(4) Stockholder Support Agreements
(d)(1) Proxy Statement/Prospectus
(d)(2) Capital Re Corporation Annual Report on Form 10-K for the fiscal
year ended December 31, 1999 is incorporated herein by reference
(d)(3) Capital Re Corporation Definitive Proxy Statement on Schedule 14A
filed on April 26, 1999 is incorporated herein by reference
(e) Appraisal Rights under Delaware General Corporation Law (attached
as Appendix D to the Proxy Statement/Prospectus)
</TABLE>
* Previously filed
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EXHIBIT (c)(2)
STAND-BY CAPITAL COMMITMENT AGREEMENT
This Stand-By Capital Commitment Agreement (this "Agreement") is made as of
October 26, 1999 (the "Effective Date"), by and between Capital Re Corporation,
a Delaware corporation (the "Borrower"), and ACE Limited, a company incorporated
with limited liability under the Cayman Islands Companies Law (the "Lender").
Certain capitalized terms used in this Agreement are defined in Appendix A
hereto.
The parties hereto agree as follows:
1. Commitment. The Lender agrees, upon the terms and subject to the
condition set forth herein, to provide, or to cause one of its Subsidiaries to
provide, loans to the Borrower in one or more installments (each, a "Loan") in
an aggregate amount not to exceed U.S.$50,000,000 (the "Commitment") at any time
and from time to time during the period from the Effective Date to the
Termination Date (as defined below). Amounts borrowed as Loans may be repaid
and reborrowed by the Borrower in accordance with the provisions hereof.
2. The Loans. The Loans shall be made upon the Borrower's written notice
delivered to the Lender at least five business days prior to the requested
borrowing date, specifying the amount of the Loan and the requested borrowing
date, which shall be a business day (in the United States and Bermuda). The
obligation of the Lender to make Loans hereunder is subject to the condition
that no Event of Default shall be continuing at the time of the making of such
Loan. Each Loan made hereunder shall be made in United States Dollars and same
day funds and shall be paid to such account or accounts as may be directed in
writing by the Borrower. The Loans made by the Lender shall be evidenced by one
or more loan accounts or records maintained by the Lender in the ordinary course
of business. Any failure so to record or any error in doing so shall not,
however, limit or otherwise affect the obligation of the Borrower hereunder to
pay any amount owing with respect to the Loans.
3. Interest. Interest shall accrue on the outstanding principal amount of
the Loans made hereunder from the applicable borrowing date until paid at a rate
per annum equal to the Applicable Rate and shall be payable quarterly in arrears
on each March 31, June 30, September 30 and December 31 and upon any repayment.
All accrued and unpaid interest shall be due and payable on the Termination
Date. The Borrower additionally agrees to pay interest after the date the Loans
become due (whether at stated maturity, by acceleration or otherwise), on the
principal balance of the Loans outstanding from time to time and, to the extent
not prohibited by law, on accrued interest thereon that is not paid when due, at
a rate per annum equal to all times to the sum of the Applicable Rate plus 2.0%
per annum. Interest accruing after the Loans made hereunder become due shall be
due and payable on demand.
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4. Payment; Event of Default. The Borrower may, at any time or from time
to time, prepay Loans in whole or in part without premium or penalty. Both
principal and interest are payable to such account or accounts as the Lender may
direct, in United States Dollars and same day funds, free and clear or, and
without deduction for, any and all taxes, levies, imposts, deductions, charges,
withholdings and liabilities with respect thereto. If any of the following
events (each, an "Event of Default") shall occur: (a) the failure of the
Borrower to pay within 30 days after the date when due any interest owed
hereunder, (b) the failure of the Borrower to observe the covenants in Section 7
hereof, (c) the merger Agreement is terminated pursuant to Section 8.3(a) or
8.4(a) thereof, (d) after any termination of the Merger Agreement, the Borrower
merges or consolidates or there is a sale of all or substantially all assets of
the Borrower and its Subsidiaries, immediately after which merger, consolidation
or sale the stockholders of the Borrower immediately prior to consummation
thereof own less than a majority of the equity of the surviving company or the
company to which such assets shall have been transferred, (e) the Borrower shall
generally not pay its debts as such debts become due, or shall admit in writing
its inability to pay its debts generally, or shall make a general assignment for
the benefit of creditors, or (f) any proceeding shall be instituted by or
against the Borrower seeking to adjudicate it as bankrupt or insolvent, or
seeking liquidation, winding up, reorganization, arrangement, adjustment,
protection, relief, or composition of it or its debts under any law relating to
bankruptcy, insolvency or reorganization or relief of debtors, or seeking the
entry of an order for relief or the appointment of a receiver, trustee, or other
similar official for it or for any substantial part of its property and, in the
case of any such proceeding instituted against it (but not instituted by it),
such proceeding shall remain undismissed or unstayed for a period of 60 days, or
the Borrower shall take any action to authorize any of the actions set forth
above in this clause (f); then, in the case of an Event of Default described in
clause (f), the Loans made under this Agreement shall be immediately due and
payable, whereupon all principal of and interest on all Loans made under this
Agreement shall become and be forthwith immediately due and payable; and in the
case of any other Event of Default the Lender may declare all Loans made under
this Agreement to be immediately due and payable and terminate the Commitment
(the date of such declaration and termination, the "Termination Date"),
whereupon all principal of and interest on all Loans made under this Agreement
shall become and be forthwith immediately due and payable.
5. Conversion.
(a) Optional Conversion. At any time and from time to time after the
Effective Date, subject to the required approval ("Regulatory Approval") of any
Governmental Entity having jurisdiction over the Borrower or the Lender, the
Lender shall have the right to convert, in whole or in part, the Loans
outstanding under this Agreement into such number of shares of Common Stock as
is equal to (x) the amount of Loans outstanding (plus any accrued and unpaid
interest) divided by (y) $14.00 (the "Conversion Price"); provided, that if such
conversion is limited by applicable law, only such amount as is permitted
without Regulatory Approval shall be converted, and the Borrower and the Lender
shall use all commercially reasonable efforts to
<PAGE>
obtain Regulatory Approval to allow conversion of any remaining portion to be
converted. The Lender shall pay to the Borrower the Conversion Price in cash for
each share of Common Stock converted from any unused portion of the Commitment.
(b) Mandatory Conversion. In the event of the termination of the Merger
Agreement (other than pursuant to Sections 8.3(a) or 8.4(a) thereof), all of the
Loans outstanding under this Agreement shall convert into such number of shares
of Common Stock as is equal to the aggregate amount of the Loans (plus and
accrued and unpaid interest) divided by the lesser of (x) the Conversion Price
or (y) the current market price per share of Common Stock (as defined in Section
5(e)(iv)) on the date of such conversion; provided, that if such conversion is
limited by applicable law, only such amount as is permitted without Regulatory
Approval shall be converted, and the Borrower and the Lender shall use all
commercially reasonable efforts to obtain Regulatory Approval to allow
conversion of the remaining portion of the Loans.
(c) Fractional Shares. The Borrower will not issue any fractional shares
of Common Stock upon conversion and, in lieu thereof, will deliver a check for
the value of any such fractional share, determined by multiplying the Conversion
Price by the fraction, rounded to the nearest cent.
(d) Company to Provide Conversion Stock. The Borrower shall reserve a
sufficient number of shares of authorized but unissued Common Stock or Common
Stock held in treasury to permit the conversion to be effected in full (the
"Conversion Shares"). Upon conversion, the Lender shall provide notice thereof
to the Borrower and the Borrower, no later than the fifth business day after
such notice has been delivered, shall issue and deliver to the Lender a
certificate for the number of full shares of Common Stock issuable upon such
conversion and a check in lieu of any fractional share. The Borrower shall
comply with all securities laws regulating the issuance and delivery of the
Conversion Shares. The holders of the Conversion Shares shall be entitled to
registration rights on the same terms as outlined in that certain Stock Option
Agreement dated as of June 10, 1999 between the Borrower and ACE Limited.
(e) Adjustment.
(i) In case at any time the Borrower shall pay or make a stock
dividend or other distribution in Common Stock on any class of capital
stock of the Borrower, the Conversion Price in effect at the opening of
business on the day following the date fixed for the determination of
stockholders entitled to receive such dividend or other distribution shall
be reduced so that the same shall equal the price determined by multiplying
such Conversion Price by a fraction of which the numerator shall be the
number of shares of Common Stock outstanding at the close of business on
the date fixed for such determination and the denominator shall be the sum
of such number of shares and the total number of shares constituting such
dividend or other distribution, such adjustment to become effective
immediately after the opening of business on the day
<PAGE>
following the date fixed for such determination.
(ii) In case at any time the Borrower shall (A) subdivide its
outstanding Common Stock, (B) combine its outstanding Common Stock into a
smaller number of shares, or (C) issue by reclassification of its Common
Stock (including any such reclassification in connection with a
consolidation or merger in which the Borrower is the surviving corporation)
any shares, the Conversion Price in effect at the effective date of such
subdivision, combination or reclassification shall be proportionately
adjusted so that the Lender shall be entitled to receive after such time
the aggregate number and kind of shares which, if the Loans or the unused
portion of the Commitment had been converted immediately prior to such
time, the Lender would have owned upon such conversion and been entitled to
receive upon such subdivision, combination or reclassification. Such
adjustment shall be made successively whenever any event listed above shall
occur.
(iii) In case at any time the Borrower shall fix a record date for
the making of a distribution, by dividend or otherwise, to all holders of
its Common Stock, of evidences of its indebtedness or assets (including
securities (including warrant, options and rights), but excluding any
dividend or distribution referred to in Section 5(e)(i) and any regular
quarterly cash dividend), then in each such case the Conversion Price in
effect after such record date shall be determined by multiplying the
Conversion Price in effect immediately prior to such record date by a
fraction, of which the numerator shall be the total number of outstanding
shares of Common Stock multiplied by the current market price per share of
Common Stock (as defined in Section 5(e)(iv)) on such record date, less the
fair market value (as determined by the Board of Directors of the borrower
of the portion of the assets or evidences of indebtedness so to be
distributed, and of which the denominator shall be the total number of
outstanding shares of Common Stock multiplied by such current market price
per share of Common Stock. Such adjustment shall be made successively
whenever such a record date is fixed; and in the event that such
distribution is not so made, the Conversion Price shall again be adjusted
to be the Conversion Price which would then be in effect if such record
date has not been fixed.
(iv) For the purpose of any computation under Sections 5(b) and
5(e)(iii), the current market price per share of Common Stock on any date
shall be deemed to be the average of the closing prices on the New York
Stock Exchange Composite Transaction Reporting System, as reported in the
Wall Street Journal, for the 20 trading days immediately preceding the
second trading day prior to the day in question.
(v) If the Borrower is a party to a merger, combination or other
transaction which reclassifies or changes its outstanding Common Stock, the
successor corporation shall enter into a supplemental agreement which shall
provide that the Lender may convert into the kind and amount of securities,
cash or other assets which the Lender would have owned after such
transaction if the Lender had converted immediately prior
<PAGE>
to the consummation of such transaction.
(vi) The Borrower may make such downward adjustments in the
Conversion Price as it considers to be advisable in order that any event
treated for United States Federal income tax purposes as a dividend of
stock or stock rights shall not be taxable to the recipients.
6. Representations and Warranties.
(a) Organization, Good Standing and Qualification. The Borrower is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware, and each of its Subsidiaries is a corporation or other
entity duly organized, validly existing and in good standing under the laws of
its respective jurisdiction of organization. The Borrower and each of its
Subsidiaries has full power and authority (corporate and other) to own, lease
and operate its respective properties and assets and to carry on its business as
presently conducted and as proposed to be conducted, except where the failure to
hold such franchises, grants, licenses, certificates, permits, consents and
orders, or to have such power and authority, would not, when taken together with
all other such failures, reasonably be expected to have a Borrower Material
Adverse Effect.
(b) Corporate Authority; Approval. The Borrower has all requisite power
and authority and has taken all corporate action necessary in order to execute,
deliver and perform its obligations under this Agreement. This Agreement has
been duly executed and delivered by the Borrower and (assuming the due
authorization, execution and delivery hereof by the Lender) constitutes the
legal, valid and binding obligation of the Borrower enforceable against the
Borrower in accordance with its terms.
(c) No Violations. Neither the execution, delivery or performance of this
Agreement nor the consummation by the Borrower of the transactions contemplated
hereby nor compliance by the Borrower with any of the provisions hereof will (i)
result in any breach or violation of any provision of the certificate of
incorporation or bylaws or similar organizational documents of the Borrower,
(ii) result in a violation or breach of, or constitute (with or without due
notice or lapse of time or both) a default (or give rise to any right of
termination, amendment, cancellation, acceleration or increase in the rate of
interest) under any of the terms, conditions or provisions of any note, bond,
mortgage, indenture, guarantee, other evidence of indebtedness, lease, license,
contract agreement or other instrument or obligation to which the Borrower or
any of its Subsidiaries is a party or by which any of them or any of their
properties or assets may be bound (a "Contract") or result in the creation of a
lien upon any of the properties or assets of the Borrower or any of its
Subsidiaries or (iii) violate any order, writ, injunction, judgment, decree,
statute, rule, regulation or other Law applicable to the Borrower, any of its
Subsidiaries or any of their properties or assets, except in the case of clause
(ii) or (iii) for violations, breaches, defaults, or rights of termination,
amendment, cancellation or acceleration
<PAGE>
or liens, which would not, individually or in the aggregate, reasonably be
expected to have a Borrower Material Adverse Effect.
(d) Conversion Shares. The Borrower has reserved a sufficient number of
shares of authorized but unissued Common Stock or Common Stock held in treasury
to permit the conversion contemplated in Section 5 hereof to be effected in
full. All of the Conversion Shares, when issued, will be validly issued, fully
paid and non-assessable.
7. Covenants. So long as there are any Loans outstanding or the Lender
has any Commitment hereunder, none of the Borrower, or its Subsidiaries will (a)
declare or pay any dividends or return any capital to its stockholders or
authorize or make any other distribution, payment or delivery of property or
cash to its stockholders as such (other than (x) to the Borrower and (y) the
Borrower's regular quarterly cash dividend of $0.04 per share), or redeem,
retire, purchase or otherwise acquire, directly or indirectly, for any
consideration, any shares of any class of capital stock of the Borrower now or
hereafter outstanding (or any warrants for or options or stock appreciation
rights in respect of any of such shares) (other than management stock
repurchases required by agreements in effect on the Effective Date), or set
aside any funds for any of the foregoing purposes (all of the foregoing,
"Dividends"), or (b) merge or consolidate with or into another entity (provided
that a Subsidiary of the Borrower may merge with or into the Borrower or another
Subsidiary of the Borrower so long as no Event of Default shall have occurred
and be continuing or would result therefrom) or sell, assign, transfer, convey
or otherwise dispose of all or substantially all of the properties or assets of
the Borrower and its Subsidiaries.
8. Miscellaneous. The parties hereto agree to negotiate in good faith for
any amendments to this Agreement necessary for regulatory purposes. No amendment
or waiver of any provision of this Agreement shall be effective unless the same
shall be in writing and signed by the Borrower and the Lender. None of the
rights, duties and obligations of any party hereunder may be assigned except
with the consent of the other party hereto; provided that the Lender may assign,
in whole or in part, any Loans to any of its Subsidiaries. Any notice required
or permitted to be delivered hereunder shall be deemed to have been given when
given in writing by overnight carrier or facsimile to the address or number
listed on the signature page hereto. This Agreement may be executed in any
number of separate counterparts, each of which, when so executed, shall be
deemed an original, and all of said counterparts taken together shall be deemed
to constitute but one and the same instrument. The illegality or
unenforceability of any provision of this Agreement shall not in any way affect
or impair the legality or enforceability of the remaining provisions of this
Agreement. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE
WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO THE CONFLICT OF LAW
PRINCIPLES THEREOF.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered by their proper and duly authorized officers as of
the date and year first above written.
Borrower: CAPITAL RE CORPORATION
By:/s/ Jerome F. Jurschak
----------------------------
Name: Jerome F. Jurschak
Title: Chairman and Chief Executive Officer
Address for Notices: 1325 Avenue of the Americas
New York, New York 10019
Attention: General Counsel
Facsimile: (212) 581-3268
Lender: ACE LIMITED
By:/s/ Donald Kramer
----------------------------
Name: Donald Kramer
Title: Vice Chairman
Address for Notices: The ACE Building
30 Woodbourne Avenue
Hamilton, HM 08 Bermuda
<PAGE>
Appendix A
Certain Defined Terms. As used in the Agreement, the following terms shall
have the following meanings:
"Applicable Rate" means 6% per annum.
"Borrower Material Adverse Effect" means a material adverse effect on the
properties, business, assets, conditions (financial or otherwise), liabilities
or results of operations of the Borrower and its Subsidiaries taken as a whole,
other than effects caused by changes in general economic conditions or
conditions generally affecting the insurance or reinsurance industry.
"Common Stock" means the common stock, par value $.01 per share, of the
Borrower.
"Governmental Entity" means any United States of foreign court, arbitral
tribunal, administrative agency or commission or other governmental or other
regulatory authority, body, commission or agency, including the Corporation of
Lloyd's.
"Law" means any applicable federal, state, local or foreign laws, statutes,
ordinances, rules, regulations, judgments, orders, injunctions, decrees,
arbitration awards, agency requirements, licenses or permits (including
insurance laws and regulations) of any Governmental Entity.
"Merger Agreement" means that certain Agreement and Plan of Merger dated as
of the date hereof among the Borrower, the Lender and CapRe Acquisition Corp.
"Subsidiary" means, with respect to any person, any entity, whether
incorporated or unincorporated, of which at least a majority of the securities
or ownership interests having by their terms ordinary voting power to elect a
majority of the board of directors or other persons performing similar functions
is directly or indirectly owned or controlled by such person or by one or more
of its respective Subsidiaries or by such person and any one or more of its
respective Subsidiaries.
<PAGE>
EXHIBIT (c)(4)
STOCKHOLDER SUPPORT AGREEMENT
STOCKHOLDER SUPPORT AGREEMENT, dated as of June 10, 1999 (this
"Agreement"), by the undersigned stockholder (the "Stockholder") of CAPITAL RE
CORPORATION, a Delaware corporation (the "Company"), for the benefit of ACE
LIMITED, a company incorporated with limited liability under the Cayman Islands
Companies Law ("ACE").
RECITALS
WHEREAS, concurrently with the execution and delivery of this Agreement,
ACE, Pacer Acquisition Corp., a Delaware corporation and a wholly owned direct
subsidiary of ACE ("Merger Subsidiary"), and the Company, have entered into an
Agreement and Plan of Merger, dated as of the date hereof (the "Merger
Agreement"), which provides for, among other things, the merger of the Company
and Merger Subsidiary (the "Merger"); and
WHEREAS, the Stockholder owns of record and/or holds stock options,
warrants or convertible securities to acquire (whether or not vested) that
number and class of shares of outstanding capital stock of the Company ("Company
Capital Stock") appearing on the signature page hereof (such shares of Company
Capital Stock, together with any other shares of capital stock of the Company
acquired by such Stockholder after the date hereof and during the term of this
Agreement, being collectively referred to herein as the "Subject Shares"); and
WHEREAS, as a condition to its willingness to enter into the Merger
Agreement, ACE has required that the Stockholder agree, and in order to induce
ACE to enter into the Merger Agreement, the Stockholder has agreed, to enter
into this Agreement.
NOW, THEREFORE, in consideration of the promises and the mutual covenants
and agreements set forth herein, the Stockholder agrees as follows:
1. Agreement to Vote. Until the termination of this Agreement in
accordance with Section 14, Stockholder agrees as follows:
(a) At the Company's stockholders' meeting to vote on approval and
adoption of the Merger Agreement, including any adjournment or postponement
thereof (the "Stockholders' Meeting") or in any other circumstances upon
which a vote, consent or other approval with respect to the Merger and the
Merger Agreement is sought, the Stockholder hereby irrevocably and
unconditionally agrees to vote (or cause to be voted) the Subject Shares in
favor of the Merger, the adoption of the Merger Agreement and the approval
of the terms thereof and each of the other transactions contemplated by the
<PAGE>
Merger Agreement.
(b) At any meeting of stockholders of the Company or at any
adjournment thereof or in any other circumstances upon which the
Stockholder's vote, consent or other approval is sought, the Stockholder
hereby irrevocably and unconditionally agrees to vote (or cause to be
voted) the Subject Shares against (i) approval of any proposal made in
opposition to or in competition with the Merger Agreement or the
transactions contemplated by the Merger Agreement, (ii) any merger,
consolidation, merger of assets, business combination, share exchange,
reorganization or recapitalization of the Company or any of its
subsidiaries, with or involving any party other than ACE or one of its
subsidiaries, (iii) any liquidation, dissolution or winding up of the
Company, (iv) any change in the capital structure of the Company (other
than pursuant to the Merger Agreement) and (v) any other action including,
without limitation, any amendment of the Company's Certificate of
Incorporation or Bylaws, which such action reasonably may be expected to
impede, frustrate, interfere with, delay, postpone, attempt to discourage,
prevent or nullify the consummation of the transactions contemplated by the
Merger Agreement or this Agreement or result in a breach of any of the
covenants, representations, warranties or other obligations or agreements
of the Company under the Merger Agreement which would materially and
adversely affect the Company or its ability to consummate the transactions
contemplated by the Merger Agreement. The Stockholder further agrees not to
commit or agree to take any action inconsistent with the foregoing.
(c) Any such vote shall be cast or consent shall be given in
accordance with such procedures relating thereto as shall ensure that it is
duly counted for purposes of determining that a quorum is present and for
purposes of recording the results of such vote or consent. The Stockholder
agrees to deliver to ACE upon request a proxy in such form as ACE may
reasonably request, which proxy shall be coupled with an interest and
irrevocable to the extent permitted under Delaware law, with the total
number of Shares correctly stated thereon.
2. Restriction on Transfer of Company Capital Stock. The Stockholder
agrees (other than pursuant to the Merger Agreement) not to (a) sell, transfer,
pledge, assign or otherwise dispose of (including by gift) (collectively,
"Transfer"), or enter into any contract, option or other arrangement (including
any profit-sharing arrangement) with respect to the Transfer of the Subject
Shares to any person or (b) enter into any voting arrangement, whether by proxy,
voting agreement or otherwise, in relation to the Subject Shares, and agrees not
to commit or agree to take any of the foregoing actions.
3. No-Shop. The Stockholder shall not, nor shall the Stockholder permit
any affiliate, director, officer, employee, investment banker, attorney or other
advisor or representative of the Stockholder to, (i) directly or indirectly
solicit, initiate or knowingly
2
<PAGE>
encourage the submission of, any Acquisition Proposal or (ii) directly or
indirectly participate in any discussions or negotiations regarding, or furnish
to any person any information with respect to, or take any other action to
facilitate any inquiries or the making of any proposal that constitutes or may
reasonably be expected to lead to, any Acquisition Proposal; provided, that the
foregoing shall not restrict any director of the Company from taking any action
permitted by Section 6.3 of the Merger Agreement.
4. No Proxy Solicitations. The Stockholder agrees that it will not, nor
will it permit any entity under its control to, (a) solicit proxies or become a
"participant" in a "solicitation" (as such terms are defined in Regulation 14A
under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) in
opposition to or competition with the consummation of the Merger or otherwise
encourage or assist any party in taking or planning any action which would
compete with or otherwise could serve to materially interfere with, delay,
discourage, adversely affect or inhibit the timely consummation of the merger in
accordance with the terms of the Merger Agreement, (b) directly or indirectly
encourage, initiate or cooperate in a stockholders' vote or action by consent of
the Company's stockholders in opposition to or in competition with the
consummation of the Merger, or (c) become a member of a "group" (as such term is
used in Section 13(d)(3) of the Exchange Act) with respect to any voting
securities of the Company for the purpose of opposing or competing with the
consummation of the Merger; provided, that the foregoing shall not restrict any
director of the Company from taking any action such director believes is
necessary to satisfy such director's fiduciary duty to stockholders of the
Company.
5. Support of Merger. The Stockholder shall use the Stockholder's best
efforts to take, or cause to be taken, all actions, and to do, or cause to be
done, and to assist and cooperate with ACE in doing, all things necessary,
proper or advisable to support and to consummate and make effective, in the most
expeditious manner practicable, the Merger and the other transactions
contemplated by the Merger Agreement.
6. Legend. As soon as practicable after the execution of this Agreement,
the Stockholder shall surrender to the Company the certificates representing the
Subject Shares in its possession (and within 30 days the Subject Shares not in
its possession), shall cause the following legend to be placed on the
certificates representing such Subject Shares and shall request that such legend
remain thereon until the earlier of (i) the termination hereof or (ii) the
consummation of the Merger:
"The shares of capital stock represented by this certificate are subject to
a Stockholder Support Agreement, dated as of June 10, 1999, among the
Stockholder named herein and ACE Limited, which, among other things, (a)
restricts the sale or transfer of such shares except in accordance
therewith, and (b) restricts the voting of such shares except in accordance
therewith."
In the event that ACE requests that a proxy be executed and delivered by the
Stockholder to it
3
<PAGE>
pursuant to Section 1(c) hereof, the Stockholder shall promptly surrender to the
Company the certificates representing the Shares covered by such proxy and cause
the foregoing legend to be revised to add to the end of such legend the
following words:
", and such shares are also subject to an irrevocable proxy."
The Stockholder shall provide ACE with reasonably satisfactory evidence of its
compliance with this Section 6 on or prior to the date five business days after
the execution hereof with respect to Subject Shares in its possession (or within
30 days with respect to Subject Shares not in its possession) or of the request
relating to the Stockholder's proxy, as the case may be.
7. Restriction on Transfer of Ordinary Shares. The Stockholder agrees,
until the date which is 180 days after the date of the consummation of the
Merger, not to Transfer or enter into any contract, option or other arrangement
(including any profit-sharing arrangement) with respect to the Transfer of the
ordinary shares, par value $0.041666667 per share, of ACE to be received as
consideration in the Merger, and agrees not to commit or agree to take any of
the foregoing actions; provided, that the Stockholder may sell all or
substantially all of such shares to a single person who agrees in writing (in
form and substance reasonably satisfactory to ACE) to abide by the foregoing
restrictions.
8. Standstill. The Stockholder agrees that, for a period of three years
following the date hereof (the "Standstill Period"), it will not (and it will
ensure that its affiliates (and any person acting on behalf of or in concert
with it or any affiliate) will not), without ACE's prior written approval, (a)
purchase or otherwise acquire (or enter into any agreement or make any proposal,
including any proposal which is made public, to purchase or otherwise acquire)
any securities of ACE, any warrant or option to purchase such securities, any
security convertible into any such securities, or any other right to acquire
such securities if upon any such purchase or acquisition the Stockholder owns or
has the right to acquire (whether or not presently) five percent or more of the
outstanding voting shares of ACE, (b) solicit proxies from stockholders of ACE
or otherwise seek to influence or control the management or policies of ACE or
any of its affiliates, (c) form, join or in any way participate in a "group"
(within the meaning of Section 13(d)(3) of the Exchange Act) with respect to any
voting securities of ACE or any of its subsidiaries, (d) otherwise act, alone or
in concert with others, to seek to control or influence the management, Board of
Directors or policies of ACE, (e) disclose any intention, plan or arrangement
inconsistent with the foregoing or (f) assist, advise or encourage any other
person in doing any of the foregoing; provided, however, that this Section 8
shall not prohibit the purchase or other acquisition of securities of ACE by any
person described in Rule 13d-1(b)(1)(i) and (ii) of the Exchange Act. The
Stockholders also agree during such period not to request ACE (or its directors,
officers, employees or agents), directly or indirectly, to amend or waive any
provisions of this Section 8 (including this sentence) or take any action which
might require ACE to make a public announcement regarding the possibility of a
business combination, merger or
4
<PAGE>
extraordinary transaction.
9. Confidentiality. The Stockholder acknowledges that, in relation to the
negotiation of the Merger Agreement and the consummation of the transactions
contemplated thereby, it may have access to material non-public information
concerning ACE. The Stockholder also recognizes that successful consummation of
the transactions contemplated by this Agreement and the Merger Agreement may be
dependent upon confidentiality with respect to the matters referred to herein.
In this connection, pending public disclosure thereof, the Stockholder hereby
agrees not to disclose or discuss such matters with anyone not a party to this
Agreement (other than its counsel and advisors, if any) without the prior
written consent of ACE, except for filings required pursuant to the Exchange Act
and the rules and regulations thereunder or disclosures its counsel advises are
necessary in order to fulfill its obligations imposed by law, in which case the
Stockholder shall give notice of such disclosure to ACE as promptly as
practicable so as to enable ACE to seek a protective order from a court of
competent jurisdiction with respect thereto.
10. Additional Shares. If, after the date hereof, the Stockholder
acquires beneficial ownership (as such term is defined in the Exchange Act) of
any shares of the capital stock of the Company (any such shares, "Additional
Shares"), including, without limitation, upon exercise of any option, warrant or
right to acquire shares of capital stock or through any stock dividend or stock
split, the provisions of this Agreement (other than those set forth in Section
13(a)) applicable to the Subject Shares shall be applicable to such Additional
Shares as if such Additional Shares had been Subject Shares as of the date
hereof. The provisions of the immediately preceding sentence shall be effective
with respect to Additional Shares without action by any person or entity
immediately upon the acquisition by either Stockholder of beneficial ownership
of such Additional Shares.
11. Action by Written Consent. If, in lieu of the Stockholders' Meeting,
stockholder action in respect of the Merger Agreement or any of the transactions
contemplated by the Merger Agreement is taken by written consent, the provisions
of this Agreement imposing obligations in respect of or in connection with the
Stockholders' Meeting shall apply mutatis mutandis to such action by written
consent.
12. Stockholders Certificates. Stockholder agrees to execute and deliver
a certificate containing such representations as are reasonably necessary and
customary for tax counsel to ACE on the one hand, and the Company on the other
hand, to render an opinion to the effect that the Merger Agreement will
constitute a reorganization within the meaning of Section 368(a) of the Internal
Revenue Code of 1986, as amended, and that no gain or loss will be recognized by
the stockholders of the Company to the extent they receive Ordinary Shares
solely in exchange for their Common Stock.
13. Representations and Warranties. The Stockholder represents and
warrants to ACE
5
<PAGE>
as follows:
(a) As of the date hereof, Stockholder is the beneficial and
registered owner of the Subject Shares. As of the date hereof, the
Stockholder does not beneficially own (as such term is defined in the
United States Securities Exchange Act of 1934, as amended (the "Exchange
Act")) any shares of any class or series of capital stock of the Company
other than the Subject Shares or any securities convertible into or
exercisable for shares of any class or series of the Company's capital
stock or have any options or other rights to acquire any shares of any
class or series of capital stock of the Company or any securities
convertible into or exercisable for shares of any class of the Company's
capital stock. The Subject Shares and certificates representing such
Subject Shares are now, and at all times during the term hereof will be,
held by the Stockholder, or by a nominee or custodian for the benefit of
the Stockholder, free and clear of all liens, claims, security interests,
proxies, voting trusts or agreements, understandings or arrangements or any
other encumbrances whatsoever, except for any such encumbrances or proxies
arising hereunder.
(b) The Stockholder has full legal power, authority and right to vote
all of the Subject Shares in favor of approval and adoption of the Merger
Agreement without the consent or approval of, or any other action on the
part of, any other person or entity. Without limiting the generality of the
foregoing, except for this Agreement, the Stockholder has not entered into
any voting agreement or any other agreement with any person or entity with
respect to any of the Subject Shares, granted any person or entity any
proxy (revocable or irrevocable) or power of attorney with respect to any
of the Subject Shares, deposited any of the Subject Shares in a voting
trust or entered into any arrangement or agreement with any person or
entity limiting or affecting the Stockholder's ability to enter into this
Agreement or legal power, authority or right to vote its Subject Shares in
favor of the approval and adoption of the Merger Agreement or any of the
transactions contemplated by the Merger Agreement, and the Stockholder will
not take any such action after the date of this Agreement and prior to the
Stockholders' Meeting.
(c) This Agreement has been duly and validly executed and delivered
by the Stockholder and constitutes a valid and binding agreement
enforceable against the Stockholder in accordance with its terms except to
the extent (i) such enforcement may be limited by applicable bankruptcy,
insolvency or similar laws affecting creditors' rights and (ii) the remedy
of specific performance and injunctive and other forms of equitable relief
may be subject to equitable defenses and to the discretion of the court
before which any proceeding therefor may be brought.
The representations and warranties contained in this Section 13 shall be made as
of the date hereof and as of each date from the date hereof through and
including the date the Merger is
6
<PAGE>
consummated.
14. Termination. The obligations of the Stockholder hereunder shall
terminate upon the earlier of the termination of the Merger Agreement pursuant
to Article 8 thereof or the Effective Time.
15. Further Assurances. The Stockholder will, from time to time, execute
and deliver, or cause to be executed and delivered, such additional or further
consents, documents and other instruments as ACE may reasonably request for the
purpose of effectively carrying out the transactions contemplated by this
Agreement.
16. Successors, Assigns and Transferees Bound. Any successor, assignee or
transferee (including a successor, assignee or transferee as a result of the
death of the Stockholder, such as an executor or heir) shall be bound by the
terms hereof, and the Stockholder shall take any and all actions necessary to
obtain the written confirmation from such successor, assignee or transferee that
it is bound by the terms hereof.
17. Remedies. The Stockholder acknowledges that money damages would be
both incalculable and an insufficient remedy for any breach of this Agreement by
it, and that any such breach would cause ACE irreparable harm. Accordingly, the
Stockholder agrees that in the event of any breach or threatened breach of this
Agreement, ACE, in addition to any other remedies at law or in equity it may
have, shall be entitled, without the requirement of posting a bond or other
security, to equitable relief, including injunctive relief and specific
performance.
18. Severability. The invalidity or unenforceability of any provision of
this Agreement in any jurisdiction shall not affect the validity or
enforceability of any other provision of this Agreement in such jurisdiction, or
the validity or enforceability of any provision of this Agreement in any other
jurisdiction.
19. Amendment. This Agreement may be amended only by means of a written
instrument executed and delivered by both the Stockholder and ACE.
20. Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally or mailed by
registered or certified mail (return receipt requested) to the parties at the
following addresses (or at such other address for a party as shall be specified
by like notice):
(a) if to ACE:
ACE Limited
The ACE Building
30 Woodbourne Avenue
7
<PAGE>
Hamilton HM 08 Bermuda
Facsimile: (441) 295 3997
Attention: Peter N. Mear, Esq.
with a copy to:
Mayer, Brown & Platt
190 South LaSalle Street
Chicago, Illinois 60603
Facsimile: (312) 701-7711
Attention: Edward S. Best
(b) if to the Stockholder:
Constellation Investments, Inc.
250 West Pratt Street
Baltimore, Maryland 21201
Facsimile: (410) 783-2862
Attention: Steve Kesler
21. Governing Law. This Agreement shall be governed by, and construed in
accordance in accordance with, the laws of the State of Delaware, regardless of
the laws that might otherwise govern under applicable principles of conflicts of
laws thereof.
22. Capitalized Terms. Capitalized terms used in this Agreement that are
not defined herein shall have such meanings as set forth in the Merger
Agreement.
23. Counterparts. For the convenience of the parties, this Agreement may
be executed in counterparts, each of which shall be deemed an original, but all
of which together shall constitute one and the same instrument.
CONSTELLATION INVESTMENTS, INC.
By: /s/ Steven D. Kesler
--------------------------
Name: Steven D. Kesler
Title: President
Number and class of shares of Company Capital
Stock owned or subject to acquisition on the date
hereof:
8
<PAGE>
Number Class
--------- -----
4,973,340 common
Accepted and Agreed to as of the
date set forth above:
ACE LIMITED
By: /s/ Brian Duperreault
------------------------------
Name: Brian Duperreault
Title: Chairman, President and
Chief Executive Officer
9
<PAGE>
STOCKHOLDER SUPPORT AGREEMENT
STOCKHOLDER SUPPORT AGREEMENT, dated as of June 10, 1999 (this
"Agreement"), by the undersigned stockholder (the "Stockholder") of CAPITAL RE
CORPORATION, a Delaware corporation (the "Company"), for the benefit of ACE
LIMITED, a company incorporated with limited liability under the Cayman Islands
Companies Law ("ACE").
RECITALS
WHEREAS, concurrently with the execution and delivery of this Agreement,
ACE, Pacer Acquisition Corp., a Delaware corporation and a wholly owned direct
subsidiary of ACE ("Merger Subsidiary"), and the Company, have entered into an
Agreement and Plan of Merger, dated as of the date hereof (the "Merger
Agreement"), which provides for, among other things, the merger of the Company
and Merger Subsidiary (the "Merger"); and
WHEREAS, the Stockholder owns of record and/or holds stock options,
warrants or convertible securities to acquire (whether or not vested) that
number and class of shares of outstanding capital stock of the Company ("Company
Capital Stock") appearing on the signature page hereof (such shares of Company
Capital Stock, together with any other shares of capital stock of the Company
acquired by such Stockholder after the date hereof and during the term of this
Agreement, being collectively referred to herein as the "Subject Shares"); and
WHEREAS, as a condition to its willingness to enter into the Merger
Agreement, ACE has required that the Stockholder agree, and in order to induce
ACE to enter into the Merger Agreement, the Stockholder has agreed, to enter
into this Agreement.
NOW, THEREFORE, in consideration of the promises and the mutual covenants
and agreements set forth herein, the Stockholder agrees as follows:
1. Agreement to Vote. Until the termination of this Agreement in
accordance with Section 14, Stockholder agrees as follows:
(a) At the Company's stockholders' meeting to vote on approval and
adoption of the Merger Agreement, including any adjournment or postponement
thereof (the "Stockholders' Meeting") or in any other circumstances upon
which a vote, consent or other approval with respect to the Merger and the
Merger Agreement is sought, the Stockholder hereby irrevocably and
unconditionally agrees to vote (or cause to be voted) the Subject Shares in
favor of the Merger, the adoption of the Merger Agreement and the approval
of the terms thereof and each of the other transactions contemplated by the
Merger Agreement.
10
<PAGE>
(b) At any meeting of stockholders of the Company or at any
adjournment thereof or in any other circumstances upon which the
Stockholder's vote, consent or other approval is sought, the Stockholder
hereby irrevocably and unconditionally agrees to vote (or cause to be
voted) the Subject Shares against (i) approval of any proposal made in
opposition to or in competition with the Merger Agreement or the
transactions contemplated by the Merger Agreement, (ii) any merger,
consolidation, merger of assets, business combination, share exchange,
reorganization or recapitalization of the Company or any of its
subsidiaries, with or involving any party other than ACE or one of its
subsidiaries, (iii) any liquidation, dissolution or winding up of the
Company, (iv) any change in the capital structure of the Company (other
than pursuant to the Merger Agreement) and (v) any other action including,
without limitation, any amendment of the Company's Certificate of
Incorporation or Bylaws, which such action reasonably may be expected to
impede, frustrate, interfere with, delay, postpone, attempt to discourage,
prevent or nullify the consummation of the transactions contemplated by the
Merger Agreement or this Agreement or result in a breach of any of the
covenants, representations, warranties or other obligations or agreements
of the Company under the Merger Agreement which would materially and
adversely affect the Company or its ability to consummate the transactions
contemplated by the Merger Agreement. The Stockholder further agrees not to
commit or agree to take any action inconsistent with the foregoing.
(c) Any such vote shall be cast or consent shall be given in
accordance with such procedures relating thereto as shall ensure that it is
duly counted for purposes of determining that a quorum is present and for
purposes of recording the results of such vote or consent. The Stockholder
agrees to deliver to ACE upon request a proxy in such form as ACE may
reasonably request, which proxy shall be coupled with an interest and
irrevocable to the extent permitted under Delaware law, with the total
number of Shares correctly stated thereon.
2. Restriction on Transfer of Company Capital Stock. The Stockholder
agrees (other than pursuant to the Merger Agreement) not to (a) sell, transfer,
pledge, assign or otherwise dispose of (including by gift) (collectively,
"Transfer"), or enter into any contract, option or other arrangement (including
any profit-sharing arrangement) with respect to the Transfer of the Subject
Shares to any person or (b) enter into any voting arrangement, whether by proxy,
voting agreement or otherwise, in relation to the Subject Shares, and agrees not
to commit or agree to take any of the foregoing actions; provided, however that
Stockholder may pledge the Subject Shares pursuant to agreements the same in all
material respects to Exhibit A attached hereto (the "Pledge Agreement")
prohibiting the pledgee from Transferring the Subject Shares or taking any other
action prohibited above, except that the pledgee may liquidate the Subject
Shares if neither Stockholder or ACE provide further security as required under
the Pledge Agreement after three business (3) days written notice of the need to
provide such security pursuant to the Pledge Agreement and subject to ACE's
right of first refusal to purchase the Subject Shares. In the event
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Stockholder does not meet the requirements for additional security within two
(2) business days of receiving such notice, ACE may provide such security.
Stockholder hereby agrees to immediately reimburse ACE for the amount of any
additional security provided and to indemnify ACE against any losses, costs
and/or expenses, including reasonable attorneys' fees and any difference in the
price at which ACE purchase Subject Shares pursuant to the aforementioned right
of first refusal and the purchase price paid in the Merger. Stockholder's
obligation shall be secured by a Guaranty from Minnesota Power in the form of
Exhibit B attached hereto delivered to ACE at the time this Agreement is
executed.
3. No-Shop. The Stockholder shall not, nor shall the Stockholder permit
any affiliate, director, officer, employee, investment banker, attorney or other
advisor or representative of the Stockholder to, (i) directly or indirectly
solicit, initiate or knowingly encourage the submission of, any Acquisition
Proposal or (ii) directly or indirectly participate in any discussions or
negotiations regarding, or furnish to any person any information with respect
to, or take any other action to facilitate any inquiries or the making of any
proposal that constitutes or may reasonably be expected to lead to, any
Acquisition Proposal; provided, that the foregoing shall not restrict any
director of the Company from taking any action permitted by Section 6.3 of the
Merger Agreement.
4. No Proxy Solicitations. The Stockholder agrees that it will not, nor
will it permit any entity under its control to, (a) solicit proxies or become a
"participant" in a "solicitation" (as such terms are defined in Regulation 14A
under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) in
opposition to or competition with the consummation of the Merger or otherwise
encourage or assist any party in taking or planning any action which would
compete with or otherwise could serve to materially interfere with, delay,
discourage, adversely affect or inhibit the timely consummation of the merger in
accordance with the terms of the Merger Agreement, (b) directly or indirectly
encourage, initiate or cooperate in a stockholders' vote or action by consent of
the Company's stockholders in opposition to or in competition with the
consummation of the Merger, or (c) become a member of a "group" (as such term is
used in Section 13(d)(3) of the Exchange Act) with respect to any voting
securities of the Company for the purpose of opposing or competing with the
consummation of the Merger; provided, that the foregoing shall not restrict any
director of the Company from taking any action such director believes is
necessary to satisfy such director's fiduciary duty to stockholders of the
Company.
5. Support of Merger. The Stockholder shall use the Stockholder's best
efforts to take, or cause to be taken, all actions, and to do, or cause to be
done, and to assist and cooperate with ACE in doing, all things necessary,
proper or advisable to support and to consummate and make effective, in the most
expeditious manner practicable, the Merger and the other transactions
contemplated by the Merger Agreement.
6. Legend. As soon as practicable after the execution of this Agreement,
the Stockholder shall surrender to the Company the certificates representing the
Subject Shares in its
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<PAGE>
possession (and within 30 days the Subject Shares not in its possession), shall
cause the following legend to be placed on the certificates representing such
Subject Shares and shall request that such legend remain thereon until the
earlier of (i) the termination hereof or (ii) the consummation of the Merger:
"The shares of capital stock represented by this certificate are subject to
a Stockholder Support Agreement, dated as of June 10, 1999, among the
Stockholder named herein and ACE Limited, which, among other things, (a)
restricts the sale or transfer of such shares except in accordance
therewith, and (b) restricts the voting of such shares except in accordance
therewith."
In the event that ACE requests that a proxy be executed and delivered by the
Stockholder to it pursuant to Section 1(c) hereof, the Stockholder shall
promptly surrender to the Company the certificates representing the Shares
covered by such proxy and cause the foregoing legend to be revised to add to the
end of such legend the following words:
", and such shares are also subject to an irrevocable proxy."
The Stockholder shall provide ACE with reasonably satisfactory evidence of its
compliance with this Section 6 on or prior to the date five business days after
the execution hereof with respect to Subject Shares in its possession (or within
30 days with respect to Subject Shares not in its possession) or of the request
relating to the Stockholder's proxy, as the case may be.
7. Restriction on Transfer of Ordinary Shares. The Stockholder agrees,
until the date which is 180 days after the date of the consummation of the
Merger, not to Transfer or enter into any contract, option or other arrangement
(including any profit-sharing arrangement) with respect to the Transfer of the
ordinary shares, par value $0.041666667 per share, of ACE to be received as
consideration in the Merger, and agrees not to commit or agree to take any of
the foregoing actions; provided, that the Stockholder may sell all or
substantially all of such shares to a single person who agrees in writing (in
form and substance reasonably satisfactory to ACE) to abide by the foregoing
restrictions; and provided, further, that the Stockholder may pledge the
Ordinary Shares pursuant to the Pledge Agreement and other provisions of
Paragraph 2 hereof.
8. Standstill. The Stockholder agrees that, for a period of three years
following the date hereof (the "Standstill Period"), it will not (and it will
ensure that its affiliates (and any person acting on behalf of or in concert
with it or any affiliate) will not), without ACE's prior written approval, (a)
purchase or otherwise acquire (or enter into any agreement or make any proposal,
including any proposal which is made public, to purchase or otherwise acquire)
any securities of ACE, any warrant or option to purchase such securities, any
security convertible into any such securities, or any other right to acquire
such securities if upon any such purchase or acquisition the Stockholder owns or
has the right to acquire (whether or not presently) five percent or more of the
outstanding voting shares of ACE, (b) solicit proxies from stockholders of
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<PAGE>
ACE or otherwise seek to influence or control the management or policies of ACE
or any of its affiliates, (c) form, join or in any way participate in a "group"
(within the meaning of Section 13(d)(3) of the Exchange Act) with respect to any
voting securities of ACE or any of its subsidiaries, (d) otherwise act, alone or
in concert with others, to seek to control or influence the management, Board of
Directors or policies of ACE, (e) disclose any intention, plan or arrangement
inconsistent with the foregoing or (f) assist, advise or encourage any other
person in doing any of the foregoing; provided, however, that this Section 8
shall not prohibit the purchase or other acquisition of securities of ACE by any
person described in Rule 13d-1(b)(1)(i) and (ii) of the Exchange Act. The
Stockholders also agree during such period not to request ACE (or its directors,
officers, employees or agents), directly or indirectly, to amend or waive any
provisions of this Section 8 (including this sentence) or take any action which
might require ACE to make a public announcement regarding the possibility of a
business combination, merger or extraordinary transaction.
9. Confidentiality. The Stockholder acknowledges that, in relation to the
negotiation of the Merger Agreement and the consummation of the transactions
contemplated thereby, it may have access to material non-public information
concerning ACE. The Stockholder also recognizes that successful consummation of
the transactions contemplated by this Agreement and the Merger Agreement may be
dependent upon confidentiality with respect to the matters referred to herein.
In this connection, pending public disclosure thereof, the Stockholder hereby
agrees not to disclose or discuss such matters with anyone not a party to this
Agreement (other than its counsel and advisors, if any) without the prior
written consent of ACE, except for filings required pursuant to the Exchange Act
and the rules and regulations thereunder or disclosures its counsel advises are
necessary in order to fulfill its obligations imposed by law, in which case the
Stockholder shall give notice of such disclosure to ACE as promptly as
practicable so as to enable ACE to seek a protective order from a court of
competent jurisdiction with respect thereto.
10. Additional Shares. If, after the date hereof, the Stockholder
acquires beneficial ownership (as such term is defined in the Exchange Act) of
any shares of the capital stock of the Company (any such shares, "Additional
Shares"), including, without limitation, upon exercise of any option, warrant or
right to acquire shares of capital stock or through any stock dividend or stock
split, the provisions of this Agreement (other than those set forth in Section
13(a)) applicable to the Subject Shares shall be applicable to such Additional
Shares as if such Additional Shares had been Subject Shares as of the date
hereof. The provisions of the immediately preceding sentence shall be effective
with respect to Additional Shares without action by any person or entity
immediately upon the acquisition by either Stockholder of beneficial ownership
of such Additional Shares.
11. Action by Written Consent. If, in lieu of the Stockholders' Meeting,
stockholder action in respect of the Merger Agreement or any of the transactions
contemplated by the Merger Agreement is taken by written consent, the provisions
of this Agreement imposing obligations in
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<PAGE>
respect of or in connection with the Stockholders' Meeting shall apply mutatis
mutandis to such action by written consent.
12. Stockholders Certificates. Stockholder agrees to execute and deliver
a certificate containing such representations as are reasonably necessary and
customary for tax counsel to ACE on the one hand, and the Company on the other
hand, to render an opinion to the effect that the Merger Agreement will
constitute a reorganization within the meaning of Section 368(a) of the Internal
Revenue Code of 1986, as amended, and that no gain or loss will be recognized by
the stockholders of the Company to the extent they receive Ordinary Shares
solely in exchange for their Common Stock.
13. Representations and Warranties. The Stockholder represents and
warrants to ACE as follows:
(a) As of the date hereof, Stockholder is the beneficial and
registered owner of the Subject Shares. As of the date hereof, the
Stockholder does not beneficially own (as such term is defined in the
United States Securities Exchange Act of 1934, as amended (the "Exchange
Act")) any shares of any class or series of capital stock of the Company
other than the Subject Shares or any securities convertible into or
exercisable for shares of any class or series of the Company's capital
stock or have any options or other rights to acquire any shares of any
class or series of capital stock of the Company or any securities
convertible into or exercisable for shares of any class of the Company's
capital stock. Except as permitted in Paragraph 2 herein relating to
pledges, the Subject Shares and certificates representing such Subject
Shares are now, and at all times during the term hereof will be, held by
the Stockholder, or by a nominee or custodian for the benefit of the
Stockholder, free and clear of all liens, claims, security interests,
proxies, voting trusts or agreements, understandings or arrangements or any
other encumbrances whatsoever, except for any such encumbrances or proxies
arising hereunder.
(b) The Stockholder has full legal power, authority and right to vote
all of the Subject Shares in favor of approval and adoption of the Merger
Agreement without the consent or approval of, or any other action on the
part of, any other person or entity. Without limiting the generality of the
foregoing, except for this Agreement, the Stockholder has not entered into
any voting agreement or any other agreement with any person or entity with
respect to any of the Subject Shares, granted any person or entity any
proxy (revocable or irrevocable) or power of attorney with respect to any
of the Subject Shares, deposited any of the Subject Shares in a voting
trust or entered into any arrangement or agreement with any person or
entity limiting or affecting the Stockholder's ability to enter into this
Agreement or legal power, authority or right to vote its Subject Shares in
favor of the approval and adoption of the Merger Agreement or any of the
transactions contemplated by the Merger Agreement, and the Stockholder will
not take any such action after the date of this Agreement and prior to the
Stockholders'
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<PAGE>
Meeting.
(c) This Agreement has been duly and validly executed and delivered
by the Stockholder and constitutes a valid and binding agreement
enforceable against the Stockholder in accordance with its terms except to
the extent (i) such enforcement may be limited by applicable bankruptcy,
insolvency or similar laws affecting creditors' rights and (ii) the remedy
of specific performance and injunctive and other forms of equitable relief
may be subject to equitable defenses and to the discretion of the court
before which any proceeding therefor may be brought.
The representations and warranties contained in this Section 13 shall be made as
of the date hereof and as of each date from the date hereof through and
including the date the Merger is consummated.
14. Termination. The obligations of the Stockholder hereunder shall
terminate upon the earlier of the termination of the Merger Agreement pursuant
to Article 8 thereof or the Effective Time.
15. Further Assurances. The Stockholder will, from time to time, execute
and deliver, or cause to be executed and delivered, such additional or further
consents, documents and other instruments as ACE may reasonably request for the
purpose of effectively carrying out the transactions contemplated by this
Agreement.
16. Successors, Assigns and Transferees Bound. Any successor, assignee or
transferee (including a successor, assignee or transferee as a result of the
death of the Stockholder, such as an executor or heir) shall be bound by the
terms hereof, and the Stockholder shall take any and all actions necessary to
obtain the written confirmation from such successor, assignee or transferee that
it is bound by the terms hereof.
17. Remedies. The Stockholder acknowledges that money damages would be
both incalculable and an insufficient remedy for any breach of this Agreement by
it, and that any such breach would cause ACE irreparable harm. Accordingly, the
Stockholder agrees that in the event of any breach or threatened breach of this
Agreement, ACE, in addition to any other remedies at law or in equity it may
have, shall be entitled, without the requirement of posting a bond or other
security, to equitable relief, including injunctive relief and specific
performance.
18. Severability. The invalidity or unenforceability of any provision of
this Agreement in any jurisdiction shall not affect the validity or
enforceability of any other provision of this Agreement in such jurisdiction, or
the validity or enforceability of any provision of this Agreement in any other
jurisdiction.
19. Amendment. This Agreement may be amended only by means of a written
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<PAGE>
instrument executed and delivered by both the Stockholder and ACE.
20. Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally or mailed by
registered or certified mail (return receipt requested) to the parties at the
following addresses (or at such other address for a party as shall be specified
by like notice):
(a) if to ACE:
ACE Limited
The ACE Building
30 Woodbourne Avenue
Hamilton HM 08 Bermuda
Facsimile: (441) 295 3997
Attention: Peter N. Mear, Esq.
with a copy to:
Mayer, Brown & Platt
190 South LaSalle Street
Chicago, Illinois 60603
Facsimile: (312) 701-7711
Attention: Edward S. Best
(b) if to the Stockholder:
MP Investments, Inc.
30 West Superior Street
Duluth, Minnesota 55802
Facsimile: (218) 723-3960
Attention: Vice President, General Counsel and Secretary
21. Governing Law. This Agreement shall be governed by, and construed in
accordance in accordance with, the laws of the State of Delaware, regardless of
the laws that might otherwise govern under applicable principles of conflicts of
laws thereof.
22. Capitalized Terms. Capitalized terms used in this Agreement that are
not defined herein shall have such meanings as set forth in the Merger
Agreement.
23. Counterparts. For the convenience of the parties, this Agreement may
be executed in counterparts, each of which shall be deemed an original, but all
of which together shall constitute one and the same instrument.
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<PAGE>
MP INVESTMENTS, INC.
By: /s/ Philip R. Halverson
------------------------------------
Name: Philip R. Halverson
Title: Vice President, General Counsel &
Secretary
Number and class of shares of Company Capital
Stock owned or subject to acquisition on the date
hereof:
Number Class
--------- -----
7,280,480 common
Accepted and Agreed to as of the
date set forth above:
ACE LIMITED
By: Brian Duperreault
------------------------------------
Name: Brian Duperreault
Title: Chairman, President and
Chief Executive Officer
9
<PAGE>
As filed with the Securities and Exchange Commission on November 29, 1999
Registration No. 333-90927
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
Under
The Securities Act of 1933
----------------
ACE LIMITED
(Exact Name of Registrant as Specified in Its Charter)
----------------
Cayman Islands 6331 98-0091805
(State or Other (Primary Standard (IRS Employer
Jurisdiction of Industrial Identification Number)
Incorporation Classification
or Organization) Code Number)
The ACE Building Peter N. Mear
30 Woodbourne Avenue General Counsel and Secretary
Hamilton, HM 08, Bermuda c/o ACE INA Holdings Inc.
(441) 295-5200 Two Liberty Place
(Address, Including Zip Code, and 1601 Chestnut Street
Telephone Number, Including Area Code, Philadelphia, Pennsylvania 19101
of Registrant's Principal Executive
Offices) (441) 295-5200
(Name, Address, Including Zip Code, and
Telephone Number, Including Area Code,
of Agent For Service)
Copies To:
Edward S. Best, Esq. Michael J. Silver, Esq.
Mayer, Brown & Platt Hogan & Hartson L.L.P.
190 South LaSalle Street 111 South Calvert Street
Chicago, Illinois 60603 Baltimore, Maryland 21202
----------------
Approximate date of commencement of proposed sale to the public: As soon as
possible after this registration statement is declared effective and all other
conditions described in the registration statement are satisfied.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a), may
determine.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
CAPITAL RE CORPORATION
1325 Avenue of the Americas
New York, NY 10019
Merger Proposed--Your Vote Is Very Important
November 30, 1999
To the Stockholders of Capital Re Corporation:
The boards of directors of Capital Re Corporation and ACE Limited have
entered into a new merger agreement that substantially changes the terms of the
previous agreement between the parties. The new agreement provides that Capital
Re will merge into CapRe Acquisition Corp., a wholly owned subsidiary of ACE.
Upon completion of the merger, for each Capital Re share you own, you will
receive 0.65 of an ACE ordinary share plus a cash payment of the greater of
$1.30 or the difference (if positive) between the market value of 0.65 of an
ACE ordinary share and $14.00. In no event will the cash payment be more than
$4.68 per share of Capital Re common stock that you own. The market value of
0.65 of an ACE ordinary share will be determined by reference to the average of
the closing prices of ACE's ordinary shares on the New York Stock Exchange over
the five trading days ending three trading days prior to the closing of the
merger.
The merger requires the approval of the holders of at least a majority of
the outstanding shares of Capital Re common stock. Capital Re has scheduled a
special meeting of its stockholders on December 30, 1999 at 1325 Avenue of the
Americas, New York, NY 10019 to vote on the merger. We urge you to attend this
meeting, at which we will be available to answer any questions you may have.
ACE, which currently owns approximately 15.9% of Capital Re's common stock,
and other major stockholders together holding approximately 32.2% of Capital
Re's common stock, intend to vote in favor of adoption of the merger agreement
and approval of the merger.
Regardless of the number of shares you own or whether you plan to attend the
meeting, it is important that your shares be represented and voted. If you fail
to vote by proxy or in person, it will have the same effect as a vote against
the transaction. The board of directors of Capital Re recommends that you vote
FOR adoption of the merger agreement and approval of the merger. Voting
instructions are inside. This proxy statement/prospectus provides you with
detailed information about the proposed merger including information on the
reasons why the merger now being proposed differs from the merger proposed in
the proxy statement/prospectus dated September 3, 1999 previously mailed. We
encourage you to read this entire document carefully.
[JEROME F. JURSCHAK SIG]
Jerome F. Jurschak
Chairman and Chief Executive Officer
Capital Re Corporation
This proxy statement/prospectus is dated November 30, 1999, and is first
being mailed to stockholders on or about December 1, 1999.
<PAGE>
CAPITAL RE CORPORATION
1325 Avenue of the Americas
New York, New York 10019
Notice of Special Meeting of Stockholders December 30, 1999
Notice is hereby given that Capital Re Corporation will hold a special
meeting of its stockholders on December 30, 1999 at 10:00 a.m., at 1325 Avenue
of the Americas, New York, NY 10019, for the following purposes:
(1) To consider and vote upon a proposal to adopt the Amended and
Restated Agreement and Plan of Merger, dated as of October 26, 1999, among
Capital Re Corporation, CapRe Acquisition Corp. and ACE Limited, as amended
November 29, 1999, and to approve the merger contemplated by that
agreement;
(2) To authorize a postponement or adjournment of the special meeting,
if necessary, to permit further solicitation of proxies; and
(3) To transact such other business as may properly come before the
special meeting or any adjournments or postponements of the special
meeting.
A copy of the merger agreement, as amended, is attached as Appendix A to the
proxy statement/ prospectus accompanying this notice. Capital Re has
established the close of business on November 26, 1999 as the record date to
determine the stockholders entitled to vote at the special meeting or any
postponement or adjournment thereof. No business other than the proposals
described in this notice will be considered at the special meeting or any
adjournment or postponement thereof. A list of stockholders entitled to vote at
the special meeting will be available for inspection by stockholders of record
for any purpose germane to the meeting during business hours at the principal
executive offices of Capital Re during the ten-day period prior to the date of
the Capital Re special meeting and will also be available at the special
meeting.
The affirmative vote of a majority of the outstanding shares of Capital Re
common stock is required to adopt the merger agreement.
Your board of directors has determined that the merger agreement and the
merger are fair to and in the best interests of Capital Re and its stockholders
(other than ACE) and recommends that you vote to adopt the merger agreement and
approve the merger described in detail in the accompanying proxy
statement/prospectus.
Your vote is important and we urge you to complete, sign, date and return
the accompanying proxy card in the enclosed postage-paid envelope as promptly
as possible, whether or not you expect to attend the Capital Re special
meeting. If you are unable to attend in person, your shares will be voted at
the Capital Re special meeting if you return your proxy card. If you complete,
sign, date and mail your proxy card without indicating how you want to vote,
your proxy will be counted as a vote FOR adoption of the merger agreement and
approval of the merger. If your shares are held in "street name" by your broker
or other nominee, only that holder can vote your shares. You should follow the
directions provided by that nominee regarding how to instruct it to vote your
shares.
Please note: Proxy cards previously returned in connection with the special
meeting of stockholders called for October 7, 1999 to vote on adoption of the
previous merger agreement with ACE dated June 10, 1999 are NOT valid to cast a
vote at the December 30, 1999 special meeting. If you wish to vote at the
December 30, 1999 meeting, you must complete, sign, date and mail the YELLOW
proxy card included with the accompanying proxy statement/prospectus.
By Order of the Board of Directors
[signature]
Alan S. Roseman
Secretary
Capital Re Corporation
New York, New York
November 30, 1999
<PAGE>
CAPITAL RE CORPORATION
PROXY STATEMENT
---------------
ACE LIMITED
PROSPECTUS
20,815,677 ORDINARY SHARES
This proxy statement/prospectus relates to a revised merger proposal in
which you will receive for each share of Capital Re Corporation common stock
that you own on the date of the merger 0.65 of an ACE Limited ordinary share
plus a cash payment equal to the greater of $1.30 and the difference (if
positive) between the market value of 0.65 of an ACE ordinary share and $14.00.
In no event will the cash payment be more than $4.68 per share of Capital Re
common stock that you own. The market value of 0.65 of an ACE ordinary share
will be determined by reference to the average of the closing prices of ACE's
ordinary shares on the New York Stock Exchange over the five trading days
ending three trading days prior to the closing of the merger. The closing price
of ACE's ordinary shares on the New York Stock Exchange on November 26, 1999
was $18.00.
This revised merger proposal supersedes the prior merger proposal that was
the subject of a proxy statement dated September 3, 1999.
Capital Re Corporation's board of directors is furnishing this proxy
statement/prospectus to you in connection with its solicitation of proxies for
use at a meeting of Capital Re's stockholders to be held on December 30, 1999
to adopt the amended and restated merger agreement and approve the merger.
Capital Re's board of directors has approved and declared advisable this merger
agreement, and recommends that you vote to adopt it and approve the revised
merger. This proxy statement/prospectus and the accompanying form of proxy are
first being mailed to you on or about December 1, 1999.
Please note: Proxy cards previously returned in connection with the special
meeting of stockholders called for October 7, 1999 to vote on adoption of the
previous merger agreement with ACE dated June 10, 1999 are NOT valid to cast a
vote at the December 30, 1999 special meeting. If you wish to vote at the
December 30, 1999 meeting, you must complete, sign, date and mail the YELLOW
proxy card included with the accompanying proxy statement.
Throughout this proxy statement/prospectus, we refer to the amended and
restated merger agreement, as amended on November 29, 1999, as the "merger
agreement" and the revised merger proposal as the "merger," unless the context
otherwise requires.
See "Risk Factors" on page 16 for a discussion of risks relevant to the merger.
ACE's ordinary shares are traded on the New York Stock Exchange under the
symbol "ACL," and shares of Capital Re common stock are traded on the New York
Stock Exchange under the symbol "KRE."
Please do not send your Capital Re common stock certificates with the enclosed
proxy.
Neither this transaction nor these securities have been approved or
disapproved by the Securities and Exchange Commission. The Commission has not
passed upon the fairness or merits of this transaction nor upon the accuracy or
adequacy of the information contained in this proxy statement/prospectus. Any
representation to the contrary is unlawful.
---------------
The date of this proxy statement/prospectus is November 30, 1999.
This proxy statement/prospectus incorporates by reference important business
and financial information about both ACE and Capital Re which is not included
in or delivered with this proxy statement/prospectus. See "Where You Can Find
More Information" on page 89.
You can obtain any of the documents incorporated by reference in this
document through ACE or Capital Re, as the case may be, or from the Securities
and Exchange Commission through its web site at http://www.sec.gov. Documents
incorporated by reference are available from ACE Limited and Capital Re
Corporation without charge, excluding any exhibits to those documents unless
the exhibit is specifically incorporated by reference as an exhibit in this
proxy statement/prospectus. You can obtain documents incorporated by reference
in this proxy statement/prospectus by requesting them in writing or by
telephone from the appropriate company at the following addresses:
ACE LIMITED CAPITAL RE CORPORATION
The ACE Building 1325 Avenue of the Americas
30 Woodbourne Avenue New York, NY 10019
Hamilton, HM 08, Bermuda 212-974-0100
(441) 295-5200
If you would like to request documents, please do so by December 22, 1999 to
receive them before the meeting. If you request any incorporated documents, we
will mail them to you by first class mail, or another equally prompt means,
within one business day after we receive your request.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary.................................................................. 1
Risk Factors............................................................. 16
Cautionary Statement Concerning Forward-Looking Statements............... 18
Special Factors.......................................................... 19
Special Meeting.......................................................... 51
Unaudited Pro Forma Condensed Consolidated Financial Information of ACE.. 53
Information Regarding Directors, Executive Officers and Five Percent
Stockholders............................................................ 62
The Merger Agreement..................................................... 65
The Stock Option Agreement............................................... 76
The Stockholder Support Agreements....................................... 78
The Capital Support Agreement............................................ 79
Comparison of Stockholders' Rights and Description of the Share Capital
of ACE Following The Merger............................................. 79
Legal Matters............................................................ 89
Experts.................................................................. 89
Where You Can Find More Information...................................... 91
Schedule I--Directors and Executive Officers of ACE Limited.............. 93
Appendix A Agreement and Plan of Merger.................................. A-1
Appendix B Stock Option Agreement........................................ B-1
Appendix C Opinion of Goldman, Sachs & Co................................ C-1
Appendix D Section 262 of the Delaware General Corporate Law............. D-1
</TABLE>
i
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SUMMARY
This document constitutes the proxy statement of Capital Re and the
prospectus of ACE. The transactions described in this proxy
statement/prospectus are complex. This summary highlights selected information
from this proxy statement/prospectus and may not contain all of the information
that is important to you. To better understand the merger and related
transactions and for a more complete description of the legal terms of the
merger and related transactions, you should carefully read this entire document
and the documents to which we have referred you. See "Where You Can Find More
Information" on page 91. References in this proxy statement/prospectus to "$"
or dollars are to United States dollars. Financial information regarding both
Capital Re and ACE has been prepared in accordance with United States generally
accepted accounting principles.
The Parties
ACE Limited
The ACE Building
30 Woodbourne Avenue
Hamilton, HM 08, Bermuda
(441) 295-5200
Internet address: http://www.acelimited.com
ACE is a holding company incorporated with limited liability under the
Cayman Islands Companies Law. ACE maintains its principal business office in
Bermuda. ACE, through its various subsidiaries, provides a broad range of
insurance and reinsurance products to insureds in the United States and 47
other countries worldwide. In addition, ACE provides funds at Lloyd's to
support underwriting by Lloyd's syndicates. As of September 30, 1999, ACE and
its subsidiaries had total consolidated assets of over $29.3 billion.
Capital Re Corporation
1325 Avenue of the Americas
New York, N.Y. 10019
(212) 974-0100
Internet address: http://www.capitalrecorp.com
Capital Re, a Delaware corporation, is an insurance holding company for a
group of reinsurance companies that are engaged principally in serving the
United States domestic and international financial guaranty and financial risks
insurance markets. Capital Re has two principal divisions: financial guaranty
and financial risks. The financial guaranty division is composed of municipal
and non-municipal financial guaranty reinsurance and credit default swaps. The
financial risks division is composed of mortgage guaranty reinsurance, trade
credit reinsurance, title reinsurance and financial solutions. As of September
30, 1999, Capital Re had assets in excess of $1.4 billion.
ACE currently owns approximately 15.9% of Capital Re's outstanding common
stock and two executive officers of ACE, Dominic Frederico and Donald Kramer,
serve as members of the board of directors of Capital Re pursuant to rights ACE
exercised under a Stock Purchase Agreement between ACE and Capital Re dated
February 19, 1999.
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The Merger
WHAT CAPITAL RE STOCKHOLDERS WILL RECEIVE IN THE MERGER (SEE PAGE 66)
Each share of outstanding Capital Re common stock not held by ACE will be
converted into merger consideration consisting of 0.65 of an ACE ordinary share
plus a cash payment equal to the greater of $1.30 and the difference (if
positive) between the market value of 0.65 of an ACE ordinary share and $14.00.
In no event will the cash payment be more than $4.68 per share of Capital Re
common stock that you own. The market value of 0.65 of an ACE ordinary share
will be determined by reference to the average of the closing prices of ACE's
ordinary shares on the New York Stock Exchange over the five trading days
ending three trading days prior to the closing of the merger. The average
closing price will be determined on the second trading day prior to the closing
of the merger and, together with the cash per Capital Re share to be paid in
the merger, will be publicly announced by ACE as soon as practicable after its
determination. Interested parties may also contact ACE's investor relations
department (441-295-5200) for that information beginning two trading days prior
to the closing of the merger. The total number of shares to be received by
Capital Re stockholders in the merger will constitute approximately 9.6% of the
ACE ordinary shares to be outstanding after the merger.
The following chart gives a few examples of the amount of cash that Capital
Re stockholders would receive in the merger given the range of average closing
prices of ACE ordinary shares. The chart does not include cash received for
fractional shares or cash paid in respect of dissenting shares.
<TABLE>
<CAPTION>
Average Closing Amount of Cash Total Implied Value
Price of Payment Per Capital Per Capital
ACE Ordinary Shares Re Common Share Re Common Share
- ------------------- ------------------- -------------------
<S> <C> <C>
$28.00 $1.30 $19.50
$26.00 $1.30 $18.20
$24.00 $1.30 $16.90
$22.00 $1.30 $15.60
$20.00 $1.30 $14.30
$18.00 $2.30 $14.00
$16.00 $3.60 $14.00
$15.00 $4.25 $14.00
$14.00 $4.68 $13.78
</TABLE>
Capital Re stockholders will not receive fractional shares. Instead, Capital
Re stockholders will receive cash equal to the market value of any fractional
shares that will be based on the average closing price of an ACE ordinary share
for the five consecutive trading days ending three days prior to the effective
time of the merger.
WHAT CAPITAL RE STOCK OPTION HOLDERS WILL RECEIVE IN THE MERGER (SEE PAGE 66)
As a result of the merger, each outstanding and unexercised option or right
to purchase Capital Re common stock issued under Capital Re's employee benefit
plans will be replaced with an option or right to purchase ACE ordinary shares
under ACE's existing stock option plan. The number and purchase price of the
shares covered by the new options will be adjusted so that the aggregate
purchase price of the shares covered by the ACE options will be the same as the
aggregate purchase price of the shares covered by the Capital Re options and so
that the difference between the market value of the Capital Re shares subject
to the options and the aggregate exercise price of those options is the same as
the difference between the market value of the ACE shares subject to the new
options and the aggregate exercise price of those options. However, if the per
share exercise price of such option to purchase Capital Re common stock is
equal to or greater than the implied value of the merger consideration, with
the consent of the holder, such option shall be canceled and replaced with an
2
<PAGE>
option or right to purchase that number of ACE ordinary shares equal to the
number of shares of Capital Re stock subject to such option multiplied by the
implied value per share of the merger consideration divided by the fair market
value of ACE's ordinary shares as of the closing date of the merger, and the
purchase price shall be equal to the fair market value per ACE ordinary share
as of the closing date of the merger. For these purposes, the market value of
ACE shares will be based on the average of the closing prices of ACE's ordinary
shares on the New York Stock Exchange on the five trading days ending three
days before the merger and the market value of Capital Re shares will be based
upon the implied value of the merger consideration.
COMPARISON OF STOCKHOLDERS' RIGHTS (SEE PAGE 79)
Upon the merger, Capital Re stockholders will no longer be stockholders of a
company governed by the Delaware General Corporation Law but instead will
become shareholders of ACE, which is governed by the Companies Law of the
Cayman Islands.
Voting
MATTERS TO BE VOTED ON (SEE PAGE 51)
At the Capital Re special meeting, Capital Re stockholders will be asked to
adopt the merger agreement and approve the merger, to authorize, if necessary,
a postponement or adjournment of the special meeting to permit further
solicitation of proxies, and to transact such other business as may properly
come before the special meeting.
VOTE REQUIRED (SEE PAGE 51)
The affirmative vote of the holders of a majority of the outstanding shares
of common stock of Capital Re is required for adoption of the merger agreement.
Constellation Investments, Inc., a holder of 4,984,340 shares, or approximately
13.1%, of Capital Re's issued and outstanding common stock has agreed to vote
all of its shares to adopt the merger agreement and approve the merger. MP
Investments, Inc., a holder of 7,280,480 shares, or approximately 19.1%, of
Capital Re's issued and outstanding common stock has agreed to vote all of its
shares to adopt the merger agreement and approve the merger. See "The
Stockholder Support Agreements" on page 78. ACE will vote all of its shares
(approximately 15.9% of Capital Re's outstanding shares) in favor of adoption
of the merger agreement and approval of the merger. In addition, Capital Re's
directors and executive officers own an aggregate of approximately 4.4% of
Capital Re's common stock.
DISSENTERS' RIGHTS (SEE PAGE 49)
If the merger is completed, Capital Re stockholders who file a written
objection with Capital Re prior to the Capital Re stockholders meeting and do
not vote for the merger are entitled to dissenters' appraisal rights under
Delaware law.
RECORD DATE (SEE PAGE 51)
You are entitled to vote at the Capital Re special meeting if you owned
shares of Capital Re common stock as of the close of business on the record
date, which is 5:00 p.m., New York time, on November 26, 1999.
3
<PAGE>
Special Factors
CAPITAL RE'S RECOMMENDATIONS TO ITS STOCKHOLDERS (SEE PAGE 28)
A special committee comprised of the members of Capital Re's board of
directors not affiliated with ACE has recommended to the board of directors,
and the board has approved, the revised merger agreement. The board and the
special committee believe that the merger and the related transactions are
advisable and fair to and in the best interests of Capital Re's stockholders
(other than ACE) and recommends that Capital Re stockholders vote for the
proposal to adopt the merger agreement and approve the merger. Among the
reasons for the recommendation by the special committee and the board are the
following:
. the proposed merger is a product of a competitive bidding process among
Capital Re, ACE and XL Capital Ltd. ("XL") negotiated by a committee of
Capital Re's board of directors that excluded ACE's representatives on
the board, which resulted in revised merger consideration that provided
an additional 0.05 of an ACE ordinary share and a minimum of $1.30 in
cash per Capital Re share and exceeded the nominal value of ACE's
original merger consideration on October 6, 1999, the day before the
original merger was scheduled to close, by over 40%;
. the revised merger agreement retains the right of Capital Re, under
certain circumstances, to consider unsolicited superior proposals
received from unaffiliated parties;
. the board of directors and the special committee received the opinion of
Goldman Sachs that, as of October 26, 1999, the merger consideration
under the merger agreement was fair, from a financial point of view, to
the stockholders of Capital Re (other than ACE); and
. to the extent Capital Re stockholders receive ACE ordinary shares as part
of the merger consideration, the continuing strategic value of the
transaction provides benefits to Capital Re's stockholders of the size
and diversity of ACE's business, the international reach of ACE's
operations and ACE's access to capital. Capital Re and ACE have
complementary rather than overlapping businesses in product lines,
underwriting expertise and customers.
The board of Capital Re believes that, for these and other reasons, the
combined company will be able to compete more effectively in the market by
delivering products more quickly, increasing its market share and decreasing,
through diversification of products, stockholders' risk.
The board and the special committee did not specifically adopt the
conclusions of the opinion of Goldman Sachs, its financial advisors. The
fairness opinion was only one of many factors considered by the board and the
special committee in their evaluation of the merger. In light of the variety of
factors considered by the board and by the special committee, neither the board
nor the special committee quantified or otherwise attempted to assign relative
weights to the specific factors considered in making its determination that the
merger is fair to and in the best interests of Capital Re's stockholders other
than ACE.
The full text of the written opinion of Goldman Sachs, dated October 26,
1999, which sets forth assumptions made, matters considered and limitations on
the review undertaken in connection with the opinion, is attached as Appendix C
to this proxy statement/prospectus and is incorporated by reference in this
document. The opinion of Goldman Sachs referred to in this document does not
constitute a recommendation as to how you should vote with respect to the
merger. We urge you to read the opinion in its entirety.
PURPOSE, ALTERNATIVES, REASONS AND EFFECTS OF THE MERGER (SEE PAGE 38)
ACE's purpose in effecting the merger is to diversify its product line by
adding Capital Re's financial guaranty business to ACE's existing businesses.
Capital Re will be given access to ACE's larger and more stable capital base
which will allow it to grow its business. Upon completion of the merger,
Capital Re will become a privately-held company wholly owned by ACE. This will
allow for more efficient use of ACE's capital base and will allow Capital Re to
take advantage of ACE's favorable tax and regulatory domicile. ACE
4
<PAGE>
entered into the merger when it did at the request of Capital Re. At the time
ACE originally agreed to merge with Capital Re, Capital Re faced substantial
uncertainty with respect to its ratings because of certain unfavorable
developments in its business.
If the merger is completed, Capital Re common stock would cease to be
publicly traded and holders of Capital Re common stock (other than ACE and
stockholders who dissent from the merger and seek appraisal of their shares in
accordance with the Delaware law requirements explained in this proxy
statement/prospectus) would receive a combination of ACE ordinary shares and
cash as described in this proxy statement/prospectus. As a result of the
merger, Capital Re's public stockholders will not face the risk of a decline in
the value of Capital Re or Capital Re's common stock. However, Capital Re's
public stockholders will face the risk of declines in the value of ACE and
ACE's ordinary shares. Capital Re stockholders will, however, have the
opportunity to indirectly participate in the future earnings and growth of
Capital Re through their interest in ACE. While Capital Re's stockholders would
acquire shares in a larger, more diversified company, such diversification
could result in potential detriments or adverse effects to Capital Re's
stockholders when compared to their investment in Capital Re. These matters are
discussed below under "Special Factors--Purposes, Alternatives, Reasons and
Effects of the Merger."
POSITION OF ACE REGARDING FAIRNESS OF THE MERGER (SEE PAGE 39)
ACE believes that the consideration to be received by Capital Re's
stockholders in the merger is fair to the stockholders of Capital Re (other
than ACE). Among the factors considered by ACE are the following:
. the fact that a special committee of Capital Re's board of directors
consisting of all of the directors of Capital Re other than the two
directors serving as the designees of ACE determined that the merger
agreement and the merger are advisable and fair to and in the best
interests of Capital Re and its stockholders other than ACE;
. the fact that the special committee of Capital Re's board of directors
determined that the merger is at least as favorable to Capital Re's
stockholders as a competing proposal made by XL;
. the fact that ACE negotiated the merger agreement with Capital Re on an
arms'-length basis; and
. the fact that the merger allows the stockholders of Capital Re to
participate in the equity ownership of ACE and possible future
appreciation in the value of ACE's ordinary shares.
ACE did not receive any report, opinion or appraisal from an outside party
relating to the fairness from a financial point of view of the merger
consideration or the merger to Capital Re or its stockholders. ACE did receive
a financial presentation from Credit Suisse First Boston Corporation as to
certain financial matters relating to the merger which is described under
"Special Factors--Presentation of the Financial Advisor to ACE."
In light of the variety of factors considered by ACE, ACE did not quantify
or otherwise attempt to assign relative weights to the specific factors
considered in making its determination that the consideration to be received by
Capital Re's stockholders in the merger is fair to the stockholders of Capital
Re other than ACE.
INTERESTS OF CAPITAL RE'S DIRECTORS AND OFFICERS IN THE MERGER (SEE PAGE 62)
In considering the recommendation of the Capital Re board with respect to
the merger agreement and the merger, you should be aware that the directors and
executive officers of Capital Re have interests in the merger that are
different from, and in addition to, your interests. The Capital Re board was
aware of and considered these interests in approving the merger agreement. Five
senior executive officers of Capital Re have entered into agreements relating
to their employment. These agreements provide that following the merger these
persons will continue to be employed by Capital Re in positions of
responsibility similar to their current positions and will receive certain
additional benefits. ACE will also honor all of the severance provisions of
5
<PAGE>
Capital Re's employees' change in control and severance agreements. Two of
Capital Re's directors, Dominic Frederico and Donald Kramer, serve on Capital
Re's board as nominees of ACE under an agreement giving ACE the right to
appoint two directors to Capital Re's board. Messrs. Frederico and Kramer were
nominated by ACE on November 8, 1999 after receipt by the Company of the XL
offer in order to further ACE's interest in acquiring Capital Re. Messrs.
Frederico and Kramer, who are executive officers of ACE, did not serve on the
special committee of Capital Re's board that evaluated the merger nor did they
vote with respect to the merger or the merger agreement because of their
positions as executive officers of ACE.
OPINION OF CAPITAL RE'S FINANCIAL ADVISOR (SEE PAGE 31)
On October 26, 1999, Goldman, Sachs & Co. orally advised the Capital Re board
that, as of that date, the merger consideration to be received by Capital Re
stockholders (other than ACE) under the amended and restated merger agreement
signed on that date is fair from a financial point of view to Capital Re
stockholders (other than ACE). Goldman Sachs subsequently confirmed its oral
opinion by delivering a written opinion on October 26, 1999.
The full text of the written opinion of Goldman Sachs, dated October 26,
1999, which sets forth assumptions made, matters considered and limitations on
the review undertaken in connection with the opinion, is attached as Appendix C
to this proxy statement/prospectus and is incorporated by reference in this
document. The opinion of Goldman Sachs referred to in this document does not
constitute a recommendation as to how you should vote with respect to the
merger. We urge you to read the opinion in its entirety.
The Merger Agreement
The amended and restated merger agreement, as amended, is attached as Appendix
A to this proxy statement/prospectus. We encourage you to read the merger
agreement because it is the legal document that governs the merger. The
following is a summary of some of the principal terms of the merger agreement.
CONDITIONS TO THE MERGER (SEE PAGE 67)
The completion of the merger depends upon the satisfaction of a number of
customary conditions, including the following:
--adoption of the merger agreement and approval of the merger by the
Capital Re stockholders;
--approval for listing by the New York Stock Exchange of the ACE shares to
be issued in the merger;
--receipt of all necessary regulatory approvals;
--absence of any law or court order that prohibits the merger; and
--the registration statement registering the ACE ordinary shares to be
received by Capital Re's stockholders becoming effective.
TERMINATION OF THE MERGER AGREEMENT (SEE PAGE 74)
The merger agreement can be terminated at any time prior to the effective
time of the merger under the following circumstances:
--by mutual written consent of both parties by action of each party's board
of directors;
--by either party
--if the merger is not completed on or before February 28, 2000, which
will be extended to April 28, 2000 if the sole reason the merger isn't
completed is the absence of a required governmental consent, other than
due to a material breach of the merger agreement by the terminating
party;
6
<PAGE>
--if the stockholders of Capital Re fail to adopt the merger agreement
other than due to a material breach of the merger agreement by the
terminating party;
--if a court or governmental authority permanently prohibits the merger;
or
--upon a material breach of any covenant or agreement in the merger
agreement by the other party that is not cured within a specified time or
that cannot be cured;
--by Capital Re, prior to or after adoption of the merger agreement by its
stockholders
--if it is not in material breach of any of the terms of the merger
agreement and its board of directors authorizes Capital Re to enter into
a binding written agreement for an unsolicited superior proposal from a
party other than ACE; and
--Capital Re gives ACE notice and a copy of the superior proposal and ACE
does not make, within five business days, an offer that Capital Re's
board, after good faith consultation with its financial advisors and
after taking into account the long term prospects and interests of
Capital Re and its stockholders, believes is at least as favorable as the
superior proposal; and
--Capital Re pays the termination fee described below;
--by ACE's board
--at any time before the effective time of the merger if Capital Re enters
into a binding agreement for a superior proposal; or
--if Capital Re or its board of directors
--adversely withdraws, modifies or amends its recommendation to adopt
the merger agreement or fails to reconfirm, within five days after
ACE's written request, its recommendation to its stockholders in favor
of the merger;
--fails, after the registration statement of which this proxy
statement/prospectus is a part is declared effective, to promptly mail
this proxy statement/prospectus;
--approves, recommends or enters into an agreement with respect to a
business combination or similar transaction proposal with a party other
than ACE;
--resolves to do any of the above; or
--fails, in response to a tender offer or exchange offer for 10% or more
of the outstanding Capital Re common stock, within ten business days
after the commencement of the offer, to recommend rejection of that
offer.
TERMINATION FEES AND EXPENSES (SEE PAGE 75)
The merger agreement requires the payment by Capital Re to ACE of a
termination fee of $25 million after termination of the merger agreement in any
of the following circumstances:
--termination by ACE because Capital Re's stockholders fail to approve the
merger; and
--prior to or at the time of Capital Re's stockholder meeting, a third
party either makes a proposal to acquire Capital Re or has publicly
announced an intention to acquire Capital Re; and
--within 12 months of the termination of the merger agreement, Capital Re
enters into an agreement concerning an acquisition proposal;
--termination by ACE because Capital Re accepts a superior proposal from a
third party for the acquisition of Capital Re; or
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--termination by Capital Re in order to accept a superior proposal from a
third party after ACE has had an opportunity to match the superior
proposal.
The merger agreement requires Capital Re to pay ACE up to $3 million for
ACE's out-of-pocket expenses if the merger agreement is terminated by ACE
because Capital Re materially breaches any covenant or agreement contained in
the merger agreement that is not curable or, if curable, is not cured within 20
days after written notice of the breach is given by ACE to Capital Re.
The merger agreement also requires ACE to pay Capital Re up to $3 million
for Capital Re's out-of-pocket expenses if the merger agreement is terminated
by Capital Re because ACE materially breaches any covenant or agreement
contained in the merger agreement that is not curable or, if curable, is not
cured within 20 days after written notice of the breach is given by Capital Re
to ACE.
AMENDMENT OF MERGER AGREEMENT (SEE PAGE 76)
Subject to applicable law, at any time prior to the effective time of the
merger, ACE and Capital Re may further modify or amend the merger agreement. On
November 29, 1999, ACE and Capital Re amended Section 1.4 of the merger
agreement to clarify under what circumstances the merger could be restructured
to provide for the merger of Capital Re Acquisition Corp. into Capital Re.
WAIVER OF CONDITIONS (SEE PAGE 76)
Any failure of ACE or Capital Re to comply with any obligation, covenant,
agreement or condition in the merger agreement can be waived in writing by
Capital Re or ACE, respectively. However, a waiver or failure to insist upon
strict compliance with an obligation, covenant, agreement or condition does not
operate as a waiver of, or estoppel with respect to, any subsequent or other
failure.
The Stock Option Agreement
The stock option agreement is attached as Appendix B to this proxy
statement/prospectus. The following summarizes some of the principal terms of
the stock option agreement.
TERMS OF THE OPTION (SEE PAGE 76)
In connection with the original merger agreement entered into on June 10,
1999, Capital Re granted ACE an option to purchase 3,220,135 shares of its
common stock, approximately 9.9%, exercisable under specified circumstances.
The per share exercise price of the option is $17.40. The option is exercisable
if the merger agreement is terminated and ACE is or becomes entitled to the $25
million termination payment from Capital Re. However, in no event can the sum
of ACE's profit on the sale of the option, or shares into which they are
exercisable, and the $25 million termination payment, exceed $25 million.
OPTION MAY DETER COMPETING BIDDERS (SEE PAGE 78)
The option agreement was intended to increase the likelihood that the merger
will be consummated and to discourage third parties from seeking to acquire
Capital Re. The option agreement may discourage, but does not preclude, a third
party from proposing a competing transaction, including one that some Capital
Re stockholders might perceive to be more favorable to stockholders than this
merger.
8
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Other Information
REGULATORY APPROVALS (SEE PAGE 48)
In order to complete the merger, ACE and Capital Re must receive
authorizations from various U.S. federal and state governmental and non-
governmental entities. ACE and Capital Re have received all such
authorizations, but have not yet completed any required non U.S. filings.
COMPARATIVE PER SHARE MARKET PRICE INFORMATION (SEE PAGE 14)
ACE's ordinary shares and Capital Re's common stock are each listed on the
New York Stock Exchange. On May 26, 1999, the last full trading day before ACE
and Capital Re confirmed publicly that they were engaged in discussions
regarding a merger, ACE ordinary shares closed at $31.50 per share and Capital
Re common stock closed at $19.25. On June 10, 1999, the last full trading day
on the New York Stock Exchange prior to the public announcement of the original
merger agreement, ACE's ordinary shares closed at $27.875 per share and Capital
Re's common stock closed at $16.5625 per share. On October 25, 1999, the last
full trading day on the NYSE prior to public announcement of the amended and
restated merger agreement, ACE's ordinary shares closed at $17.50 per share and
Capital Re's common stock closed at $13.5625 per share.
STOCK EXCHANGE LISTING OF ACE SHARES (SEE PAGE 44)
ACE has applied to list the ACE ordinary shares to be issued in connection
with the merger on the New York Stock Exchange.
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES (SEE PAGE 45)
So long as certain conditions are met, ACE and Capital Re believe that the
merger will be structured and completed such that the stockholders of Capital
Re will not recognize gain or loss with respect to their receipt of ACE
ordinary shares in the merger. Capital Re stockholders will, however, recognize
any gain realized with respect to their receipt of cash in the merger. In the
event that over one-half of the total amount which ACE pays to acquire Capital
Re is comprised of cash, the merger will be restructured. Under this revised
structure, the stockholders of Capital Re would recognize gain or loss with
respect to their receipt of ACE ordinary shares and cash in the merger.
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Summary Historical Consolidated Financial Data of ACE
The following table sets forth summary historical consolidated financial and
other data of ACE. The interim financial data have been derived from our
unaudited financial statements and include, in the opinion of our management,
all adjustments, consisting only of normal recurring accruals, necessary for a
fair presentation of the financial data. The results for the interim nine month
periods do not necessarily indicate the results to be expected for the full
fiscal year. The year-end financial data have been derived from our audited
financial statements. On July 9, 1998, we completed the acquisition of Tarquin
Limited, which we accounted for on a pooling-of-interests basis. We have
restated all prior financial information presented to include the results of
operations and financial position of the combined entities. For the historical
annual periods presented below, our fiscal year ended on September 30. From and
after July 2, 1999, our fiscal year was changed to December 31. You should read
the following information in conjunction with our financial statements and
notes thereto, the information set forth under the caption "Management's
Discussion and Analysis of Results of Operations and Financial Condition"
included in Appendix B and the other financial and statistical information that
we include or incorporate by reference in this prospectus supplement and the
accompanying prospectus.
<TABLE>
<CAPTION>
Nine Months Three Months
Ended Ended
September 30, December 31, Year Ended September 30,
----------------------- ------------------ ----------------------------------------------------------
1999 1998 1998 1997 1998 1997 1996 1995 1994
----------- ---------- -------- -------- ---------- ---------- ---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Operations data:
Net premiums written.. $ 1,643,838 $ 727,824 $154,103 $153,149 $ 880,973 $ 789,773 $ 781,884 $ 544,880 $ 385,926
Net premiums earned... 1,538,489 688,973 218,007 205,330 894,303 805,372 755,840 473,133 391,117
Net investment
income............... 334,338 260,582 85,095 63,672 324,254 253,440 213,701 184,041 142,677
Net realized gain
(loss) on
investments.......... (15,932) 160,892 130,154 27,493 188,385 127,702 55,229 50,765 3,717
Losses and loss
expenses(1).......... 1,045,262 394,637 111,169 122,255 516,892 486,140 520,277 366,322 520,556
Acquisition costs,
administrative and
other expenses....... 503,568 226,936 69,030 44,630 271,566 153,486 138,343 81,976 63,459
Amortization of
goodwill............. 26,408 10,563 4,435 2,271 12,834 7,325 1,507 (437) (826)
Interest expense...... 52,745 24,098 4,741 1,361 25,459 11,657 10,481 5,036 --
Income taxes.......... 15,978 16,272 5,342 3,768 20,040 25,181 26,543 7,673 --
----------- ---------- -------- -------- ---------- ---------- ---------- ---------- ----------
Net income (loss)(1).. $ 212,934 $ 437,941 $238,539 $122,210 $ 560,151 $ 502,725 $ 327,619 $ 247,369 $ (45,678)
=========== ========== ======== ======== ========== ========== ========== ========== ==========
Balance sheet data (at
end of period):
Total investments and
cash................. $11,864,501 $6,201,074 NM NM $6,201,074 $4,787,916 $4,342,781 $3,225,786 $2,538,321
Total assets.......... 29,344,183 8,788,753 NM NM 8,788,753 5,647,596 5,077,780 3,514,946 2,632,361
Net unpaid losses and
loss expenses(1)..... 9,092,713 2,678,341 NM NM 2,678,341 2,006,873 1,892,302 1,452,299 1,160,392
Total shareholders'
equity(1)............ 3,864,369 3,714,270 NM NM 3,714,270 2,785,155 2,367,003 1,524,123 1,088,745
Selected Other Data:
Loss and loss expense
ratio(1)............. 67.9% 57.3% 51.0% 59.5% 57.8% 60.4% 68.8% 77.4% 133.1%
Underwriting and
administrative
expense ratio(2)..... 32.2% 26.2% 31.7% 21.7% 25.0% 19.0% 18.3% 17.2% 16.0%
Combined ratio(1)(2).. 100.1% 83.5% 82.7% 81.2% 82.8% 79.4% 87.1% 94.6% 149.1%
Loss reserves to
capital and surplus
ratio(1)............. 235.3% 72.1% NM NM 72.1% 72.1% 79.9% 95.3% 106.6%
Net premiums written
to capital and
surplus ratio........ NM NM NM NM 23.7% 28.4% 33.0% 35.8% 35.4%
</TABLE>
- --------
NM--Not meaningful
(1) At June 30, 1994, ACE increased its then existing reserves relating to
breast implant claims. Although the reserve increase was partially
satisfied by an allocation from existing IBNR, it also required an increase
in ACE's total reserve for unpaid losses and loss expenses at June 30, 1994
of $200 million (see "Management's Discussion and Analysis of Results of
Operations and Financial Condition--Breast Implant Litigation" included in
Appendix B).
(2) Excluding non-recurring and non-insurance expenses.
10
<PAGE>
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA OF CAPITAL RE
The following table presents summary historical consolidated financial data
of Capital Re for the periods indicated. The historical financial data as of
and for the five years ended December 31, 1998 were derived from Capital Re's
audited consolidated financial statements, as filed in Capital Re's Forms 10-K.
The historical financial data as of and for the nine months ended September 30,
1999 were derived from Capital Re's unaudited consolidated financial
statements, as filed in Capital Re's Form 10-Q. The data should be read in
conjunction with the consolidated financial statements, related notes and other
financial information of Capital Re incorporated by reference in this proxy
statement/prospectus.
The historical financial information for Capital Re reflects the following
item that you should consider in making period-to-period comparisons:
Net income per share is based on the weighted average number of shares of
common stock and common stock equivalents outstanding for each period as
required by Statement of Financial Accounting Standard No. 128.
On June 30, 1998, Capital Re effected a two-for-one split of its common
stock.
<TABLE>
<CAPTION>
Nine Months
Ended September 30, Year Ended December 31,
--------------------- ---------------------------------------------
1999 1998 1998 1997 1996 1995 1994
---------- --------- -------- -------- -------- ------- -------
(in thousands except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Net premiums written.... $ 142,293 $ 157,037 $210,594 $164,275 $105,188 $89,508 $82,795
Net premiums earned..... 125,533 129,171 168,385 115,291 92,436 60,097 58,850
Net investment income... 52,440 48,465 64,854 56,498 51,558 46,654 40,113
Net realized gains on
sales of investments... (3,926) 4,309 (1,506) 8,037 1,471 53 1,780
Other income............ 5,101 1,259 3,212 1,635 813 281 719
Losses and loss
expenses............... 200,161 33,677 86,564 15,633 9,483 2,637 2,167
Acquisition costs....... 39,177 39,037 49,433 38,515 30,714 20,902 21,471
Other expenses.......... 22,315 26,657 30,944 16,725 15,521 10,840 12,796
Interest expense........ 5,644 5,582 7,412 7,399 6,895 6,893 6,539
Minority interest in
Capital Re LLC......... 4,303 4,303 5,738 5,738 5,738 5,738 5,387
---------- --------- -------- -------- -------- ------- -------
(Loss)/income before
income tax............. (92,452) 73,948 54,854 97,451 77,927 60,075 53,102
Income tax (recovery)... (35,307) 19,656 10,667 26,633 20,913 14,548 13,296
---------- --------- -------- -------- -------- ------- -------
Net (loss)/income from
continuing operations.. (57,145) 54,292 44,187 70,818 57,014 45,527 39,806
(Loss)/income from
discontinued
operations, net of
tax.................... (75,896) 158 (2,645) (766) (490) 0 0
---------- --------- -------- -------- -------- ------- -------
Net (loss)/income....... $ (133,041) $ 54,450 $ 41,542 $ 70,052 $ 56,524 $45,527 $39,806
========== ========= ======== ======== ======== ======= =======
Weighted average
shares--basic.......... 33,792 31,871 31,885 31,746 31,312 29,576 29,650
Earnings per share--
basic.................. (3.94) 1.71 1.30 2.21 1.81 1.54 1.34
Weighted average
shares--diluted........ 34,058 32,730 32,645 32,505 31,892 29,828 29,706
Earnings per share--
diluted................ (3.91) 1.66 1.27 2.16 1.77 1.53 1.34
</TABLE>
11
<PAGE>
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA OF CAPITAL RE (cont'd)
<TABLE>
<CAPTION>
As of
As of December 31,
September 30, ------------------------------------------------------
1999 1998 1997 1996 1995 1994
------------- ---------- ---------- ---------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Total quoted investments
and cash............... $1,137,274 $1,184,931 $1,022,026 $ 914,409 $776,304 $640,114
Insurance and
reinsurance balances
receivable (including
reinsurance
recoveries)............ 74,060 75,045 77,511 83,522 86,396 61,210
Other assets............ 207,060 248,917 246,305 159,670 119,185 108,716
---------- ---------- ---------- ---------- -------- --------
Total assets........... $1,418,394 $1,508,893 $1,345,842 $1,157,601 $981,885 $810,040
---------- ---------- ---------- ---------- -------- --------
Unpaid losses and loss
expenses............... $ 107,383 $ 87,960 $ 27,986 $ 19,902 $ 12,783 $ 9,012
Unearned premiums....... 416,188 405,866 373,996 337,104 314,451 274,916
Other liabilities....... 393,110 404,241 374,917 310,709 242,708 200,598
---------- ---------- ---------- ---------- -------- --------
Total liabilities...... $ 916,681 $ 898,067 $ 776,899 $ 667,715 $569,942 $484,526
---------- ---------- ---------- ---------- -------- --------
Share capital and
additional paid in
capital................ $ 302,909 $ 227,604 $ 225,321 $ 222,685 $191,804 $191,364
Retained earnings....... 218,449 355,693 319,253 253,807 201,228 158,806
Other shareholders'
equity components...... (14,754) 32,420 29,260 16,724 22,549 (21,018)
Treasury Stock, at
cost................... (4,891) (4,891) (4,891) (3,870) (3,638) (3,638)
---------- ---------- ---------- ---------- -------- --------
Total shareholders'
equity................ $ 501,713 $ 610,826 $ 568,943 $ 489,346 $411,943 $325,514
---------- ---------- ---------- ---------- -------- --------
Total liabilities and
shareholders' equity.. $1,418,394 $1,508,893 $1,345,842 $1,157,061 $981,885 $810,040
========== ========== ========== ========== ======== ========
</TABLE>
SUMMARY UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION OF
ACE
<TABLE>
<CAPTION>
Twelve
Months Ended Year Ended
September 30, 1999 September 30, 1998
------------------------- ----------------------
(in millions except share and per share data)
<S> <C> <C>
Statement of Operations
Data:
Net premiums written.... $ 4,182 $ 4,082
====================== ======================
Net premiums earned..... 4,096 4,019
Net investment income... 791 835
Other income............ 289 285
Losses and loss
expenses............... 3,046 2,769
Acquisition costs and
administrative
expenses............... 1,385 1,857
Other expenses.......... 845 252
Income tax (recovery)... (92) 11
---------------------- ----------------------
Income excluding net
realized gains......... (8) 250
Cumulative effect of
accounting change...... (85) --
Net realized gains on
investments............ 176 208
---------------------- ----------------------
Net income--continuing
operations............. $ 83 $ 458
====================== ======================
Diluted earnings per
share--continuing
operations............. $ 0.37 $ 2.14
====================== ======================
Diluted earnings per
share from continuing
operations excluding
net realized gains and
cumulative effect of
accounting change...... $ (.04) $ 1.17
====================== ======================
Weighted average shares
outstanding--diluted... 221,625,005 214,036,518
====================== ======================
<CAPTION>
As of September 30, 1999
-------------------------
(in millions, except per
share data)
<S> <C> <C>
Balance Sheet Data:
Total investments and
cash................... $ 12,845
Other assets, including
goodwill............... 17,798
Total assets............ 30,643
Unpaid losses and loss
expenses............... 17,305
Total liabilities....... 26,330
Total shareholders'
equity................. 4,313
Total liabilities and
shareholders' equity... 30,643
Fully diluted book value
per share.............. $ 19.65
</TABLE>
12
<PAGE>
COMPARATIVE PER SHARE INFORMATION
COMPARATIVE PER SHARE FINANCIAL DATA
The following table presents the net income, dividends, and book value per
share of ACE and Capital Re, on a pro forma basis for ACE and an equivalent pro
forma basis for Capital Re. Pro forma data for ACE was derived by combining the
historical financial statements of ACE with Capital Re's historical financial
statements, giving effect to the merger using the "purchase" method of
accounting. Equivalent pro forma information for Capital Re is presented on an
equivalent share basis, which reflects ACE's pro forma amounts multiplied by an
exchange ratio of 0.65 of an ACE share per share of Capital Re common stock and
the per share cash consideration paid.
Pro forma income statement-related per share amounts have been prepared as
if the merger had occurred at the beginning of the earliest year presented.
These amounts do not include non-recurring items directly attributable to the
merger, including change-in-control costs and fees for investment bankers,
accountants, and attorneys, nor do they include ACE's estimate of the expected
annual operating expense savings from the merger. Pro forma book value per
share amounts have been prepared as if the merger had occurred at the beginning
of the earliest year presented and do not include the effect of additional
shares that may be issued as a result of the exercise of stock options.
The information set forth below should be read in conjunction with the
respective audited consolidated financial statements and notes thereto of ACE
and Capital Re, which are incorporated herein by reference. The pro forma
information is presented for illustrative purposes only and is not necessarily
indicative of the operating results or financial position that would have
occurred if the merger had been consummated on the date indicated, nor is it
necessarily indicative of future operating results or financial position.
COMPARATIVE PER SHARE INFORMATION
<TABLE>
<CAPTION>
Year
Twelve Months Ended Ended or at
or at September 30,
Historical ACE(8) September 30, 1999 1998(1)(2)(3)
----------------- --------------------- ------------------
<S> <C> <C>
Diluted Earnings per share excluding
net realized gains.................. $ 1.71 $ 1.97
Diluted Earnings per share........... 2.29 2.96
Cash dividends per share(4).......... 0.40 0.34
Basic book value per share........... 19.91 19.19
Fully diluted book value per share... 19.72 19.14
<CAPTION>
Unaudited Pro Forma Combined for
CIGNA P&C Acquisition
--------------------------------
<S> <C> <C>
Diluted Earnings per share excluding
net realized gains.................. $ 0.29 $ 1.18
Diluted Earnings per share........... 0.78 2.27
Cash dividends per share(4).......... .40 0.34
Basic book value per share........... 20.02 N.M.
Fully diluted book value per share... 19.65 N.M.
<CAPTION>
Twelve Months Year Ended
Ended December 31,
Historical Capital Re September 30, 1999(4) 1998(5)
--------------------- --------------------- ------------------
<S> <C> <C>
Diluted Earnings (loss) per share
from continuing operations excluding
net realized gains.................. $(1.79) $ 1.38
Diluted Earnings (loss) per share
from continuing operations.......... (1.99) 1.35
Cash dividends per share(4).......... 0.16 $ 0.16
Basic book value per share........... 13.73 $19.13
Fully diluted book value per share... 13.34 $18.92
<CAPTION>
Twelve Months
Unaudited Pro Forma Combined for Ended or at Year Ended or at
CIGNA P&C Acquisition and Capital Re September 30, 1999 September 30, 1998
------------------------------------ --------------------- ------------------
<S> <C> <C>
Diluted earnings (loss) per share
from continuing operations excluding
net realized gains and cumulative
effect of accounting change......... $(0.04) $ 1.17
Diluted earnings per share from
continuing operations............... 0.37 2.14
Cash dividends per share(6).......... 0.40 0.34
Basic book value per share........... 19.84 N.M.
Fully diluted book value per share... 19.65 N.M.
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
Unaudited Equivalent Pro Forma per
Capital Re Share Combined Twelve Months
for CIGNA P&C and Capital Re Ended or at Year Ended or at
Acquisitions(5) September 30, 1999 September 30, 1998
---------------------------------- ------------------ ------------------
<S> <C> <C>
Diluted earnings (loss) per share from
continuing operations excluding net
realized gains and cumulative effect of
accounting change....................... $ (.03) $0.76
Diluted earnings per share from
continuing operations................... .24 1.39
Cash dividends per share(7).............. 0.40 0.34
Basic book value per share............... 12.90 --
Per share cash consideration............. 2.54 --
------
15.44 --
------
Fully diluted book value per share....... $12.77 --
Per share cash consideration............. 2.54 --
------
15.31 --
------
</TABLE>
- --------
(1) The historical earnings per share for the year ended September 30, 1998
include ACE's results for the year ended September 30, 1998 and Capital
Re's results for the year ended December 31, 1998.
(2) Pro forma combined per share data for the year ended September 30, 1998
includes ACE's results for the year ended September 30, 1998 and CIGNA
P&C's and Capital Re's results for the year ended December 31, 1998.
(3) Historical ACE earnings per share for the year ended September 30, 1998
include one-time expenses of $0.23 per share in connection with ACE's
pooling of interest transaction with Tarquin Limited in July 1998.
(4) Pro forma historical information adjusted to a September 30 fiscal year.
(5) Historical Capital Re financial Information.
(6) Pro forma cash dividends per share are assumed to be the same as
historically declared by ACE.
(7) The Unaudited Equivalent Pro Forma per Capital Re Share data represents the
Unaudited Pro Forma Combined for CIGNA P&C and Capital Re Acquisitions data
calculated using the exchange ratio applied to the conversion of
outstanding Capital Re shares.
(8) On July 2, 1999, ACE changed its fiscal year-end from September 30 to
December 31. This change will be implemented retroactively, however the
period from the most recent fiscal year-end (September 30, 1998) to the
most recent interim date for which a balance sheet is required is
represented by the twelve months ended September 30, 1999.
COMPARATIVE MARKET PRICE AND DIVIDEND INFORMATION
ACE ordinary shares are listed on the NYSE under the trading symbol "ACL,"
and Capital Re common stock is listed on the NYSE under the trading symbol
"KRE." The following table sets forth the high and low closing sale prices of
ACE shares and Capital Re common stock as reported on the New York Stock
Exchange Composite Transactions List for the periods indicated, both as
adjusted for the three for one stock split of ACE's ordinary shares in March
1998 and for the two for one stock split of Capital Re's common stock in June
1998.
<TABLE>
<CAPTION>
ACE Sales Capital Re Sales
Prices Prices
--------------- -----------------
High Low High Low
------- ------- -------- --------
<S> <C> <C> <C> <C>
Fiscal Year(1) 1997
First Quarter................................. $20.047 $17.453 $ 23.688 $ 20.625
Second Quarter................................ $22.078 $18.750 $ 27.125 $ 19.500
Third Quarter................................. $24.875 $19.422 $ 30.500 $ 25.031
Fourth Quarter................................ $32.172 $24.500 $ 31.438 $ 27.969
Fiscal Year(1) 1998
First Quarter................................. $33.484 $29.719 $ 33.219 $ 28.969
Second Quarter................................ $40.537 $30.422 $ 38.688 $ 31.344
Third Quarter................................. $40.313 $34.438 $ 37.750 $ 24.250
Fourth Quarter................................ $42.125 $26.938 $ 25.938 $ 15.500
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
ACE Sales Capital Re Sales
Prices Prices
---------------- ----------------
High Low High Low
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Fiscal Year(1) 1999
First Quarter............................... $ 34.813 $25.438 $ 20.375 $11.938
Second Quarter.............................. $ 34.438 $25.438 $ 20.625 $15.186
Third Quarter(2)............................ $ 34.875 $27.375 $ 16.000 $12.500
Fourth Quarter(3)........................... $ 28.438 $21.938 -- --
Period from October 1, 1999 through November
26, 1999................................... $21.5625 $ 15.50 $15.0625 $ 9.625
</TABLE>
- --------
(1) The fiscal years of ACE ended on September 30 of each year; the fiscal year
of Capital Re ends on December 31 of each year. From and after July 2,
1999, the fiscal year of ACE will end on December 31.
(2) The third quarter of ACE ends on June 30 of each year; the third quarter of
Capital Re ended on September 30, 1999.
(3) The fourth quarter of ACE ended on September 30, 1999.
DIVIDENDS
The following table sets forth dividends declared per ACE ordinary share and
per share of Capital Re common stock for the periods indicated. The ability of
either ACE or Capital Re to pay dividends to their respective stockholders is
subject to certain restrictions and depends upon limitations under applicable
law and other factors their respective boards of directors deem relevant,
including results of operations, financial condition and surplus requirements.
<TABLE>
<CAPTION>
ACE Capital Re
Dividends Dividends
--------- ----------
<S> <C> <C>
Fiscal Year(1) 1997
First Quarter............................................. $ 0.06 $ 0.04
Second Quarter............................................ $ 0.06 $ 0.04
Third Quarter............................................. $0.0733 $ 0.04
Fourth Quarter............................................ $0.0733 $ 0.04
Fiscal Year(1) 1998
First Quarter............................................. $ 0.08 $ 0.04
Second Quarter............................................ $ 0.08 $ 0.04
Third Quarter............................................. $ 0.09 $ 0.04
Fourth Quarter............................................ $ 0.09 $ 0.04
Fiscal Year(1) 1999
First Quarter............................................. $ 0.09 $ 0.04
Second Quarter............................................ $ 0.09 $ 0.04
Third Quarter............................................. $ 0.11 $ 0.04
Fourth Quarter............................................ $ 0.11 --
Period from October 1, 1999 through November 26, 1999..... -- --
</TABLE>
- --------
(1) The fiscal years of ACE ended on September 30 of each year; the fiscal year
of Capital Re ends on December 31 of each year. From and after July 2,
1999, the fiscal year of ACE will end on December 31.
15
<PAGE>
RISK FACTORS
In addition to the matters addressed in "Cautionary Statement Concerning
Forward-Looking Statements" on page 18 and the other information included in
this proxy statement/prospectus, Capital Re stockholders should consider the
following risk factors carefully in determining whether to approve the merger.
YOU COULD RECEIVE LESS THAN $14.00 IN VALUE PER CAPITAL RE SHARE
If the market value of an ACE ordinary share is below $14.3385, you will
receive less than $14.00 in value per share of consideration in the merger. For
each share of Capital Re stock that you own, you will receive merger
consideration consisting of 0.65 of an ACE ordinary share plus a cash payment
equal to the greater of $1.30 and the difference (if positive) between the
market value of an ACE ordinary share and $14.00, subject to a maximum amount
of cash of $4.68 per Capital Re share. The market value of ACE's ordinary
shares will be determined by reference to the average closing prices of ACE's
ordinary shares on the New York Stock Exchange over the five trading days
ending three trading days prior to the closing of the merger. Because the
amount of cash which ACE has agreed to pay is capped at $4.68 per Capital Re
share, in the event the market value of an ACE ordinary share is below
$14.3385, you will receive less than $14.00 in value per share of consideration
in the merger. In addition, if ACE's ordinary share price declines between the
third trading day prior to closing and the closing date, you may also receive
less than $14.00 per share in value, even if the cash portion of the merger
consideration does not reach the $4.68 cap. For instance, if ACE's market value
for purposes of the consideration calculation is $15.00, the cash portion to be
paid will be $4.25. If ACE's stock declines to $14 by the closing date you will
receive merger consideration of $13.35.
THE MERGER MAY NOT BE TAX-FREE
As discussed below under "Special Factors--Material United States Federal
Income Tax Consequences" (See page 45), so long as certain conditions are met,
ACE and Capital Re believe that the stockholders of Capital Re will not
recognize gain or loss with respect to their receipt of ACE ordinary shares in
the merger. Capital Re stockholders, will, under any circumstances, recognize
any gain realized with respect to their receipt of cash in the merger. One of
the conditions to proceeding with the merger as currently structured is that at
least one-half of the consideration paid by ACE in its acquisition of Capital
Re consist of ACE ordinary shares. In the event that over one-half of the total
amount which ACE pays to acquire Capital Re (including the amounts ACE paid to
purchase shares in the market and those paid in respect of dissenters' rights)
is comprised of cash, the merger will be restructured so that Capital Re rather
than CapRe Acquisition Corp. will be the surviving entity in the merger. ACE
would exercise this right in order to ensure that Capital Re does not recognize
gain or loss in the merger. Under this revised structure, the stockholders of
Capital Re would recognize gain or loss with respect to their receipt of ACE
ordinary shares and cash in the merger. ACE and Capital Re currently believe
that the merger will proceed as currently structured so long as the market
value of ACE's ordinary shares is equal to or exceeds $9.32. If the mix of cash
and ACE ordinary shares to be received by Capital Re stockholders in the merger
is such that the merger is restructured, or if counsel to either ACE or Capital
Re is unable to provide a tax opinion that the merger will be treated as a
reorganization within the meaning of Section 368(a) of the Code, the merger
will be restructured and ACE will issue a press release informing the Capital
Re stockholders that the merger is fully taxable.
YOU MAY HAVE DIFFICULTY ENFORCING CIVIL REMEDIES
ACE is a Cayman Islands company with its principal place of business in
Hamilton, Bermuda. Some of ACE's directors and officers, and some experts named
in this proxy statement/prospectus reside outside the United States and all or
a substantial portion of the assets of these people and of ACE are located
outside the United States. Consequently, it may be difficult for United States
investors to effect service within the United States upon ACE or its directors
or officers who are not United States residents, or to realize in the United
States upon judgments of courts of the United States predicated upon civil
liabilities under the Securities Act or
16
<PAGE>
other matters. In addition, investors should not assume that courts in the
Cayman Islands or other non-United States jurisdictions
--would enforce judgments of United States courts obtained in actions
against ACE or those persons based upon civil liability provisions of the
United States federal securities laws or the securities or blue sky laws
of any state within the United States; or
--would enforce, in original actions, liabilities against ACE or those
persons based upon United States federal securities laws or any state
securities or blue sky laws.
ACE has appointed CT Corporation System, 1633 Broadway, New York, New York
10019, as agent for service of process in any action in any United States
federal or state court brought against it under the securities laws of the
United States arising out of the registration of its shares pursuant to the
registration statement of which this proxy statement/prospectus is a part.
VARIOUS MARKET AND OTHER FACTORS HAVE CAUSED, OR COULD IN THE FUTURE CAUSE,
VOLATILITY IN ACE'S ORDINARY SHARE PRICE
The market price of ACE's ordinary shares has fluctuated, and may fluctuate
in the future, significantly in response to various factors and events,
including:
--fluctuations in ACE's financial results;
--changes in securities analysts' earning estimates or recommendations; or
--publicity about ACE or other companies in the insurance and reinsurance
industries.
During the period from the signing of the original merger agreement in June
1999 through the signing of the amended and restated merger agreement on
October 26, 1999, the trading price of ACE's ordinary shares fell from $29.75
to as low as $15.50. There can be no assurance that such a price decline will
not recur either before or after completion of the merger.
Also, the stock market experiences broad price and volume fluctuations that,
in many cases, are unrelated to the performance of particular companies. These
fluctuations, as well as upgrades and downgrades in analysts' recommendations
of ACE ordinary shares, have affected the market price of ACE ordinary shares
in the past and are likely to do so in the future. In addition, the adoption of
new statutes or regulations affecting the insurance and reinsurance industries,
or changes in existing statutes and regulations, could impact ACE's ordinary
share price.
17
<PAGE>
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
ACE and Capital Re have made in this proxy statement/prospectus and in the
documents referred to in this proxy statement/prospectus forward-looking
statements that are subject to risks and uncertainties. These statements are
based on the beliefs and assumptions of the management of the companies and on
the information currently available to management. Forward-looking statements
include information concerning possible or assumed future results of ACE,
Capital Re and the combined company and may be preceded by, followed by, or
otherwise include the words "believes," "expects," "anticipates," "intends,"
"plans," "estimates" or similar expressions.
All forward-looking statements address matters that involve risks and
uncertainties. Accordingly, you should understand that there are or will be
important factors, in addition to those discussed elsewhere in this proxy
statement/prospectus and in the documents referred to in this proxy
statement/prospectus, that could affect the future results of the combined
company following the merger and that could cause actual results to differ
materially from those expressed in such forward-looking statements, including
but not limited to the following:
--uncertainties relating to government and regulatory policies (such as
subjecting ACE to insurance regulation or taxation in additional
jurisdictions),
--the occurrence of catastrophic events or other insured or reinsured
events with a frequency or severity exceeding ACE's estimates,
--the legal environment,
--the uncertainties of the reserving process,
--the impact of mergers and acquisitions, including the ability to
successfully integrate acquired businesses, such as Capital Re and the
international and domestic property and casualty businesses of CIGNA
Corporation, the competing demands for ACE's capital and the risk of
undisclosed liabilities,
--loss of the services of any of ACE's executive officers,
--changing rates of inflation and other economic conditions,
--losses due to foreign currency exchange rate fluctuations,
--ability to collect reinsurance recoverables,
--the competitive environment in which ACE operates and associated pricing
pressures,
--the impact of Year 2000 related issues,
--developments in global financial markets that could affect ACE's
investment portfolio, and
--risks associated with the introduction of new products and services.
Except for their ongoing obligations to disclose material information as
required by the federal securities laws, ACE and Capital Re do not have any
intention or obligation to update forward-looking statements after they
distribute this proxy statement/prospectus, even if new information, future
events or other circumstances have made them incorrect or misleading. For those
statements, ACE and Capital Re claim the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation
Reform Act of 1995.
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SPECIAL FACTORS
GENERAL
Capital Re is furnishing this proxy statement to its stockholders in
connection with the solicitation of proxies by its board of directors for use
at the special meeting of its stockholders and at any adjournments or
postponements of that meeting. This proxy statement also serves as ACE's
prospectus with respect to the shares being issued in the merger.
At the Capital Re special meeting, Capital Re stockholders will be asked to
vote upon a proposal to adopt the merger agreement pursuant to which the merger
of CapRe Acquisition Corp., a newly-formed Delaware subsidiary of ACE, and
Capital Re will be effected. The affirmative vote of the holders of a majority
of the shares of Capital Re common stock outstanding on the record date is
required to approve the proposal to adopt the merger agreement. See "The
Special Meeting" on page 51.
THE MERGER
The merger agreement provides, among other things, for the merger of Capital
Re with CapRe Acquisition Corp. Unless certain conditions occur, it is expected
that CapRe Acquisition Corp. will be the surviving corporation. As a result of
the merger, Capital Re will become a wholly owned subsidiary of ACE. In the
merger, each outstanding share of Capital Re common stock will be converted
into 0.65 of an ACE ordinary share plus a cash payment equal to the greater of
$1.30 and the difference (if positive) between the market value of an ACE
ordinary share and $14.00, subject to a maximum amount of cash of $4.68 per
Capital Re share. In the event that over one-half of the total amount which ACE
pays to acquire Capital Re (including amounts ACE paid to purchase shares in
the market and those paid in respect of dissenters' rights) is comprised of
cash, ACE may restructure the merger so that CapRe Acquisition Corp. will be
merged into Capital Re with Capital Re being the surviving corporation.
The merger will become effective at the time of filing a certificate of
merger with the Secretary of State of the State of Delaware or at such later
time as is specified in the certificate of merger. The effective time of the
merger is expected to occur as soon as practicable following the adoption by
the Capital Re stockholders of the merger agreement. See "The Merger
Agreement--Closing of the Merger; Effective Time of the Merger; Capital Re
Following the Merger" on page 65.
After consummation of the merger, ACE may create a holding company between
itself and Capital Re. This new holding company may be incorporated outside the
United States.
BACKGROUND OF THE MERGER
On January 22, 1998, Moody's Investors Service Inc. announced that it had
placed under review, for possible downgrade, the financial strength rating of
one of Capital Re's subsidiaries, Capital Reinsurance Company, and the senior
debt and preferred stock ratings of Capital Re.
On January 29, 1998, Brian Duperreault, Chairman and Chief Executive Officer
of ACE, and Dominic Frederico, then President of ACE Insurance, attended a
meeting at Capital Re's New York offices with senior officers of Capital Re,
relating to a business joint venture the companies had been discussing, ACE
Capital Re Limited. The joint venture concept was initially developed in 1996
with Global Capital Reinsurance Limited. A tax-advantaged, Bermuda domiciled
reinsurer, the joint venture was capitalized with $20 million of paid-in
capital ($10 million from each joint venture partner) and $30 million of
committed capital ($15 million from each joint venture partner). The joint
venture was strategically positioned as a financial risks (re)insurance company
with emphasis placed on opportunities which may be created by the intersection
of finite risk and financial risk (including financial guaranty). In March
1997, as the business plan for the joint venture was in the process of
initiation, XL Capital made an offer to purchase Global Capital Reinsurance.
The purchase was
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completed in May 1997 and Capital Re commenced discussions with XL regarding
the future of the joint venture. Due to conflicts between XL's pre-existing
financial products operation and the business plan for the joint venture,
Capital Re determined that XL would not be an optimal partner. Consequently, in
September 1997, Capital Re entered into discussions with ACE to explore its
interest in the joint venture concept. ACE agreed to replace XL by purchasing
Global Capital Reinsurance's shares in the joint venture for book value.
Following the joint venture discussion, there was some conversation regarding
the implications of the rating review and the business plan and strategic
issues facing Capital Re if Moody's Investor's Service, Inc. downgraded Capital
Reinsurance. ACE suggested that, if Capital Re were analyzing its strategic
alternatives during the rating review process, ACE would like to be considered
as a possible merger partner. It was agreed that preliminary discussions would
be scheduled in the following weeks.
Following the January 29, 1998 meeting, a confidentiality agreement with ACE
was negotiated governing the exchange of information between Capital Re and
ACE. The confidentiality agreement was finalized and signed on February 5,
1998.
On February 5, 1998, Capital Re met with its financial advisor, Goldman
Sachs, to discuss ACE's suggestion and Capital Re's overall strategy and
direction in light of the Moody's rating review process. Given the uncertainty
and strategic importance of the rating review process, it was decided that for
the time being that any discussions between Capital Re and ACE were to be
exploratory in nature.
An exploratory meeting was held on February 20, 1998, between Capital Re and
ACE financial officials, at the New York offices of ACE's counsel, Mayer, Brown
& Platt. Following the meeting, additional contacts occurred between the
parties and their respective auditors to discuss the companies' respective
accounting policies.
On March 10, 1998, ACE completed its purchase of all of XL's share in the
joint venture.
On March 16, 1998, a further meeting was held at the New York offices of
Mayer, Brown & Platt involving representatives of Credit Suisse First Boston
Corporation, ACE's financial advisor, and Goldman Sachs, Capital Re's financial
advisor, as well as officers of each company. The parties agreed that certain
teams would be assembled from both companies to focus on the tax, accounting,
legal and business plan aspects of a possible business combination.
On March 23, 1998, a further meeting was held involving officials of both
companies and respective tax advisors to discuss tax-related issues regarding a
potential business combination. A follow-up to that meeting occurred on March
30, 1998.
On April 9, 1998, Capital Re held a special meeting of its board of
directors by telephone. The main agenda item was to update the board on the
Moody's rating review process. Management suggested that it was in the best
interest of shareholders to analyze the strategic alternatives for Capital Re
in the context of the Moody's review process. It was mentioned that management
had been consulting with Goldman Sachs to develop strategic alternatives, which
could include a potential business combination.
A further meeting involving each company's representatives and financial
advisors occurred on April 13, 1998, at which certain additional business plan
information was discussed. Further informal contacts followed in April 1998.
On May 12, 1998, Moody's affirmed the triple-A financial strength rating of
Capital Reinsurance Company and the senior debt and preferred stock ratings of
Capital Re.
On May 19 and 20, 1998, Capital Re's board of directors held its regularly
scheduled quarterly meeting in Capital Re's New York offices. At the May 20,
1998 session, Capital Re's management presented a status report regarding the
Moody's review process. Mr. Satz, chairman, reminded the board that, although
Capital Re's ratings had been affirmed, Moody's could reassess Capital Re's
capital position at any time. Further, as a
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result of the rating affirmation process, Capital Re's operating environment
was being substantially limited to financial guaranty business and similar
related credit-based businesses. Representatives from Goldman Sachs attended
the meeting and discussed with the board Capital Re's position in the equity
market and the various strategic alternatives available, including a possible
business combination. A number of possible merger and acquisition candidates
were discussed. The board also approved the engagement of Goldman Sachs as
financial advisor for the purpose of pursuing these alternatives. The board
also appointed a special transaction committee and delegated to it the
authority to consider the strategic alternatives and make recommendations to
the full board.
During the next several weeks, Goldman Sachs made inquiry on Capital Re's
behalf of approximately ten qualified institutions likely to be interested in a
strategic combination with Capital Re. ACE indicated during this period an
unwillingness to participate in a "competitive" process. Based on the responses
to these inquiries, Capital Re concluded that it was not likely that a superior
strategic partner would emerge and contacted ACE to further pursue direct
discussions.
On the afternoon of June 13, 1998, the chairman of ACE called Capital Re's
chairman. After a general discussion regarding the strategic benefits of a
business combination, Mr. Duperreault indicated that ACE would consider a
combination involving an exchange of ACE ordinary shares for outstanding
Capital Re shares at a premium to the then current market price. Mr. Satz
agreed to communicate ACE's indication to the Capital Re board and to schedule
a face-to-face meeting.
In the ensuing days, Mr. Satz contacted each of the members of Capital Re's
board of directors to discuss ACE's indication of interest and the upcoming
meeting with ACE to further the discussions.
On June 25, 1998, Capital Re officials met with ACE officials at ACE's
Bermuda offices to discuss ACE's indication of interest. Following these
discussions Capital Re and ACE agreed to a schedule of due diligence. At the
same time, it was agreed that discussions with the rating agencies and a
confirmation of ratings would need to be obtained before any definitive
agreement could be reached.
A meeting of the special transactions committee of Capital Re's board was
held on July 13, 1998. Mr. Satz began the meeting by providing an update of the
market survey process conducted with the assistance of Goldman Sachs. Mr. Satz
noted that the process did not yield any significant current interest from
qualified institutions. He continued by stating that the discussions with ACE
had produced an indication of the range of value ACE would be willing to place
on Capital Re's shares in the event of a combination, and that as a result of
further discussions that range would be a significant premium to then current
market value. Mr. Satz then described the expected rating agency timing and
process to review any proposal. The special transactions committee authorized
Capital Re to proceed to discuss and negotiate a possible acquisition
transaction with ACE, including presenting a proposal to the rating agencies
for their review and consideration with respect to the ratings effect of such a
transaction.
On July 17, 1998, Capital Re officials again met with ACE officials
regarding their respective business plans.
Outside counsel to both companies had a conference call on July 22, 1998 to
organize the documentation process and discuss the material legal issues
associated with any transaction.
On July 23 and 24, 1998, representatives from both companies met with
Standard & Poor's Corporation and Moody's to give an initial presentation of
the proposed transaction. The presentation contained a summary of a possible
transaction structure and the reasons why the triple-A financial strength
rating of Capital Reinsurance should be confirmed as a result. The rating
agencies indicated that they would respond on a preliminary basis within two
weeks. Also on July 24, 1998, Mr. Satz met with Mr. Duperreault in New York to
discuss management organization and retention issues. These issues were also
the subject of follow-up conversations over the ensuing two weeks.
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ACE began business and underwriting due diligence on July 29, 1998 at
Capital Re's New York offices. On-site due diligence continued for
approximately two weeks and included legal and accounting due diligence
conducted by ACE's professional advisors.
On August 3, 1998, Standard & Poor's and Moody's contacted Capital Re to
discuss their preliminary thoughts on maintenance of Capital Reinsurance's
triple-A rating in the context of a transaction with ACE. It was indicated by
Moody's that it was unlikely that a definitive decision could be reached
before late August 1998.
On August 4, 1998, representatives from Capital Re met with ACE in the New
York offices of ACE's outside counsel for a due diligence presentation by ACE
to Capital Re. Capital Re's outside counsel conducted legal due diligence at
ACE's Bermuda offices during the following week.
A meeting of the special transactions committee of the board of directors
of Capital Re was held on August 5, 1998. Mr. Satz updated the committee on
the preliminary responses of Standard & Poor's and Moody's.
There were several discussions between Capital Re and Moody's during the
following two weeks. Capital Re proposed several alternative transaction and
capital structures in response to Moody's concerns.
On August 26, 1998, Moody's contacted Capital Re and indicated their belief
that, because ACE's holding company would be rated no better than A, the
proposed transaction would result in a downgrade of the triple-A rating of
Capital Reinsurance.
Over the next week Capital Re explored the viability of proceeding with ACE
based on a business plan which assumed Capital Reinsurance was double-A rated
by Moody's and triple-A rated by Standard & Poor's. However, during the final
weeks of August and early September the equity market experienced a dramatic
downward correction and the market value of Capital Re and ACE fell
substantially. Management notified the board of directors of Moody's action
and in light of the condition of the equity market, Capital Re ceased
discussions with ACE.
On September 4, 1998, Capital Re's board of directors directed that
discussions between Capital Re and ACE be terminated.
On November 2, 1998, Capital Re reported that KRE Reinsurance Ltd., one of
Capital Re's reinsurance subsidiaries, had reinsured approximately $155.8
million in outstanding par amount of three issues of asset-backed securities
issued on behalf of Commercial Financial Services Inc. On October 22, 1998,
Standard & Poor's suspended its single "A' rating on the Commercial Financial
Services securities due to lack of sufficient information material to the
ratings of the transactions in light of allegations that Commercial Financial
Services may have been involved in improper conduct, including substantial
sales of assets to an affiliate. During October 22-23, 1998, based on these
allegations and insufficient information to the contrary, Duff & Phelps Credit
Rating Company, Fitch ICBA and Moody's also downgraded, or withdrew, their
ratings on the Commercial Financial Services securities that they rated.
On November 5, 1998, Moody's again placed the financial strength rating of
Capital Reinsurance Company on credit review for possible downgrade. The
senior debt and preferred stock rating of Capital Re were also placed under
review. Standard & Poor's followed with similar credit review actions
regarding certain Capital Re subsidiaries on December 17, 1998.
On December 9, 1998, Mr. Jurschak was appointed chairman and chief
executive officer of Capital Re.
As the Commercial Financial Services situation developed and the magnitude
of Capital Re's loss exposure became clearer, Capital Re engaged Goldman Sachs
and Cochoran, Coronia & Co. to raise $75 million of additional equity capital
to support the claims-paying rating of the operating subsidiaries. A small
group of financial and strategic investors were contacted as potential
investors.
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By the third week of January 1999, Capital Re identified a small number of
potential investors who would be invited for due diligence, which began shortly
thereafter. ACE again indicated that it would likely be interested in making an
investment but would not become part of a competitive process. Capital Re's
management discussed the possibility of an ACE investment with members of the
board and it was decided to follow up with ACE to determine the terms on which
they would be willing to invest and the time frame on which they could proceed.
ACE representatives indicated to Capital Re that ACE would be willing to invest
in Capital Re at an attractive price and with a high degree of closing
certainty, given the due diligence already completed the prior summer. It was
the view of Capital Re's board that proceeding quickly with ACE regarding the
equity investment had both timing and strategic advantages. Accordingly, a
decision was made in later January to proceed with ACE as soon as possible.
During the first two weeks of February 1999, Capital Re's market price
declined significantly and there were several conversations with ACE concerning
the price of the proposed investment. It was agreed that the price would be set
at the lower of December 31, 1998 fully diluted book value or the average of
the five highest closing prices for Capital Re's common stock from the date of
the definitive agreement until April 15, 1999.
The proposed pricing formula was at the higher end of the proposals Capital
Re had received from other prospective investors.
ACE conducted due diligence at Capital Re's New York offices on February 16
and 17, 1999. On February 19, 1999, ACE and Capital Re entered into a
definitive stock purchase agreement with respect to the $75 million investment.
One of the conditions precedent to closing was the maintenance of Capital
Reinsurance's Company's triple-A financial strength rating from Moody's.
On March 10, 1999, Moody's announced a downgrade of the financial strength
rating of Capital Reinsurance Company to Aa2. As a result of the March 10, 1999
downgrade, Capital Re contacted ACE on March 11, 1999 to discuss ACE's
willingness to proceed with its pending investment notwithstanding the Moody's
downgrade. In a series of conversations on March 12, 1999, Capital Re and ACE
discussed the terms of the investment and agreed to amend the stock purchase
agreement to provide that the stock purchase would be at a price equal to the
lower of fully diluted book value at December 31, 1998 or the average of the
five highest consecutive closing prices of Capital Re's common stock from March
12, 1999 through April 15, 1999. The condition to closing regarding Capital
Reinsurance Company's Moody's financial strength rating would be amended to
Aa2. On March 16, 1999, ACE and Capital Re entered into a first amendment to
the stock purchase agreement incorporating the changes agreed to on March 12,
1999. Closing was then contingent on receipt of customary regulatory approvals.
Between March 30, 1999 and April 15, 1999, ACE purchased 74,500 shares of
Capital Re common stock on the open market for an aggregate purchase price of
$1,207,821.
On May 13, 1999, Capital Re was notified that International Financial
Services Life Insurance Company, a party to certain reinsurance transactions
entered into in 1997 and 1998 with KRE Reinsurance Ltd., had been placed under
supervision by the insurance department of its state of domicile. The
reinsurance transactions involved the assumption by KRE Reinsurance and
subsequent retrocession to International Financial Services Life Insurance
Company entities of certain blocks of single premium deferred and immediate
annuity business. Based on preliminary information available to Capital Re, it
appeared that all or a substantial part of the assets of International
Financial Services Life Insurance Company might be missing from the custody of
the International Financial Services Life Insurance Company companies. KRE
Reinsurance's net economic exposure to these transactions was approximately $70
million.
On May 14, 1999, Capital Re's executive management committee met to discuss
the International Financial Services Life Insurance Company situation and
potential implications for Capital Re's ratings, business plan and capital
plan. It was acknowledged that a material loss on the International Financial
Services
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Life Insurance Company exposure would have significant capital impairment
consequences for KRE Reinsurance, and could threaten its financial strength
ratings. A material loss could also put pressure on Capital Reinsurance's
financial strength ratings. It was also recognized that an actual rating
downgrade would interfere with the pending $75 million investment by ACE as the
closing of the transaction was subject to a maintenance of the ratings. A
meeting of the executive committee of Capital Re's board of directors was held
on May 14, 1999 and management described the situation and discussed strategic
alternatives.
On May 16, 1999, the executive committee of Capital Re's board of directors
met in Capital Re's New York offices. Management presented the limited facts of
the International Financial Services Life Insurance Company situation then
known and potential loss scenarios. The capital implications, effects on
Capital Re's business plan and effect on ratings of an International Financial
Services Life Insurance Company loss coupled with the Commercial Financial
Services loss reserve and the possible loss of ACE's $75 million capital
commitment were reviewed and were viewed as presenting a substantial danger to
Capital Re that needed to be addressed at that time by seeking a transaction
that would bolster Capital Re's financial strength. Representatives of Goldman
Sachs also were present and gave advice concerning the situation. It was
determined that Capital Re should contact ACE and discuss both their continued
interest in the $75 million investment and other strategic alternatives,
including a possible business combination. It was also determined that not
seeking a strategic transaction at that time was not a viable alternative in
light of the imminent risk to Capital Re's key financial strength rating status
on which a substantial portion of its business depended.
On May 18, 1999, members of Capital Re's management met with Mr. Frederico
of ACE in New York. After discussing the situation, Mr. Frederico indicated
that ACE would be interested in both completing its $75 million investment and
purchasing a controlling interest in Capital Re from Capital Re's two largest
stockholders, Constellation Investments, Inc. and MP Investments, Inc., at a
mutually agreeable price.
On May 19, 1999, Capital Re's board of directors met in New York and
discussed ACE's proposal. Capital Re's two largest institutional stockholders,
Constellation Investments, Inc. and MP Investments, Inc., who were represented
on the Capital Re board, indicated a willingness to pursue such a transaction.
That evening, Capital Re officials again met with Mr. Frederico and indicated a
willingness to proceed if ACE were interested. Mr. Frederico acknowledged ACE's
interest and a discussion of possible terms was held. Later that evening
Capital Re management met with the board representatives of Constellation
Investments, Inc. and MP Investments, Inc. and its financial advisors to
discuss the ACE proposal and alternative transaction structures. It was agreed
that Capital Re should respond to ACE with a proposal to effect a merger rather
than the possible purchase of shares from Constellation and MP Investments,
because of the belief that a merger in which all Capital Re stockholders (other
than ACE) would receive consideration would be more advantageous to
stockholders generally than a transaction after which remaining Capital Re
stockholders (other than ACE) would be denied the opportunity to seek a future
control premium for their shares.
On the morning of May 20, 1999, Capital Re's board of directors reconvened
and endorsed moving ahead with negotiations with ACE concerning a business
combination. The board ratified the formal engagement of Goldman Sachs to act
as Capital Re's financial advisor for the transaction. Discussions were held
with Mr. Frederico that day regarding possible terms of a combination. These
discussions continued among Capital Re officials and ACE officials over the
course of the next several days. At the same time, counsel for the respective
parties exchanged drafts of a possible binding letter of intent.
On May 24, 1999, Capital Re's board of directors met telephonically and,
after a presentation by management and its legal and financial advisors,
approved the material terms of the merger transaction and authorized final
negotiation of the binding letter of intent. A further board meeting was held
in the evening of May 26, 1999, at which time authorization was given to enter
into the letter of intent. At the May 26, 1999 board meeting, Goldman Sachs
orally advised Capital Re's board that, as of that date and subject to
reviewing, among other things, the merger agreement and related documents, the
exchange ratio to be received by Capital Re stockholders under the letter of
intent was fair from a financial point of view to the Capital Re stockholders.
ACE and Capital Re entered in the letter of intent later that evening. ACE also
confirmed its intention to
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proceed with the $75 million investment under the stock purchase agreement.
These events were announced by press releases on May 27, 1999.
During the following two weeks, ACE and its professional advisors conducted
due diligence, and the merger agreement, option agreement and related documents
were drafted and negotiated between Capital Re's counsel and ACE's counsel.
On June 10, 1999, Capital Re's board of directors met telephonically and,
after a presentation by management and oral confirmation by Goldman Sachs
regarding the fairness of the exchange ratio, approved the merger agreement,
the stock option agreement and related documentation and authorized their
execution. Later that afternoon, both parties executed the agreement in Capital
Re's New York offices and Goldman Sachs delivered its written opinion that, as
of June 10, 1999, the exchange ratio was fair to Capital Re's stockholders
(other than ACE) from a financial point of view. On the same day a second
amendment to the stock purchase agreement was executed reconfirming ACE's
commitment to make the $75 million investment. These events were announced by
press releases on June 11, 1999.
On June 15, 1999, the closing under the $75 million stock purchase
agreement, aggregating 4,424,779 shares of Capital Re common stock, was held.
On October 1, 1999, ACE invested an additional $85 million in the joint
venture with Capital Re, diluting Capital Re's investment to approximately 13%.
On October 6, 1999, XL Capital Ltd. delivered an unsolicited letter to
Capital Re's board of directors offering to acquire Capital Re for $12.50 per
share in cash but otherwise on substantially identical terms as the proposed
merger with ACE. The XL offer, by its terms, was not subject to due diligence.
On October 6, 1999, based on the closing price of ACE's ordinary shares on
October 5, 1999, the value of the original consideration under the original
merger agreement was under $10.00 per Capital Re share. The Capital Re board of
directors met that afternoon and postponed the stockholder meeting set for the
next morning. In addition, the Capital Re board of directors authorized Capital
Re's management to enter into discussions with XL regarding its proposal and,
after execution of a confidentiality agreement with XL, to provide XL with
confidential information.
On October 6, 1999, Capital Re and XL executed a confidentiality agreement
identical to the confidentiality agreement with ACE. On October 7, 1999,
representatives of Capital Re met with representatives of XL to discuss the XL
proposal. On October 8 and 9, 1999, XL representatives met with Capital Re
representatives to perform a limited due diligence review and XL was provided
with certain confidential information.
On October 8, 1999, ACE exercised its right under the stock purchase
agreement related to its $75 million investment in Capital Re to designate
Dominic Frederico and Donald Kramer as its nominees to be elected at the next
meeting of the Capital Re Board of Directors. ACE also delivered a letter to
Capital Re on that date asserting that Capital Re's actions in postponing the
stockholder meeting, opening discussions with XL and providing confidential
information to XL constituted breaches of the original merger agreement.
On October 10, 1999, XL delivered a letter to Capital Re's board of
directors increasing its cash offer to $13.00 per Capital Re share. In
addition, XL proposed providing Capital Re with a $50 million Stand-By Capital
Commitment to assure the necessary capital support for rating agency and market
purposes pending closing of the XL transaction. In addition, XL agreed not to
require a number of the closing conditions contained in the merger agreement
with ACE. XL also made a written proposal with respect to proposed management
compensation issues and provided Capital Re a form of proposed cash merger
agreement. By its terms the XL proposal was irrevocable prior to the close of
business on October 19, 1999.
On October 10, 1999, the Capital Re board of directors met and elected
Messrs. Frederico and Kramer to the board increasing the size of the board to
nine. The board then met to evaluate the XL proposal. Messrs.
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Frederico and Kramer excused themselves from the discussions because of their
positions as ACE executive officers. During the board meeting, Capital Re's
outside legal and financial advisors made presentations with respect to the XL
proposal and the existing merger agreement with ACE. The Capital Re board
determined that the XL proposal constituted a "superior proposal" under the
merger agreement and voted to inform ACE that Capital Re intended to enter into
a binding merger agreement with XL, subject to ACE's rights under the merger
agreement to make a counteroffer within five business days. The Capital Re
board also voted to notify ACE that it would meet on October 15, 1999 to
consider withdrawing its recommendation in favor of the ACE merger agreement in
light of the existence of XL's superior proposal. These notices were delivered
to ACE on October 10, 1999.
On October 13, 1999, the ACE board of directors met to consider possible
reactions to the XL proposal and Capital Re's notice of its intentions to
accept the superior XL proposal and consider withdrawing its recommendation in
favor of the ACE merger. During this meeting, ACE's legal and financial
advisors reviewed potential alternatives with ACE's board of directors
including the merger consideration payable to Capital Re's stockholders in the
proposed merger. After considering the financial and strategic impact of these
various options, the ACE board of directors authorized management to increase
the consideration payable to Capital Re's stockholders.
On October 14, 1999, ACE delivered a letter to Capital Re under which it
offered to increase the merger consideration under its merger agreement to 0.60
ACE ordinary shares plus an amount of cash which, on a per share basis, could
deliver $13.00 per share to Capital Re stockholders, subject to a maximum
aggregate amount of cash of $150 million or $4.68 per share, but providing no
minimum amount of cash. ACE also agreed to amend its merger agreement to
eliminate many of the previous closing conditions and to provide credit support
similar to that proposed by XL. ACE also agreed to match the compensation
offered by XL to non-executive management employees. Representatives of Capital
Re and ACE discussed the new ACE proposal and whether it would be viewed by the
board as at least as favorable as the $13.00 cash XL proposal.
On October 15, 1999, the Capital Re board met to consider withdrawing its
recommendation with respect to the existing ACE merger agreement. With ACE's
representatives, Messrs. Frederico and Kramer, abstaining because of their
positions as ACE executive officers, the board voted to formally withdraw its
recommendation in favor of the original ACE merger agreement, in light of the
XL superior proposal. The board also determined to form a special committee,
consisting of all board members other than Messrs. Frederico and Kramer, to
evaluate the ACE proposal and any XL proposals.
A meeting of the special committee was convened immediately after
adjournment of the October 15 board meeting. A number of significant issues on
the ACE proposal were raised by the participants, including issues on the
closing condition related to the tax treatment of the proposal, the lack of a
"floor" to the cash consideration and other matters. The special committee
directed Goldman Sachs to convey to ACE and their representatives those
deficiencies in ACE's revised proposal that could cause the board to find that
the ACE proposal was not at least as favorable as XL's proposal.
On October 15, 1999, XL delivered a letter to Capital Re's board increasing
the compensation being offered to employees and officers of Capital Re.
On October 18, 1999, ACE submitted a revised offer to Capital Re to provide
for a minimum of $1.45 in cash per Capital Re share and to remove any upper
limits on the consideration to be received by Capital Re stockholders. The
total value of the offer to Capital Re stockholders remained at $13.00 per
share.The proposal also restructured the transaction to eliminate the receipt
of tax opinions as a condition to closing. On the afternoon of October 18,
1999, XL delivered a revised offer letter to Capital Re, irrevocable before the
close of business on October 27, 1999 unless Capital Re entered into a revised
agreement with ACE. In its letter XL increased its cash offer to $14.00 per
share.
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A special committee meeting of the Capital Re board was held late in the day
on October 18, 1999. Presentations were made to the special committee by
Goldman Sachs, Capital Re's outside financial advisors, and Hogan & Hartson
LLP, Capital Re's outside counsel. The special committee then determined that
the revised ACE offer of October 18, 1999 was "at least as favorable" as the XL
$13.00 offer. The special committee then determined that the XL $14.00 offer
was a "superior proposal" under the original merger agreement with ACE. These
determinations were communicated to the full Board, which, with ACE's
representatives abstaining because of their positions as ACE executive
officers, voted to adopt the committee's determinations and to deliver notice
to ACE of these determinations and an intention to accept the XL $14.00 offer
following the five business day period provided for in the original merger
agreement. Counsel for Capital Re also communicated to ACE's counsel that the
board would not formally evaluate whether ACE's $13.00 revised offer of October
18 was "at least as favorable" as XL's $14.00 cash offer before the end of the
five day period unless ACE requested that it do so, so as to permit ACE an
opportunity to consider further revising its offer.
Before submitting any further revised offer, on October 21, 1999 ACE filed
suit against Capital Re in Delaware Chancery Court alleging that Capital Re had
materially breached the merger agreement with ACE by engaging in discussions
with XL in violation of the "non-solicitation" provisions of the merger
agreement. ACE's lawsuit requested a temporary restraining order preventing
Capital Re from terminating the original merger agreement with ACE and
accepting XL's $14.00 cash offer. ACE's lawsuit requested that the court order
Capital Re to carry out the terms of the original merger agreement, including
the holding of a stockholder meeting to vote an adoption of the original all
stock merger consideration of 0.6 of an ACE ordinary share. A hearing on ACE's
request for temporary restraining order was scheduled by the court for October
25, 1999.
On October 25, 1999, the special committee of Capital Re's board of
directors met and determined to recommend to the board that ACE's $13.00
revised offer of October 18 was not "at least as favorable" as XL's $14.00 cash
offer. While the special committee was convened, following a hearing, the
Delaware Chancery Court denied ACE's request for a temporary restraining order
and concluded that ACE was unlikely to prevail on the merits of its claim
regarding breach of contract. Immediately thereafter, Mr. Kramer was invited to
address the committee. Mr. Kramer delivered a letter to Capital Re offering to
increase the merger consideration to the amount provided for in the amended and
restated merger agreement to which this proxy statement/prospectus relates.
On October 26, 1999, the special committee of Capital Re's board met and,
following a presentation by counsel and by Goldman Sachs and a full discussion,
the special committee determined that ACE's October 25 offer was at least as
favorable as the XL offer of October 18, subject to obtaining ACE's agreement
that (i) all litigation and threats of litigation would be suspended and (ii)
the obtaining of amended stockholder voting agreements would not be a condition
to the signing of a new merger agreement. This was communicated to ACE's
representatives, who agreed to these terms. Subsequently, the full Capital Re
board met and after receiving the report of the special committee and an oral
opinion from Goldman Sachs as to the fairness of the revised merger
consideration under the amended and restated merger agreement to Capital Re's
stockholders other than ACE, voted to approve the proposed amended and restated
merger agreement with ACE. Messrs. Frederico and Kramer abstained from voting
on the matters put before the board because of their positions as ACE executive
officers.
Late in the afternoon of October 26, 1999, the amended and restated merger
agreement was executed as well as a $50 million capital support agreement. This
was announced by press releases on October 26, 1999.
On October 28, 1999, XL publicly announced that it was "reviewing its
options," and on November 10, 1999, announced that it would not submit an
additional offer to acquire Capital Re "at this time."
On November 23, 1999, Capital Re borrowed $21,980,000 under the capital
support agreement, and ACE exercised its right to convert the borrowing into
1,570,000 Capital Re shares.
On November 29, 1999, ACE and Capital Re amended Section 1.4 of the merger
agreement to clarify under what circumstances the merger could be restructured
to provide for the merger of Capital Re Acquisition Corp. into Capital Re.
27
<PAGE>
CAPITAL RE'S REASONS FOR THE MERGER; RECOMMENDATION OF THE BOARD OF DIRECTORS
OF CAPITAL RE
The board of directors of Capital Re has determined that the amended and
restated merger agreement is advisable and recommends that stockholders vote to
adopt that merger agreement and approve the merger at the special meeting. The
board believes that the proposed merger agreement is fair to and in the best
interests of Capital Re stockholders other than ACE, both from a substantive
and procedural standpoint. This belief is based on a number of factors that
address both substantive and procedural fairness.
Capital Re's Reasons for the Merger
In reaching its conclusion that the merger agreement, as amended and
revised, is advisable and fair to Capital Re's stockholders other than ACE, the
Capital Re board considered and reviewed with its management, as well as its
financial and legal advisors, a number of factors. As noted in "Background of
the Merger" above, the board considered the latest XL offer as an alternative
to the merger that is now proposed, and earlier in May 1999 considered other
possible alternative transactions as well as the alternative of not seeking any
type of transaction. In light of the imminent danger to Capital Re's key
financial strength ratings in May 1999 and the likely material adverse effect
that would have on the key franchise of Capital Re, the alternative of not
seeking a transaction and exploring other alternative means of avoiding a
ratings downgrade was not believed to be viable. Further, Capital Re had
actively sought other possible strategic partners in seeking to raise the
additional capital needed in early 1999, and ACE had emerged as not only
providing the most attractive capital offer, but also as offering a number of
strategic advantages to Capital Re stockholders described further below.
Following execution of the merger agreement, the Capital Re board retained the
right to consider certain competing offers within the constraints of its
contractual obligations to ACE, and has done so in respect of the XL offer, the
only competing offer received, as described above.
The following are the material factors considered by the Capital Re board of
directors and its special committee in evaluating the fairness of the proposed
merger to stockholders other than ACE:
As regards procedural fairness, although approval of a majority of
stockholders unaffiliated with ACE is not required to approve the transaction,
the proposed merger was reviewed and recommended by a committee of the Capital
Re board that excluded ACE's representatives. A majority of the members of this
committee consists of persons not employed by Capital Re or affiliated with MP
Investments (a party to one of the stockholder voting agreements). This
committee took an active role in the process leading to the final merger
proposal from ACE and the last offer from XL.
As another element of procedural fairness, the merger agreement that was
negotiated at arms' length and was approved by the special committee contains
provisions permitting the board of directors, a majority of whose members are
both unaffiliated with ACE and are not Capital Re employees, to consider
alternative unsolicited offers from XL or any other person who might offer a
"superior" transaction to Capital Re's stockholders. The board has specific
contractual rights to terminate the merger agreement and accept such
alternative superior transaction after giving ACE a period of time to
counteroffer. The procedural advantages of these provisions to Capital Re
stockholders other than ACE were demonstrated by the process that led ACE to
propose the current merger transaction, which represents a substantial premium
to Capital Re stockholders compared to the value of the merger consideration
they would have received had the XL offer not been made on October 6, 1999.
The fact that Capital Re stockholders who do not favor the merger have the
right under Delaware law to obtain the appraised value of their shares is
another factor of procedural fairness that the Capital Re board viewed as
favorable. No stockholder who objects to receiving ACE shares is required to
accept the merger
28
<PAGE>
consideration, although stockholders do not have the alternative of keeping
their Capital Re shares if holders of a majority of Capital Re stockholders
approve the merger and the merger is completed.
The Capital Re board and the special committee noted the amount of the
revised merger consideration and the fact that it was the product of a
competitive bidding process between ACE and XL that concluded with offers that
exceeded the nominal value of ACE's original merger consideration on October 6,
1999, the day before the original merger was scheduled to close, by over 40%.
The Capital Re board and the special committee gave considerable weight to the
fact that the currently proposed merger consideration reflects a substantial
increase in value over the implied value of the original merger consideration
when XL's October 6 offer was made, which the board and the committee believed
reflects a fair value for Capital Re stockholders (other than ACE) over the
original ACE proposal of June 10. In addition, based on historic market prices
for both ACE and Capital Re shares, it is believed that the offered
consideration is a fair reflection of relative values and has the opportunity
for substantial growth for Capital Re stockholders as ACE stockholders. These
conclusions were based in part on the analyses presented to the board and the
special committee by Goldman Sachs, financial advisor to Capital Re's board, as
discussed further below.
The board and special committee also considered the merger consideration in
light of current Capital Re book value and a related possible "liquidation"
alternative that assumed a ratings downgrade and involved putting Capital Re's
insurance operations into a "run-off" mode. As discussed in further detail in
"Opinion of Capital Re's Financial Advisor" below, the board and special
committee considered an analysis of these factors that showed that the net
present value of Capital Re's book value on this basis was significantly lower
than the nominal value of both the XL $14 all cash offer and the current ACE
proposal. The board and the special committee did not separately consider
"going concern value" as such in evaluating fairness of the transaction. While
the merger consideration currently offered is less than the purchase prices ACE
has previously paid in prior open market purchases through April 1999, it is
nevertheless higher than the recent trading prices of Capital Re shares since
the merger was originally entered into, which the Capital Re board and the
special committee believe also supports the fairness of the transaction to
Capital Re stockholders other than ACE.
The Capital Re board and the special committee also noted the continued
strategic value to Capital Re stockholders from the share portion of the merger
consideration, which value supports the conclusion as to fairness and is
derived from the following factors:
--the business, financial condition, operations, earnings and prospects
of Capital Re, including the recent loss developments and the increased
probability of adverse ratings developments;
--the business, financial condition, operations, earnings and prospects
of ACE;
--the benefit to Capital Re from the size and diversity of ACE's
business, the international reach of ACE's operations and the financial
flexibility associated with the size of ACE's capital base, which should
enable the combined company to compete more effectively with existing
and new competitors having greater resources than Capital Re alone;
--the financial resources and access to capital available to Capital Re
as part of ACE contrasted with the limited access to new capital that
Capital Re currently faces;
--given capital constraints facing Capital Re as a stand-alone company,
even if Capital Re was able to withstand the immediate effects of the
recent loss developments, Capital Re would be in a more vulnerable
position should other unforeseen loss developments occur if Capital Re
does not combine with ACE;
--ACE has a demonstrated record of growth and innovations on a scale that
exceeds what Capital Re can achieve on its own;
--Capital Re and ACE have complementary, rather than overlapping,
businesses in product lines, reinsurance underwriting expertise and
customer base. The board of Capital Re believes that this fact
29
<PAGE>
should enable the combined company to accelerate product line innovation
and market penetration while achieving the risk-spreading advantage to
stockholders from diversification; and
--most members of Capital Re's management team are expected to have
significant roles in the combined company as ACE intends to consolidate
its financial risks operations through Capital Re.
The Capital Re board and the special committee received the opinion of
Goldman Sachs that, as of October 26, 1999, the merger consideration under the
merger agreement was fair, from a financial point of view, to the stockholders
of Capital Re (other than ACE). This opinion, a copy of which is conformed in
Annex C, is described further below and provided further support to the board's
and the special committee's conclusions as to fairness.
The Capital Re board and the special committee also considered the other
terms and conditions of the merger agreement and the stock option agreement,
including the relatively few conditions to closing and the potential for an
increase in value of the consideration to be received through appreciation as
the ACE ordinary shares. These factors were also viewed as supporting the
conclusion as to fairness.
The Capital Re board and special committee also considered a variety of
risks, potentially negative factors and possible alternative views concerning
the merger, all of which could cause the transaction to not be as fair to
Capital Re stockholders (other than ACE) as the board and special committee
believe. These include the following:
--the fact that there was a risk that continued deterioration in ACE's
stock price could cause the value of the merger consideration to be below
XL's $14.00 cash offer;
--the possibility that, despite the merger, the rating agencies may
nevertheless lower the financial ratings of Capital Re's reinsurance
subsidiaries, which could lead to potential adverse business developments;
--the possibility that the integration of the businesses of Capital Re and
ACE might not proceed as planned;
--the risk that, despite the efforts of the combined companies, senior
management and other personnel of Capital Re might not choose to remain
employed by the combined company;
--those provisions of the merger agreement and stock option agreement that
restrict Capital Re from soliciting alternative proposals and that require
Capital Re to pay a termination fee and permit ACE to buy an additional
9.9% of Capital Re's shares should Capital Re ultimately be acquired by a
third party;
--the fact that ACE has or controls, through voting agreements, enough
Capital Re stock to provide ACE with effective control over the outcome of
the stockholder vote; and
--the fact that some members of Capital Re management have interests in the
merger that are different from, and in addition to, the interests of other
Capital Re stockholders, as described under "Information Regarding
Directors, Executive Officers and Five Percent Stockholders--Other
Interests of Directors and Executive Officers in the Merger" beginning on
page 62 below.
The foregoing discussion of the information and other factors considered by
the Capital Re board and the special committee is not meant to be exhaustive.
The board of directors of Capital Re did not specifically adopt the conclusions
of the opinion of Goldman Sachs referred to above. The Goldman Sachs opinion
was only one of many factors considered by the Capital Re board and the special
committee. The Capital Re board did not give particular priority to, quantify
or weight the various factors considered by it, including all of the material
factors described above, in reaching the determination to adopt the merger
agreement and approve the merger and recommend similar action by stockholders,
nor did the board or special committee do so in reaching their determinations
as to fairness. Individual directors may have viewed the relative importance of
these factors differently.
30
<PAGE>
The board of directors of Capital Re includes two representatives of ACE,
Messrs. Frederico and Kramer. These individuals did not participate in the
deliberations of the board on the XL or revised ACE proposals and abstained
from all voting on matters relating thereto. They were not members of the
special committee of the board that met and made recommendations regarding the
XL and revised ACE proposals. However, they did have an opportunity at each
board meeting they attended to express their views with respect to these
matters, and did express those views in support of ACE's original agreement,
its October 14 proposal and October 25 proposal, on several occasions. They
also received copies of materials, including presentations by outside counsel
and financial advisors, given to the board regarding these matters.
See "Information Regarding Directors, Executive Officers and Five Percent
Stockholders--Other Interests of Directors and Executive Officers in the
Merger" on page 62 for a further discussion of the issues relating to the
conflicts of interests of the ACE representatives on the Capital Re board and
the steps taken by ACE and Capital Re to reach their independent conclusions
that, notwithstanding these conflicts of interests, the proposed merger is both
substantively and procedurally fair to the Capital Re stockholders other than
ACE.
Opinion of Capital Re's Financial Advisor
On October 26, 1999, Goldman Sachs orally advised the Capital Re board that,
as of that date, the merger consideration to be received by Capital Re
stockholders (other than ACE) under the amended and restated merger agreement
signed on that date is fair from a financial point of view to Capital Re
stockholders (other than ACE). Goldman Sachs subsequently confirmed its oral
opinion by delivering a written opinion on October 26, 1999. In this section of
this document, we frequently refer to the "merger consideration" to be received
by stockholders, by which we mean (i) the exchange ratio equal to 0.65 of an
ordinary share of ACE and (ii) a cash component (in no case greater than $4.68)
equal to the greater of:
a) $1.30
and
b) the difference (if positive) between $14.00 and 0.65 multiplied by
the average closing price of an ACE ordinary share on the NYSE for the five
consecutive trading days ending three trading days prior to the closing
date under the amended and restated merger agreement.
The full text of the written opinion of Goldman Sachs, dated October 26,
1999, which sets forth assumptions made, matters considered and limitations on
the review undertaken in connection with the opinion, is attached as Appendix C
to this proxy statement/prospectus and is incorporated by reference in this
document. The opinion of Goldman Sachs referred to in this document does not
constitute a recommendation as to how you should vote with respect to the
merger. We urge you to read the opinion in its entirety.
In connection with its opinion, Goldman Sachs reviewed:
--the merger agreement of June 10, 1999;
--the amended and restated merger agreement of October 26, 1999;
--the registration statement as in effect on October 26, 1999, including
the proxy statement/prospectus included in it;
--annual reports to stockholders and annual reports on Form 10-K of Capital
Re and ACE for the five fiscal years ended December 31, 1998 and September
30, 1998, respectively;
--certain interim reports to stockholders and quarterly reports on Form 10-
Q of Capital Re and ACE; and
--certain internal financial analyses and forecasts for Capital Re prepared
by its management.
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<PAGE>
--Goldman Sachs also reviewed a liquidation analysis for Capital Re
prepared by its management assuming a downgrade of the outstanding
financial strength ratings of Capital Re's principal operating
subsidiaries Capital Reinsurance Company and KRE Reinsurance Ltd.
Goldman Sachs held discussions with members of the senior management of
Capital Re and ACE regarding the strategic rationale for, and the potential
benefits of, the transaction contemplated by the amended and restated merger
agreement, and the past and current business operations, financial condition
and future prospects of their respective companies. In addition, Goldman Sachs:
--reviewed the reported price and trading activity for Capital Re common
stock and the ACE ordinary shares;
--compared certain financial and stock market information for Capital Re
and ACE with similar information for certain other companies the
securities of which are publicly traded;
--reviewed the financial terms of certain recent business combinations in
the financial guaranty insurance and mortgage guaranty insurance
industries; and
--performed such other studies and analyses as Goldman Sachs considered
appropriate.
Capital Re informed Goldman Sachs that it believed, and instructed Goldman
Sachs to assume, that without a transaction of the type contemplated by the
amended and restated merger agreement, Capital Re's reinsurance exposure to
entities affiliated with International Financial Services Life Insurance
Company, and certain potential losses related to its support for the
underwriting of RGB Syndicate 490, would result in a downgrade of the financial
strength ratings mentioned above in the immediate future and that this
downgrade would have a profound negative impact on the business operations and
the financial condition of Capital Re. Goldman Sachs also assumed that all
material governmental, regulatory or other consents and approvals necessary for
the consummation of the merger contemplated by the amended and restated merger
agreement will be obtained without any adverse effect on Capital Re or ACE or
on the contemplated benefits of the merger contemplated by the amended and
restated merger agreement. Goldman Sachs was not requested to solicit, and did
not solicit, interest from third parties with respect to an acquisition of or
other business combination with Capital Re. Capital Re received an unsolicited
proposal from XL to acquire all of the outstanding shares of Capital Re common
stock. However, Goldman Sachs's opinion does not address the relative merits of
the transaction contemplated by the amended and restated merger agreement as
compared to any alternative business transaction that might be available to
Capital Re.
Goldman Sachs relied upon the accuracy and completeness of all of the
financial and other information, including the liquidation analysis, reviewed
by them and assumed such accuracy and completeness for purposes of rendering
its opinion. ACE did not make available to Goldman Sachs in writing its
forecasts of expected future performance. Goldman Sachs' review with respect to
this information was limited to discussions with senior managers of ACE and the
earnings and growth estimates of research analysts. Goldman Sachs is not an
actuary and its services did not include any actuarial determinations or an
attempt to evaluate actuarial assumptions for Capital Re or ACE. Goldman Sachs
did not make an independent evaluation or appraisal of the assets and
liabilities of Capital Re or ACE or any of their subsidiaries and was not
furnished with any evaluation or appraisal.
The advice and written opinion of Goldman Sachs referred to in this document
was provided for the information and assistance of the board of directors of
Capital Re in connection with its consideration of the merger contemplated by
the amended and restated merger agreement and the opinion does not constitute a
recommendation as to how any holder of the common stock of Capital Re should
vote with respect to the merger.
The following is a summary of the material financial analyses used by
Goldman Sachs in connection with providing its written opinion to Capital Re's
board of directors on October 26, 1999. The summary of financial analyses
includes information presented in tabular format. The tables should be read
together with the text.
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<PAGE>
Summary of Terms of Proposed Transaction. Goldman Sachs reviewed the terms
of the proposed merger, including:
--the merger consideration;
--the closing price of ACE ordinary shares as of October 25, 1999;
--the implied price per share of Capital Re common stock applying the
merger consideration under the amended and restated merger agreement; and
--the expected method of purchase accounting.
Solely for the purposes of their analysis, Goldman Sachs calculated an
implied price per share of Capital Re common stock by applying the merger
consideration to the price of ACE ordinary shares. Assuming a per share price
of ACE ordinary shares of between $14.34 and $19.54, and applying the merger
consideration, Goldman Sachs calculated an implied price of $14.00 per share of
Capital Re common stock. If the price of the ACE ordinary shares exceeds
$19.54, the implied price per share would be calculated based on a fixed cash
component per share of $1.30 plus the product of the exchange ratio of 0.65
multiplied by the price of an ACE ordinary share. If the price of the ACE
ordinary shares falls below $14.34, the implied price per share would be
calculated based on a fixed cash component per share of $4.68 plus the product
of the exchange ratio of 0.65 multiplied by the price of an ACE ordinary share.
Based upon the price of an ACE ordinary share on October 25, 1999 of $17.50,
Goldman Sachs calculated an implied price per share of $14.00 and calculated
the aggregate amount to be paid for all the shares of Capital Re common stock
to be approximately $511 million (excluding the shares of Capital Re common
stock owned by ACE, the value of the remaining shares was calculated to be
approximately $448 million). Any implied price per share calculated at the
closing of the merger may vary from the implied price per share calculated by
Goldman Sachs.
Based on an implied price per share of $14.00, Goldman Sachs conducted the
analyses described below. Unless otherwise indicated, estimated 1999 net income
from continuing operations per share was provided by the management of Capital
Re, which included estimates for reserves relating to Commercial Financial
Services, International Financial Services Life Insurance Company and the sale
of RGB Underwriting Agencies (a subsidiary of Capital Re). In addition, for
purposes of its analysis, Goldman Sachs calculated a normalized estimated 1999
net income per share. Normalized estimated 1999 net income per share adjusts
net income from continuing operations per share to exclude management's
estimated reserves for Commercial Financial Services, International Financial
Services Life Insurance Company and the sale of RGB Underwriting Agencies.
Unless otherwise indicated, all estimates were provided by Capital Re
management assuming their ability to execute their ongoing strategic plan.
Under these analyses, Goldman Sachs calculated that the implied value of
Capital Re common stock based on the merger consideration reflected:
--a multiple of 6.48x normalized estimated 1999 net income per share;
--a multiple of 6.36x estimated 2000 net income per share;
--a multiple of 1.02x reported book value per share for Capital Re's common
stock at September 30, 1999 excluding marked to market adjustments to the
investment portfolio;
--a premium to the closing price of Capital Re common stock on October 5,
1999, the day before XL announced its first cash offer to acquire all of
the outstanding shares of Capital Re, of 45.4%;
--a discount to the closing stock price on May 26, 1999, the date of the
original binding letter of intent with ACE, of 27.3%; and
--a premium to the closing stock price on February 17, 1999, the date
Capital Re common stock traded at its 52-week low prior to the date of
ACE's original binding letter of intent, of 17.3%.
33
<PAGE>
Goldman Sachs compared the price performance of the ACE ordinary shares
based on 1-month, 3-month, 6-month and 1-year averages and calculated the
implied price per share of Capital Re shares at these prices applying the
merger consideration. This analysis showed the following:
<TABLE>
<CAPTION>
ACE Price Implied Capital Re Price
--------- ------------------------
<S> <C> <C>
10/25/1999............................. $17.50 $14.00
1-Month Average........................ 16.61 14.00
3-Month Average........................ 20.21 14.44
6-Month Average........................ 24.66 17.33
1-Year Average......................... 27.45 19.14
</TABLE>
Goldman Sachs also reviewed the implied price for Capital Re common stock at
various prices for the ACE ordinary shares as well as the composition of the
merger consideration in cash and stock. This review showed the following:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ACE Ordinary Share
Price.................. $13.13 $14.34 $16.19 $17.50(b) $18.81 $19.54 $20.13 $22.97
% change in ACE ordinary
share price(a)......... -25% -18% -8% 0% 8% 12% 15% 25%
Stock component (0.65
exchange).............. $8.53 $9.32 $10.52 $11.38 $12.23 $12.70 $13.08 $14.93
Cash component.......... 4.68 4.68 3.48 2.63 1.77 1.30 1.30 1.30
------ ------ ------ --------- ------ ------ ------ ------
Total
consideration...... $13.21 $14.00 $14.00 $14.00 $14.00 $14.00 $14.38 $16.23
</TABLE>
- --------
(a) Based on the price for ACE ordinary shares on October 25, 1999.
(b) ACE ordinary share price on October 25, 1999.
Historical Trading Analysis Goldman Sachs also compared the price
performance of Capital Re common stock on a daily basis from October 5, 1999,
the day before XL announced its first proposal to acquire all of the
outstanding shares of Capital Re, through October 25, 1999, with the
performance of ACE ordinary shares and the S&P 500 Index. This analysis
indicated that:
--Capital Re common stock increased 40.9% from $9.63 to $13.56;
--the price of ACE ordinary shares increased 7.3% from $16.31 to $17.50;
and
--the S&P 500 Index decreased 0.6% from $1,301.35 to $1,293.63.
Goldman Sachs reviewed the historical trading prices and volumes for Capital
Re common stock on a daily basis from October 22, 1998 through October 22,
1999. This analysis showed that the closing market price of Capital Re common
stock ranged from $9.62 to $22.00, with a closing price of $13.50.
Selected Companies Analysis. Goldman Sachs reviewed and compared other
financial information, including estimated earnings prepared by Capital Re
management and public market multiples for Capital Re, and compared them to
corresponding financial information, estimated earnings as reported by
Institutional Brokerage Estimate Service International, Inc. and public market
multiples for a group of selected companies in the bond insurance and
reinsurance industry (comprised of MBIA Inc., Ambac Financial Group Inc.,
Financial Security Assurance Holdings Ltd. and Enhance Financial Services Group
Inc.), as well as a group of companies in the mortgage insurance industry
(comprised of MGIC Investment Corporation, the PMI Group, Inc., Radian
Investment Corporation and Triad Guaranty, Inc.). These companies were selected
because they are publicly traded companies with operations that for purposes of
this analysis may be considered similar to Capital Re. Goldman Sachs calculated
and compared various financial multiples and ratios. The multiples were
calculated using the October 25, 1999, October 5, 1999 and May 26, 1999 closing
prices for Capital Re common stock of $13.56, $9.63 and $19.25, respectively
and the October 25, 1999 closing prices for the comparable companies. The
multiples and ratios for Capital Re were based on information provided by
Capital Re management and the multiples for each of the selected companies were
based on the most recent publicly available information.
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<PAGE>
Goldman Sachs' analysis, among other things, showed the following:
<TABLE>
<CAPTION>
Price/Book
Price/Earnings Value Per
Per Share(a) Share(b)
Closing ----------------- ----------
Company Prices 1999E 2000E at 9/30/99
- ------- ---------- ----- ------- ----------
<S> <C> <C> <C> <C>
Capital Re (price on 10/25/99)........ $13.56 6.3x 6.2x 0.99x
Capital Re (price on 10/5/99)......... 9.63 4.5 4.4 0.62
Capital Re (price on 5/26/99)......... 19.25 9.0 8.8 1.12
<CAPTION>
Price
Bond Insurers/Reinsurers 10/25/1999
- ------------------------ ----------
<S> <C> <C> <C> <C>
MBIA.................................. $49.25 10.5x 9.3x 1.39x
Ambac Financial....................... 46.38 10.9 9.5 1.57
Financial Security Assurance.......... 52.38 11.9 10.6 1.57
Enhance Financial Services............ 17.53 7.2 6.3 0.98
Median................................ 10.7 9.4 1.48
Selection of Mortgage Insurers
- ------------------------------
MGIC.................................. $53.88 13.0x 11.3x 3.57x
PMI Group............................. 48.94 10.9 9.5 1.29
Radian................................ 48.81 10.7 8.9 1.14
Triad Guaranty........................ 18.88 9.1 7.9 1.73
Median................................ 10.8 9.2 1.51
</TABLE>
- --------
Note: Financial data as of latest available public information.
(a) For the comparable companies, based on latest median calendarized
International Brokerage Estimate Service International, Inc. earnings
estimates.
(b)Excluding certain marked to market adjustments to the investment portfolio
based on management's estimates.
Selected Transaction Analysis. Goldman Sachs analyzed publically available
information relating to the following eight selected transactions in the
mortgage insurance, bond insurance and bond reinsurance industry since 1989:
<TABLE>
<CAPTION>
Date Effective Acquiror Target
-------------- -------- ------
<S> <C> <C>
07/23/99 CMAC Investment Amerin Corporation
Corporation
02/17/98 MBIA Inc. CapMac Holdings
07/23/97 Swiss Reinsurance CapMacHoldings (a)
05/23/96 Swiss Reinsurance Enhance Financial Services
Group Inc.
12/20/95 Financial Security Capital Guaranty
Assurance Holdings Ltd.
02/28/90 US WEST Financial Security Assurance
Holdings Ltd.
12/29/89 MBIA Inc. Bond Investors Group, Inc.
04/20/89 General Electric Capital FGIC Corporation
Corporation
</TABLE>
--------
(a) One million secondary shares purchased, Swiss Reinsurance interest
then equaled 5.8%.
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<PAGE>
Goldman Sachs compared information for these transactions to the implied
price of Capital Re common stock based on the merger consideration under the
amended and restated merger agreement. This analysis indicated that for the
selected transactions:
--total consideration as a multiple of book value ranged from 0.86x to
1.78x for the selected transactions compared with 1.02x for the merger
consideration based on book value per share for Capital Re's common stock
at September 30, 1999;
--total consideration as a multiple of latest twelve month net income per
share or net income, whichever was more applicable, for the latest twelve
months, ranged from 8.9x to 19.4x for the selected transactions compared
with:
--6.5x for the merger based on estimated 1999 earnings per share and
net income from continuing operations per share for the latest twelve
months ending September 30, 1999 based on management's projection for
normalized earnings assuming the ability to execute their current
strategic plan;
--total consideration as a multiple of estimated 1999 net income per share
or estimated 1999 net income, whichever was more applicable, ranged from
8.5x to 17.5x for the selected transactions compared with:
--6.4x for the merger based on estimated 1999 net income based upon
management's projection for normalized earnings assuming the ability
to execute their current strategic plan.
Pro Forma Merger Analysis. Goldman Sachs prepared pro forma analyses of the
financial impact of the merger using three prices for ACE ordinary shares:
--$19.54, a 12% increase in market price as of October 25, 1999, which is
the price at which the cash component of the merger consideration would be
at a minimum of $1.30 per share;
--$17.50, market price as of October 25, 1999; and
--$14.34, an 18% decrease in market price as of October 25, 1999, which is
the price at which the cash component of the merger consideration would
reach a maximum of $4.68 per share.
Goldman Sachs reviewed the impact of the merger on the combined company's net
income per share, based on management's estimates for Capital Re net income per
share and Institutional Brokerage Estimate Service International, Inc.
estimates for ACE net income per share and assuming the achievement of no
synergies or cost savings in 2000. This analysis indicated that, on a pro forma
basis as if the merger had occurred on January 1, 2000, the merger would be
based on estimated 2000 net income per share for ACE:
--4.3% accretive to ACE's earnings per share at $19.54;
--3.9% accretive to ACE's earnings per share at $17.50; and
--3.3% accretive to ACE's earnings per share at $14.34.
Discounted Cash Flow Analysis. Goldman Sachs prepared a discounted cash flow
analysis for an ACE ordinary share assuming a combination with Capital Re
through December 31, 2010. The analysis calculated the net present value of the
annual dividends per share based on a historical dividend payout ratio of 15%
for the combined company through the discounting period plus the net present
value of the of the December 31, 2010 terminal price per share. For the purpose
of the analysis, Goldman Sachs used discount rates ranging from 11.0% to 17.0%
and a terminal price to earnings multiples ranging from 6.0x to 13.0x. The
analysis was performed using International Brokerage Estimate Service earnings
estimates for ACE through 2000 and applied the International Brokerage Estimate
Service long term growth rate estimate to ACE's earnings per share from 2001 to
2010. For Capital Re, Goldman Sachs used Capital Re's management estimate
through 2000 and then applied an historical growth rate of 12% to Capital Re
earnings per share from 2001 to 2010. This analysis indicated net present
values per ACE ordinary share ranging from a low of $14.60 to a high of $47.58.
Goldman Sachs also performed the same analysis using a December 31, 2010
terminal price to book
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multiple ranging from 0.8x to 1.8x. This analysis indicated net present values
per ACE ordinary share ranged from a low of $13.40 to a high of $42.57.
Liquidation Analysis. As mentioned above, Goldman Sachs reviewed a
liquidation analysis of Capital Re prepared by Capital Re management. This
analysis calculated the net present value of Capital Re's book value per share
assuming a downgrade of current financial strength ratings which would result
in the loss of previously ceded premiums in the financial guaranty and mortgage
businesses. This analysis also assumed, among other things, the realization of
the net present value of the credit default swap business and the realization
of losses and write-offs for Commercial Financial Services, International
Financial Services Life Insurance Company and the sale of RGB Underwriting
Agencies. Based on payout periods in years 2000, 2001, and 2003 and discount
rates of 10%, 12%, 14% and 16%, the analysis showed net present value of
Capital Re book value in the range of $8.04 to $12.25 per share.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible of partial analysis or summary description. Selecting
portions of the analyses or of the summary set forth above, without considering
the analyses as a whole, could create an incomplete view of the processes
underlying Goldman Sachs' opinion. In arriving at its fairness determination,
Goldman Sachs considered the results of all these analyses.
The analyses were prepared solely for purposes of Goldman Sachs' providing
its opinion to the Capital Re board of directors as to the fairness from a
financial point of view of the merger consideration to be received under the
amended and restated merger agreement. The analyses do not purport to be
appraisals or necessarily to reflect the prices at which businesses or
securities actually may be sold. Analyses based upon forecasts of future
results are not necessarily indicative of actual future results, which may be
significantly more or less favorable than those suggested by such analyses.
Because such analyses are inherently subject to uncertainty, being based upon
numerous factors or events beyond the control of the parties or their
respective advisors, none of Capital Re, ACE, Goldman Sachs or any other person
assumes responsibility if future results are materially different from those
forecast. As described above, Goldman Sachs' opinion to the board of directors
of Capital Re was one of many factors taken into consideration by the Capital
Re board of directors in making its determination to approve the amended and
restated merger agreement. The foregoing summary does not purport to be a
complete description of the analyses performed by Goldman Sachs. You should
read the written opinion of Goldman Sachs attached as Appendix C.
Goldman Sachs, as part of its investment banking business, is continually
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private placements,
and valuations for estate, corporate and other purposes. Capital Re selected
Goldman Sachs as its financial advisor because it is a nationally recognized
investment banking firm that has substantial experience in merger and
acquisition transactions. Goldman Sachs has provided investment banking
services to Capital Re from time to time, including acting as managing
underwriter of the initial public offering of 6,325,000 shares of common stock
in April 1992, managing underwriter for a public offering of $100 million of
7.75% debentures due November 1, 2002 in December 1992, managing underwriter
for a public offering of $75 million of 7.65% company obligated mandatorily
redeemable preferred securities of Capital Re LLC in May 1994 and managing
underwriter of a public offering of 3,450,000 shares of common stock in
February 1996. Goldman Sachs also advised Capital Re on the sale of $75 million
of its common stock to ACE and acted its financial advisor in connection with,
and participated in certain of the negotiations leading to, the amended and
restated merger agreement.
Goldman Sachs provides a full range of financial, advisory and brokerage
services and in the course of its normal trading activities may from time to
time effect transactions and hold positions in the securities or options on
securities of Capital Re and ACE for its own account and for the account of
customers.
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Under a letter agreement, dated May 17, 1999, Capital Re engaged Goldman
Sachs to act as its financial advisor in connection with the merger. Under this
agreement, Capital Re agreed to pay Goldman Sachs an advisory fee of $1.0
million which was paid at the time of the signing of the original merger
agreement. The total transaction fee payable under this agreement equals 1.055%
of the aggregate consideration paid for the common stock of Capital Re if the
merger is completed. Capital Re agreed to pay the transaction fee in cash upon
consummation of the transaction.
The advisory fee of $1.0 million paid on June 10, 1999 together with a fee
of $1.875 million paid to Goldman Sachs under a letter agreement dated December
21, 1998 in connection with the advisory services provided to Capital Re in
connection with the sale of $75 million of its common stock to ACE will be
credited toward the payment of any transaction fee.
The total transaction fee would equal approximately $5.5 million based on
the closing price per ACE ordinary share on November 10, 1999 of $19.94, of
which $2.875 million has already been paid and will be credited against this
total transaction fee.
Capital Re also agreed to reimburse Goldman Sachs for their reasonable out-
of-pocket expenses, including attorneys' fees, and to indemnify Goldman Sachs
against certain liabilities, including certain liabilities under the federal
securities laws.
PURPOSE, ALTERNATIVES, REASONS AND EFFECTS OF THE MERGER
ACE's purpose in entering in effecting the merger is to diversify its
product line by adding Capital Re's financial guaranty business to ACE's
existing businesses. Such diversification is expected to positively effect the
combined entity's results of operations as well its risk profile. Capital Re's
two principal divisions, financial guaranty and financial risk, are engaged in
the business of municipal and non-municipal financial guaranty reinsurance,
mortgage guaranty reinsurance, title reinsurance, trade credit reinsurance and
financial solutions. Other than through its joint venture with Capital Re, ACE
is not significantly involved in any of these businesses. ACE's larger capital
base will also allow Capital Re to grow its business. Capital Re may also be
able to take advantages of certain tax and regulatory advantages of ACE's
Bermuda location.
As noted above, ACE entered into the merger when it did at the request of
Capital Re. At the time ACE originally agreed to merge with Capital Re, Capital
Re faced substantial uncertainty with respect to its ratings because of certain
unfavorable developments in its business. The announcement of the merger with
ACE alleviated the rating agencies concerns and by providing Capital Re with
access to ACE's larger base of capital.
Before reaching its decision to pursue a merger with Capital Re, ACE did not
consider alternative structures to a merger. As noted above, Capital Re
approached ACE with a proposal to effect a merger. The potential benefits of a
merger included the ability to obtain complete control of Capital Re in one
step, the ability to complete the transaction on a tax-efficient basis for
Capital Re's stockholders and the opportunity to raise additional capital
through the issuance of ACE ordinary shares in the merger. While a two-step
exchange offer could have accomplished the same goals as a one-step merger,
such an exchange offer could have adversely affected the availability of
favorable tax treatment for the transaction, it would not have been
significantly quicker given the need for regulatory approvals and might still
have required a long-form merger if sufficient shares were not tendered for
exchange in the first step. Thus, a two-step exchange offer would not have
afforded Capital Re, ACE or Capital Re's unaffiliated stockholders with
additional benefits over the chosen structure. An expansion of the existing
joint venture between ACE and Capital Re or the formation of a new joint
venture would not have provided Capital Re with the additional capital to
resolve the rating agency concerns discussed above. An additional equity
investment by ACE would not have provided Capital Re with continued access to
additional capital.
If the merger is completed, Capital Re common stock would cease to be
publicly traded and holders of Capital Re common stock (other than ACE and
stockholders who dissent from the merger and seek appraisal of
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their shares in accordance with the Delaware law requirements explained in this
document) would receive a combination of ACE ordinary shares and cash as
described in this proxy statement/prospectus. As a result of the merger,
Capital Re's public stockholders will not face the risk of a decline in the
value of Capital Re or Capital Re's common stock. However, Capital Re's public
stockholders will face the risk of declines in the value of ACE and ACE's
ordinary shares. Capital Re stockholders will, however, have the opportunity to
indirectly participate in the future earnings and growth of Capital Re through
their interest in ACE.
While Capital Re's stockholders would acquire shares in a larger, more
diversified company, such diversification could result in potential detriments
or adverse effects to Capital Re's stockholders when compared with their
investment in Capital Re. While Capital Re's operations are limited to the
financial guaranty and financial risk segment of the property and casualty
insurance industry, ACE operates more broadly in the property and casualty
insurance industry. Thus, ACE is subject to losses as a result of product
liability claims, natural disasters and other occurrences that Capital Re is
not subject to. In addition, more of ACE's business is generated from non-U.S.
risks than Capital Re's exposing ACE's business to potentially greater
political and financial risks than Capital Re's. Also, because ACE is more
diversified than Capital Re, it may not benefit as significantly from a
favorable market for financial guaranty and financial risk insurance as would
Capital Re on a stand alone basis. ACE is incorporated in the Cayman Islands
and has its principal executive offices in Bermuda. Because of its foreign
incorporation and location, the rights of ACE shareholders as compared with the
rights of Capital Re's stockholders may be different. See "Comparison of
Stockholders' Rights and Description of the Share Capital of ACE Following the
Merger."
If the merger is completed, Capital Re will become a wholly owned subsidiary
of ACE and Capital Re's financial results (including net earnings), assets and
liabilities (including net book value) will be reflected in ACE's consolidated
financial statements. As a wholly owned subsidiary of ACE, it is expected that
Capital Re's business will be operated in coordination with ACE's other
insurance and reinsurance operations. In addition, Capital Re may cede business
to ACE's other insurance and reinsurance subsidiaries.
POSITION OF ACE REGARDING FAIRNESS OF THE MERGER
ACE believes that the consideration to be received by Capital Re's
stockholders in the merger is fair to the stockholders of Capital Re (other
than ACE). ACE bases this belief on the following factors:
. Competitive Process--The merger consideration to be paid ultimately was
determined through a competitive bidding process. On October 6, 1999, XL,
an unaffiliated third party, offered $12.50 in cash for each Capital Re
share, and shortly thereafter increased its offer to $13.00 per share.
ACE then increased the consideration it was offering to $13.00 in ACE
ordinary shares and cash. XL then increased its cash offer to $14.00. ACE
matched this revised offer by offering $14.00 in ACE ordinary shares and
cash. ACE believes that this competitive process contributed to the
fairness of the merger consideration to be paid in the merger.
. Increased Consideration--The value of the merger consideration offered by
ACE represents a significant increase over the value of the merger
consideration contained in the original merger agreement. The original
merger agreement provided for Capital Re stockholders to receive 0.60 of
an ACE ordinary share for each Capital Re share. The current merger
provides an additional 0.05 of an ACE ordinary share and a minimum of
$1.30 in cash per Capital Re share.
. Special Committee Participation--A special committee of Capital Re's
board of directors consisting of all of the directors of Capital Re,
other than the two nominees of ACE, negotiated the merger agreement with
ACE and determined that the merger agreement and the merger are advisable
and fair to and in the best interests of Capital Re and its stockholders,
other than ACE. While the special committee included two officers of
Capital Re, a majority of the special committee consisted of non-employee
directors. The special committee assisted in ensuring that the merger
consideration and the procedures followed, were fair to Capital Re's
stockholders, other than ACE. The increased merger consideration and
elimination of significant closing conditions were obtained by the
negotiation of the special committee.
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. Special Committee Valuation--The special committee of Capital Re's board
of directors, based, among other things, upon the advice of Goldman,
Sachs & Co. and Capital Re's legal counsel, determined that the merger
consideration offered by ACE is at least as favorable to Capital Re's
stockholders, other than ACE, as the merger consideration proposed by XL.
Because ACE's offer includes ACE ordinary shares, the special committee
had to evaluate ACE's offer and compare it to the all cash offer by XL.
The special committee also took into account other factors such as the
timing, certainty of closing, and the upside potential in ACE's ordinary
shares versus downside risk.
. Potential Future Appreciation--The merger allows Capital Re's
stockholders to participate in the equity ownership of ACE and potential
future appreciation in the value of ACE's ordinary shares and any
potential future change of control premiums. Capital Re's stockholders
may also be able to do so on a tax deferred basis.
. Equal Treatment--All Capital Re stockholders, other than ACE, will
receive the same consideration in the merger. Capital Re's two large,
unaffiliated stockholders will receive the same merger consideration as
the other Capital Re stockholders.
. Appraisal Rights--Any Capital Re stockholders who believe that they are
not receiving fair consideration for their shares have the right to
dissent from the merger and have the opportunity to obtain an appraisal
of their shares. Thus, no stockholder is required to accept consideration
that is not "fair."
In connection with its consideration of the fairness of the consideration to
be received by the Capital Re stockholders, ACE has adopted the conclusions as
to fairness set forth under "Special Factors--Capital Re's Reasons for the
Merger; Recommendation of the Board of Directors of Capital Re" and the
analyses underlying such conclusions, of Capital Re's board of directors, based
upon ACE's views as to the reasonableness of such analyses.
ACE also believes that the procedures followed in negotiating the merger
were procedurally fair to Capital Re's unaffiliated stockholders. The merger
was approved by a majority of Capital Re's directors who are not employees of
Capital Re. While the merger does not require approval of at least a majority
of unaffiliated Capital Re stockholders, ACE owns less than 16% of the
outstanding Capital Re shares. Thus, the affirmative vote of a significant
percentage of unaffiliated Capital Re stockholders is required. As noted above,
Capital Re's two large unaffiliated stockholders owning approximately 32% of
Capital Re's outstanding shares intend to vote in favor of the merger. While
the Capital Re special committee included employees of Capital Re, a majority
of the members of the special committee were not employees of Capital Re and
thus could and did represent the interests of Capital Re's unaffiliated
stockholders.
ACE did not find it practical to assign, nor did it assign, relative weights
to the individual factors considered in reaching its conclusion as to fairness.
Following announcement of the original merger agreement in June 1999, the
market price for Capital Re's shares tended to closely correlate with the
market price of 0.60 of an ACE ordinary share (i.e., the merger consideration
in the original merger). As a result, ACE did not take into account Capital
Re's then current market price in determining the fairness of the merger as ACE
believes such prices reflected the value of the consideration in the original
merger rather than the market's view of the value of such shares. However, ACE
notes that the merger consideration at the time of the execution of the merger
agreement constituted over a 40% premium over the implied value of the original
merger consideration prior to the announcement of the first XL offer on October
6. ACE did not take into account historical market prices for Capital Re's
stock in determining the fairness of the merger because of the numerous
material events that had taken place in the months leading up to and after the
signing of the original merger agreement. ACE did not estimate Capital Re's
"going concern value" or its "liquidation value" and therefore did not take
into account such values in determining the fairness of the merger.
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In determining the fairness of the merger consideration, ACE also considered
the financial presentation made to its board of directors by Credit Suisse
First Boston Corporation. ACE did not specifically adopt the analyses of Credit
Suisse First Boston. However, it should be noted that Credit Suisse First
Boston did not express any opinion as to the fairness of the transaction,
either to ACE or to Capital Re's unaffiliated stockholders.
Notwithstanding the foregoing conclusions, ACE's interests in the merger
were represented by ACE's board of directors, together with its advisors, whose
primary concern was the fairness to ACE, whose interests may conflict with
those of Capital Re's stockholders.
SOURCE AND AMOUNT OF FUNDS
The source of the cash component of the consideration to be paid by ACE to
the Capital Re stockholders is available cash on hand or proceeds from sales of
investments securities. Depending on the timing of the consummation of the
merger, for liquidity purposes, ACE may also issue commercial paper or make
short-term borrowings under existing lines of credit.
PRESENTATION OF THE FINANCIAL ADVISOR TO ACE
Credit Suisse First Boston Corporation has acted as financial advisor to ACE
in connection with the merger. ACE selected Credit Suisse First Boston based on
Credit Suisse First Boston's experience, expertise and familiarity with ACE and
its business. Credit Suisse First Boston is an internationally recognized
investment banking firm and is regularly engaged in the valuation of businesses
and securities in connection with mergers and acquisitions, leveraged buyouts,
negotiated underwritings, competitive biddings, secondary distributions of
listed and unlisted securities, private placements and valuations for corporate
and other purposes.
In connection with Credit Suisse First Boston's engagement, ACE requested
that Credit Suisse First Boston evaluate the consideration to be paid by ACE in
the merger. On October 13, 1999, at a meeting of the ACE board of directors
held to evaluate the proposed merger, Credit Suisse First Boston made a
financial presentation to the ACE board of directors with respect to the merger
consideration. Credit Suisse First Boston was not requested to, and did not,
render an opinion as to the fairness of the consideration payable in the merger
from a financial point of view.
In connection with its financial presentation to the ACE board, Credit
Suisse First Boston reviewed the merger agreement, dated June 10, 1999, and
related documents, as well as publicly available business and financial
information relating to ACE and Capital Re. Credit Suisse First Boston also
reviewed other information relating to ACE and Capital Re, including financial
forecasts, which ACE provided to or discussed with Credit Suisse First Boston,
and met with the management of ACE to discuss the businesses and prospects of
ACE and Capital Re.
Credit Suisse First Boston also considered financial and stock market data
of ACE and Capital Re and compared those data with similar data for other
publicly held companies engaged in businesses similar to ACE and Capital Re and
considered, to the extent publicly available, the financial terms of other
business combinations and other transactions recently effected. Credit Suisse
First Boston also considered other information, financial studies, analyses and
investigations and financial, economic and market criteria which Credit Suisse
First Boston deemed relevant.
In connection with its review, Credit Suisse First Boston did not assume any
responsibility for independent verification of any of the information that was
provided to or otherwise reviewed by it and relied on that information being
complete and accurate in all material respects. With respect to the financial
forecasts, Credit Suisse First Boston was advised, and assumed, that the
forecasts were reasonably prepared on bases reflecting the best currently
available estimates and judgments of the management of ACE as to the future
financial performance of ACE and Capital Re and the potential synergies and
strategic benefits anticipated to result from the merger, including the amount,
timing and achievability of those synergies and benefits.
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Credit Suisse First Boston was not requested to, and did not, make an
independent evaluation or appraisal of the assets or liabilities, contingent or
otherwise, of ACE or Capital Re, and was not furnished with any evaluations or
appraisals. Credit Suisse First Boston's financial presentation was based on
information available to, and financial, economic, market and other conditions
as they existed and could be evaluated by, Credit Suisse First Boston on the
date of its financial presentation. Credit Suisse First Boston did not express
any opinion as to the actual value of the ACE ordinary shares when issued in
the merger or the prices at which the
ACE ordinary shares will trade after the merger. Credit Suisse First Boston
also was not requested to, and did not, recommend the specific consideration
payable in the merger, which consideration was determined by ACE and Capital
Re. No other limitations were imposed on Credit Suisse First Boston with
respect to the investigations made or procedures followed in connection with
its financial presentation.
In preparing its presentation to the ACE board, Credit Suisse First Boston
performed a variety of financial and comparative analyses, including those
described below. The summary of Credit Suisse First Boston's analyses described
below is not a complete description of the analyses performed by Credit Suisse
First Boston. The financial analyses included in a financial presentation 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
presentation is not readily susceptible to summary description. In connection
with its financial presentation, Credit Suisse First Boston made qualitative
judgments as to the significance and relevance of each analysis and factor that
it considered. Accordingly, Credit Suisse First Boston believes that its
analyses must be considered as a whole and that selecting portions of its
analyses and factors or focusing on information presented in tabular format,
without considering all analyses and factors or the narrative description of
the analyses, could create a misleading or incomplete view of the processes
underlying its analyses and financial presentation.
A copy of Credit Suisse First Boston's written presentation to the ACE board
of directors has been attached as an exhibit to ACE's Schedule 13E-3 filed with
the Commission and will be available for inspection and copying at the
principal executive offices of ACE during regular business hours by any
interested stockholder of ACE or any representative of such stockholder who has
been so designated in writing and may be inspected and copied at the office of,
and obtained by mail from, the Commission.
In performing its analyses, Credit Suisse First Boston considered industry
performance, regulatory, general business, economic, market and financial
conditions and other matters, many of which are beyond the control of ACE and
Capital Re. No company, transaction or business used in Credit Suisse First
Boston's analyses as a comparison is identical to ACE or Capital Re or the
proposed merger, and an evaluation of the results of those analyses is not
entirely mathematical. Rather, the analyses involve complex considerations and
judgments concerning financial and operating characteristics and other factors
that could affect the acquisition, public trading or other values of the
companies, business segments or transactions analyzed.
The estimates contained in Credit Suisse First Boston's analyses and the
ranges of valuations resulting from any particular analysis are not necessarily
indicative of actual values or predictive of future results or values, which
may be significantly more or less favorable than those suggested by the
analyses. In addition, analyses relating to the value of the businesses or
securities do not purport to be appraisals or to reflect the prices at which
businesses or securities actually may be sold. Accordingly, Credit Suisse First
Boston's analyses and estimates are inherently subject to substantial
uncertainty.
Credit Suisse First Boston's financial presentation was not the only factor
considered by the ACE board in its evaluation of the proposed merger and should
not be viewed as determinative of the views of the ACE board with respect to
the merger or the merger consideration.
The following is a summary of the material analyses underlying Credit Suisse
First Boston's financial presentation to ACE's board in connection with the
merger. The financial analyses summarized below include information presented
in tabular format. In order to fully understand Credit Suisse First Boston's
financial analyses, the tables must be read together with the text of each
summary. The tables
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alone do not constitute a complete description of the financial analyses.
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 Credit Suisse First Boston's financial analyses.
Pro Forma Merger Analysis. Credit Suisse First Boston analyzed the potential
pro forma effect of the merger on the estimated earnings per share, commonly
referred to as EPS, of ACE in calendar years 2000 and
2001, based on publicly available research analysts' estimates in the case of
ACE and on internal estimates of the management of ACE in the case of Capital
Re. This analysis indicated that the merger would be accretive to ACE's
estimated EPS in calendar years 2000 and 2001, except that the merger would be
dilutive to the estimated EPS of ACE if ACE's stock price were below
approximately $12.00 per share. The actual results achieved by ACE may vary
from projected results and the variations may be material.
Credit Suisse First Boston also conducted a selected companies analysis, a
selected mergers and acquisitions analysis and a discounted cash flow analysis,
the results of which were used to derive an aggregate equity reference range
for Capital Re.
Selected Companies Analysis. Credit Suisse First Boston compared financial,
operating and stock market data of Capital Re to corresponding data of the
following publicly traded companies in the bond insurance and reinsurance
industry:
. Ambac Financial Group Inc.
. Enhance Financial Services Group Inc.
. Financial Security Assurance Holdings Ltd.
. MBIA Inc.
Credit Suisse First Boston compared equity values of the selected companies
as multiples of latest 12 months and estimated calendar years 1999 and 2000
price to earnings and as a multiple of price to reported book value. Credit
Suisse First Boston then applied a range of selected multiples for the selected
companies of latest 12 months and estimated calendar years 1999 and 2000 price
to earnings and price to reported book value to the estimated calendar year
2000 earnings, reported book value as of June 30, 1999 and estimated book value
as of September 30, 1999 of Capital Re. Credit Suisse First Boston also
considered the effect of control premiums ranging from 10% to 30% on the equity
reference ranges implied by this analysis. All multiples were based on closing
stock prices on October 11, 1999. Estimated financial data for the selected
companies were based on publicly available research analysts' estimates and
estimated financial data for Capital Re were based on internal estimates of the
management of ACE.
Selected Mergers and Acquisitions Analysis. Credit Suisse First Boston
analyzed the implied purchase prices and transaction multiples paid or proposed
to be paid in following selected merger and acquisition transactions in the
mortgage insurance, bond insurance and bond reinsurance industry:
Acquiror Target
. Financial Security Assurance Holdings Ltd.
. Capital Guaranty Corporation
. MBIA Inc. . CapMAC Holdings Inc
. General Re Corporation . National Re Corporation
. PartnerRe Ltd. . Sociate Anonyme Francaise de
. Swiss Reinsurance Co Reassurances
. CMAC Investment Corp . Life Re Corporation
. Chubb Corp . Amerin Corp
. Fortis, Inc. . Executive Risk Inc.
. American Bankers Insurance Group,
Inc.
Credit Suisse First Boston compared equity values in the selected
transactions as multiples of estimated book value and latest 12 months net
income, excluding realized capital gains and losses. Credit Suisse First
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Boston then applied a range of selected multiples for the selected transactions
of the most recent estimated book value and latest 12 months net income to the
estimated September 30, 1999 book value and latest 12 months net income of
Capital Re. All multiples were based on publicly available financial
information.
Discounted Cash Flow Analysis. Credit Suisse First Boston estimated the
present value of the stand-alone, unlevered, after-tax fee cash flows that
Capital Re could produce over calendar years 1999 through 2003. Ranges of
estimated terminal values were calculated by using terminal multiples of
estimated December 31, 2000 book value of 1.0x to 1.2x and estimated calendar
year 2003 earnings of 8.0x to 10.0x. The free cash flows were then discounted
to present value using discount rates of 10% to 12%.
Aggregate Reference Range. Based on the valuation methodologies described
above, Credit Suisse First Boston derived the following approximate implied
aggregate and per share equity reference ranges for Capital Re:
<TABLE>
<CAPTION>
Aggregate Equity Per Share Equity
Reference Range Reference Range
---------------------------- ----------------
<S> <C> <C>
Capital Re (excluding shares
owned by ACE).............. $500 million to $650 million $15.57 to $20.25
</TABLE>
Miscellaneous. Pursuant to the terms of Credit Suisse First Boston's
engagement, ACE has agreed to pay Credit Suisse First Boston for its financial
advisory services upon completion of the merger an aggregate fee of $3,000,000.
ACE also has agreed to reimburse Credit Suisse First Boston for its out-of-
pocket expenses, including fees and expenses of legal counsel and any other
advisor retained by Credit Suisse First Boston, and to indemnify Credit Suisse
First Boston and related parties against liabilities, including liabilities
under the federal securities laws, arising out of its engagement.
Credit Suisse First Boston and its affiliates have in the past provided
financial services to ACE unrelated to the proposed merger, for which services
Credit Suisse First Boston and its affiliates have received compensation. In
the ordinary course of business, Credit Suisse First Boston and its affiliates
may actively trade the debt and equity securities of both ACE and Capital Re
for their own accounts and for the accounts of customers and, accordingly, may
at any time hold a long or short position in those securities.
LISTING OF THE ACE SHARES
ACE has agreed to use its best efforts to cause the ACE shares to be issued
in the merger and the ACE shares to be reserved for issuance upon the exercise
of the existing Capital Re options to be approved for listing on the New York
Stock Exchange, subject to official notice of issuance. Such authorizations for
listing are conditions to the obligations of ACE and Capital Re to consummate
the merger. See "The Merger Agreement--Conditions to the Merger" on page 67.
PLANS OR PROPOSALS
Following completion of the merger, Capital Re will become a wholly owned
subsidiary of ACE. After consummation of the merger, ACE may create a holding
company between itself and Capital Re. This new holding company may be
organized in a jurisdiction outside of the United States. Capital Re's board of
directors following the merger will consist exclusively of designees of ACE. In
addition, as a wholly owned subsidiary of ACE, Capital Re's current dividend
policy will be dependent upon Capital Re's and ACE's business needs from time
to time. Except as generally described in this proxy statement/prospectus, ACE
does not have any plans or proposals concerning any extraordinary corporate
transaction involving Capital Re, any sale or transfer of a material amount of
Capital Re's assets, any change in Capital Re's management, any material change
in Capital Re's present policy on indebtedness or capitalization, or any other
change in Capital Re's corporate structure or business.
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DELISTING AND DEREGISTRATION OF CAPITAL RE COMMON STOCK; CESSATION OF CAPITAL
RE PERIODIC REPORTING
If the merger is consummated, the Capital Re common stock will cease to be
listed on the New York Stock Exchange. However, as an issuer of $75 million of
long term debt due 2002 and a guarantor of $75 million of monthly income
preferred stock of Capital Re LLC, Capital Re must still make separate periodic
filings with the SEC under the Securities Exchange Act of 1934. Capital Re
LLC's outstanding preferred stock will continue to be listed on the New York
Stock Exchange under the symbol KRE Pr L.
ACCOUNTING TREATMENT
ACE plans to account for the merger as a "purchase" in accordance with
United States generally accepted accounting principles. This means that, for
financial accounting purposes, ACE will allocate the purchase price to assets
acquired and liabilities assumed from Capital Re based on their estimated fair
values at the time the merger is completed. The amount of the purchase price
that exceeds the net fair market value of assets acquired and liabilities
assumed will be reflected on the balance sheet of ACE as goodwill and will have
to be written off against future earnings.
FEES AND EXPENSES
The following table sets forth the estimated expenses incurred and to be
incurred by ACE and Capital Re in connection with the merger. These fees will
be paid by ACE and will not be the responsibility of Capital Re.
<TABLE>
<S> <C>
Filing fees................................................... $ 117,628
Printing costs................................................ 500,000
Legal fees.................................................... 1,000,000
Accounting fees............................................... 100,000
Financial advisory fees....................................... 8,500,000
Transfer agent fees........................................... 30,000
Miscellaneous................................................. 752,372
-----------
Total....................................................... $11,000,000
===========
</TABLE>
Except as set forth above, ACE will not pay any fees or commissions to any
broker or dealer or other person for soliciting proxies in connection with the
merger.
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
General. The following is a discussion of the material United States federal
income tax consequences of the merger. This summary deals only with Capital Re
stockholders who hold their shares of Capital Re common stock as capital assets
and is based upon the Internal Revenue Code of 1986, as amended, the proposed,
temporary and final Treasury regulations promulgated thereunder, and any
relevant administrative rulings or pronouncements or judicial decisions, all as
in effect on the date hereof and all of which are subject to change, possibly
with retroactive effect. This discussion does not address all of the tax
consequences that may be relevant to a particular Capital Re stockholder in
light of that stockholder's specific circumstances, nor does it discuss the
United States federal income tax consequences that may be applicable to certain
types of Capital Re stockholders, such as Capital Re stockholders who have
received their shares of Capital Re common stock pursuant to the exercise of
employee stock options or otherwise as compensation, dealers in securities,
financial institutions, tax-exempt entities, life insurance companies, persons
holding their shares as a part of a hedging, integrated, conversion or
constructive sale transaction or as part of a straddle, or who may be subject
to special rules and/or limitations under the Internal Revenue Code that are
not discussed below. In addition, the following discussion does not discuss the
state, local or foreign tax consequences of the merger. Consequently, each
Capital Re stockholder is urged to consult its own tax advisor in determining
the federal, state, local and foreign income and any other tax consequences. No
ruling on any of the issues
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discussed below will be sought from the Internal Revenue Service. In addition,
Capital Re stockholders should note that the opinions of counsel described
below are not binding on the IRS or the courts. Consequently, no assurance can
be given that the IRS will not assert positions that are contrary to such
opinions of counsel.
Mayer Brown & Platt, counsel to ACE, and Hogan & Hartson L.L.P., counsel to
Capital Re, have each delivered an opinion to the effect that the discussion
herein under the heading "Special Factors--Material United States Federal
Income Tax Consequences," to the extent it contains descriptions of applicable
federal income tax law, is correct in all material respects.
The Merger as Currently Structured. The parties obligations to effect the
merger as currently structured are conditioned on the delivery of an opinion to
ACE from Mayer, Brown & Platt, its tax counsel, and the delivery to Capital Re
from Hogan & Hartson, its tax counsel, each dated as of the closing date of the
merger, that for United States federal income tax purposes, the merger will
constitute a reorganization within the meaning of Section 368(a) of the Code
and each of ACE, Capital Re and CapRe Acquisition Corp. will be a party to that
reorganization within the meaning of Section 368(b) of the Code. It is a
condition to the consummation of the merger as currently structured that such
opinions be rendered. It is currently expected that the opinions of counsel
will be rendered. However, if the value of ACE ordinary shares decreases below
a certain level, the merger may be restructured pursuant to Section 1.4 of the
merger agreement. The merger as restructured would not qualify as a
reorganization under Section 368(a) of the Code. The tax consequences of the
revised structure are discussed below under the caption "Revised Structure."
The opinions of counsel will rely on the customary representations and
assumptions that are set forth therein, including, without limitation,
representations of ACE, CapRe Acquisition Corp. and Capital Re to the effect
that:
--at the effective time of the merger, the fair market value of ACE will be
equal to or greater than the fair market value of Capital Re;
--50% or less of the total voting power and the total value of the
outstanding ACE ordinary shares will be received pursuant to the merger by
Capital Re stockholders who are "United States persons";
--50% or less of the total voting power and the total value of the
outstanding ACE ordinary shares will be owned, immediately after the
merger, by "United States persons" who are either officers or directors of
Capital Re or persons that directly, indirectly or constructively owned 5%
or more of either the total voting power or the total value of the
outstanding stock of Capital Re immediately prior to the merger;
--either ACE or one or more of its "qualified subsidiaries" (within the
meaning of Treasury Regulations Section 1.367(a)-3(c)(5)(vii)) has been
engaged in an "active trade or business" (within the meaning of temporary
Treasury Regulations Sections 1.367(a)2T(b)(2) and (3)) outside of the
United States for the entire 36 month period immediately preceding the
merger and ACE or such qualified subsidiary does not intend to
substantially dispose of or discontinue such trade or business; and
--Capital Re will timely file a United States federal income tax return for
the taxable year in which the merger occurs and attach a statement titled
"Section 367(a)--Reporting of Cross Border Transfer under Reg. Section
1.367(a)-3(c)(6)" that sets forth all of the information required to be
disclosed under such Treasury Regulation Section.
If any of the factual assumptions or representations set forth in the
opinions of counsel, including, without limitation, the foregoing
representations, are inaccurate, such opinions may not accurately describe the
proper United States federal income tax treatment of the merger and,
consequently, this discussion may not accurately describe the United States
federal income tax consequences of the merger.
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If the merger constitutes a reorganization within the meaning of Section
368, the material United States federal income tax consequences of the merger
will be as follows:
--no gain or loss will be recognized by ACE, CapRe Acquisition Corp. or
Capital Re pursuant to the merger;
--a holder of Capital Re common stock that (a) is a United States person
that directly, indirectly or constructively owns (within the meaning of
Treasury Regulations 1.367(a)-3(c)-(5)(ii)) at least five percent of
either the total voting power or total value of the outstanding ACE
ordinary shares immediately after the merger, and (b) does not enter into
a gain recognition agreement as described in Treasury Regulations
1.367(a)-8 ("Taxable Five Percent Shareholder"), will recognize gain (but
not loss) equal to the amount, if any, by which the value of ACE ordinary
shares and cash received exceeds the holder's tax basis in its Capital Re
common stock;
--a holder of Capital Re common that is not a Taxable Five Percent
Shareholder generally will recognize gain (but not loss) equal to the
lesser of (a) cash received (disregarding cash received in lieu of a
fractional share interest in an ACE ordinary share) or (b) the difference
between the sum of the cash received and the fair market value of the ACE
ordinary shares received (including cash received in lieu of a fractional
share interest in an ACE ordinary share) less the holder's tax basis in
its Capital Re common stock;
--a holder of Capital Re common stock that receives cash in lieu of a
fractional share interest in an ACE ordinary share generally will
recognize gain or loss equal to the difference between the cash received
in lieu of such fractional share interest and the tax basis allocated
thereto, as if such fractional share interest had been distributed as part
of the merger and then redeemed by ACE for cash in full payment in
exchange for the fractional share;
--any gain recognized by a holder of Capital Re common should be
characterized as capital, unless certain tests under Section 302 are not
met (e.g., if the shareholder has an influence on the corporate affairs of
ACE or has a greater than de minimis interest in ACE);
--the basis of ACE ordinary shares (including any fractional share
interest) received by a holder of Capital Re common will equal the basis
of the Capital Re common surrendered therefor, less the amount of any cash
received, plus the amount of any gain recognized (other than with respect
to a fractional share interest);
--the holding period of the ACE ordinary shares received by a holder of
Capital Re common will include the holding period with respect to Capital
Re common stock surrendered in the merger, provided that such holder has
held the Capital Re common and will hold the ACE ordinary shares as
capital assets; and
--no gain or loss will be recognized by holders of ACE ordinary shares as a
result of the merger and their tax basis and holding period in such ACE
ordinary shares will not be affected by the merger.
Revised Structure.
As provided in Section 1.4 of the merger agreement, if the total amount of
cash paid by ACE to acquire Capital Re shares from stockholders of Capital Re
(including shares acquired in the open market, fractional shares for which cash
is paid and shares in respect of which appraisal rights are validly asserted)
exceeds one-half of the fair market value of the total consideration paid and
to be paid by ACE to acquire Capital Re shares from stockholders of Capital Re,
ACE may restructure the merger so that CapRe Acquisition Corp. is merged with
and into Capital Re with Capital Re surviving as a wholly owned subsidiary of
ACE. If the merger is so restructured, the merger would be a taxable
transaction for federal income tax purposes. ACE would be treated
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as purchasing the stock of Capital Re. A holder of Capital Re common would
recognize gain or loss equal to the amount, if any, by which the value of ACE
ordinary shares and cash received exceeds the holder's tax basis in its Capital
Re common stock. Any gain recognized would be capital to the extent that the
Capital Re common was held as a capital asset. The basis of ACE ordinary shares
received would be fair market value. The holding period of the ACE ordinary
shares received would not include the holding period with respect to Capital Re
common stock surrendered in the merger.
Capital Re stockholders are urged to consult their own tax advisors to
determine the particular tax consequences to them (including the application
and effect of any state, local or foreign income and other tax laws) of the
merger.
REGULATORY APPROVALS
Antitrust Filings. Under the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended, and the rules promulgated thereunder by the Federal Trade
Commission, the merger may not be consummated until notifications have been
given and certain information has been furnished to the Federal Trade
Commission and the Antitrust Division of the United States Department of
Justice and specified waiting period requirements have been satisfied. Capital
Re filed notification and report forms under the Hart-Scott-Rodino Act with the
Federal Trade Commission and the Antitrust Division on August 20, 1999. On
September 2, 1999, ACE filed notification and report forms under the Hart-
Scott-Rodino Act with the Federal Trade Commission and the Antitrust Division.
On September 16, 1999, ACE and Capital Re were informed that the waiting period
under the Hart-Scott-Rodino Act had been terminated. In addition, each state in
which any subsidiary of ACE or Capital Re or any of its subsidiaries operates
may also seek to review the merger. It is possible that some of these
authorities may seek to challenge the merger.
The businesses of ACE and Capital Re involve transactions in numerous
jurisdictions outside of the United States, and, as a result, implementation of
the merger may be subject to antitrust laws in such jurisdictions. ACE and
Capital Re are continuing to evaluate whether or not they are legally required,
or it is otherwise appropriate, to make any such filings in any other
jurisdiction.
State Insurance Regulatory Approvals. State insurance holding company laws
and regulations applicable to Capital Re provide that no person may acquire
control of certain Capital Re insurance subsidiaries unless such person has
provided certain required information to, and such acquisition has been
approved by, the appropriate insurance regulatory authorities. In accordance
with these laws, an application on Form A for approval of ACE's $75 million
investment in Capital Re was filed with and approved by the Commissioner of
Insurance of the State of Maryland and with and by the Superintendent of
Insurance of the State of New York. ACE and Capital Re have been advised that
no further approvals by these entities in connection with the merger are
required.
Lloyd's Consent. Capital Re indirectly owns 100% of the share capital of RGB
Underwriting Agencies Ltd., a Lloyd's of London regulated managing agency that
presently manages four syndicates operating in the Lloyd's insurance market and
CRC Capital Ltd., a Lloyd's corporate member. ACE and Capital Re have been
advised by counsel that the prior written consent of Lloyd's is not required
for ACE to become a controller of another managing agency or corporate member.
Other. In addition to the foregoing, ACE and Capital Re may be required to
obtain regulatory approvals, file notices or make certain other filings in
other jurisdictions in which one or the other maintains an office, conducts
business or has customers. At the time of this filing, ACE and Capital Re do
not expect any such other approvals, notices or other filings to be material in
connection with the merger.
Status of Regulatory Approvals and Other Information. ACE and Capital Re
have filed (or will promptly file) all applications and notices and have taken
(or will promptly take) other appropriate action with respect to any approvals
or other action of any governmental authority that ACE or Capital Re deems
necessary. The
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merger agreement provides that receipt of all regulatory approvals and consents
of governmental authorities required to permit the consummation of the merger
is a condition to the obligations of the companies to consummate the merger.
There can be no assurance that any governmental authority will approve or take
any other required action with respect to the merger, and, if approvals are
received or action is taken, there can be no assurance as to the date of such
approvals or action, that such approvals or action will not be conditioned upon
matters that would cause the parties to mutually consent to abandon the merger
or that no action will be brought challenging such approvals or action.
Although ACE and Capital Re are not aware of any governmental approvals or
actions that may be required for consummation of the merger other than as
described above, should any other approval or action be required, ACE and
Capital Re currently contemplate that such approval or action would be sought.
Neither ACE nor Capital Re expects the consummation of the merger to be delayed
by any such approval or action.
The obligations of ACE and Capital Re to consummate the merger are further
subject to the condition that there be no preliminary or permanent injunction
or law or other order by any court of competent jurisdiction or other
governmental authority prohibiting the consummation of the merger.
DISSENTERS' RIGHTS
Capital Re stockholders have the right to dissent from the merger and to
receive payment for their shares in accordance with the terms of Section 262 of
the Delaware General Corporation Law. The following discussion is a summary of
the dissenters' rights law under the Delaware law. The entire statute is
reprinted in Appendix D. ANY STOCKHOLDER THAT WISHES TO EXERCISE DISSENTERS'
RIGHTS OR PRESERVE THE RIGHT TO DO SO SHOULD REVIEW THE STATUTE CAREFULLY.
CAPITAL RE STOCKHOLDERS THAT DO NOT COMPLY WITH THE PROCEDURES OF THE STATUTE
WILL LOSE THEIR DISSENTERS' RIGHTS.
A Capital Re stockholder that wishes to dissent from the acquisition must
satisfy both of the following conditions, among others:
--WRITTEN OBJECTION. The stockholder must file a written objection to the
merger with Capital Re at its offices at 1325 Avenue of the Americas, New
York, New York 10019, Attention: Secretary, before the vote is taken at
the Capital Re stockholders meeting.
--NO VOTE IN FAVOR. The stockholder must not vote in favor of the merger.
Capital Re stockholders that file and do not withdraw a written objection to
the merger will not be entitled to receive the merger consideration payable by
ACE in the merger. Any Capital Re stockholder in that circumstance that later
withdraws the stockholder's demand for appraisal will then receive the same
merger consideration that all other non-dissenting Capital Re stockholders
receive.
A negative vote alone will not constitute the written objection required
before the meeting. The written objection should specify the stockholder's name
and mailing address, the number of shares of Capital Re common stock owned by
the stockholder and that the stockholder is demanding appraisal of his or her
shares.
If the Capital Re stockholders approve the acquisition, Capital Re will send
written notice to each dissenting stockholder that has filed an objection and
not voted in favor of the acquisition no later than 10 days after consummation
of the acquisition. The notice will state the date that the acquisition has
become effective.
Within 120 days after the effective time of the acquisition, any dissenting
stockholder that desires to have his or her shares appraised should file a
petition with the Delaware Court of Chancery demanding a determination of the
fair value of the shares of all the dissenting stockholders. Within the same
period, a dissenting stockholder may also make a written request to Capital Re
demanding a statement by Capital Re of the number of dissenting Capital Re
stockholders and the aggregate number of dissenting shares of Capital Re common
stock. Capital Re must mail the statement within 10 days after it receives the
request.
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If a proper petition for appraisal is timely filed, the Chancery Court will
determine which Capital Re stockholders, if any, are entitled to appraisal
rights.
The Chancery Court may require any stockholders demanding appraisal rights
to submit their certificates of Capital Re common stock to the Register in
Chancery for notation on these certificates of the pendency of the appraisal
proceedings.
Where the proceedings are not dismissed, the Chancery Court will appraise
the shares of Capital Re common stock owned by the dissenting stockholders by
determining the fair value of the shares exclusive of any element of value
arising out of the accomplishment or expectation of the acquisition and the
fair rate of interest, if any, on the amount determined to be the fair value.
Capital Re stockholders considering seeking appraisal should recognize that
the fair value of their shares determined under Section 262 could be more than,
the same as or less than the consideration they are entitled to receive
pursuant to the merger agreement if they do not seek appraisal of their shares.
The Chancery Court may determine the cost of the appraisal proceedings and
allocate the cost against the dissenting stockholders and Capital Re as it
deems equitable under the circumstances.
After the acquisition is complete, any Capital Re stockholder who has
demanded appraisal in compliance with Section 262 will not be entitled to vote
for any purpose any shares subject to the demand or to receive payment of
dividends or other distributions on the shares, except for dividends or
distributions payable to stockholders of record on a date prior to the
effective time of the merger.
At any time within 60 days after the consummation of the merger, any
dissenting stockholder will have the right to withdraw his or her demand for
appraisal and to accept the terms offered in the merger. After this period, the
stockholder may withdraw the demand only with the written consent of Capital
Re.
If no petition is filed by any dissenting stockholder within 120 days after
the effective time of the merger, Capital Re stockholders' rights as to
appraisal will cease and dissenting stockholders will be entitled only to
receive the consideration offered pursuant to the merger agreement.
FEDERAL SECURITIES LAWS CONSEQUENCES; STOCK TRANSFER RESTRICTION
All ACE ordinary shares received by Capital Re stockholders in the merger
will be registered under the Securities Act and will be freely transferable,
except that ACE ordinary shares received by persons who are deemed to be
affiliates of Capital Re under the Securities Act at the time of the Capital Re
meeting may be resold by them only in transactions permitted by Rule 145 under
the Securities Act or otherwise permitted under the Securities Act. Persons who
may be deemed to be affiliates of Capital Re for such purposes generally
include individuals or entities that control, are controlled by or are under
common control with Capital Re and may include certain officers, directors and
principal stockholders of Capital Re. The merger agreement requires Capital Re
to provide ACE with a letter identifying such persons and to use its reasonable
best efforts to cause each of such affiliates to execute a written agreement to
the effect that such persons will not sell, pledge, transfer or otherwise
dispose of any of the ACE ordinary shares issued to such persons in the merger
in violation of the Securities Act or the rules and regulations promulgated by
the Securities and Exchange Commission thereunder.
This proxy statement/prospectus does not cover any resales of the ACE
ordinary shares to be received by the stockholders of Capital Re upon
consummation of the merger, and no person is authorized to make any use of this
proxy statement/prospectus in connection with any such resale. Resales by
Capital Re affiliates must be separately registered or qualify for an exemption
under the Securities Act. ACE has agreed to file a post-effective amendment to
this proxy statement/prospectus to permit the resale of ACE ordinary shares
received by Capital Re affiliates upon consummation of the merger.
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THE SPECIAL MEETING
PURPOSE, TIME AND PLACE
This proxy statement/prospectus is being furnished to stockholders of
Capital Re in connection with the solicitation of proxies by Capital Re from
holders of Capital Re common stock for use at the Capital Re special meeting to
be held on December 30, 1999, at 10:00 a.m., and at any adjournments or
postponements thereof. At the meeting, holders of Capital Re common stock will
be asked to consider and vote on the proposal to adopt the merger agreement and
approve the merger, to authorize a postponement or adjournment of the special
meeting, if necessary, to permit future solicitation of proxies and to transact
any other business as may properly come before the special meeting.
Proxies previously executed and returned in connection with the postponed
October 7, 1999 special meeting are not valid in connection with the December
30, 1999 special meeting. Even if you have previously returned a proxy car for
the October 7, 1999 meeting, you must execute and return a new proxy in order
for your vote to be counted.
The board of directors of Capital Re has determined that the merger
agreement and the merger are advisable and fair to and in the best interests of
Capital Re and its stockholders, has adopted the merger agreement and
recommends a vote for the adoption of the merger agreement and approval of the
merger.
RECORD DATE; QUORUM; VOTE REQUIRED
Record Date. Capital Re has established the close of business on November
26, 1999 as the record date to determine the holders of Capital Re common
stock, par value $0.01 per share, entitled to notice of, and to vote at, the
special meeting. Only holders of record of Capital Re common stock at the close
of business, which is 5:00 p.m., New York time, on the record date will be
entitled to notice of, and to vote at, the Capital Re special meeting. At the
close of business on the record date, 38,093,398 shares of Capital Re common
stock were outstanding and were held by approximately 36 holders of record. The
Capital Re common stock constitutes the only outstanding class of voting
securities of Capital Re. Each share of Capital Re common stock is entitled to
one vote on the adoption of the merger agreement. Votes may be cast at the
Capital Re special meeting in person or by proxy.
Quorum. The presence at the Capital Re special meeting of the holders of a
majority of the outstanding shares of Capital Re common stock, either in person
or by proxy, is necessary to constitute a quorum to transact business at the
Capital Re special meeting. In the event that a quorum is not present at the
Capital Re special meeting, it is expected that the meeting will be adjourned
or postponed in order to solicit additional proxies.
Abstentions and broker non-votes will be counted as shares present for
purposes of determining the presence or absence of a quorum at the Capital Re
special meeting. Broker non-votes are shares held by brokers or nominees that
are represented at a meeting but with respect to which the broker or nominee is
not empowered to vote on a particular matter.
If your shares are held in a stock brokerage account or by a bank or other
nominee, you are considered the beneficial owner of shares held in street name
and this proxy statement/prospectus is being forwarded to you by your broker or
nominee who is considered the record holder with respect to the shares. As the
beneficial owner, you have the right to direct the record holder of your shares
on how to vote. If you do not instruct the record holder of your shares on how
to vote and he or she returns the proxy in respect of your shares, he or she
will be deemed by Capital Re to be present at the special meeting and your
shares will be deemed represented at the meeting for purposes of determining
the presence or absence of a quorum.
Vote Required.
The affirmative vote of the holders of a majority of the outstanding shares
of common stock of Capital Re is required for adoption of the merger agreement.
Constellation Investments, Inc., a holder of 4,984,340 shares, or approximately
13.1%, of Capital Re's issued and outstanding common stock has agreed to vote
all of its shares to adopt the merger agreement and approve the merger. MP
Investments, Inc., a holder of 7,280,480 shares, or approximately 19.1%, of
Capital Re's issued and outstanding common stock has agreed to vote all of
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its shares to adopt the merger agreement and approve the merger. The voting
agreements with Constellation Investments, Inc. and MP Investments, Inc.
terminate if the merger agreement is terminated.
Constellation Investments, Inc., MP Investments, Inc. and ACE together own
approximately 48.1% of Capital Re common stock and will vote all of their
shares in favor of adoption of the merger agreement and approval of the merger.
Abstentions from voting may be specified with respect to the adoption of the
merger agreement by properly marking the "ABSTAIN" box on the proxy for the
adoption of the merger agreement. Abstentions, broker non-votes and failures to
vote will have the effect of votes cast against the adoption of the merger
agreement.
PROXIES
Proxies previously executed and returned in connection with the postponed
October 7, 1999 special meeting are not valid in connection with the December
30, 1999 special meeting. Even if you have previously returned a proxy card for
the October 7, 1999 meeting, you must execute and return a new proxy in order
for your vote to be counted.
Shares of Capital Re common stock represented by properly executed proxies
received in time for the Capital Re special meeting will be voted at the
Capital Re special meeting in the manner specified on such proxies. Proxies
that are properly executed but that do not contain voting instructions will be
voted FOR the adoption of the merger agreement and approval of the merger. No
other matter other than the adoption of the merger agreement and approval of
the merger may be brought before the Capital Re special meeting.
In the event that a quorum is not present at the time the Capital Re special
meeting is convened, or if for any other reason Capital Re believes that
additional time should be allowed for the solicitation of proxies, Capital Re
may adjourn the Capital Re special meeting with or without a vote of the
stockholders. If Capital Re proposes to adjourn the Capital Re special meeting
by a vote of the stockholders, the persons named in the enclosed form of proxy
will vote all shares of Capital Re common stock for which they have voting
authority in favor of an adjournment, if such authority is granted on the
proxy.
The grant of a proxy on the enclosed Capital Re proxy card does not preclude
a stockholder from voting in person at the Capital Re special meeting. A
stockholder may revoke a proxy at any time prior to its exercise by:
--delivering, prior to the Capital Re special meeting, to Capital Re
Corporation, Attention: Secretary, a written notice of revocation bearing
a later date or time than the revoked proxy;
--completing and submitting a new later-dated proxy card; or
--attending the Capital Re special meeting and voting in person.
Attendance at the Capital Re special meeting will not by itself constitute
revocation of a proxy; a stockholder must vote in person at the meeting. If a
broker has been instructed to vote a stockholder's shares, the stockholder must
follow directions received from the broker in order to change the stockholder's
vote.
ACE will bear the cost of Capital Re's solicitation of proxies from its
stockholders as well as the cost of printing this proxy statement/prospectus
and filing it with the Securities and Exchange Commission. In addition to
solicitation by mail, the directors, officers and employees of Capital Re and
its subsidiaries may solicit proxies from Capital Re stockholders by telephone,
fax, telegram or in person. Arrangements will also be made with brokerage
houses and other custodians, nominees and fiduciaries for the forwarding of
solicitation material to the beneficial owners of stock held of record by such
persons, and Capital Re will reimburse the custodians, nominees and fiduciaries
for their reasonable out-of-pocket expenses in connection with their forwarding
of solicitation material. If your shares are registered in the name of your
broker and you would like to vote your shares, you need to contact your broker
and have the stock registered in your name.
INDEPENDENT AUDITORS
Representatives of Ernst & Young LLP, Capital Re's independent accountants,
are expected to be present at the Capital Re special meeting, where they will
have the opportunity to make a statement if they desire to do so and will be
available to respond to appropriate questions.
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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL INFORMATION OF ACE
On July 2, 1999, ACE purchased the international and domestic property and
casualty businesses of CIGNA for $3.45 billion in cash. Under the terms of the
acquisition agreement, ACE acquired CIGNA's domestic property and casualty
insurance operations and also its international property and casualty insurance
companies and branches, including most of the accident and health business
written through those companies. National Indemnity Company, a subsidiary of
Berkshire Hathaway Inc., provided $1.25 billion of reinsurance against
unanticipated increases in recorded reserves for insurance losses and loss
adjustment expenses of certain subsidiaries being acquired by ACE. ACE financed
this acquisition with a combination of available cash, a hybrid trust preferred
security, and the remainder with commercial paper issuance. We replaced a
portion of the commercial paper with the proceeds of $800 million principal
amount of senior debt issued in August 1999. We intend to replace the remaining
commercial paper with a combination of newly issued ACE ordinary shares, senior
or subordinated debt and trust preferred securities.
On October 26, 1999, ACE and Capital Re and CapRe Acquisition Corp. entered
into an amended and restated merger agreement. This agreement replaced the
original merger agreement entered into by ACE and Capital Re on June 10, 1999.
Under the new agreement, Capital Re stockholders will receive 0.65 ordinary
shares of ACE for each share of common stock of Capital Re at closing plus a
cash payment equal to the greater of $1.30 and the difference (if positive)
between the market value of 0.65 of an ACE ordinary share and $14.00. In no
event will the cash payment be more than $4.68 per share of Capital Re stock
($150 million in the aggregate). It is anticipated that the transaction will be
completed by the end of calendar 1999, subject to SEC approval and customary
closing conditions, including approval of the merger by Capital Re's
shareholders.
On July 2, 1999, ACE changed its fiscal year-end from September 30 to
December 31. This change will be implemented retroactively, however, the period
from the most recent fiscal year-end (September 30, 1998) to the most recent
interim date for which a balance sheet is required is represented by the twelve
months ended September 30, 1999.
The following unaudited pro forma condensed consolidated balance sheet as of
September 30, 1999 gives effect to the acquisition of Capital Re as if it had
occurred on September 30, 1999. The unaudited pro forma condensed consolidated
statements of operations for the twelve months ended September 30, 1999, and
for the twelve months ended September 30, 1998 present operating results of ACE
as if these acquisitions had occurred on October 1, 1997. These amounts do not
include ACE's estimate of the expected annual operating expense savings from
the acquisition of CIGNA's property and casualty businesses.
The unaudited pro forma condensed consolidated financial statements should
be read in conjunction with ACE's consolidated financial statements included in
ACE's Annual Report on Form 10-K for the year ended September 30, 1998, the
unaudited consolidated financial statements of ACE included in ACE's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1999, the audited
combined financial statements of CIGNA's property and casualty businesses for
the year ended December 31, 1998 previously filed as exhibit 99.1 to a Form 8-K
filed by ACE dated May 19, 1999, the consolidated financial statements of
Capital Re included in the Capital Re Annual Report on Form 10-K for the year
ended December 31, 1998 and the unaudited consolidated financial statements of
Capital Re included in the Capital Re Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999. The unaudited pro forma condensed
consolidated financial information is not intended to be indicative of the
consolidated results of operations or financial position of ACE that would have
been reported if these acquisitions had occurred at the dates indicated or of
the consolidated results of future operations or of future financial position.
The acquisitions of CIGNA's property and casualty businesses and Capital Re
have both been accounted for as a purchase in accordance with generally
accepted accounting principles. Under purchase accounting, the total purchase
price is allocated to the acquired assets and liabilities based on their fair
values.
53
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
At September 30, 1999
-----------------------------------------------------------------------
Pro Forma
Combined
for
Pro Forma Capital Re
ACE Capital Re Adjustments Notes Acquisition
----------- ----------- ----------- ----- -----------
(dollars in millions, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total investments and
cash................... $ 11,865 $1,137 $ (82) (2)
(75) (6) $ 12,845
Reinsurance
recoverables........... 8,924 5 8,929
Premiums receivable..... 2,319 17 2,336
Other assets............ 3,571 259 3,830
Goodwill................ 2,665 38 (3) 2,703
----------- ------ ---------- -----------
Total assets........... $ 29,344 $1,418 $ (119) $ 30,643
=========== ====== ========== ===========
Unpaid losses and loss
expenses............... 17,198 107 17,305
Unearned premiums....... 2,128 416 2,544
Trust Preferred
Securities............. 400 75 475
Indebtedness............ 2,499 100 2,599
Other liabilities....... 3,255 218 5 (3) 3,407
(71) (1)
----------- ------ ---------- -----------
Total liabilities...... $ 25,480 $ 916 $ (66) $ 26,330
----------- ------ ---------- -----------
Total shareholders'
equity................. 3,864 502
71 (1)
(75) (6)
368 (2)
10 (4)
(427) (5) 4,313
----------- ------ ---------- -----------
Total liabilities and
shareholders equity... $ 29,344 $1,418 $ (119) $ 30,643
=========== ====== ========== ===========
Shares outstanding on a
fully diluted basis.... 197,681,281 2,544,000 (1)
20,865,000 (2)(4)
698,000 221,788,281
=========== ========== ===========
Fully diluted book value
per share(7)........... $ 19.72 $ 19.65
=========== ===========
</TABLE>
54
<PAGE>
PRO FORMA BALANCE SHEET FOOTNOTES
(1) Under the terms of the acquisition agreement by and among CIGNA
Corporation, CIGNA Holdings, Inc. and ACE Limited dated January 11, 1999,
all unvested options to acquire shares of CIGNA and all unvested
restricted stock of CIGNA held by CIGNA employees that transferred to ACE
were cancelled by CIGNA and replaced with restricted stock of ACE. As a
result, ACE will issue approximately 2,544,000 shares of restricted stock
for a total value of approximately $71 million to those new ACE employees.
ACE has included the fair value of these ACE shares as part of the
purchase price of the acquired businesses and recorded the $71 million as
a liability at September 30, 1999. For administrative reasons, these
shares were not yet issued at September 30, 1999. For purposes of these
pro forma statements, the $71 million has been reclassified from
liabilities to shareholders' equity.
(2) The amended and restated merger agreement among Capital Re, ACE and Cap Re
Acquisition Corp. dated October 26, 1999 provides that, at the effective
time of the merger, each Capital Re common share issued and outstanding
immediately prior to the effective time will be converted into the right
to receive 0.65 ACE ordinary shares plus a cash payment equal to the
greater of $1.30 and the difference (if positive) between the market value
of 0.65 of an ACE ordinary share and $14.00, subject to a maximum amount
of cash of $4.68 per Capital Re share. For purposes of the pro forma
financial statements, ACE has used a share price of $17.625 and has
assumed that it will issue 20,865,000 ACE ordinary shares (with a total
value of $368 million) plus cash of $82 million in exchange for Capital Re
common shares. The actual cash consideration will be based on the average
closing price of an ACE share on the New York Stock Exchanges as reported
in the Wall Street Journal (NYC edition) for the five consecutive trading
days ending three trading days prior to the closing date, subject to the
limits noted above.
(3) Under purchase accounting, the total purchase price is allocated to the
acquired assets and liabilities assumed based on their fair values. The
excess of the cost of the transaction (including expenses incurred by ACE
related to the transaction estimated at $5 million) over the fair value of
the Capital Re net assets acquired is recorded as goodwill. Based on the
value of the ACE ordinary shares expected to be issued, including the ACE
options described in note 4, to effect the merger, ACE would record
goodwill of $38 million as a result of the merger (see discussion of
purchase price in note 2 above). The actual goodwill recorded will be
calculated based on the actual cash consideration as described in note (2)
above and can range from ($2) million to $107 million. Goodwill is expected
to be amortized on a straight line basis over 25 years.
(4) Pursuant to the merger agreement, all of Capital Re stock options
outstanding will be cancelled and replaced with ACE options. ACE will also
issue restricted shares of ACE ordinary shares to certain Capital Re
employees in conjunction with the merger. ACE will record the value of
these ACE options and the restricted stock of approximately $10 million as
part of the purchase price of Capital Re.
(5) The adjustment reflects the consolidation adjustment to eliminate Capital
Re's shareholders' equity.
(6) Eliminates ACE's current investment of $75 million in Capital Re.
(7) Fully diluted book value per share is based on the sum of total
shareholders' equity and the aggregate proceeds assuming exercise of all
outstanding ACE options and Capital Re stock options that will be cancelled
and replaced with ACE options.
55
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Twelve Months Ended September 30, 1999
-------------------------------------------------------------------------------------------------------
Pro Forma
Pro Forma Combined for
Combined CIGNA
for CIGNA P&C and
CIGNA Pro Forma P&C Pro forma Capital
ACE Ltd(1) P&C(2) Adjustments Notes Acquisition Capital Re(9) Adjustments Notes Re Acquisition
----------- ------- ----------- ------ ----------- -------------- ----------- ----- --------------
(In million of U.S. dollars)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Premiums
Written........... $ 1,798 $ 2,188 $ $ 3,986 $ 196 $ 4,182
Net Premiums
Earned............ 1,757 2,174 3,931 165 4,096
Net investment
income............ 419 413 (106) (3)(4) 726 68 (3) (13) 791
Other revenues..... 69 213 282 7 289
Losses and loss
expenses.......... (1,156) (1,698) 61 (2,793) (253) (3,046)
Acquisition costs
and administrative
expenses.......... (570) (740) (3) (1,310) (75) (1,385)
Other expenses..... (161) (515) (154) (5)(6) (830) (13) (2) (12) (845)
Income tax......... (21) 34 38 (7) 51 41 92
----------- ------- --------- ----------- ----- ---------- -----------
Income (loss)
excluding net
realized gains
(losses) and the
cumulative effect
of accounting
change............ 337 (119) (161) 57 (60) (5) (8)
Net realized gains
(losses) on
investments....... 115 68 183 (7) 176
Cumulative effect
of accounting
change for
guaranty fund and
other insurance
related
assessments, net
of taxes.......... (85) (85) (85)
----------- ------- --------- ----------- ----- ---------- -----------
Income (loss) from
continuing
operations........ 452 (136) (161) 155 (67) (5) 83
Loss from
discontinued
operations, net of
tax............... (79) (79)
=========== ======= ========= ----------- ----- ---------- -----------
Net Income (loss).. $ 452 $ (136) $ (161) $ 155 $(146) $ (5) $ 4
=========== ======= ========= =========== ===== ========== ===========
Basic earnings per
share from
continuing
operations,
excluding net
realized gains
(losses) and
cumulative effect
of accounting
change............ $ 1.74 $ .29 (0.40)
=========== =========== ===========
Basic earnings per
share from
continuing
operations........ $ 2.33 $ .79 $ .38
=========== =========== ===========
Basic earnings per
share............. $ 2.33 $ .79 $ .02
=========== =========== ===========
Weighted average
shares
outstanding--
basic............. 193,888,625 2,544,000 196,432,625 20,865,000 (8) 217,297,625
=========== ========= =========== ========== ===========
Diluted earnings
per share from
continuing
operations,
excluding net
realized gains
(losses) and
cumulative effect
of accounting
change............ $ 1.71 $ .29 $ (0.04)
=========== =========== ===========
Diluted earnings
per share from
continuing
operations........ $ 2.29 $ .78 $ .37
=========== =========== ===========
Diluted earnings
per share......... $ 2.29 $ .78 $ .02
=========== =========== ===========
Weighted average
shares
outstanding--
diluted........... 197,016,925 2,544,000 199,560,925 22,064,080 (11) 221,625,005
=========== ========= =========== ========== ===========
</TABLE>
56
<PAGE>
PRO FORMA FOOTNOTES FOR THE TWELVE MONTHS ENDED SEPTEMBER 30, 1999
(1) On July 2, 1999, ACE changed its fiscal year-end from September 30 to
December 31. This change will be implemented retroactively, however the
period from the most recent fiscal year-end (September 30, 1998) to the
most recent interim date for which a balance sheet is required is
represented by the twelve months ended September 30, 1999.
(2) The actual results of operations have been included with ACE since the
acquisition date (July 2, 1999). Therefore the combined statements of
operations of CIGNA's property and casualty businesses reflect its results
of operations for the nine months ended June 30, 1999.
(3) ACE funded part of the purchase price with $1.025 billion of cash on hand.
The estimated investment income on this $1.025 billion of the purchase
price has been eliminated (based on a yield of 5.8% that approximates the
yield on the ACE portfolio for the fiscal year ended September 30, 1998).
(4) Under the terms of the acquisition agreement, CIGNA agreed to provide a
guarantee to ACE to indemnify against unanticipated increases in recorded
reserves for losses and loss adjustment expenses of certain subsidiaries
being acquired by ACE. CIGNA had the option to replace its guarantee with
reinsurance obtained from a mutually agreed upon third party reinsurer.
Contemporaneous with the consummation of the acquisition, CIGNA exercised
its option and replaced its guarantee with reinsurance by directing
certain subsidiaries being acquired to transfer $1.25 billion of
investments to a reinsurer for aggregate coverage of $2.5 billion. Such
coverage attached at an amount equal to the net recorded reserves of the
certain subsidiaries acquired, on the closing date, minus $1.25 billion.
The estimated investment income on this $1.25 billion has been eliminated
(based on a yield of 6.5% that approximates the yield on the applicable
portion of the acquired businesses' portfolio for the fiscal year ended
December 31, 1998). The pro forma adjustment to losses and loss expenses
reflects the estimated historical adverse development recorded during the
period on the guaranteed reserves.
(5) In addition to the $1.025 billion of cash on hand, ACE funded part of the
purchase price with $400 million from a hybrid trust preferred security
and the remainder with commercial paper issuance (the "initial
financing"). Interest on the hybrid trust preferred security and
commercial paper has been calculated at rates of 8.5% and 5.3%,
respectively. Ultimately, the commercial paper will be replaced with a
combination of newly issued ACE ordinary shares, senior debt, including
the notes, and trust preferred securities (together the "permanent
financing"). ACE will issue each of the new ACE ordinary shares, senior
debt and trust preferred securities at the time when ACE considers market
conditions to be most favorable for issuance. These pro forma financial
statements reflect the initial financing described above.
(6) Any excess between the purchase price and the fair value of acquired net
tangible assets will be allocated to goodwill. These pro forma financial
statements reflect all of the excess purchase price over net tangible
assets as goodwill. This entry reflects the amortization of goodwill for
the period.
(7) The estimated income tax savings is based on the estimated reduction in
net income before tax as a result of interest expense on the initial
financing.
(8) Pursuant to the acquisition agreement, all unvested options to acquire
shares of CIGNA and all unvested restricted stock of CIGNA held by CIGNA
employees who transferred to ACE were cancelled by CIGNA and replaced with
restricted stock of ACE. As a result, ACE will issue approximately
2,544,000 shares of restricted stock to those new ACE employees.
(9) The Capital Re consolidated statements of operations reflect its results
of operations for the twelve months ended September 30, 1999.
(10) The amended and restated merger agreement among Capital Re, ACE, and Cap
Re Acquisition Corp. dated October 26, 1999 provides that, at the
effective time of the merger, each Capital Re common share issued and
outstanding immediately prior to the effective time will be converted into
the right to receive 0.65 ACE ordinary shares plus cash payment equal to
the greater of $1.30 and the difference (if positive) between the market
value of 0.65 of an ACE ordinary share and $14.00, subject to a maximum
amount of cash of $4.68 per Capital Re share. For purposes of the pro
forma financial statements, ACE has used
57
<PAGE>
a share price of $17.625 and has assumed that it will issue 20,865,000 ACE
ordinary shares (with a total value of $368 million) plus cash of $82
million in exchange for Capital Re common shares.
(11) All of the outstanding options to purchase Capital Re common shares will
be cancelled and replaced with options to purchase ACE ordinary shares.
This adjustment represents the weighted average number of ordinary share
equivalents outstanding related to the newly issued ACE options.
(12) Amortization of goodwill created by the acquisition of Capital Re is
expected to be amortized over 25 years.
(13) It is expected that ACE will fund part of the Capital Re purchase with
$82 million of cash. Estimated investment income on the $82 million of
the purchase price has been eliminated (based on a yield of 5.8% which
approximates the yield on the ACE portfolio for the fiscal year ended
September 30, 1998).
58
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended September 30, 1998
-------------------------------------------------------------------------------------------------
Pro Forma
Pro Forma Combined for
Combined for CIGNA
CIGNA CIGNA P&C and
P&C Pro Forma P&C Capital Pro Forma Capital Re
ACE (1) Adjustments Notes Acquisition Re (8) Adjustments Notes Acquisitions
------------ ------ ----------- ----- ------------ ------- ----------- ------ ------------
(dollars in millions, except share and per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Premiums Written.... $ 881 $2,990 $ 3,871 $211 $ 4,082
Net Premiums Earned..... 894 2,957 3,851 168 4,019
Net investment income... 324 590 $ (141) (2)(3) 773 65 (3) (12) 835
Other revenues.......... 282 282 3 285
Losses and loss
expenses............... (517) (2,247) 81 (3) (2,683) (86) (2,769)
Acquisition costs and
administrative
expenses............... (271) (1,500) (1,771) (86) (1,857)
Other expenses.......... (38) (205) (4)(5) (243) (7) $ (2) (11) (252)
Income tax.............. (20) (30) 50 (6) -- (11) -- (11)
------------ ------ ---------- ------------ ---- ----------- ------------
Income excluding net
realized gains (losses)
....................... 372 52 (215) 209 46 (5) 250
Net realized gains
(losses) on investments
....................... 188 22 210 (2) 208
------------ ------ ---------- ------------ ---- ----------- ------------
Income from continuing
operations............. 560 74 (215) 419 44 (5) 458
Loss from discontinued
operations............. (3) (3)
------------ ------ ---------- ------------ ---- ----------- ------------
Net Income.............. $ 560 $ 74 $ (215) $ 419 $ 41 $ (5) $ 455
============ ====== ========== ============ ==== =========== ============
Basic earnings per share
from continuing
operations, excluding
net realized gains
(losses) and loss from
discontinued
operations............. $ 2.01 $ 1.11 $ 1.20
============ ============ ============
Basic earnings per share
from continuing
operations............. $ 3.03 $ 2.23 $ 2.20
============ ============ ============
Basic earnings per
share.................. $ 3.03 $ 2.23 $ 2.18
============ ============ ============
Weighted average shares
outstanding--basic..... 185,130,479 2,544,000 (7) 187,674,479 20,865,000 (9) 208,539,479
============ ========== ============ =========== ============
Diluted earnings per
share from continuing
operations, excluding
net realized gains
(losses) and loss from
discontinued
operations............. $ 1.97 $ 1.09 $ 1.17
============ ============ ============
Diluted earnings per
share from continuing
operations............. $ 2.96 $ 2.18 $ 2.14
============ ============ ============
Diluted earnings per
share.................. $ 2.96 $ 2.18 $ 2.13
============ ============ ============
Weighted average shares
outstanding--diluted... 189,281,175 2,544,000 (7) 191,825,175 22,211,343 (9)(10) 214,036,518
============ ========== ============ =========== ============
</TABLE>
59
<PAGE>
PRO FORMA FOOTNOTES FOR THE YEAR ENDED SEPTEMBER 30, 1998
(1) The combined statements of operations of CIGNA's property and casualty
businesses reflect its results of operations for the year ended December
31, 1998.
(2) ACE funded part of the purchase price with $1.025 billion of cash on hand.
The estimated investment income on this $1.025 billion of the purchase
price has been eliminated (based on a yield of 5.8% that approximates the
yield on the ACE portfolio for the fiscal year ended September 30, 1998).
(3) Under the terms of the acquisition agreement, CIGNA agreed to provide a
guarantee to ACE to indemnify against unanticipated increases in recorded
reserves for losses and loss adjustment expenses of certain subsidiaries
being acquired by ACE. CIGNA had the option to replace its guarantee with
reinsurance obtained from a mutually agreed upon third party reinsurer.
Contemporaneous with the consummation of the acquisition, CIGNA exercised
its option and replaced its guarantee with reinsurance by directing certain
subsidiaries being acquired to transfer $1.25 billion of investments to a
reinsurer for aggregate coverage of $2.5 billion. Such coverage attached at
an amount equal to the net recorded reserves of the certain subsidiaries
acquired, on the closing date, minus $1.25 billion. The estimated
investment income on this $1.25 billion has been eliminated (based on a
yield of 6.5% that approximates the yield on the applicable portion of the
acquired businesses' portfolio for the fiscal year ended December 31,
1998). The pro forma adjustment to losses and loss expenses reflects the
estimated historical adverse development recorded during the period on the
guaranteed reserves.
(4) In addition to the $1.025 billion of cash on hand, ACE funded part of the
purchase price with $400 million from a hybrid trust preferred security and
the remainder with commercial paper issuance (the "initial financing").
Interest on the hybrid trust preferred security and commercial paper has
been calculated at rates of 8.5% and 5.3%, respectively. Ultimately, the
commercial paper will be replaced with a combination of newly issued ACE
ordinary shares, senior debt, including the notes, and trust preferred
securities (together the "permanent financing"). ACE will issue each of the
new ACE ordinary shares, senior debt and trust preferred securities at the
time when ACE considers market conditions to be most favorable for
issuance. These pro forma financial statements reflect the initial
financing described above.
(5) Any excess between the purchase price and the fair value of acquired net
tangible assets will be allocated to goodwill. These pro forma financial
statements reflect all of the excess purchase price over net tangible
assets as goodwill. This entry reflects the amortization of goodwill for
the period.
(6) The estimated income tax savings is based on the estimated reduction in net
income before tax as a result of interest expense on the initial financing.
(7) Pursuant to the acquisition agreement, all unvested options to acquire
shares of CIGNA and all unvested restricted stock of CIGNA held by CIGNA
employees who transferred to ACE were cancelled by CIGNA and replaced with
restricted stock of ACE. As a result, ACE will issue approximately
2,544,000 shares of restricted stock to those new ACE employees.
(8) The Capital Re consolidated statements of operations reflect its results of
operations for the year ended December 31, 1998.
(9) The amended and restated merger agreement among Capital Re, ACE and Cap Re
Acquisition Corp. dated October 26, 1999 provides that, at the effective
time of the merger, each Capital Re common share issued and outstanding
immediately prior to the effective time will be converted into the right to
receive 0.65 ACE ordinary shares plus cash (subject to a minimum of $1.30
cash per Capital Re share and a maximum of $4.68 cash per Capital Re
share), all intended to total $14.00 per Capital Re share. For purposes of
the pro forma financial statements, ACE has used a share price of $17.625
and has assumed that it will issue 20,865,000 ACE ordinary shares (with a
total value of $368 million) plus cash of $82 million in exchange for
Capital Re common shares.
(10) All of the outstanding options to purchase Capital Re common shares will
be cancelled and replaced with options to purchase ACE ordinary shares.
This adjustment represents the weighted average number of ordinary share
equivalents outstanding related to the newly issued ACE options.
(11) Amortization of goodwill created by the acquisition of Capital Re is
expected to be amortized over 25 years.
60
<PAGE>
(12) It is expected that ACE will fund part of the Capital Re purchase with $82
million of cash. Estimated investment income on the $82 million of the
purchase price has been eliminated (based on a yield of 5.8% which
approximates the yield on the ACE portfolio for the fiscal year ended
September 30, 1998).
61
<PAGE>
INFORMATION REGARDING DIRECTORS, EXECUTIVE OFFICERS AND
FIVE PERCENT STOCKHOLDERS
Other Interests of Directors and Executive Officers in the Merger
In considering the recommendation of the Capital Re board with respect to
the merger agreement and the merger, you should be aware that the directors and
executive officers of Capital Re have interests in the merger that are
different from, and in addition to, your interests. The Capital Re board was
aware of and considered these interests in adopting the merger agreement and
approving the merger. Two of Capital Re's directors, Dominic Frederico and
Donald Kramer, serve on Capital Re's board as nominees of ACE under an
agreement giving ACE the right to designate two directors on Capital Re's
board. They were appointed to the Capital Re Board at ACE's request on October
10, 1999. Messrs. Frederico and Kramer, who are executive officers of ACE, did
not serve on the special committee of Capital Re's board that evaluated the
merger nor did they participate in the board vote with respect to the merger or
the merger agreement.
Employment Arrangements
ACE has agreed to pay to each executive who is a member of Capital Re's
executive committee a retention payment of $200,000 on each of January 1, 2002
and January 1, 2003 if the executive is still employed by ACE or a subsidiary
of ACE on that date. ACE has also agreed to grant to each person (1) options to
purchase 50,000 ACE ordinary shares with an exercise price equal to the lower
of the fair market value of ACE's ordinary shares on October 26, 1999 and the
fair market value of such ordinary shares as of the effective date of the
merger and (2) 32,000 restricted ACE ordinary shares. ACE has also agreed to
pay each such person an annual bonus equal to 100% of such person's current
base salary. The members of Capital Re's executive committee are Messrs.
Jurschak, Buzen, Donnelly, Roseman and Swain.
No other employment agreements or consulting agreements have been entered
into with these or any other employees of Capital Re in connection with the
merger.
Performance Share Plan
Effective July 1, 1996, Capital Re adopted a performance share plan to
provide performance-based compensation to some of its officers and key
employees. The performance share plan provides that, in the event of a change
in control, any increase in the share price of Capital Re common stock will be
the sole performance criterion for determining eligibility for payments under
the performance share plan. The merger will be a change in control. As a
result, by way of example, the aggregate value of performance share awards,
based on a merger consideration of $22.00 per share, would be $1,328,859. The
value of the awards to Capital Re's executive officers would be as follows:
<TABLE>
<S> <C>
David A. Buzen................................................ $119,597
Laurence C.D. Donnelly........................................ $119,597
Susan L. Hooker............................................... $ 33,221
Jerome F. Jurschak............................................ $119,597
Alan S. Roseman............................................... $119,597
Joseph W. Swain III........................................... $119,597
</TABLE>
If the price of Capital Re common stock does not exceed $18.625 per share,
there will be no performance shares awarded to Capital Re's executive officers.
Under the terms of the merger agreement, for a period of six years after the
closing of the merger, ACE is required to cause Capital Re to indemnify the
current and former directors and officers of Capital Re as provided in Capital
Re's certificate of incorporation and by-laws in effect on October 26, 1999,
the date the merger agreement was entered into. In addition, for a period of
not less than three years after the closing of the
62
<PAGE>
merger, ACE is obligated to cause Capital Re to maintain in effect its
directors' and officers' liability insurance policy, so long as the annual
premium does not exceed 150% of the last annual premium paid by Capital Re
prior to October 26, 1999. Instead of maintaining Capital Re's current policy,
ACE may cause no less favorable coverage to be provided under any policy
maintained by ACE for its directors and officers or a separate policy
maintained by the same insurer.
Stock Options Held by Capital Re Directors and Executive Officers
As a result of the merger, each outstanding and unexercised option or right
to purchase Capital Re common stock issued under Capital Re's employee benefit
plans will be replaced with an option or right to purchase ACE ordinary shares
under ACE's existing stock option plan. The number and purchase price of the
shares covered by the new options will be adjusted so that the aggregate
purchase price of the shares covered by the ACE options will be the same as the
aggregate purchase price of the shares covered by the Capital Re options and so
that the difference between the market value of the Capital Re shares subject
to the options and the aggregate exercise price of those options is the same as
the difference between the market value of the ACE shares subject to the new
options and the aggregate exercise price of those options. However, if the per
share exercise price of such option to purchase Capital Re common stock is
equal to or greater than the implied value of the merger consideration, with
the consent of the holder, such option shall be canceled and replaced with an
option or right to purchase that number of ACE ordinary shares equal to the
number of shares of Capital Re stock subject to such option multiplied by the
implied value per share of the merger consideration divided by the fair market
value of ACE's ordinary shares as of the closing date of the merger, and the
purchase price shall be equal to the fair market value per ACE ordinary share
as of the closing date of the merger. For these purposes, the market value of
ACE shares will be based on the average of the closing prices of ACE's ordinary
shares on the New York Stock Exchange on the five trading days ending three
days before the merger and the market value of Capital Re shares will be based
upon the implied value of the merger consideration.
Capital Support Agreement
ACE has agreed to provide, or to cause one of its subsidiaries to provide,
loans on a revolving basis to Capital Re in one or more installments in an
aggregate amount not to exceed $50,000,000. Any amounts outstanding will accrue
interest, payable quarterly in arrears, at 6% per annum. If an event of default
occurs and is continuing, ACE may declare all outstanding amounts due and
payable and terminate its commitment. An "event of default" includes, among
other things,
--the failure by Capital Re to pay within 30 days after the date when due
any interest owed;
--the merger agreement with ACE is terminated pursuant to Section 8.3(a) or
8.4(a) thereof;
--after any termination of the merger agreement, Capital Re merges or
consolidates or there is a sale of all or substantially all assets of
Capital Re and
--certain events of bankruptcy or insolvency.
At any time, ACE may convert any loans outstanding into common stock of
Capital Re based upon a conversion price of $14.00 per share. In the event of
the termination of the merger agreement (other than pursuant to Sections 8.3(a)
or 8.4(a) thereof), all of the outstanding loans will automatically convert
into shares of Capital Re common stock based upon a conversion price that is
equal to the lesser of (1) $14.00 and (2) the market price per share of Capital
Re's common stock on the date of such conversion.
On November 23, 1999, Capital Re borrowed $21,980,000 from ACE under the
capital support agreement. This borrowing was converted by ACE into 1,570,000
shares of Capital Re common stock. As a result of that conversion, ACE now owns
a total of 6,069,279 shares of common stock, or 15.9% of Capital Re's
outstanding stock.
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Ownership of Capital Re Common Stock
The following table sets forth certain information as of October 31, 1999
(unless otherwise specified) with respect to the beneficial ownership of
Capital Re's common stock by each person who is known to Capital Re to
beneficially own more than 5% of the outstanding shares of Capital Re common
stock, each director, each named officer, as described below, and all directors
and executive officers as a group. Unless otherwise described below, all shares
are held with sole voting and dispositive power by the parties shown.
<TABLE>
<CAPTION>
Shares of
Common Stock Percent of
Name and Address of Beneficial Owner Beneficially Owned Class
- ------------------------------------ ------------------ ----------
<S> <C> <C>
Minnesota Power(1).............................. 7,280,480 19.1%
30 W. Superior Street
Duluth, Minnesota 55802
ACE............................................. 6,069,279(2) 15.9%
Constellation Investments, Inc.(1).............. 4,984,340 13.1%
250 W. Pratt Street, 23rd floor
Baltimore, Maryland 21201
Harrison W. Conrad, Jr.......................... 9,200(3) *
Dominic J. Frederico............................ 0(4) *
Richard L. Huber................................ 10,000(5) *
Donald Kramer................................... 0(4) *
Philip Robinson................................. 11,000(6) *
Edwin L. Russell................................ 4,000 *
Barbara D. Stewart.............................. 9,000(7) *
Jerome F. Jurschak (1).......................... 478,700(8) 1.3%
Joseph W. Swain III............................. 185,300(9) *
David A. Buzen.................................. 320,750(10) *
Laurence C.D. Donnelly.......................... 333,870(11) *
Susan Hooker.................................... 40,650(12) *
All Directors and Executive Officers as a group
(13 persons)................................... 1,685,420(13) 4.4%
</TABLE>
- --------
*Less than 1%
(1) Parties to the 1992 Stockholders' Agreement. Constellation is an indirect
subsidiary of Baltimore Gas and Electric Company. Under the voting
provisions of the 1992 Stockholders' Agreement, each Institutional
Stockholder party to the 1992 Stockholders' Agreement may be deemed to
have shared voting power with respect to the shares of all parties to the
1992 Stockholders' Agreement and, accordingly, for certain limited
purposes of the Federal securities laws, each institutional stockholder
may be deemed to be the beneficial owner of the shares beneficially held
by all parties to the 1992 Stockholders' Agreement.
(2) Includes 4,424,779 shares of Capital Re common stock purchased from
Capital Re on June 15, 1999, for $75,000,000 and 74,500 shares of Capital
Re common stock purchased on the open market between March 30, 1999 and
April 15, 1999 for an aggregate purchase price of $1,207,821. Also
includes 1,570,000 shares of Capital Re common stock acquired on November
23, 1999 upon conversion of a loan in the amount of $21,980,000. Does not
include (i) 7,280,480 shares of Capital Re common stock beneficially owned
by Minnesota Power or 4,984,340 shares of Capital Re common stock
beneficially owned by Constellation Investments, Inc. which ACE may be
deemed to beneficially own as a result of the execution of voting
agreements with Minnesota Power and Constellation Investments, Inc., (ii)
3,220,135 shares of Capital Re common stock issuable under the Stock
Option Agreement or (iii) shares of Capital Re common stock issuable under
the Capital Support Agreement.
(3) Includes 9,000 shares Mr. Conrad has the right to acquire within sixty
days through exercise of outstanding options.
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(4) Messrs. Frederico and Kramer are executive officers of ACE. ACE owns
6,069,279 shares of Capital Re, which represents 15.9% of the issued and
outstanding shares of Capital Re. This number of 4,499,279 shares does not
include (i) 7,280,480 shares of Capital Re common stock beneficially owned
by Minnesota Power or 4,984,340 shares of Capital Re common stock
beneficially owned by Constellation Investments, Inc., which ACE may be
deemed to beneficially own as a result of the execution of voting
agreements with Minnesota Power and Constellation Investments, Inc., (ii)
3,220,135 shares of Capital Re common stock issuable under the Stock
Option Agreement or (iii) shares of Capital Re common stock issuable under
the Capital Support Agreement.
(5) Includes 9,000 shares Mr. Huber has the right to acquire within sixty days
through exercise of outstanding options.
(6) Includes 9,000 shares Mr. Robinson has the right to acquire within sixty
days through exercise of outstanding options.
(7) Includes 9,000 shares Ms. Stewart has the right to acquire within sixty
days through exercise of outstanding options.
(8) Includes 273,700 shares Mr. Jurschak has the right to acquire within sixty
days through exercise of outstanding options.
(9) Includes 183,600 shares Mr. Swain has the right to acquire within sixty
days through exercise of outstanding options.
(10) Includes 257,700 shares Mr. Buzen has the right to acquire within sixty
days through exercise of outstanding options.
(11) Includes 277,700 shares Mr. Donnelly has the right to acquire within sixty
days through exercise of outstanding options.
(12) Includes 40,650 shares Ms. Hooker has the right to acquire within sixty
days through exercise of outstanding options.
(13) Includes an aggregate of 1,311,350 shares that the executive officers and
directors have the right to acquire within sixty days through exercise of
outstanding options.
THE MERGER AGREEMENT
GENERAL
This section of the document describes material provisions of the merger
agreement. Because the description of the merger agreement contained in this
proxy statement/prospectus is a summary, it does not contain all the
information that may be important to you. You should read carefully the entire
copy of the merger agreement, which is attached as Appendix A to this proxy
statement/prospectus, before you decide how to vote.
CLOSING OF THE MERGER; EFFECTIVE TIME OF THE MERGER; CAPITAL RE FOLLOWING THE
MERGER
Closing of the Merger. Unless the parties agree otherwise, the closing of
the merger will take place on the third business day after the date on which
all closing conditions have been satisfied or waived. The closing of the merger
is expected to take place shortly after the approval of the stockholders of
Capital Re at the special meeting and the receipt of all necessary insurance
and other regulatory approvals.
Effective Time of the Merger. At the closing of the merger, ACE and Capital
Re will file a certificate of merger with the Delaware Secretary of State.
Unless the parties agree otherwise in writing, the merger will become effective
at the time the certificate of merger is duly filed with the Delaware Secretary
of State.
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Capital Re Following the Merger. Capital Re will merge into CapRe
Acquisition Corp., a wholly owned subsidiary of ACE, in the merger. As provided
in Section 1.4 of the merger agreement, if the total amount of cash paid by ACE
to acquire Capital Re shares from stockholders of Capital Re (including shares
acquired in the open market, fractional shares for which cash is paid and
shares in respect of which appraisal rights are validly asserted) exceeds one-
half of the fair market value of the total consideration paid and to be paid by
ACE to acquire Capital Re shares from stockholders of Capital Re, ACE may
restructure the merger so that CapRe Acquisition Corp. is merged with and into
Capital Re with Capital Re surviving as a wholly owned subsidiary of ACE. The
directors of Capital Re following the merger will be the directors of CapRe
Acquisition Corp. prior to the merger. The officers of Capital Re following the
merger will be the officers of Capital Re prior to the merger, until their
death, resignation or termination.
CONSIDERATION TO BE RECEIVED IN THE MERGER
In the merger:
--Each share Capital Re common stock outstanding immediately prior to the
effective time of the merger will be converted into the right to receive:
--0.65 of an ACE ordinary shares plus
--the greater of $1.30 and an amount of cash (which in no event may be
greater than $4.68) equal to the difference (if positive) between
$14.00 and the value of 0.65 ACE ordinary shares. The value of the ACE
ordinary shares will be based upon the average closing price of ACE's
ordinary shares on the New York Stock Exchange as reported in The Wall
Street Journal (New York City edition) for the five consecutive trading
days ending three trading days prior to the effective date of the
merger.
--each share of Capital Re common stock owned or held by ACE or Capital Re
or any of their direct or indirect subsidiaries, except for shares owned
on behalf of third parties, will cease to be outstanding and will be
canceled and retired without the payment of any consideration;
--each share of common stock of CapRe Acquisition Corp. outstanding
immediately prior to the effective time of the merger will remain one
validly issued, fully paid and non-assessable share of common stock $0.01
par value of the surviving corporation;
and
--each ACE ordinary share outstanding immediately prior to the merger will
remain outstanding following the merger and will continue to represent one
ACE ordinary share.
TREATMENT OF CAPITAL RE STOCK OPTIONS
As a result of the merger, each outstanding and unexercised option or right
to purchase Capital Re common stock issued under Capital Re's employee benefit
plans will be replaced with an option or right to purchase ACE ordinary shares
under ACE's existing stock option plan. The number and purchase price of the
new options will be adjusted so that the aggregate "in-the-money" value of the
new options remains the same as the aggregate "in-the-money" value of the
Capital Re options. The new options or rights will otherwise have vesting and
termination rights that are no less favorable than those provided under the
Capital Re stock options.
EXCHANGE OF SHARES AND PAYMENT OF MERGER CONSIDERATION; FRACTIONAL SHARES
Exchange Agent. Prior to the merger, ACE will enter into an agreement with
The Bank of New York to effect the exchange of certificates representing shares
of Capital Re common stock for certificates representing ACE ordinary shares,
any dividends or other distributions and the cash portion of the merger
consideration plus cash to be paid in lieu of fractional shares. At the time of
the merger, ACE will deposit certificates representing
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ACE ordinary shares and the cash portion of the merger consideration in trust
for the holders of Capital Re common stock. From time to time as needed, ACE
will make additional cash available to the exchange agent sufficient to pay any
unpaid dividends and other distributions and to pay cash in lieu of fractional
shares as described under "--Consideration to be Received in the Merger" on
page 66.
Exchange of Shares. Promptly after the merger, the exchange agent will mail
to each holder of a certificate of Capital Re common stock a letter of
transmittal and instructions explaining how to surrender the certificate to the
exchange agent in exchange for ACE ordinary shares and the cash portion of the
merger consideration.
Capital Re stockholders who surrender their stock certificates to the
exchange agent, together with a properly completed and signed letter of
transmittal and any other documents required by the instructions to the letter
of transmittal, will receive an ACE ordinary share certificate representing the
number of shares and associated purchase rights to which the holders are
entitled in accordance with the exchange ratio, and a check for the cash
portion of the merger consideration will be paid in lieu of fractional shares.
Holders of unexchanged Capital Re stock certificates will not receive any
dividends or other distributions made by ACE after the merger until their stock
certificates are surrendered. Upon surrender, however, subject to applicable
laws, the holders will receive all dividends and distributions made on the
related ACE ordinary shares subsequent to the merger, without interest. Any ACE
ordinary shares or cash deposited in trust with the exchange agent that remain
undistributed 180 days after the merger will be delivered back to ACE, and
holders of Capital Re common stock thereafter will have to look to ACE for
exchanging their Capital Re common stock for the merger consideration.
Capital Re stock certificates should not be returned with the enclosed proxy
card and should not be forwarded to the exchange agent except with a signed
letter of transmittal and any other documents that may be required by the
exchange agent. The letter of transmittal will be provided to Capital Re
stockholders following the merger and will be accompanied by instructions for
exchanging your shares.
Fractional Shares. No fractional ACE ordinary shares will be issued to
holders of Capital Re common stock. In lieu of fractional shares, each holder
of shares of Capital Re common stock will receive cash in an amount equal to
the product of:
--the fractional part of a share held by the stockholder; and
--the average closing price for an ACE ordinary share on the New York Stock
Exchange on the twenty trading days prior to and ending three trading days
prior to the date of the merger.
No interest will be paid in connection with the payments for fractional
shares.
CONDITIONS TO THE MERGER
Conditions to Each Company's Obligation to Effect the Merger. The
obligations of each company to effect the merger are subject to the following
conditions, unless any such condition is waived by both companies:
--adoption of the merger agreement and approval of the merger by the
Capital Re stockholders;
--approval for listing by the New York Stock Exchange of the ACE ordinary
shares to be issued in the merger;
--receipt of all necessary regulatory approvals, including the expiration
or early termination of the waiting period under the Hart-Scott-Rodino Act
or similar statute in other jurisdictions;
--absence of any law or court order that prohibits the merger;
--the registration statement registering the ACE ordinary shares to be
received by Capital Re's stockholders becoming effective; and
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--the Securities and Exchange Commission not having issued a stop order
suspending the effectiveness of the registration statement on Form S-4 of
which this proxy statement/prospectus will be a part and the absence of
any pending or threatened proceedings for such purpose.
Additional Conditions to Obligations of ACE. The obligations of ACE to
effect the merger are further subject to compliance by Capital Re in all
material respects with its agreements and covenants under the merger agreement,
unless the condition is waived by ACE.
Additional Conditions to Obligations of Capital Re. The obligations of
Capital Re to effect the merger are further subject to compliance by ACE and
CapRe Acquisition Corp. in all material respects with their agreements and
covenants under the merger agreement, unless the condition is waived by Capital
Re.
REPRESENTATIONS AND WARRANTIES BY CAPITAL RE
The merger agreement contains representations and warranties, subject to
qualifications, made by Capital Re to ACE as to, among other things:
--its organization and the organization of its subsidiaries, including its
insurance subsidiaries, and their good standing;
--its capital structure;
--corporate power and authority to execute, deliver and perform its
obligations under the merger agreement and consummate the merger;
--approval of the board of directors and all other corporate action having
been taken to adopt the merger agreement and the stock option agreement
and approve the transactions contemplated in and by those agreements;
--recommendation of the board of directors that Capital Re's stockholders
adopt the merger agreement and approve the merger;
--receipt of an opinion of Goldman Sachs that the merger consideration is
fair from a financial point of view to the Capital Re stockholders;
--absence of breach or violation of organizational documents, governmental
permits or material agreements of entering into or consummating the merger
and related transactions;
--compliance, as to form, in all material respects, of each report filed by
Capital Re with the SEC and the absence of any untrue statement of a
material fact or omission of a material fact that is required or necessary
to make the statements in the filings, in light of the circumstances in
which they were made, not misleading;
--financial statements included in reports filed by Capital Re with the SEC
having been prepared in accordance with generally accepted accounting
principles, consistently applied;
--conformity of statutory financial statements with statutory accounting
principles and all applicable laws, rules and regulations when filed;
--absence of certain changes in the financial condition, properties,
business or results of operations of Capital Re since December 31, 1998;
--absence of pending or threatened litigation;
--absence of undisclosed liabilities;
--absence of any material legal action that would reasonably be expected to
have a material adverse effect on Capital Re;
--compliance with and absence of liability under the Employee Retirement
Income Security Act of 1974, as amended;
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--compliance with federal, state, local and foreign laws and permits, and
the proper filing of permits and compliance with such laws for the last
three years;
--ownership or rights and licenses in and to all intellectual property
necessary to conduct Capital Re's business;
--establishment, budgeting and implementation of a Year 2000 compliance
program;
--compliance with all environmental laws;
--the fact that neither Capital Re nor its subsidiaries is an "investment
company";
--inapplicability of anti-takeover statutes;
--timely and accurate filing of tax returns;
--compliance with all labor laws, and absence of any plans of any officer,
director, executive or key employee to terminate his employment with
Capital Re;
--title to property and assets;
--all material contracts being in full force and effect and binding and
enforceable against Capital Re;
--the absence of employment of any broker or finder other than Goldman
Sachs;
--all material insurance policies being in full force and effect and
adequate to insure against Capital Re's risks; and
--reserves of Capital Re carried on its statutory accounting policy
statements being in compliance in all material respects with the
requirements for reserves established by the insurance departments of each
state in which its insurance companies are incorporated.
REPRESENTATIONS AND WARRANTIES BY ACE AND CAPRE ACQUISITION CORP.
The merger agreement contains representations and warranties, subject to
qualifications, made by ACE, and CapRe Acquisition Corp., as applicable, to
Capital Re as to, among other things:
--ACE's organization and the organization of its subsidiaries, including
CapRe Acquisition Corp. and its insurance subsidiaries, and their good
standing;
--capital structure of ACE and CapRe Acquisition Corp.;
--absence of prior business activity of CapRe Acquisition Corp.;
--authorization of the ACE ordinary shares to be issued to Capital Re's
stockholders;
--corporate power and authority to execute, deliver and perform its
obligations under the merger agreement and consummate the merger;
--approval of the board of directors and all other corporate action having
been taken to adopt the merger agreement and the stock option agreement
and approve the transactions contemplated in and by those agreements;
--the ACE ordinary shares to be received by Capital Re stockholders being
validly issued, fully paid and non-assessable; not subject to any pre-
emptive right; when issued, registered under the Securities Act of 1933,
as amended, and the Securities Exchange Act of 1934, as amended, and
exempt from registration under state securities laws;
--absence of breach or violation of organizational documents, governmental
permits or material agreements;
--compliance, as to form, in all material respects, of each report filed by
ACE with the SEC and the absence of any untrue statement of a material
fact or omission of a material fact that is required or
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necessary to make the statements in the filings, in light of the
circumstances in which they were made, not misleading;
--financial statements included in reports filed by ACE with the SEC having
been prepared in accordance with generally accepted accounting principles,
consistently applied;
--absence of certain changes in the financial condition, properties,
business or results of operations of ACE since September 30, 1998;
--absence of pending or threatened litigation;
--absence of employment of any broker or finder other than Credit Suisse
First Boston Corporation; and
--ability to finance the cash portion of the merger consideration.
COVENANTS AND OTHER AGREEMENTS
Capital Re Operating Covenants. The merger agreement provides that prior to
the merger Capital Re will, and will cause its subsidiaries to, conduct their
operations in the ordinary course consistent with past practice, and will use
their best efforts to preserve intact their business organization, keep
available the services of their officers and key employees and maintain
advantageous relationships with persons having business relationships with
them. Subject to some exceptions, including Capital Re obtaining the consent
of ACE, the merger agreement places specific restrictions on the ability of
Capital Re and its subsidiaries to, among other things:
--split, combine or reclassify any shares of its capital stock or other
securities;
--declare, set aside for payment or consummate any dividend or other
distribution payable in cash, stock, property or otherwise, other than
regularly paid cash dividends not in excess of $0.04 per share;
--directly or indirectly redeem, purchase or otherwise acquire any shares
of its capital stock or other securities;
--authorize for issuance, issue, sell, pledge, dispose of, encumber,
deliver or agree or commit to issue, sell, pledge or deliver any capital
stock of any class of Capital Re or any subsidiary or any securities
convertible into or exercisable or exchangeable for shares of capital
stock of any class of Capital Re or any subsidiary;
--incur any material indebtedness not previously approved by ACE;
--incur any other indebtedness except in the ordinary course of business;
--pledge or otherwise encumber shares of capital stock of Capital Re or its
subsidiaries;
--mortgage or pledge any of its material assets, tangible or intangible, or
create any lien on any of them;
--enter into, adopt, amend or terminate any bonus, profit sharing,
compensation, severance, termination, stock option, stock appreciation
right, restricted stock, performance unit, stock equivalent, stock
purchase agreement, pension, retirement, deferred compensation,
employment, severance or other employee benefit plan;
--enter into or amend any employment or severance agreement with, increase
in any material manner the salary, wages, bonus, commission, or other
compensation or benefits of any director or executive officer of Capital
Re or any of its subsidiaries;
--acquire any corporation, partnership or other business organization or
division thereof or make any material investment either by purchase of
stock or securities, contributions to capital, property transfer or
acquisition of any material amount of properties or assets of any other
individual or entity;
--pay, discharge or satisfy any claims, liabilities or obligations other
than in the ordinary course of business and consistent with past practice
of liabilities reflected or reserved against on Capital Re's
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consolidated balance sheet dated June 30, 1999 or incurred in the ordinary
course of business and consistent with past practice;
--amend the certificate of incorporation or any similar document of Capital
Re or any of its subsidiaries;
--adopt a plan of complete or partial liquidation or resolutions providing
for the complete or partial liquidation, dissolution, merger,
consolidation, restructuring, recapitalization or other reorganization of
Capital Re or any of its subsidiaries;
--enter into any new lines of business, change any material policy forms,
change the pricing formula for material insurance policies, materially
change its investment policies or guidelines or otherwise make material
changes to the operation of its business or change its loss reserve
methodology;
--invest any investment securities of Capital Re in investments that are
not rated in one of the four highest categories by a "nationally
recognized statistical rating agency," as defined in the rules or
regulations of the SEC;
--sell, lease, encumber, transfer or dispose of any assets outside the
ordinary course of business consistent with past practice or any assets
that are material to Capital Re or any of its subsidiaries, or enter into
any material commitment or transaction outside the ordinary course of
business consistent with past practice, except with respect to any assets
related to RGB Underwriting Agencies, Ltd.;
--authorize or make or commit to make any capital expenditures, except for
transactions in the ordinary course of business consistent with past
practice, but not in excess of $100,000 in the aggregate, or pursuant to
agreements or commitments entered into by Capital Re or any of its
subsidiaries, unless otherwise reserved against in Capital Re's balance
sheet dated June 30, 1999;
--make any tax elections or settle or compromise any material United States
federal, state, local or other foreign income tax liability, or waive or
extend the statute of limitations in respect of any such taxes;
--pay or agree to pay in settlement or compromise of any suits or claims of
liability against Capital Re or any of its subsidiaries, its directors,
officers, employees or agents more than an aggregate of $1,000,000;
--take any action likely to materially decrease or diminish the assets or
net worth of Capital Re or any of its subsidiaries (except for reserves in
the ordinary course of business and consistent with past practice);
--change any of the accounting principles or practices used by it; or
--enter into any agreement providing for the acceleration or payment or
performance or other consequence as a result of a change in control of
Capital Re or any of its subsidiaries.
There is no closing condition that either Capital Re's or ACE's
representations have been true when made or be true at the time of closing.
Other Covenants. The merger agreement contains additional agreements
relating to, among other things:
--the preparation, filing and delivery of this proxy statement/prospectus
and ACE's filing of the registration statement on Form S-4 of which this
proxy statement/prospectus will be a part and a Schedule 13E-3;
--cooperation regarding certain filings with governmental authorities and
other agencies and organizations;
--mutual access to information, business and properties;
--cooperation regarding qualification of the merger as a "tax-free"
reorganization under the Code and obtaining opinions of counsel to that
effect (the failure to so qualify or to obtain opinions of counsel to such
effect will result in the restructuring of the merger);
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--the filing of a post-effective amendment to the registration statement of
which this proxy statement/prospectus is a part to convert it to a shelf
registration covering resales of ACE ordinary shares by affiliates of
Capital Re;
--releasing Capital Re and its officers, directors, employees, agents,
representatives, financial advisors and attorneys from liability arising
out of any breach or alleged breach of the merger agreement in connection
with or arising out of the transaction proposals made by XL;
--cooperation in the issuance of press releases relating to the merger;
--refraining from purchasing, acquiring, selling or disposing of ACE
ordinary shares;
--indemnification of officers and directors of Capital Re;
--cooperation regarding takeover statutes;
--notification upon the occurrence or non-occurrence of an event that would
violate a covenant or condition in the merger agreement; and
--obtaining requisite consents.
Recommendation of Capital Re's Board; Stockholders Meeting. Capital Re
agreed to convene a stockholders meeting as soon as practicable for the
purposes of voting on the adoption of the merger agreement and approval of the
merger. Capital Re further agreed to include in this proxy statement/prospectus
the recommendation of its board of directors that Capital Re's stockholders
adopt the merger agreement and approve the merger and the written opinion of
Goldman Sachs that the merger consideration is fair, from a financial point of
view, to Capital Re's stockholders. Furthermore, the Capital Re board agreed to
use its reasonable best efforts to obtain stockholder adoption of the merger
agreement. The Capital Re board of directors may not withdraw or modify its
recommendation in any manner adverse to ACE, unless:
--Capital Re's stockholders have not yet adopted the merger agreement; and
--Capital Re is in compliance with the terms of the merger agreement,
including the provisions described below under "--No Solicitation;" and
--it receives an unsolicited, bona fide, written proposal to acquire more
than 15% of Capital Re's assets or outstanding stock; and
--it has concluded in good faith, on the advice of its outside financial
advisors, that the proposal is a superior proposal;
or
--there has been a material adverse change in ACE and Capital Re's board of
directors is required to withdraw, amend or modify its recommendation, on
the advice of its legal counsel, in order to prevent it from breaching its
fiduciary duties to its stockholders.
Employee Matters. For a one year period following the merger, ACE agreed to
continue the existing Capital Re employee benefit plans or provide, in the
aggregate, benefits that are at least as favorable as those provided by Capital
Re. In addition, ACE will honor all of the severance provisions of Capital Re
employees' change in control severance agreements. ACE has agreed to grant, as
promptly as possible after the effective time of the merger, up to 168,000 ACE
ordinary shares under its 1998 Long-Term Incentive Plan to employees of Capital
Re and its subsidiaries designated by Capital Re's Executive Committee and
approved by ACE. All of these grants will be restricted stock awards subject to
vesting over a three year period beginning on the grant date and will be
registered under the Securities Act of 1933, as amended.
Affiliate Agreements. Capital Re has agreed to provide ACE, no later than 10
days prior to the merger, with a letter identifying all persons who may be
deemed affiliates of Capital Re for purposes of Rule 145 under the Securities
Act. Capital Re has further agreed to use its best efforts to deliver to ACE,
not less than 1 day
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prior to the merger, a letter from each such affiliate agreeing, among other
things, to abide by certain transfer restrictions pursuant to Rule 145.
Listing of ACE Ordinary Shares. ACE has agreed to use its best efforts to
cause the ACE ordinary shares to be issued in connection with the merger to be
listed on the New York Stock Exchange.
Coordination of Dividends. ACE and Capital Re agreed to coordinate with each
other regarding the declaration of dividends so that the holders of ACE
ordinary shares or Capital Re common stock will not receive two dividends or
fail to receive one dividend for any single calendar quarter with respect to
shares of Capital Re common stock and/or ACE ordinary shares received in the
merger.
NO SOLICITATION
Pursuant to the merger agreement and except as described below, Capital Re
has agreed that neither it nor its subsidiaries will, directly or indirectly,
solicit, initiate, encourage (including by way of furnishing information) or
take any action knowingly to facilitate the submission of any inquiries,
proposals or offers (whether or not in writing) with respect to a transaction
proposal, as defined below, agree to or endorse any transaction proposal, or
enter into or participate in any discussions or negotiations regarding a
transaction proposal.
Under the merger agreement, "transaction proposal" means:
--any acquisition by a third party of 15% or more of Capital Re's
consolidated assets or 15% or more of any class of Capital Re's or any of
its subsidiaries' equity securities;
--any tender offer, including a self-tender offer, or exchange offer that
if consummated would result in any person beneficially owning 15% or more
of any class of Capital Re's or any of its material subsidiaries' equity
securities;
--any merger, consolidation, business combination, sale of substantially
all of the assets, recapitalization, liquidation, dissolution or similar
transaction involving Capital Re or any of its subsidiaries whose assets,
individually or in the aggregate, constitute 15% or more of Capital Re's
consolidated assets; or
--any other transaction that would or would reasonably be expected to
impede, interfere with, prevent or materially delay the merger.
Notwithstanding the foregoing, Capital Re or its board of directors is
permitted under the merger agreement, subject in certain cases to ACE's right
to terminate the merger agreement and/or receive a termination fee, to:
--comply with Rule 14d-9 and Rule 14e-2 under the Exchange Act with regard
to a bona fide tender offer or exchange offer, which rules require a
target company to publicly respond to a tender offer; or
--participate in negotiations or discussions with, or furnish information
to, any person in response to an unsolicited bona fide written transaction
proposal submitted to Capital Re's board prior to the date Capital Re's
stockholders adopt the merger agreement, if and only to the extent that
prior to participating in discussions or negotiations or furnishing
information:
--Capital Re receives an executed confidentiality agreement containing
terms at least as favorable to it as the one previously entered into
with ACE; and
--Capital Re's board of directors concludes in good faith, based on
advice from its outside financial advisors, that the transaction
proposal is reasonably likely to be or result in a superior proposal, as
defined below, and based on written advice from its outside legal
counsel, that participating in negotiations or discussions or furnishing
information is required in order to prevent the Capital Re board from
breaching its fiduciary duties to its stockholders.
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Capital Re must also provide ACE contemporaneous notice of entering into any
negotiations or discussions or furnishing any information, provide prompt
notice of the terms and conditions of any transaction proposal and the identity
of the person making it and, to the extent disclosure is not prohibited by the
terms of any confidentiality agreement, the status of any material discussions
or negotiations. To the extent any activities regarding transaction proposals
occurred before October 26, 1999, Capital Re agreed to cease and cause its
representatives to cease all such activities, discussions or negotiations of
those activities and shall use its reasonable best efforts to cause any third
parties to return or destroy any confidential information in their possession.
Under the merger agreement, "superior proposal" means:
--any acquisition by a third party of 51% or more of Capital Re's
consolidated assets or 51% or more of any class of Capital Re's or any of
its subsidiaries' equity securities;
--any tender offer, including a self tender offer, or exchange offer that
if consummated would result in any person beneficially owning 51% or more
of any class of Capital Re's or any of its material subsidiaries' equity
securities;
--any merger, consolidation, business combination, sale of substantially
all of the assets, recapitalization, liquidation, dissolution or similar
transaction involving Capital Re or any of its subsidiaries whose assets,
individually or in the aggregate, constitute 51% or more of Capital Re's
consolidated assets; and
--in each case with respect to which any required financing is committed
or, in the good faith judgment of Capital Re's board of directors, based
on the written advice of its outside financial advisors, the party making
the proposal is reasonably capable of financing it, and which, based on
the advice of its outside legal counsel and financial advisors:
--is reasonably capable of being completed, taking into account all
legal, financial, regulatory and other aspects of the transaction
proposal and the identity of the person making the proposal; and
--would, if consummated, result in a transaction more favorable to
Capital Re's stockholders from a financial point of view than the
merger.
DIRECTORS' AND OFFICERS' INDEMNIFICATION AND INSURANCE
The merger agreement provides that, for a period of six years following the
merger, ACE will indemnify and hold harmless, and pay in advance to, all past
and present directors and officers of Capital Re and its subsidiaries to the
same extent such persons are indemnified or have the right to expenses pursuant
to Capital Re's certificate of incorporation and by-laws as of October 26,
1999, for acts or omissions occurring at or prior to the merger, including in
connection with the adoption of the merger agreement and the stock option
agreement and the approval of the transactions contemplated by those
agreements.
Following the merger, ACE will cause Capital Re to maintain for three years
directors' and officers' liability insurance policies covering matters
occurring prior to the merger and containing terms and conditions that are not
materially less advantageous than those maintained by Capital Re on October 26,
1999. ACE will not be required to spend in any one year more than 150% of the
annual premium currently paid by Capital Re for such insurance. If the annual
premium would exceed such amount, ACE will cause Capital Re to obtain a policy
with the best coverage available for a cost not exceeding that amount.
TERMINATION
The merger agreement can be terminated at any time prior to the effective
time of the merger under the following circumstances:
--by mutual written consent of both parties by action of each party's board
of directors;
--by either party
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--if the merger is not completed on or before February 28, 2000, which
will be extended to April 28, 2000 if the sole reason the merger is not
completed is the absence of a required governmental consent, other than
due to a material breach of the merger agreement by the terminating
party;
--if the stockholders of Capital Re fail to adopt the merger agreement,
other than due to a material breach of the merger agreement by the
terminating party;
--if a court or governmental authority permanently prohibits the merger;
or
--upon a material breach of any representation, covenant or agreement in
the merger agreement by the other party that is not cured within a
specified time or that cannot be cured;
--by Capital Re, prior to or after adoption of the merger agreement by its
stockholders
--if it is not in material breach of any of the terms of the merger
agreement and its board of directors authorizes Capital Re to enter into
a binding written agreement for an unsolicited superior proposal from a
party other than ACE;
--Capital Re gives ACE notice and a copy of the superior proposal and ACE
does not make, within five business days, an offer that Capital Re's
board, after good faith consultation with its financial advisors and
after taking into account the long term prospects and interests of
Capital Re and its stockholders, believes is at least as favorable as
the superior proposal; and
--Capital Re pays the termination fee described below;
--by ACE's board
--at any time before the effective time of the merger if Capital Re
enters into a binding agreement for a superior proposal;
--if Capital Re or its board of directors
--adversely withdraws, modifies or amends its recommendation to adopt the
merger agreement or fails to reconfirm, within 5 days after ACE's
written request, its recommendation to its stockholders in favor of the
merger;
--fails, after this proxy statement/prospectus is declared effective, to
promptly mail this proxy statement/prospectus;
--approves, recommends or enters into an agreement with respect to a
business combination or similar transaction proposal with a party other
than ACE;
--resolves to do any of the above; or
--fails, in response to a tender offer or exchange offer for 10% or more
of the outstanding Capital Re common stock, within ten business days
after the commencement of the offer, to recommend rejection of that
offer.
TERMINATION FEES AND EXPENSES
The merger agreement requires the payment by Capital Re to ACE of a
termination fee of $25 million after termination of the merger agreement in any
of the following circumstances:
--termination by ACE because Capital Re's stockholders fail to approve the
merger; and
--prior to or at the time of Capital Re's stockholder meeting, a third
party either makes a proposal to acquire Capital Re or has publicly
announced an intention to acquire Capital Re; and
--within 12 months of the termination of the merger agreement, Capital Re
enters into an agreement concerning an acquisition proposal;
--termination by ACE because Capital Re accepts a superior proposal from a
third party for the acquisition of Capital Re; or
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--termination by Capital Re in order to accept a superior proposal from a
third party after ACE has had an opportunity to match the superior
proposal.
The merger agreement requires Capital Re to pay ACE up to $3 million for
ACE's out-of-pocket expenses if the merger agreement is terminated by ACE
because Capital Re materially breaches any representation, warranty, covenant
or agreement contained in the merger agreement that is not curable or, if
curable, is not cured within 20 days after written notice of the breach is
given by ACE to Capital Re.
The merger agreement also requires ACE to pay Capital Re up to $3 million
for Capital Re's out-of-pocket expenses if the merger agreement is terminated
by Capital Re because ACE materially breaches any representation, warranty,
covenant or agreement contained in the merger agreement that is not curable or,
if curable, is not cured within 20 days after written notice of the breach is
given by Capital Re to ACE.
OTHER EXPENSES
The merger agreement provides that, whether or not the merger is
consummated, all out-of-pocket expenses incurred in connection with the merger
agreement and the transactions contemplated thereby will be paid by ACE, unless
the merger agreement is terminated because Capital Re accepts a superior offer
or withdraws its support for this merger.
AMENDMENT AND WAIVER
Subject to applicable law, at any time prior to the effective time of the
merger, ACE and Capital Re may further modify or amend the merger agreement.
Any failure of ACE or Capital Re to comply with any obligation, covenant,
agreement or condition in the merger agreement can be waived in writing by
Capital Re or ACE, respectively. However, a waiver or failure to insist upon
strict compliance with an obligation, covenant, agreement or condition does not
operate as a waiver of, or estoppel with respect to, any subsequent or other
failure.
THE STOCK OPTION AGREEMENT
GENERAL
As an inducement to ACE to enter into the original merger agreement, Capital
Re granted ACE an option to purchase up to approximately 9.9% of Capital Re's
currently outstanding shares of common stock pursuant to a stock option
agreement. Because the description of the stock option agreement contained in
this proxy statement/prospectus is a summary, it does not contain all the
information that may be important to you. You should read carefully the entire
copy of the stock option agreement, which is attached as Appendix B to this
proxy statement/prospectus and incorporated herein by reference, before you
decide how to vote.
TERMS OF THE OPTION
Number of Shares and Exercise Price. Under the stock option agreement,
Capital Re has granted to ACE an option to purchase up to 3,220,135 shares of
Capital Re common stock at a price per share equal to $17.40.
The number and type of securities subject to the option and the exercise
price therefor will be adjusted for any change or distribution in respect of
Capital Re's common stock by reason of a stock dividend, subdivision, spinoff,
stock split, split-up, merger, consolidation, recapitalization, combination,
exchange of shares that would be prohibited under the terms of the merger
agreement or any similar event so as to fully preserve the economic benefits
provided under the option agreement. The number of shares of Capital Re's
common stock subject to the option will also be adjusted in the event Capital
Re issues additional shares of its common stock such that the number of shares
of Capital Re's common stock subject to the option, together with shares
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previously purchased pursuant thereto, represents 9.9% of Capital Re's common
stock then issued and outstanding, without giving effect to shares subject to
or issuable pursuant to the option.
Exercise Rights. ACE may exercise its option if the merger agreement is
terminated under circumstances in which a termination fee would become payable
by Capital Re.
Expiration. To the extent the option has not been exercised, it will expire
upon the earliest of:
--the merger;
--the close of business 180 days after ACE becomes entitled to receive the
termination fee; or
--the close of business on the date ACE is no longer potentially entitled
to receive the termination fee for a reason other than ACE has already
received the termination fee.
REPURCHASE AT THE OPTION OF ACE
Under the option agreement, ACE has the right, following a repurchase
event, as described below, and ending 180 days later, to require Capital Re to
repurchase for cash the option and any shares of Capital Re's common stock
purchased by ACE pursuant to the option.
Repurchase Events. A repurchase event will occur if the merger agreement is
terminated under circumstances in which a termination fee would become payable
by Capital Re.
Repurchase Price. The price Capital Re will pay if ACE exercises its
repurchase right is equal to the sum of:
--the option price, which is
--the number of shares then purchasable upon exercise of the option; or
--such lesser number of shares as may be designated in the Repurchase
Notice;
multiplied by
--the amount by which the market/offer price exceeds the option price;
and
--the price for the option shares, which is
--the number of option shares designated in the repurchase notice;
multiplied by
--the market/offer price.
Market/Offer Price. Under the stock option agreement, the market offer
price is equal to the highest of:
--the price per share of Capital Re common stock at which a tender or
exchange offer for common stock has been made;
--the price per share for Capital Re's common stock to be paid by any third
party pursuant to an agreement with Capital Re; and
--the highest trading price per share of Capital Re common stock on the New
York Stock Exchange during the preceding six month period.
REGISTRATION RIGHTS
Under the stock option agreement, ACE has the right to require Capital Re
to file a shelf registration statement in order to permit the sale or other
disposition of any shares of Capital Re's common stock purchased by ACE
pursuant to the option.
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LIMITATION OF PROFIT
ACE's total profit under the option agreement may not exceed $25 million.
The total profit under the option agreement is the sum of:
--any net cash proceeds from the sale of the option shares to a third party
within 12 months after the exercise of the option;
--any net cash proceeds from the transfer of the option, including the
repurchase of the option by Capital Re; and
--all termination fees received by ACE under the merger agreement other
than in respect of expenses;
less
--all cash previously paid by ACE to Capital Re regarding limitation of
profit; and
--the value of the option shares previously delivered to Capital Re for
cancellation.
EFFECT OF THE STOCK OPTION AGREEMENT
The stock option agreement is intended to increase the likelihood that the
merger will be consummated in accordance with the terms of the merger
agreement. Accordingly, the option agreement may discourage, but does not
preclude, a third party from proposing a competing transaction, including one
that might be perceived by some Capital Re stockholders as being more favorable
than the merger.
THE STOCKHOLDER SUPPORT AGREEMENTS
In connection with the execution of the original merger agreement, MP
Investments and Constellation Investments, Inc. entered into stockholder
support agreements with ACE. At the record date for the Capital Re special
meeting, these stockholders collectively held approximately 32.2% of the voting
power of all outstanding Capital Re common stock. As of such record date, ACE
held an additional 15.9% of the voting power of all outstanding Capital Re
common stock. Together, these stockholders are able to significantly influence
the vote on the adoption of the merger agreement and the approval of the
merger.
Under the stockholder support agreements, at the Capital Re special meeting
or any other meeting of Capital Re stockholders, however called, and in any
action by written consent of the Capital Re stockholders, each such stockholder
has agreed:
--to vote all of its Capital Re common stock in favor of adoption of the
merger agreement;
--to vote all of its Capital Re common stock against, among other things:
--approval of any proposal made in opposition to or in competition with
the merger; or
--any other action which reasonably may be expected to delay or prevent
consummation of the merger;
--to deliver to ACE upon request a proxy entitling ACE to vote such
stockholder's shares of Capital Re common stock;
--not to sell, pledge or otherwise dispose of, or enter into any voting
arrangement with respect to, its shares of Capital Re common stock;
--not to solicit or knowingly encourage the submission of any proposal to
merge with or acquire a substantial portion of the stock or assets of
Capital Re;
--not to solicit proxies or become a participant in a solicitation in
opposition to or competition with the consummation of the merger;
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--not to become a member of a group for the purpose of opposing or
competing with the consummation of the merger; and
--to otherwise use its best efforts to cause the merger to be consummated
in the most expeditious manner practicable.
In addition, each such stockholder has agreed for a period of three years
following the execution of the stockholder support agreement, that, subject to
certain exceptions, it will not, without ACE's prior written approval, (a)
purchase or otherwise acquire any securities of ACE or any other right to
acquire such securities if upon any such purchase or acquisition the
stockholder would own or have the right to acquire (whether or not presently)
five percent or more of the outstanding voting shares of ACE, (b) solicit
proxies from stockholders of ACE or otherwise seek to influence or control the
management or policies of ACE or any of its affiliates, (c) form, join or in
any way participate in a group with respect to any voting securities of ACE or
any of its subsidiaries, (d) otherwise act, alone or in concert with others, to
seek to control or influence the management, Board of Directors or policies of
ACE, (e) disclose any intention, plan or arrangement inconsistent with the
foregoing or (f) assist, advise or encourage any other person in doing any of
the foregoing. The stockholders also agree during such period not to request
ACE (or its directors, officers, employees or agents) to amend or waive any of
the foregoing or take any action which might require ACE to make a public
announcement regarding the possibility of a business combination, merger or
extraordinary transaction.
The stockholder support agreements terminate on the earlier of the
consummation of the merger or the termination of the merger agreement.
THE CAPITAL SUPPORT AGREEMENT
ACE has agreed to provide, or to cause one of its subsidiaries to provide,
loans on a revolving basis to Capital Re in one or more installments in an
aggregate amount not to exceed $50,000,000. Any amounts outstanding will accrue
interest, payable quarterly in arrears, at 6% per annum. If an event of default
occurs and is continuing, ACE may declare all outstanding amounts due and
payable and terminate its commitment. An "event of default" includes, among
other things,
--the failure by Capital Re to pay within 30 days after the date when due
any interest owed;
--the merger agreement with ACE is terminated pursuant to Section 8.3(a) or
8.4(a) thereof;
--after any termination of the merger agreement, Capital Re merges or
consolidates or there is a sale of all or substantially all assets of
Capital Re and
--certain events of bankruptcy or insolvency.
At any time, ACE may convert any loans outstanding into common stock of
Capital Re based upon a conversion price of $14.00 per share. In the event of
the termination of the merger agreement (other than pursuant to Sections 8.3(a)
or 8.4(a) thereof), all of the outstanding loans will automatically convert
into shares of Capital Re common stock based upon a conversion price that is
equal to the lesser of (1) $14.00 and (2) the market price per share of Capital
Re's common stock on the date of such conversion.
On November 23, 1999, Capital Re borrowed $21,980,000 from ACE under the
capital support agreement. This borrowing was converted by ACE into 1,570,000
shares of Capital Re common stock. As a result of that conversion, ACE now owns
a total of 6,069,279 shares of common stock, or 15.9% of Capital Re's
outstanding stock.
COMPARISON OF STOCKHOLDERS' RIGHTS AND DESCRIPTION OF
THE SHARE CAPITAL OF ACE FOLLOWING THE MERGER
Upon the merger, the stockholders of Capital Re, whose rights are currently
governed by the Delaware General Corporation Law and the certificate of
incorporation and by-laws of Capital Re, will become shareholders of ACE, and
their rights will be governed by the Companies Law (1998 Revision) of the
Cayman Islands and the articles of association and memorandum of association of
ACE as in effect at the time of the merger. The following is a summary of
certain material differences between the rights of Capital Re stockholders and
ACE shareholders.
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The following discussion is qualified by reference to the complete text of
the Companies Law (1998 Revision) of the Cayman Islands, the articles of
association and memorandum of association of ACE, the Delaware General
Corporation Law and the certificate of incorporation and by-laws of Capital Re.
For information as to how you can obtain copies of the organizational documents
of ACE and Capital Re, See "Where You Can Find More Information" on page 89.
SHARE CAPITAL
ACE's authorized share capital is 300 million ordinary shares, par value
$.041666667 per share, of which 195,059.295 were outstanding as of
November 26, 1999, and 10 million other shares, none of which are outstanding.
In the merger, Capital Re shareholders will receive only ordinary shares and
associated rights. Under ACE's articles of association, the board of directors
can issue any part of ACE's authorized capital with any terms, rights and
restrictions as the board determines. In addition, 500,000 preferred shares
were reserved for issuance upon the exercise of rights distributed to ACE's
shareholders pursuant to ACE's shareholder rights plan.
On a pro forma basis, assuming no change in the share capital of ACE and the
capital stock of Capital Re as of November 26, 1999, immediately following the
merger approximately 215.8 million ordinary shares will be outstanding and
500,000 preferred shares will be reserved for issuance upon the exercise of the
rights distributed to ACE's shareholders pursuant to ACE's shareholder rights
plan.
ACE ORDINARY SHARES
The ACE ordinary shares to be issued to Capital Re stockholders in the
merger are entitled to one vote per share on all matters requiring a vote of
shareholders, subject to the 10% voting limitation described below. See "--
Voting Rights" on this page. There are no provisions of Cayman Islands law or
ACE's articles of association that impose any limitation on the rights of
shareholders that are not residents of the Cayman Islands to hold or vote
ordinary shares.
TRANSFER AGENT AND REGISTRAR
The Bank of New York is the transfer agent and registrar for ACE ordinary
shares.
STOCK EXCHANGE LISTING
ACE ordinary shares are listed on the New York Stock Exchange. ACE will use
its best efforts to cause the ACE ordinary shares issuable in the merger to be
approved for listing on the New York Stock Exchange on or prior to the
effective date of the merger, subject to official notice of issuance.
VOTING RIGHTS
Capital Re. Each holder of Capital Re common stock is entitled to one vote
per share on all matters submitted to a vote of stockholders at any
stockholders' meeting. All matters voted on at any duly held stockholders'
meeting shall be carried by a majority of the votes cast at the meeting by
shareholders present or represented in person or by proxy, except that Section
251 of the Delaware General Corporation Law provides that the majority of
shares entitled to vote at a meeting of shareholders is required to adopt a
merger agreement.
Shares of Capital Re common stock have noncumulative voting rights, which
means that the holders of a majority of the voting power of Capital Re may
elect all of Capital Re's directors and, in such event, the holders of the
remaining shares of Capital Re common stock will not be able to elect any
directors.
ACE. Each holder of ACE ordinary shares is entitled to one vote per share on
all matters submitted to a vote of shareholders at any shareholders' meeting,
subject to the 10% voting limitation described below. All
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matters, including the election of directors, voted upon at any duly held
shareholders' meeting shall be carried by a majority of the votes cast at the
meeting by shareholders present or represented in person or by proxy, except:
--approval of a special resolution;
--a variation of the rights attached to any class of shares, which requires
that a special resolution passed by written consent of 75% of the issued
shares of the class or at a separate meeting of the holders of shares of
that class, and for which a quorum will be holders of not less than 50% of
the issued shares of the class; and
--as otherwise provided by Cayman Islands law.
A special resolution requires the approval of at least 66 2/3% of the votes
cast by the shareholders represented in person or by proxy at a duly convened
meeting at which a quorum is present. Subject to applicable law, and any
requirement to obtain the approval of holders of a class of shares voting
separately as described above, ACE may from time to time by special resolution:
--alter, amend or repeal its memorandum of association and/or articles of
association;
--increase its share capital;
--consolidate and divide all or any of its share capital;
--subdivide the whole or any part of its share capital;
--reduce its share capital, any capital redemption reserve fund, or any
share premium account;
--change its name or alter its objects; or
--cancel shares that have not been taken or agreed to be taken by any
person.
The rights attached to a class of shares may be varied by special resolution
passed at a separate meeting of the holders of that class of shares. The quorum
for that meeting is one or more shareholders present in person or by proxy
holding not less than 50% of the issued shares of that class.
Each ordinary share has one vote, except that if, and so long as, the
controlled shares, as defined below, of any person constitute 10% or more of
the issued ACE ordinary shares, the voting rights with respect to the
controlled shares owned by that person shall be limited, in the aggregate, to a
voting power of less than 10%, pursuant to a formula specified in the articles
of association of ACE. Controlled shares means:
--all ACE ordinary shares directly, indirectly or constructively owned by
any person within the meaning of Section 958 of the Internal Revenue Code;
and
--all ACE ordinary shares directly, indirectly or constructively owned by
any such person or "group" of persons within the meaning of Section 13(d)
of the Exchange Act.
ACE ordinary shares have noncumulative voting rights, which means that the
holders of a majority of the voting power of ACE may elect all of ACE's
directors and, in such event, the holders of the remaining ACE ordinary shares
will not be able to elect any directors.
ANNUAL MEETING OF STOCKHOLDERS
Capital Re. Under Delaware law, if the annual meeting for the election of
directors is not held on the designated date or action by unanimous written
consent has not been taken, the directors are required to hold the meeting as
soon as is convenient. If they fail to do so or take action by written consent
for a period of thirty days after the designated date for the annual meeting,
or if no date has been designated for a period of thirteen months after the
latest to occur of the organization of the corporation, its last annual meeting
or after the last action by written consent to elect directors in lieu of an
annual meeting, a Delaware court may order a meeting
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to be held upon application of any stockholder or director. The shares of stock
represented at such a meeting constitute a quorum for the purposes of the
meeting, notwithstanding any provision of the certificate of incorporation or
by-laws to the contrary. However, Delaware law does not provide for a
stockholder to call such meeting other than by application to a Delaware court.
ACE. The ACE articles of association provide that an annual general meeting
of the shareholders of ACE shall be convened each year at such time and place
as the board of directors may appoint. If a meeting is not held, the
shareholders may directly or indirectly be able to bring an action requiring
the directors to convene an annual general meeting in accordance with the
provisions of ACE's articles of association.
SPECIAL MEETINGS OF STOCKHOLDERS
Capital Re. Under Delaware law, a special meeting of stockholders may be
called only by the board of directors or by persons authorized in the
certificate of incorporation or the by-laws. The by-laws of Capital Re provide
that the chairman of the board, the president, a majority of the board of
directors or a stockholder or stockholders owning at least 10% of Capital Re's
voting power can call a special meeting.
ACE. The ACE articles of association provide that extraordinary general
meetings of shareholders may be called by the board of directors and shall be
called by the board on the requisition in writing of shareholders of ACE
holding at least 25% of its issued share capital carrying the right to vote at
general meetings (after taking account of the 10% voting limitations, see "--
Voting Rights" on page 80).
QUORUM OF STOCKHOLDERS
Capital Re. Under Delaware law and Capital Re's by-laws, the quorum required
for transaction of business at a stockholders' meeting consists of a majority
of shares entitled to vote present in person or represented by proxy, but in no
event may a quorum at any stockholders' meeting be less than one-third of the
issued and outstanding stock of Capital Re entitled to vote at the meeting;
except that, where a separate vote by a class or series or classes or series is
required, a quorum shall consist of no less than one-third of the shares of
such class or series or classes or series.
ACE. The quorum required for a general meeting of shareholders is not less
than one or more shareholders present in person or represented by proxy holding
at least 50% of the voting power of the issued and outstanding shares entitled
to vote at the meeting. A quorum for considering a "special resolution" is 66
2/3% of the voting power of the issued and outstanding shares entitled to vote
at the meeting.
STOCKHOLDER CONSENT TO ACTION WITHOUT A MEETING
Capital Re. Under Delaware law, unless otherwise provided in the charter,
any action that can be taken at a meeting of the stockholders may be taken
without a meeting by written consent, signed by the holders of outstanding
stock having the minimum number of votes necessary to authorize or take the
action at a stockholders' meeting.
ACE. Cayman Islands law provides that shareholders may take action requiring
an ordinary or, if authorized by the articles of association, a special
resolution without a meeting only by unanimous written consent. The articles of
association of ACE provide that ordinary or special shareholder resolutions may
be passed without a meeting by unanimous written consent.
NOTICE OF STOCKHOLDER MEETINGS
Capital Re. Under Delaware law, a stockholder must receive notice of a
stockholder meeting not more than sixty days and not less than ten days before
the meeting.
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ACE. There is no statutory minimum notice period in relation to general
meetings of shareholders under Cayman Islands law. However, the articles of
association of ACE provide that written notice of each meeting of shareholders
stating the place, date and time of the meeting shall be given not less than
ten nor more than sixty days before the date of the meeting, to each
shareholder entitled to vote at such a meeting. The notice of any such meeting
shall state the purpose or purposes for which the meeting was called.
INSPECTION OF BOOKS AND RECORDS
Capital Re. Under Delaware law, any stockholder may inspect Capital Re's
books and records for a proper purpose.
ACE. Shareholders of a Cayman Islands company have no general rights to
inspect or obtain copies of the list of shareholders or corporate records of a
company, other than the memorandum of association, the articles of association
and the register of mortgages and charges.
AMENDMENT OF ORGANIZATIONAL DOCUMENTS
Capital Re. Under Delaware law, the certificate of incorporation may be
amended if:
--the board of directors sets forth the proposed amendment in a resolution,
declares the advisability of the amendment and directs that it be
submitted to a vote at the meeting of stockholders; and
--the holders of at least a majority of shares of stock entitled to vote on
the amendment approve it, unless the certificate of incorporation requires
the vote of a greater number of shares.
If the holders of the outstanding shares of a class are entitled to vote as
a class upon a proposed amendment, the holders of a majority of the outstanding
shares of such class must also vote in favor of the amendment.
Under Delaware law, the board of directors may amend its by-laws if so
authorized in the company's articles of incorporation. The stockholders of a
Delaware corporation may also amend its by-laws. Capital Re's certificate of
incorporation authorizes the board of directors to adopt, amend or repeal the
by-laws of Capital Re.
ACE. The articles of association and memorandum of association of ACE may be
amended or altered by a special resolution of ACE shareholders. Under Cayman
Islands law, a special resolution requires the approval of at least 66 2/3% of
the votes cast by the shareholders represented in person or by proxy at a duly
convened meeting at which a quorum is present.
TRANSFER OF SHARES
Capital Re. Capital Re has no restriction on the transfer of Capital Re
common stock.
ACE. The board of directors of ACE has absolute discretion to decline to
register a transfer of ACE shares, except in certain limited circumstances
specified in the articles of association of ACE, and in addition will decline
to register a transfer of ACE shares except in certain limited circumstances
specified in the articles of association of ACE, if it determines that the
transfer would increase the number of controlled shares of any person to 10% or
any higher percentage of the voting power of ACE. Other than for this purpose,
ACE does not anticipate restricting the transfer of any ACE shares issuable to
Capital Re stockholders in the merger unless required by applicable law.
The restrictions on voting and ownership of more than 10% of the issued ACE
shares described above may have the effect of discouraging an attempt to obtain
control of ACE.
PREEMPTIVE RIGHTS
Capital Re. Under Delaware law, security holders of a corporation only have
preemptive rights as may be provided in the corporation's certificate of
incorporation. Capital Re's certificate of incorporation does not provide for
preemptive rights.
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ACE. Holders of ACE shares do not have preemptive rights to subscribe to any
additional issue of shares of any class or series nor to any security
convertible into such shares.
DISTRIBUTIONS AND DIVIDENDS; REPURCHASES AND REDEMPTIONS
Capital Re. Under Delaware law, a corporation may pay dividends out of
surplus and, if there is no surplus, out of net profits for the current and/or
the preceding fiscal year, unless the net assets of the corporation are less
than the capital represented by issued and outstanding stock having a
preference on asset distributions. Surplus is defined as the excess of the net
assets over capital, as such capital may be adjusted by the board of directors.
A Delaware corporation may purchase or redeem shares of any class except when
its capital is impaired or would be impaired by such purchase or redemption. A
corporation may, however, purchase or redeem out of capital shares that are
entitled upon any distribution of its assets to a preference over another class
or series of its stock or, if no shares entitled to such a preference are
outstanding, any of its own shares if such shares are to be retired and the
capital reduced.
ACE. Under Cayman Islands law, the board of directors of ACE may pay to its
shareholders those dividends as appear to the directors to be justified by the
profits or financial condition of ACE out of profits available for distribution
or out of the "share premium account" (similar to the concept of additional
paid in capital) if ACE has the ability to pay its debts as they become due
immediately after payment of the dividend. The articles of association of ACE
permit the board of directors to declare dividends out of profits or out of
monies otherwise available for dividends in accordance with Cayman Islands law.
Under Cayman Islands law, ACE may purchase or redeem shares out of profits
or from the proceeds of a fresh issue of shares or out of capital if it is able
to pay its debts as they become due on terms agreed to by the board of
directors and the relevant shareholders.
APPRAISAL RIGHTS
Capital Re. Under Delaware law, a stockholder of a corporation does not have
appraisal rights--rights of dissenting shareholders in a merger to receive
payments in cash for the judicially determined value of their shares--in
connection with a merger or consolidation or, in the case of a disposition, if:
--the shares of the corporation are listed on a national securities
exchange or held of record by more than 2,000 stockholders, as is
presently the case with Capital Re; or
--the corporation will be the surviving corporation of the merger and no
vote of the stockholders of the surviving corporation is required to
approve the merger;
provided, however, that a stockholder is entitled to appraisal rights in the
case of a merger or consolidation if such stockholder is required by the terms
of an agreement of merger or consolidation to accept in exchange for the shares
of such stockholder anything other than any combination of the following:
--shares of stock of the corporation surviving or resulting from such
merger or consolidation;
--shares of any other corporation that on 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 stockholders;
--cash in lieu of fractional shares of the corporation; or
--any combination of the shares of stock and cash in lieu of fractional
shares.
ACE. Cayman Islands law does not provide for appraisal rights. However, in
the case of a court sanctioned reorganization of a Cayman Islands company, a
dissenting shareholder has the right to express to the court such shareholder's
view that the transaction sought to be approved would not provide the
shareholders with fair value for their shares. The Cayman Islands court has the
discretion to make such order as it may decide. However, ACE has been advised
that the court ordinarily would not disapprove the transaction on that
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ground absent other evidence that the arrangement or reorganization is such
that any reasonable person could not approve it, and if the transaction were
approved and consummated, the arrangement would be binding on all shareholders
by operation of law and the dissenting shareholder would have no rights
comparable to the appraisal rights available to dissenting stockholders of
Delaware corporations in certain circumstances.
In addition, Cayman Islands law provides that where an offer is made by a
company for shares of a Cayman Islands company and, within four months of the
offer, the holders of not less than 90% of the shares that are the subject of
the offer accept, the offeror may by notice given within two months after the
expiration of the four month period, require the dissenting shareholders to
transfer their shares on the terms of the offer. Within one month of such
notice, a dissenting shareholder may apply to the court objecting to the
transfer. The burden is on the dissenting shareholders to show that the court
should exercise its discretion to prevent the transfer. The Cayman Islands
court has absolute discretion to make any order as it may decide. However, ACE
has been advised that the court is unlikely to prevent the requirement of such
transfer unless there is evidence of fraud or bad faith or collusion as between
the offeror and the holders of the shares who have accepted the offer as a
means of unfairly forcing out minority stockholders or where it is
affirmatively established that notwithstanding the views of a very large
majority of the shareholders the transaction is unfair.
DIRECTORS; ELECTION AND REMOVAL OF DIRECTORS
Capital Re. The by-laws of Capital Re provide for one or more members of the
board of directors, with the actual number being fixed by the board, the
default number being nine.
A majority of the number of directors then in office constitutes a quorum
for the transaction of business. A vacancy among the directors may be filled by
the remaining directors in office, although less than a quorum, or by a sole
remaining director. The term of a director appointed to fill a newly created
directorship or other vacancy shall expire at the same time as the term of the
other directors of the class from which the new directorship is created or in
which the vacancy occurred.
Directors hold office until the annual meeting of Capital Re stockholders
for the year in which his or her term expires. Capital Re stockholders may at
any time by majority vote remove and replace any director for cause.
ACE. The articles of association of ACE provide for not less than three, nor
more than 20, members of the board of directors, with the actual number being
determined by a resolution of the board subject to the power of shareholders by
ordinary resolution to increase or reduce the limits on the number of
directors. The board is divided into three classes as nearly equal in number as
possible. At each annual general meeting of shareholders, successors to the
class of directors whose term has expired as of the annual meeting are elected
to serve for a three-year term. Classification of directors has the effect of
making it more difficult for shareholders to change the composition of the
board. At least two annual meetings, rather than one, will generally be
required to effect a change in a majority of the ACE board of directors.
Unless otherwise fixed by the board, one-third of the number of directors
then in office present in person or by proxy constitutes a quorum for the
transaction of business. A vacancy among the directors may be filled by the
remaining directors in office, although less than a quorum. The term of a
director appointed to fill a newly created directorship or other vacancy shall
expire at the same time as the term of the other directors of the class from
which the new directorship is created or in which the vacancy occurred.
Directors hold office until the annual general meeting of ACE shareholders
for the year in which his or her term expires and until his or her successor is
appointed or elected or until he or she vacates office. ACE shareholders may at
any time by special resolution of the total voting power determined in
accordance with the articles of association of ACE, including the 10% voting
limitation, remove and replace any director.
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TRANSACTIONS WITH DIRECTORS
Capital Re. Delaware law provides that a contract or transaction between a
corporation and one or more of its directors or officers, or between a
corporation and any other entity of which one or more of its directors or
officers are directors or officers, or in which one or more of its directors or
officers have a financial interest, is not void or voidable if:
--the material facts as to the director's or officer's relationship or
interest and as to the contract or transaction are disclosed or known to
the board of directors or a committee of the board, which authorizes the
contract or transaction in good faith by the affirmative vote of a
majority of the disinterested directors, even though the disinterested
directors are less than a quorum;
--the material facts as to the director's or officer's relationship or
interest and as to the contract or transaction are disclosed or known to
the stockholders entitled to vote on the contract or transaction and the
contract or transaction is specifically approved in good faith by the
stockholders; or
--the contract or transaction is fair to the corporation as of the time it
is authorized, approved or ratified by the board of directors, a committee
of the board, or the stockholders.
A corporation may make loans to, guarantee the obligations of or otherwise
assist its officers or other employees and those of a subsidiary, including
directors who are also officers or employees of the corporation or a
subsidiary, when such action, in the judgment of the directors, may reasonably
be expected to benefit the corporation.
ACE. The articles of association of ACE provide that no director will be
disqualified from office or prevented by such office from contracting with ACE.
In addition, a director interested in any contract with the company may vote in
respect of that contract or transaction in which he is interested provided that
he discloses the nature of his interest prior to the board's consideration of
it.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Capital Re. Under Delaware law, a corporation is permitted to provide
indemnification or advancement of expenses, through by-law provision, agreement
or otherwise, against judgments, fines, expenses and amounts paid in settlement
actually and reasonably incurred by the person in connection with such
proceeding if he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the corporation.
The certificate of incorporation of Capital Re makes indemnification
mandatory on the part of Capital Re to the fullest extent permitted by Delaware
law. ACE has agreed to keep these provisions in place for a period of six years
from the date of the merger.
ACE. Cayman Islands law does not limit the extent to which a company's
articles of association may provide for the indemnification of officers and
directors, except to the extent that such provision may be held by the Cayman
Islands courts to be contrary to public policy, for instance, for purporting to
provide indemnification against the consequences of committing a crime.
The articles of association of ACE provide that it will indemnify its
officers, directors, employees and agents against certain liabilities.
LIMITED LIABILITY OF DIRECTORS
Capital Re. Section 102(b)(7) of the Delaware General Corporation Law
permits the adoption of a charter provision limiting or eliminating the
monetary liability of a director to a corporation or its stockholders by reason
of a director's breach of the fiduciary duty of care. However, the law does not
permit any limitation of the liability of a director for:
--breaching the duty of loyalty to the corporation or its stockholders;
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--failing to act in good faith;
--engaging in intentional misconduct or a known violation of law;
--obtaining an improper personal benefit from the corporation; or
--paying a dividend or approving a stock repurchase that was illegal under
the Delaware law.
The certificate of incorporation of Capital Re eliminates the monetary
liability of a director to the fullest extent permitted by Delaware law. ACE
has agreed to keep these provisions in place for a period of six years from the
date of the merger.
ACE. There is no equivalent provision under Cayman Islands law. However, the
articles of association include a provision exempting officers and directors of
ACE from liability to ACE in respect of the execution of the duties of their
respective offices.
STOCKHOLDERS' SUITS
Capital Re. Section 327 of the Delaware General Corporation Law requires
that the stockholder bringing a derivative suit must have been a stockholder at
the time of the wrong complained of or that he received the stock by operation
of law from a person who was such a stockholder. In addition, the stockholder
must remain a stockholder throughout the litigation. Furthermore, a stockholder
may not sue derivatively unless he or she first makes a demand on the
corporation that it bring suit and such demand has been refused, unless it is
shown that the demand would have been futile.
ACE. Cayman Islands courts have recognized derivative suits by shareholders;
however, the consideration of such suits has been limited. In this regard, ACE
has been advised that the Cayman Islands courts ordinarily would be expected to
follow English precedent, which may permit a minority shareholder to commence
an action against or a derivative action in the name of the company to remedy a
wrong done to the company where, for example:
--the act complained of is alleged to be beyond the corporate power of the
company or illegal;
--the act complained of is alleged to constitute a fraud against the
minority perpetrated by those in control of the company; or
--the act requires approval by a greater percentage of the company's
shareholders than actually approved it.
A shareholder may also be able to bring a personal action against a company
where the right alleged to have been infringed is a personal right vested in
the individual shareholder.
ANTI-TAKEOVER LAWS
Capital Re. Section 203 of the Delaware General Corporation Law restricts
the ability of an "interested stockholder" to merge with or enter into other
business combinations with a corporation for a period of three years after
becoming an "interested stockholder." Capital Re has elected in its certificate
of incorporation not to be governed by Section 203.
ACE. There is no equivalent provision under Cayman Islands law.
VOLUNTARY DISSOLUTION
Capital Re. Delaware law provides that, unless the board of directors
approves a proposal to dissolve a corporation, the dissolution must be
consented to in writing by stockholders holding 100% of the total voting power
of the corporation. If the dissolution is initiated by the board of directors,
it need only be approved by a majority of the outstanding stock of the
corporation entitled to vote on it.
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ACE. Under Cayman Islands law, a special resolution of shareholders,
requiring 66 2/3% of the votes cast by shareholders at a duly convened meeting
at which a quorum is present, is required to commence a voluntary liquidation
of ACE.
STOCKHOLDER APPROVAL OF BUSINESS COMBINATIONS
Capital Re. Under Delaware law, there is no statutory restriction on a
Delaware corporation's ability to acquire the business of another corporation.
However, a merger or consolidation, sale, lease, exchange or other disposition
of all or substantially all of the property of the corporation not in the usual
and regular course of the corporation's business, or a dissolution of the
corporation, generally must be approved by the holders of a majority of the
shares entitled to vote thereon unless the charter provides otherwise.
ACE. ACE may acquire the assets and business of another company and carry on
that business when it is within its objects and powers as set out in its
memorandum of association. A Cayman Islands company may not "merge" with
another company. However, under Cayman Islands law, ACE may consolidate or
amalgamate with another company or reorganize or reconstruct itself pursuant to
an arrangement approved by:
--for each class of members, a majority in the number of the holders of the
shares of that class present in person or by proxy at a special meeting of
that class, provided that the shares represent at least 75% of the nominal
value of the shares of the class held by the shareholders present in
person or by proxy at the special meeting; and
--the Cayman Islands court, who may, but need not, grant its approval.
The Cayman Islands court will consider the reasonableness of the terms of
the arrangement and may refuse to grant approval even if the requisite majority
of shareholders approve the arrangement.
In addition, under Cayman Islands law, where an offer is made by a company
for shares of a Cayman Islands company and the holders of at least 90% of the
shares that are the subject of the offer accept, the offeror may compulsorily
acquire the remaining 10%. For a more detailed discussion of this provision,
See "--Appraisal Rights" on page 84.
ABSENCE OF REQUIRED VOTE FOR CERTAIN MERGERS
Capital Re. Under Delaware law, no vote of the stockholders of a corporation
surviving a merger is required to approve a merger if:
--the agreement of merger does not amend the charter of the corporation;
--each share of stock of the corporation outstanding immediately before the
merger is to be an identical outstanding or treasury share of the
surviving corporation thereafter; and
--the number of shares of common stock of the corporation to be issued in
the merger, if any, does not exceed 20 percent of the number of shares
outstanding immediately before the merger.
ACE. Under Cayman Islands law, there is no equivalent provision, and
therefore the shareholders of the surviving company in such a situation would
be entitled to vote on the business combination as described above.
RIGHTS PLANS
ACE. On May 7, 1999, ACE's board of directors declared a dividend of one
preference share purchase right for each outstanding ordinary share to
shareholders of record at the close of business on June 1, 1999. Subject to
certain exceptions, each right, when exercisable, entitles the holder to
purchase from ACE one one-thousandth of a series A junior participating
preference share at an exercise price of $150, subject to certain antidilution
adjustments. Because of the nature of the preference shares' dividend,
liquidation and voting rights,
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the value of the one one-thousandth of a preference share purchasable upon the
exercise of each right should approximate the value of one ordinary share.
The rights generally will only be exercisable:
--10 days following a public announcement that a person or a group of
affiliated or associated persons has acquired, or obtained the right to
acquire, 15% or more of the outstanding ordinary shares of ACE; or
--15 business days following the commencement of, or the announcement of an
intention to make, a tender or exchange offer for 15% or more of the
outstanding ordinary shares of ACE.
In the following description, a person or group that acquires, or obtains
the right to acquire, 15% or more of the outstanding ordinary shares of ACE is
referred to as an "acquiring person." Generally, if any person or group becomes
an acquiring person, each right, except for rights held by the acquiring
person, will entitle its holder to purchase ordinary shares having a value
equal to two times the exercise price of the right. If ACE is acquired in a
merger, amalgamation or other business combination transaction or if 50% or
more of ACE's assets or earnings power is sold, then proper provision will be
made so that each holder of a right, except for the acquiring person, will be
entitled to receive common stock of the acquiring or surviving company having a
value equal to two times the exercise price of the right.
ACE's board of directors has the option, at any time after any person or
group becomes an acquiring person but before the acquiring person acquires 50%
or more of the outstanding ordinary shares, to exchange each right, except for
rights held by the acquiring person, for one ACE ordinary share.
At any time prior to the time that any person or group becomes an acquiring
person, ACE's board of directors may redeem the rights in whole, but not in
part, at a price of $0.01 per right. The rights will expire on June 1, 2009 if
they have not been previously exercised, exchanged or redeemed.
Purpose of the Rights. The ACE rights are designed to protect the interests
of the companies and their shareholders against coercive takeover tactics. The
purpose of the rights is to encourage potential acquirors to negotiate with the
companies' boards of directors prior to attempting a takeover and to give the
boards leverage in negotiating on behalf of their shareholders the terms of any
proposed takeover. The rights may deter certain takeover proposals.
Capital Re. Capital Re does not have a rights plan.
LEGAL MATTERS
The validity of ACE ordinary shares to be issued in connection with the
merger will be passed upon by Maples and Calder, Cayman Islands counsel to ACE.
Certain United States federal income tax matters relating to the merger will be
passed upon by Mayer, Brown & Platt, Chicago, Illinois, for ACE and by Hogan &
Hartson L.L.P., Washington, D.C., for Capital Re. See "Special Factors--
Material United States Federal Income Tax Consequences" on page 45.
EXPERTS
The consolidated financial statements and financial statement schedules
incorporated in this Registration Statement by reference to ACE's Annual Report
on Form 10-K for the year ended September 30, 1998 have been so incorporated in
reliance on the reports of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm as experts in accounting and auditing.
The CIGNA Corporation Property and Casualty Businesses Combined Financial
Statements incorporated in this Registration Statement by reference to ACE's
Form 8-K current report (date of earliest event reported:
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May 19, 1999) have been so incorporated in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in accounting and auditing.
The consolidated financial statements and financial statement schedules of
Capital Re included in Capital Re's Annual Report on Form 10-K for the year
ended December 31, 1998 and incorporated by reference in the proxy statement of
Capital Re, which is referred to and made a part of this prospectus and
registration statement of ACE, have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon, and are
incorporated herein by reference in reliance upon such report given on the
authority of such firm as experts in accounting and auditing.
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WHERE YOU CAN FIND MORE INFORMATION
ACE and Capital Re each file annual, quarterly and other reports, proxy
statements and other information with the Securities and Exchange Commission.
You may read and copy any reports, statements or other information we file at
the Securities and Exchange Commission's public reference rooms at 450 Fifth
Street, N.W., Washington, D.C. 20549 and at public reference rooms in New York,
New York and Chicago, Illinois. Please call the Securities and Exchange
Commission at 1-800-SEC-0330 for further information on the public reference
rooms. Reports, proxy and information statements and other information
regarding ACE and Capital Re that is filed electronically with the Securities
and Exchange Commission are also available to the public at the web site
maintained by the Securities and Exchange Commission at "http://www.sec.gov"
and from ACE's and Capital Re's web sites at "http://www.acelimited.com" and
"http://www.capitalrecorp.com," respectively.
ACE has filed a registration statement on Form S-4 to register with the
Securities and Exchange Commission the ACE ordinary shares to be issued to
Capital Re stockholders in the merger. This proxy statement/prospectus is a
part of the registration statement and constitutes a prospectus of ACE in
addition to being a proxy statement of Capital Re for the Capital Re meeting.
As allowed by Securities and Exchange Commission rules, this proxy
statement/prospectus does not contain all the information you can find in the
Registration Statement or the exhibits to the registration statement.
The Securities and Exchange Commission allows us to "incorporate by
reference" information into this proxy statement/prospectus, which means that
we can disclose important information to you by referring you to another
document filed separately with the Securities and Exchange Commission. The
information incorporated by reference is deemed to be part of this proxy
statement/prospectus, except for any information superseded by information in
this proxy statement/prospectus. This proxy statement/prospectus incorporates
by reference the documents set forth below that we have previously filed with
the Securities and Exchange Commission. These documents contain important
information about our companies and their finances.
<TABLE>
<CAPTION>
ACE SEC FILINGS (FILE NO. 1-11778) PERIOD
---------------------------------- ------
<S> <C>
Annual Report on Form 10-K, as amended.. Year ended September 30, 1998
Quarterly Report on Form 10-Q........... Quarter ended December 31, 1998
Quarterly Report on Form 10-Q........... Quarter ended March 31, 1999
Quarterly Report on Form 10-Q........... Quarter ended June 30, 1999
Quarterly Report on Form 10-Q........... Quarter ended September 30, 1999
Current Report on Form 8-K.............. Filed on December 23, 1998
Current Report on Form 8-K, as amended.. Filed on January 14, 1999
Current Report on Form 8-K.............. Filed on May 10, 1999
Current Report on Form 8-K.............. Filed on May 19, 1999
Current Report on Form 8-K, as amended.. Filed on July 19, 1999
Description of ACE ordinary shares on
Form 8-A, as amended................... Filed on March 2, 1993
Description of Series A Junior
Participating Preference Shares on Form
8-A.................................... Filed on May 7, 1999
<CAPTION>
CAPITAL RE SEC FILINGS (FILE NO. 1-
10995) PERIOD
----------------------------------- ------
<S> <C>
Annual Report on Form 10-K.............. Year ended December 31, 1998
Quarterly Report on Form 10-Q........... Quarter ended March 31, 1999
Quarterly Report on Form 10-Q........... Quarter ended June 30, 1999
Quarterly Report on Form 10-Q........... Quarter ended September 30, 1999
Current Report on Form 8-K.............. Filed on June 11, 1999
Current Report on Form 8-K.............. Filed on October 15, 1999
Current Report on Form 8-K.............. Filed on October 25, 1999
Current Report on Form 8-K.............. Filed on October 27, 1999
Current Report on Form 8-K.............. Filed on October 29, 1999
</TABLE>
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We are also incorporating by reference additional documents that we file
with the Securities and Exchange Commission between the date of this proxy
statement/prospectus and the date of the Capital Re special meeting.
ACE has supplied all information contained or incorporated by reference in
this proxy statement/prospectus relating to ACE and Capital Re has supplied all
such information relating to Capital Re.
If you are a stockholder, we may have sent you some of the documents
incorporated by reference, but you can obtain all of them through us or the
Securities and Exchange Commission. Documents incorporated by reference are
available from us without charge, excluding all exhibits unless we have
specifically incorporated by reference an exhibit in this proxy
statement/prospectus. Stockholders may obtain documents incorporated by
reference in this proxy statement/prospectus by requesting them in writing or
by telephone from the appropriate party at the following addresses:
<TABLE>
<CAPTION>
ACE LIMITED CAPITAL RE CORPORATION
----------- ----------------------
<S> <C>
The ACE Building 1325 Avenue of the Americas
30 Woodbourne Avenue New York, NY 10019
Hamilton, HM 08, Bermuda (212) 974-0100
(441) 295-5200
</TABLE>
If you would like to request documents from us, please do so by December 22,
1999 in order to receive them before the meeting on December 30, 1999.
You should rely only on the information contained or incorporated by
reference in this proxy statement/prospectus to vote on adoption of the merger
agreement. We have not authorized anyone to provide you with information that
is different from what is contained in this proxy statement/prospectus. This
proxy statement/prospectus is dated November 30, 1999. You should not assume
that the information contained in this proxy statement/prospectus is accurate
as of any date other than such date, and neither the mailing of this proxy
statement/prospectus to stockholders of Capital Re nor the issuance of ACE
ordinary shares in the merger shall create any implication to the contrary.
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SCHEDULE I
DIRECTORS AND EXECUTIVE OFFICERS OF ACE LIMITED
The name and present principal occupation or employment of each of the
directors and executive officers of ACE Limited ("ACE") are set forth below.
Unless otherwise indicated, the director's or officer's business address is the
ACE Building, 30 Woodbourne Avenue, Hamilton HM 08 Bermuda. Except as set forth
below, each occupation set forth opposite an individual's name refers to ACE.
Name and Present Principal Occupation Employment History Citizenship
Michael G. Atieh Vice President--U.S. Human Health Division Merck & Company,
Inc. 770 Sumneytown Pike West Point, PA 19486
1/11/99-Present United States
Merck & Co., Inc. 770 Sumneytown Pike
West Point, PA 19486 Vice President--
Market Development
4/1/94-1/11/99
Merck-Medco Managed Care, L.L.C. 100
Summit Avenue Montvale, New Jersey
07645 Senior Vice President--Sales
Robert A. Blee Chief Accounting Officer
10/98-Present Bermuda
ACE Limited 30 Woodbourne Avenue
Hamilton HM 08, Bermuda Chief
Accounting Officer Group Controller
(1/97-10/98) Vice President--Finance
(7/96-1/97) Asst. Vice President &
Asst. Controller (10/94-7/96)
John Burville Chief Actuary 1/92-Present England
ACE Limited 30 Woodbourne Avenue
Hamilton HM 08, Bermuda Chief Actuary
John C. Charman 7/98-Present England
Chief Executive Officer ACE London Group Limited; ACE London
ACE Global Markets Underwriting Limited; ACE UK
Crosby Courts Underwriting Limited; ACE (CG) Limited
38 Bishopsgate Crosby Court, 38 Bishopgate
London EC2N 4DL England London EC2N 4DL
Director
7/86-7/98
Charman Trustees Limited; Charman
Group Limited; Charman Underwriting
Agencies Limited
Posgate & Denby (Agencies) Limited
1 Minster Court, Mincing Lane
London EC3R 7AA
Director
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Name and Present Principal Occupation Employment History Citizenship
Bruce L. Crockett 7/96-Present United
Retired President & CEO, COMSAT States
Corporation Self-employed Private Investor
2/92-7/96
906 Frome Lane COMSAT Corporation
McLean, VA 22102-2106 6560 Rock Spring Drive
Bethesda, MD 20817
President, CEO & Director
Brian Duperreault 10/94-Present United
ACE Limited States
Chairman and Chief Executive
Officer 30 Woodbourne Avenue
Hamilton HM 08, Bermuda
Chief Executive Officer
John Engestrom 5/99-Present Sweden
President and Chief Executive Tempest Reinsurance Company Ltd.
Officer, Tempest Reinsurance Wessex House
Company Limited 45 Reid Street
(a subsidiary of ACE) Hamilton HM 12 Bermuda
Wessex House 1997-5/99
45 Reid Street Liberty Re
Hamilton HM 12 Bermuda Chief Executive Officer
1992-1997
Mercantile and General Reinsurance Co.
Group Chief Executive
Dominic J. Frederico United
11/99-Present States
President and Chief Operating ACE Insurance Ltd.
Officer 30 Woodbourne
Hamilton HM 08, Bermuda
Chairman, President & CEO ofACE INA
Holdings (5/99-11/99)
President of A.C.E. Insurance Company,
Ltd.(7/97-5/99)
Executive Vice President, Underwriting
ofA.C.E. Insurance Company, Ltd.
(12/96-7/97)
Executive Vice President, Financial
Lines ofA.C.E. Insurance Company,
Ltd. (1/95-12/96)
2/82-12/94
American International Group
70 Pine Street
New York, NY 10270
Executive Vice President--AIGRM
94
<PAGE>
Name and Present Principal Occupation Employment History Citizenship
Meryl D. Hartzband 2/99-Present United States
Principal--Investment Director, Marsh & McLennan Capital, Inc.
Marsh & McLennan Capital Inc. 20 Horseneck Lane
20 Horseneck Lane Greenwich, CT 06930
Greenwich, CT 06830 Investment Director
1982-1999
JP Morgan
60 Wall Street
New York, NY 10260
Managing Director
Robert M. Hernandez 12/94-Present
Vice Chairman & Chief Financial United States
Officer USX Corporation
USX Corporation 600 Grant Street
600 Grant Street Pittsburgh, PA 15219
Room 6105 Vice Chairman, Chief Financial
Pittsburgh, PA 15219-4776 Officer, and Director
Donald Kramer 7/96-Present
Vice Chairman United States
ACE Strategic Advisors ACE Limited
2 Greenwich Plaza--Suite 100 30 Woodbourne Avenue
Greenwich, CT 06830 Hamilton HM 08, Bermuda
Vice Chairman
Tempest Reinsurance Company, Ltd.
Wessex House
45 Reid Street
Hamilton HM 12, Bermuda
Chairman (9/93-7/96)
Christopher Z. Marshall 1/86-Present
Chief Financial Officer Bermuda
ACE Limited
30 Woodbourne Avenue
Hamilton HM 08, Bermuda
Chief Financial Officer (1997-Present)
Executive Vice President & Chief
Finance Officer (1992-1996)
Robin J.W. Masters 6/86-Present
Chief Investment Officer United States
ACE Limited
30 Woodbourne Avenue
Hamilton HM 08, Bermuda
Chief Investment Officer
Peter Mear
General Counsel and Secretary 4/96-Present United States
ACE Limited
30 Woodbourne Avenue
Hamilton HM 08, Bermuda
General Counsel
2/91-4/96
Aetna Casualty and Surety Company
151 Farmington Avenue
Hartford, CT 06156
Vice President and Claims Counsel
95
<PAGE>
Name and Present Principal Occupation Employment History Citizenship
Peter Menikoff 1998-Present United States
Former President & CEO, CONEMSCO, Inc. Private Investor
3 Willowick Circle 3 Willowick Circle
Houston, TX 77024 Houston, Texas 77024
1997-1998
CONEMSCO, Inc.
13111 Northwest Freeway
Houston, Texas 77040
President and CEO
1982-1997
Tenneco Inc.
1275 King Street
Greenwich, Connecticut
Various
Thomas J. Neff 10/96-Present United States
Chairman Spencer Stuart
Spencer Stuart & Associates New York, New York
277 Park Avenue Chairman, U.S.
New York, NY 10172
1979-1996
Spencer Stuart
New York, New York
President
Dennis B. Reding United States
7/99-Present
President and Chief Executive Officer United States
ACE INA--Domestic
Ace INA--Domestic
Six Concourse Parkway Six Concourse Parkway, Suite 2500
Suite 2500 Atlanta, GA 30328
Atlanta, Georgia 30328 President and Chief Executive Officer
President and CEO of ACE
USA Inc. (1/98-7/99)
President and CEO of Westchester
Specialty Group, Inc. (7/93-1/98)
Glen M. Renfrew Australia
Retired Managing Director & CEO, Reuters
Holdings plc
Suite 618
48 Par-La-Ville Road
Hamilton HM 12, Bermuda
Robert Ripp United States
Retired Chairman & CEO, AMP (7/98-1999)
AMP Incorporated
Incorporated PO Box 3608
21 Old Logging Road Harrisburg, Pennsylvania
Bedford, NY 10506
Chairman and Chief Executive Officer
Vice President and Chief
Financial Officer (8/94-7/98)
96
<PAGE>
Name and Present Principal Occupation Employment History Citizenship
Gary Schmalzriedt 7/99-Present United States
President and Chief Executive Officer A.C.E. Insurance Company, Ltd.
of A.C.E. Insurance Company, Ltd. 30 Woodbourne Avenue
Hamilton HM 08, Bermuda
President and Chief Executive Officer
1991-7/99
CIGNA Insurance Company of Europe
Rue Belliard 9-11
1040 Brussels, Belgium
Chairman and Chief Executive Officer
B. Kingsley Schubert 7/99-Present Austria
President and Chief Executive Officer ACE INA International
of ACE INA--International Two Liberty Place
1601 Chestnut Street
Philadelphia, PA 19101
CIGNA International Property and
Casualty
President (1/99-7/99)
President of CIGNA International
(2/96-1/99)
Sr. Vice President of CIGNA
International (3/95-2/96)
Walter A. Scott 9/94-Present United States
Retired Chairman of ACE Limited ACE Ltd.
Fairview 30 Woodbourne Avenue
Under the Mountain Road Hamilton HM 08, Bermuda
R.R. Box 17 Director
So. Londonderry, VT 05155
9/89-9/94
ACE Ltd
30 Woodbourne Avenue
Hamilton HM 08, Bermuda
Chairman, President & CEO
Dermot Smurfit 1962-Present Ireland
Joint Deputy Chairman Jefferson Smurfit Group plc
Jefferson Smurfit Group plc Beech Hill
Beech Hill Clonskeagh
Clonskeagh Dublin, Ireland
Dublin 4 Ireland Joint Deputy Chairman
Robert W. Staley 1/98-Present United States
Vice Chairman Emerson Electric Co.
Emerson Electric Co. 8000 W. Florissant Avenue
8000 W. Florissant Avenue St. Louis, MO 63136
St. Louis, MO 63136 Vice Chairman & Director
1/95-Present
Chairman
Emerson Electric Asia-Pacific
97
<PAGE>
Name and Present Principal Occupation
Employment History Citizenship
Gary M. Stuart 1998-Present United States
Executive Vice President--Finance Executive Vice President--Finance
Union Pacific Corporation Union Pacific Corporation
1416 Dodge Street 1416 Dodge Street
Omaha, NE 68179
Omaha, NE 68179
1990-1998
Union Pacific Corporation
Vice President, Treasurer
Sidney F. Wentz 1989-Present United States
Chairman--Board of Trustees The Robert Wood Johnson Foundation
Robert Wood Johnson Foundation Route One & College Road East
Route 1 & College Road East PO Box 2316
Princeton, NJ 08543-2316
Princeton, New Jersey 08543-2316
Chairman of the Board
Keith P. White 1990-Present England
Chief Administrative Officer
ACE Ltd.
30 Woodbourne Avenue
Hamilton HM 08, Bermuda
Senior Vice President
98
<PAGE>
Appendix A
Amended and Restated Agreement and Plan of Merger
among
CAPITAL RE CORPORATION,
ACE LIMITED
and
CAPRE ACQUISITION CORP.
Dated as of October 26 , 1999
(as amended November 29, 1999)
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I THE MERGER...... A-1
1.1.The Merger.......... A-1
1.2.Closing............. A-1
1.3.Effective Time...... A-2
1.4.Reservation of Right
to Revise Structure.... A-2
ARTICLE II THE SURVIVING
CORPORATION.............. A-2
2.1.The Certificate of
Incorporation.......... A-2
2.2.The Bylaws.......... A-2
2.3.Directors........... A-2
2.4.Officers............ A-2
ARTICLE III CONVERSION OF
SHARES................... A-3
3.1.Effect on Stock..... A-3
3.2.Exchange of
Certificates for
Shares................. A-3
3.3.Appraisal Rights.... A-5
3.4.Adjustments to
Prevent Dilution....... A-6
ARTICLE IV REPRESENTATIONS
AND WARRANTIES OF THE
COMPANY.................. A-6
4.1.Organization, Good
Standing and
Qualification.......... A-6
4.2.Capitalization...... A-6
4.3.Company
Subsidiaries........... A-7
4.4.Corporate Authority;
Approval and Fairness.. A-8
4.5.Governmental
Filings; No
Violations............. A-8
4.6.Company Reports;
Financial Statement.... A-9
4.7.Absence of Certain
Changes................ A-10
4.8.Litigation and
Liabilities............ A-10
4.9.Employee Benefits... A-11
4.10.Compliance with
Laws; Permits.......... A-13
4.11.Intellectual
Property............... A-13
4.12.Year 2000
Compliance............. A-14
4.13.Environmental
Laws................... A-14
4.14.Investment
Company................ A-14
4.15.Takeover Statutes.. A-15
4.16.Taxes.............. A-15
4.17.Labor Matters...... A-15
4.18.Title to Property.. A-16
4.19.Material
Contracts.............. A-16
4.20.Brokers and
Finders................ A-16
4.21.Insurance Matters.. A-16
4.22.Liabilities and
Reserves............... A-17
ARTICLE V REPRESENTATIONS
AND WARRANTIES OF PARENT
AND MERGER SUBSIDIARY.... A-18
5.1.Merger Subsidiary... A-18
5.2.Organization, Good
Standing and
Qualification.......... A-18
5.3.Capitalization...... A-19
5.4.Corporate
Authority.............. A-19
5.5.Governmental
Filings; No
Violations............. A-19
5.6.Parent Reports;
Financial Statements... A-20
</TABLE>
A-i
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
5.7.Absence of Certain Changes........................................... A-20
5.8.Litigation and Liabilities........................................... A-20
5.9.Brokers and Finders.................................................. A-21
5.10.Financing........................................................... A-21
ARTICLE VI COVENANTS....................................................... A-21
6.1.Interim Operations of the Company.................................... A-21
6.2.Interim Operations of Merger Subsidiary.............................. A-23
6.3.No Solicitation...................................................... A-23
6.4.Information Supplied................................................. A-25
6.5.Stockholders Meeting................................................. A-25
6.6.Filings; Other Actions; Notification................................. A-26
6.7.Taxation............................................................. A-27
6.8.Access............................................................... A-27
6.9.Affiliates........................................................... A-27
6.10.Stock Exchange Listing.............................................. A-27
6.11.Publicity........................................................... A-27
6.12.Benefits............................................................ A-28
6.13.Certain Change in Control Matters................................... A-29
6.14.Expenses............................................................ A-30
6.15.Indemnification; Directors' and Officers' Insurance................. A-30
6.16.Purchase of Ordinary Shares......................................... A-31
6.17.Other Actions by the Company and Parent............................. A-31
6.18.Coordination of Dividends........................................... A-31
6.19.Release and Discharge............................................... A-32
ARTICLE VII CONDITIONS..................................................... A-32
7.1.Conditions to Each Party's Obligation to Effect the Merger........... A-32
7.2.Conditions to Obligations of Parent and Merger Subsidiary............ A-33
7.3.Conditions to Obligation of the Company.............................. A-33
ARTICLE VIII TERMINATION................................................... A-33
8.1.Termination by Mutual Consent........................................ A-33
8.2.Termination by Either Parent or the Company.......................... A-33
8.3.Termination by the Company........................................... A-34
8.4.Termination by Parent................................................ A-34
8.5.Effect of Termination and Abandonment................................ A-35
ARTICLE IX MISCELLANEOUS AND GENERAL....................................... A-36
9.1.Survival............................................................. A-36
9.2.Modification or Amendment............................................ A-36
9.3.Waiver of Conditions................................................. A-36
9.4.Counterparts......................................................... A-36
9.5.Governing Law; Waiver of Jury Trial.................................. A-36
9.6.Notices.............................................................. A-37
9.7.Entire Agreement; No Other Representations........................... A-37
9.8.No Third Party Beneficiaries......................................... A-38
9.9.Severability......................................................... A-38
9.10.Interpretation...................................................... A-38
9.11.Assignment.......................................................... A-38
9.12.Definitions......................................................... A-38
</TABLE>
A-ii
<PAGE>
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER
This Amended and Restated Agreement and Plan of Merger (hereinafter called
this "Agreement"), dated as of October 26, 1999 among Capital Re Corporation, a
Delaware corporation (the "Company"), ACE Limited, a company incorporated with
limited liability under the Cayman Islands Companies Law ("Parent"), and CapRe
Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of
Parent ("Merger Subsidiary").
RECITALS
Whereas, the Company, Parent and Merger Subsidiary are parties to an
Agreement and Plan of Merger dated as of June 10, 1999 (the "Original
Agreement"); and
Whereas, the respective boards of directors of each of Parent, Merger
Subsidiary and the Company have determined that the merger of the Company with
and into Merger Subsidiary (the "Merger") upon the terms and subject to the
conditions set forth in this Agreement is advisable and have approved the
Merger;
Whereas, the Company and Parent have entered into a Stock Option Agreement
dated as of June 10, 1999 (the "Stock Option Agreement"), pursuant to which the
Company has granted Parent an option to purchase shares of common stock of the
Company under certain circumstances;
Whereas, the Company, Parent and Merger Subsidiary desire to make certain
representations, warranties, covenants and agreements in connection with this
Agreement; and
Whereas, the Company, Parent and merger Subsidiary desire to amend and
restate the Original Agreement as set forth herein.
Now, Therefore, in consideration of the premises, and of the
representations, warranties, covenants and agreements contained herein, the
parties hereto agree as follows:
ARTICLE I
The Merger
1.1. The Merger.
Upon the terms and subject to the conditions set forth in this Agreement, at
the Effective Time (as defined in Section 1.3) the Company shall be merged with
and into Merger Subsidiary and the separate corporate existence of the Company
shall thereupon cease. Merger Subsidiary shall be the surviving corporation in
the Merger (sometimes hereinafter referred to as the "Surviving Corporation"),
and the separate corporate existence of Merger Subsidiary with all its rights,
privileges, immunities, powers and franchises shall continue unaffected by the
Merger except as otherwise provided herein. The Merger shall have the effects
specified in the Delaware General Corporation Law, as amended (the "DGCL").
1.2. Closing.
The closing of the Merger (the "Closing") shall take place (i) at the
offices of Mayer, Brown & Platt, 1675 Broadway, New York, New York, at 9:00
A.M. on the third business day after the day on which the last to be fulfilled
or waived of the conditions set forth in Article VII (other than those
conditions that by their nature are to be satisfied at the Closing, but subject
to the fulfillment or waiver of those conditions) shall be satisfied or waived
in accordance with this Agreement or (ii) at such other place and time and/or
on such other date as the Company and Parent may agree in writing (the "Closing
Date").
<PAGE>
1.3. Effective Time.
As soon as practicable following the Closing, the Company, Merger Subsidiary
and Parent will cause a Certificate of Merger (the "Certificate of Merger") to
be executed, acknowledged and filed with and accepted for record by the
Delaware Secretary of State (the "Secretary") as provided in Section 251 of the
DGCL. The Merger shall become effective at the time the Certificate of Merger
is filed with the Secretary or at such later time as may be agreed to by the
Company and Parent and set forth in the Certificate of Merger (the "Effective
Time").
1.4. Reservation of Right to Revise Structure.
In the event the sum of (i) the aggregate Cash Component of the Merger, plus
(ii) the aggregate amount of cash paid by Parent to acquire Company Common
Stock prior to closing (including the $1.3 million already expended) other than
Company Common Stock acquired directly from the Company, plus (iii) an amount
reasonably calculated to equal the cash to be paid in lieu of fractional
shares, plus (iv) the aggregate amount of cash expected to be paid in respect
of Dissenting Shares (assuming the amount of cash paid per each Dissenting
Share will equal the fair market value of the Merger Consideration received per
each share participating in the merger) (the sum of (i) through (iv) being the
"Total Cash Consideration") exceeds one-half of the sum of (i) the fair market
value of the aggregate Merger Consideration, plus (ii) the aggregate amount of
cash paid by Parent to acquire Company Common Stock prior to closing (including
the $1.3 million already expended) other than Company Common Stock acquired
directly from the Company, plus (iii) the amount of cash paid in respect of
Dissenting Shares, (the sum of (i) through (iii) being the "Total
Consideration"), at Parent's election, the Merger may alternatively be
structured so that Merger Subsidiary is merged with and into the Company. No
change in structure shall (1) alter or change the amount or kind of the Merger
Consideration, (2) materially impede or delay the consummation of the
transactions contemplated by this Agreement or (3) materially and adversely
affect the ability of any party to timely perform its obligations under this
Agreement or otherwise to consummate the transactions contemplated by this
Agreement. If Parent makes any such election, the parties agree to execute an
appropriate amendment to this Agreement and any other documents necessary in
order to reflect such election.
ARTICLE II
The Surviving Corporation
2.1. The Certificate of Incorporation.
At the Effective Time, the certificate of incorporation of Merger Subsidiary
shall be the certificate of incorporation of the Surviving Corporation, until
thereafter amended as provided therein or by applicable law (the "Certificate
of Incorporation").
2.2. The Bylaws.
The bylaws of Merger Subsidiary in effect at the Effective Time shall be the
Bylaws of the Surviving Corporation (the "Bylaws"), until thereafter amended as
provided therein, as set forth in the Certificate of Incorporation or by
applicable law.
2.3. Directors.
The directors of Merger Subsidiary at the Effective Time shall, from and
after the Effective Time, be the directors of the Surviving Corporation until
their successors have been duly elected or appointed and qualified or until
their earlier death, resignation or removal in accordance with the Certificate
of Incorporation and the Bylaws.
2.4. Officers.
The officers of the Company at the Effective Time shall, 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 their
earlier death, resignation or termination.
A-2
<PAGE>
ARTICLE III
Conversion of Shares
3.1. Effect on Stock.
At the Effective Time, as a result of the Merger and without any action on
the part of the holder of any stock of the Company:
(a) Merger Consideration. Each share (each a "Share" or, collectively, the
"Shares") of common stock, par value $.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 cancelled pursuant to
Section 3.1(b) and Dissenting Shares) shall be converted into, and become
exchangeable for the right to receive the "Merger Consideration." The Merger
Consideration shall consist of (i) 0.65 of an ordinary share, par value
$.041666667 per share, of Parent ("Parent Shares") (including any related
Rights issued pursuant to the Rights Agreement (the "Parent Rights Agreement")
dated May 7, 1999 between Parent and The Bank of New York) (the "Exchange
Ratio") and (ii) an amount of cash (the "Cash Component") equal to the greater
of (A) $1.30 and (B) the difference (if positive) between (I) $14.00 and (II)
the product of (1) 0.65 multiplied by (2) the average closing price (the
"Average Closing Price") of a Parent Share on the New York Stock Exchange
("NYSE") as reported in The Wall Street Journal (New York City edition) for the
five consecutive trading days ending three trading days prior to the Effective
Time; provided that the Cash Component shall in no event be greater than $4.68.
At the Effective Time, all Shares shall no longer be outstanding and shall
automatically be canceled and retired and shall cease to exist, and each
certificate (a "Certificate") formerly representing any of such Shares shall
thereafter represent only the right to receive the Merger Consideration, cash
in lieu of fractional Parent Shares pursuant to Section 3.2(e), if any, and any
distribution or dividend pursuant to Section 3.2(c).
(b) Cancellation of Shares. Each Share issued and outstanding immediately
prior to the Effective Time and owned by Parent or owned by the Company or any
direct or indirect Subsidiary of Parent or of the Company (in each case other
than Shares that are owned on behalf of third parties), shall, by virtue of the
Merger and without any action on the part of the holder thereof, cease to be
outstanding and shall be canceled and retired without payment of any
consideration therefor.
(c) Merger Subsidiary. At the Effective Time, each share of common stock of
Merger Subsidiary issued and outstanding immediately prior to the Effective
Time shall remain one validly issued, fully paid and nonassessable share of
common stock, $0.01 par value, of the Surviving Corporation.
3.2. Exchange of Certificates for Shares.
(a) Exchange Agent. Promptly after the Effective Time, Parent shall deposit,
or shall cause to be deposited, with an exchange agent, who shall be the
Parent's transfer agent or another entity selected by Parent prior to the
Effective Time with the Company's approval, which shall not be unreasonably
withheld (the "Exchange Agent"), for the benefit of the holders of Shares,
certificates representing the Parent Shares and, after the Effective Time, if
applicable, any cash, dividends or other distributions with respect to Parent
Shares to be issued or paid pursuant to Section 3.1 (including the Cash
Component of the Merger Consideration and cash in lieu of fractional Parent
Shares) in exchange for Shares outstanding immediately prior to the Effective
Time upon due surrender of the Certificates (or affidavits of loss in lieu
thereof) pursuant to the provisions of this Article III (such certificates for
Parent Shares, together with the amount of any dividends or other distributions
payable with respect thereto and any Cash Component of the Merger Consideration
and/or cash in lieu of fractional Parent Shares, being hereinafter referred to
as the "Exchange Fund").
A-3
<PAGE>
(b) Exchange Procedures. Promptly after the Effective Time, Parent shall
cause the Exchange Agent to mail to each holder of record of Shares (i) a
letter of transmittal specifying that delivery shall be effected, and risk of
loss and title to the Certificates shall pass, only upon delivery of the
Certificates (or affidavits of loss in lieu thereof) to the Exchange Agent,
such letter of transmittal to be in such form and have such other provisions as
Parent and the Company may reasonably agree prior to the Effective Time, and
(ii) instructions for use in effecting the surrender of the Certificates in
exchange for (A) certificates representing Parent Shares and (B) the Cash
Component of the Merger Consideration, cash in lieu of fractional Parent Shares
and any unpaid dividends and other distributions pursuant to Section 3.2(c).
Subject to Section 3.2(h), upon surrender of a Certificate for cancellation to
the Exchange Agent together with such letter of transmittal, duly executed, the
holder of such Certificate shall be entitled to receive in exchange therefor
(x) a certificate representing that number of whole Parent Shares that such
holder is entitled to receive pursuant to this Article III, (y) a check in the
amount (after giving effect to any required tax withholdings) of any Cash
Component of the Merger Consideration, cash in lieu of fractional Parent Shares
and any unpaid dividends or other distributions that such holder has the right
to receive pursuant to Section 3.2(c), and the Certificate so surrendered shall
forthwith be canceled. No interest will be paid or accrued on any amount
payable upon due surrender of the Certificates. In the event of a transfer of
ownership of Shares that is not registered in the transfer records of the
Company, a certificate representing the proper number of Parent Shares,
together with a check for any Cash Component of the Merger Consideration, cash
to be paid in lieu of fractional Parent Shares and any other dividends or
distributions in respect thereof, may be issued and/or paid to such a
transferee if the Certificate formerly representing such Shares is presented to
the Exchange Agent, accompanied by all documents required to evidence and
effect such transfer and to evidence that any applicable stock transfer taxes
have been paid. If any certificate for Parent Shares is to be issued in a name
other than that in which the Certificate surrendered in exchange therefor is
registered, it shall be a condition of such exchange that the Person (as
defined below) requesting such exchange shall pay any transfer or other taxes
required by reason of the issuance of certificates for Parent Shares in a name
other than that of the registered holder of the Certificate surrendered, or
shall establish to the satisfaction of Parent or the Exchange Agent that such
tax has been paid or is not applicable. For the purposes of this Agreement, the
term "Person" shall mean any individual, corporation (including not-for-
profit), general or limited partnership, limited liability company, joint
venture, estate, trust, association, organization, governmental entity or other
entity of any kind or nature.
(c) Distributions with Respect to Unexchanged Shares; Voting.
(i) All Parent Shares to be issued pursuant to the Merger shall be
deemed issued and outstanding as of the Effective Time and whenever a
dividend or other distribution is declared by Parent in respect of Parent
Shares, the record date for which is after the Effective Time, that
declaration shall include dividends or other distributions in respect of
all shares issuable pursuant to this Agreement. No dividends or other
distributions in respect of Parent Shares shall be paid to any holder of
any unsurrendered Certificate until such Certificate is surrendered for
exchange in accordance with this Article III. Subject to the effect of
applicable laws, following surrender of any such Certificate, there shall
be issued and/or paid to the holder of the certificates representing whole
Parent Shares issued in exchange therefor, without interest, (A) at the
time of such surrender, the dividends or other distributions with a record
date after the Effective Time and a payment date on or prior to such time
of surrender payable with respect to such whole Parent Shares and not paid
and (B) at the appropriate payment date, the dividends or other
distributions payable with respect to such whole Parent Shares with a
record date after the Effective Time and with a payment date subsequent to
surrender.
(ii) Holders of unsurrendered Certificates who were the registered
holders at the Effective Time shall not be entitled to vote after the
Effective Time at any meeting of Parent stockholders (or consent in
connection with any consent of stockholders in lieu of a meeting).
(d) Transfers. After the Effective Time, there shall be no transfers on the
stock transfer books of the Company of the Shares that were outstanding
immediately prior to the Effective Time.
A-4
<PAGE>
(e) Fractional Shares. Notwithstanding any other provision of this
Agreement, no fractional Parent Shares will be issued and any holder of Shares
entitled to receive a fractional Parent Share but for this Section 3.2(e) shall
be entitled to receive a cash payment in lieu thereof, which payment shall
equal the amount determined by multiplying (i) the fraction of a Parent Share
to which such holder would otherwise be entitled by (ii) the Average Closing
Price. The fractional share interests of each holder of Company Common Stock
shall be aggregated, so that no such holder shall receive cash in an amount
equal to or greater than the value of one Parent Share.
(f) Investment of the Exchange Fund. The Exchange Agent shall invest any
cash included in the Exchange Fund as directed by Parent on a daily basis. Any
interest and other income resulting from such investments shall promptly be
paid to Parent.
(g) Termination of Exchange Fund. Any portion of the Exchange Fund
(including the proceeds of any investments thereof and any Parent Shares) that
remains unclaimed by the stockholders of the Company for 180 days after the
Effective Time shall be paid to Parent. Any stockholders of the Company who
have not theretofore complied with this Article III shall thereafter look only
to Parent for payment of their Parent Shares and any cash, dividends and other
distributions in respect thereof payable and/or issuable pursuant to Section
3.1 and Section 3.2(c) upon due surrender of their Certificates (or affidavits
of loss in lieu thereof), in each case, without any interest thereon.
Notwithstanding the foregoing, none of Parent, the Surviving Corporation, the
Exchange Agent or any other Person shall be liable to any holder of Shares for
any amount properly delivered to a public official pursuant to applicable
abandoned property, escheat or similar laws.
(h) Lost, Stolen or Destroyed Certificates. In the event 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 Parent, the posting by such Person of a bond in
customary amount as indemnity against any claim that may be made against it
with respect to such Certificate, the Exchange Agent will issue in exchange for
such lost, stolen or destroyed Certificate the Parent Shares and any cash
payable and any unpaid dividends or other distributions in respect thereof
pursuant to Section 3.2(c) upon due surrender of and deliverable in respect of
the Shares represented by such Certificate pursuant to this Agreement.
(i) Further Assurances. At and after the Effective Time, the officers and
directors of the Surviving Corporation will be authorized to execute and
deliver, in the name and on behalf of the Company or Merger Subsidiary, any
deeds, bills of sale, assignments or assurances and to take and do, in the name
and on behalf of the Company or Merger Subsidiary, any other actions and things
to vest, perfect or confirm of record or otherwise in Parent or in the
Surviving Corporation any and all right, title and interest in, to and under
any of the rights, properties or assets acquired or to be acquired by Parent or
the Surviving Corporation as a result of, or in connection with, the Merger.
3.3. Appraisal Rights.
(a) Dissenting Stock. Each outstanding Share as to which a written demand
for appraisal is filed in accordance with (S) 262 of the DGCL at or prior to
the Stockholders Meeting (as hereinafter defined) and not withdrawn at or prior
to the Stockholders Meeting and which is not voted in favor of the Merger shall
not be converted into or represent a right to receive the Merger Consideration
hereunder unless and until the holder shall have failed to perfect, or shall
have effectively withdrawn or lost his or her right to appraisal of and payment
for his or her Shares under such (S) 262, at which time his or her Shares shall
be treated in accordance with Section 3.3(b) below. All such Shares as to which
such a written demand for appraisal is so filed and not withdrawn at or prior
to the time of such vote and which are not voted in favor of the Merger, except
any such Shares the holder of which, prior to the Effective Time, shall have
effectively withdrawn or lost, his or her right to appraisal of and payment for
his or her Shares under such (S) 262, are herein called "Dissenting Shares."
The Company shall give Parent prompt notice upon receipt by the Company of any
written demands for appraisal
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rights, withdrawal of such demands, and any other instruments served pursuant
to (S) 262 of the DGCL, and the Company shall give Parent the opportunity to
direct all negotiations and proceedings with respect to such demands. The
Company shall not voluntarily make any payment with respect to any demands for
appraisal rights and shall not, except with the prior written consent of the
Parent, settle or offer to settle any such demands. Each holder of Shares who
becomes entitled, pursuant to (S) 262 of the DGCL, to payment for his or her
Shares under the provisions of such section shall receive payment therefor from
the Surviving Corporation and such Shares shall be canceled.
(b) Conversion of Dissenting Shares. If prior to the Effective Time any
stockholder of the Company shall fail to perfect, or shall effectively withdraw
or lose, his or her right to appraisal of and payment for his or her Dissenting
Shares under (S) 262 of the DGCL, the Shares of such holder shall be treated
for purposes of this Article III like any other Shares. If, after the Effective
Time, any holder of Shares shall fail to perfect, or shall effectively withdraw
or lose, his or her right to appraisal of and payment for his or her Dissenting
Shares under (S) 262 of the DGCL, each Dissenting Share of such holder shall be
treated as though such share has been converted into the right to receive the
Merger Consideration as provided in this Article III.
3.4. Adjustments to Prevent Dilution.
In the event that after the date hereof and prior to the Effective Time the
Company changes the number of Shares or securities convertible or exchangeable
into or exercisable for Shares, or Parent changes the number of Parent Shares
or securities convertible or exchangeable into or exercisable for Parent
Shares, issued and outstanding prior to the Effective Time, as a result of a
reclassification, stock split (including a reverse split), stock dividend or
distribution, recapitalization, merger, subdivision, issuer tender or exchange
offer, or other similar transaction, the Merger Consideration shall be
equitably adjusted.
ARTICLE IV
Representations and Warranties of the Company
Except as set forth in the corresponding sections or subsections of the
Company disclosure schedule attached to this agreement (the "Company Disclosure
Schedule"), the Company hereby represents and warrants to Parent and Merger
Subsidiary that:
4.1. Organization, Good Standing and Qualification.
The Company is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware, and each of its Subsidiaries
(as defined in Section 9.12(b)) is a corporation or other entity duly
organized, validly existing and in good standing under the laws of its
respective jurisdiction of organization. The Company and each of its
Subsidiaries has full power and authority (corporate and other) to own, lease
and operate its respective properties and assets and to carry on its business
as presently conducted and as proposed to be conducted, except where the
failure to hold such franchises, grants, licenses, certificates, permits,
consents and orders, or to have such power and authority, would not, when taken
together with all other such failures, reasonably be expected to have a Company
Material Adverse Effect (as defined in Section 9.12(b)). The Company has made
available to Parent a complete and correct copy of the Company's and each
Subsidiary's charter and by-laws or other organizational documents, each as
amended to and as in effect as of the date hereof.
4.2. Capitalization.
The authorized capital stock of the Company consists of 75,000,000 Shares,
of which 32,526,619 Shares were outstanding as of the close of business on
October 25, 1999, and 25,000,000 shares of Preferred Stock, par value $.01 per
share (the "Preferred Shares"), of which no shares were outstanding as of the
close of
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business on the date hereof. All of the outstanding Shares have been duly
authorized and are validly issued, fully paid and nonassessable. The Company
has no commitments to issue or deliver Shares or Preferred Shares, except that,
as of October 25, 1999, there were an aggregate of not greater than 6,460,000
Shares reserved for issuance pursuant to the Company's 1992 Employee Stock
Option Plan, 1997 Employee Stock Option Plan, 1993 Director's Stock Option Plan
and the Performance Share Plan (the "Company Stock Plans"). Each of the
outstanding shares of capital stock or other securities of each of the
Company's Subsidiaries is duly authorized, validly issued, fully paid and
nonassessable and owned by the Company or a direct or indirect wholly-owned
subsidiary of the Company, free and clear of any lien, pledge, security
interest, claim or other encumbrance. Section 4.2 of the Company Disclosure
Schedule sets forth in the aggregate, by Company Stock Plan, the number of
options and stock appreciation rights outstanding, their grant price, the date
such options or rights were granted and the class and number of Shares reserved
for issuance pursuant to each such Company Stock Plan, together with the name
of each holder of an option or stock appreciation right outstanding under any
such Company Stock Plan, (such options and rights being having collectively
referred to as the "Company Options"), a description of the exercise or
purchase prices, vesting schedules, expiration dates, and class and number of
Shares subject to each such Company Option, together with a listing of all
Company Options that shall vest at the Effective Time as a result of the
Merger. Except as described in Section 4.2 of the Company Disclosure Schedule,
there are no preemptive or other outstanding rights, options, warrants,
conversion rights, stock appreciation rights, redemption rights, repurchase
rights, agreements, arrangements or commitments to issue or sell any shares of
capital stock or other securities of the Company or any of its Subsidiaries or
any securities or obligations convertible or exchangeable into or exercisable
for, or giving any Person a right to subscribe for or acquire, any securities
of the Company or any of its Subsidiaries, and no securities or obligations
evidencing such rights are authorized, issued or outstanding. The Company does
not have outstanding any bonds, debentures, notes or other obligations the
holders of which have the right to vote (or, except as referred to in this
Section 4.2, convertible into or exercisable for securities having the right to
vote) with the stockholders of the Company on any matter.
Except as described in Section 4.2 of the Company Disclosure Schedule or as
specifically described in this Agreement or the Stock Option Agreement, since
June 30, 1999, the Company has not (i) made or agreed to make any stock split
or stock dividend, or issued or permitted to be issued any shares of capital
stock, or securities exercisable for or convertible into shares of capital
stock, of the Company other than pursuant to and as required by the terms of
any Company Stock Plan; (ii) repurchased, redeemed or otherwise acquired any
shares of capital stock of the Company; or (iii) other than its regular
quarterly cash dividend of $0.04 per share, declared, set aside, made or paid
to the stockholders of the Company dividends or other distributions on the
outstanding shares of capital stock of the Company.
4.3. Company Subsidiaries.
(a) Section 4.3(a)(i) of the Company Disclosure Schedule sets forth the name
and jurisdiction of incorporation of each of the Company's Subsidiaries. The
Company conducts its insurance operations through the Subsidiaries set forth in
Section 4.3(a)(ii) of the Company Disclosure Schedule (collectively, the
"Company Insurance Subsidiaries"). Each of the Company Insurance Subsidiaries
is (1) duly licensed or authorized as an insurance company or reinsurer in its
jurisdiction of incorporation, (2) duly licensed or authorized as an insurance
company or reinsurer in each other jurisdiction where it is required to be so
licensed or authorized, and (3) duly authorized in its jurisdiction of
incorporation and each other applicable jurisdiction to write each line of
business reported as being written in the Company SAP Statements (as
hereinafter defined), except, in any such case, where the failure to be so
licensed or authorized would not, individually or in the aggregate, be
reasonably expected to have a Company Material Adverse Effect. The Company has
made all required filings under applicable holding company statutes except
where the failure to file would not be reasonably expected to have a Company
Material Adverse Effect.
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(b) Except for the Company's Subsidiaries, securities held in the Company's
investment portfolio and except as set forth in Section 4.3(b) of the Company
Disclosure Schedule, the Company does not directly or indirectly own any equity
or similar interest in, or any interest convertible into or exchangeable or
exercisable for any equity or similar interest in, any corporation,
partnership, joint venture or other business association or entity.
4.4. Corporate Authority; Approval and Fairness.
(a) The Company has all requisite power and authority and has taken all
corporate action necessary in order to execute, deliver and perform its
obligations under this Agreement and the Stock Option Agreement, and subject
only to approval of the Merger by the holders of at least a majority of the
outstanding Shares (the "Company Requisite Vote"), to consummate the Merger.
This Agreement and the Stock Option Agreement have been duly executed and
delivered by the Company and (assuming the due authorization, execution and
delivery hereof and thereof by Parent and the Company) constitute legal, valid
and binding obligations of the Company enforceable against the Company in
accordance with their respective terms, except as enforceability may be limited
or affected by bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance and other similar laws and equitable principles now or hereafter in
effect and affecting the rights and remedies of creditors generally.
(b) The Board of Directors of the Company has duly and validly approved and
taken all corporate action required to be taken by the Board of Directors (in
each case by a unanimous vote of all the directors in office at such time) for
the consummation of the transactions contemplated by this Agreement and the
Stock Option Agreement, including, but not limited to, (i) having determined
that this Agreement, the Stock Option Agreement and the transactions
contemplated hereby and thereby, taken together, are advisable and are fair to
and in the best interests of the stockholders of the Company, and (ii) having
resolved to recommend that the holders of the Shares adopt this Agreement and
approve the Merger. The affirmative vote in favor of the adoption of this
Agreement by the Company Requisite Vote is the only vote of the holders of any
class or series of Company capital stock necessary to approve this Agreement
and the Merger. No vote of the stockholders of the Company is required to
approve the Stock Option Agreement. The Board of Directors of the Company has
received the opinion of its financial advisor Goldman, Sachs & Co., to the
effect that, as of the date of such opinion, the Merger Consideration is fair
from a financial point of view to the holders of Shares.
4.5. Governmental Filings; No Violations.
Subject to obtaining the Private Consents (as defined below) and except for
all filings, permits, authorizations, consents and approvals as may be required
under, and compliance with other applicable requirements of, the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act"), state
securities or "blue sky" laws, state takeover laws, state and foreign insurance
regulatory laws and commissions, including Lloyd's of London and the U.K.
Treasury Department, and for the approval of this Agreement by the Company's
stockholders and the filing and recordation of this Agreement or the
Certificate of Merger as required by the DGCL, and except as may result from
any facts or circumstances relating solely to the Parent or its Affiliates,
neither the execution, delivery or performance of this Agreement or the Stock
Option Agreement nor the consummation by the Company of the transactions
contemplated hereby or thereby nor compliance by the Company with any of the
provisions hereof or thereof will (i) result in any breach or violation of any
provision of the certificate of incorporation or by-laws or similar
organizational documents of the Company or of any of its Subsidiaries, (ii)
require any filing with, or permit, authorization, consent or approval of, any
United States or foreign court, arbitral tribunal, administrative agency or
commission or other governmental or other regulatory authority, body,
commission or agency, including the Corporation of Lloyd's (a "Governmental
Entity"), except where the failure to obtain such permits, authorizations,
consents or approvals or to make such filings would not have a Company Material
Adverse Effect, (iii) result in a violation or breach of, or constitute (with
or without due
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notice or lapse of time or both) a default (or give rise to any right of
termination, amendment, cancellation, acceleration or increase in the rate of
interest) under any of the terms, conditions or provisions of any note, bond,
mortgage, indenture, guarantee, other evidence of indebtedness, lease, license,
contract, agreement or other instrument or obligation to which the Company or
any of its Subsidiaries is a party or by which any of them or any of their
properties or assets may be bound (a "Contract") or result in the creation of a
lien upon any of the properties or assets of the Company or any of its
Subsidiaries or (iv) violate any order, writ, injunction, judgment, decree,
statute, rule, regulation or other Law applicable to the Company, any of its
Subsidiaries or any of their properties or assets, except in the case of
clauses (iii) and (iv) for violations, breaches, defaults, or rights of
termination, amendment, cancellation or acceleration or liens, which would not,
individually or in the aggregate, reasonably be expected to have a Company
Material Adverse Effect. Section 4.5 of the Company Disclosure Schedule sets
forth, to the knowledge of the Responsible Executive Officers of the Company
(as defined in Section 9.12(b)), a list of contracts (by category and type,
where applicable) material to the Company and its Subsidiaries, taken as a
whole, pursuant to which consents or waivers ("Private Consents") are or may be
required prior to consummation of the transactions contemplated by this
Agreement (subject to the exception set forth above).
4.6. Company Reports; Financial Statement.
(a) The Company has delivered or made available to Parent true and complete
copies of each registration statement, report, proxy statement or information
statement prepared by it since January 1, 1996, including (i) the Company's
Annual Report on Form 10-K for the year ended December 31, 1998, (ii) the
Company's definitive Proxy Statement for its 1998 Annual Meeting of
Stockholders, and (iii) the Company's Quarterly Report on Form 10-Q for the
quarterly periods ended March 31, 1999 and June 30, 1999, each in the form
(including exhibits, annexes and any amendments thereto) filed with the
Securities and Exchange Commission (the "SEC") (collectively, including any
such reports filed subsequent to the date hereof, the "Company Reports"). Each
Company Report complied in all material respects with the applicable
requirements of the Securities Act of 1933 (the "Securities Act") and the rules
and regulations promulgated thereunder, or the Exchange Act and the rules and
regulations promulgated thereunder, each as in effect on the date so filed.
Each report filed by the Company with the SEC subsequent to the date hereof and
prior to the Effective Time will comply in all material respects with the
applicable requirements of the Securities Act and the rules and regulations
promulgated thereunder, or the Exchange Act and the rules and regulations
promulgated thereunder, each as in effect on the date so filed. No Subsidiary
of the Company is required to file any form, report, statement, schedule,
registration statement or other document with the SEC. As of their respective
dates, the Company Reports did not, and any Company Reports filed with the SEC
subsequent to the date hereof will not, contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements made therein, in light of the circumstances
under which they were made, not misleading. Each of the consolidated balance
sheets included in or incorporated by reference into the Company Reports
(including the related notes and schedules) fairly presents, or will fairly
present, the consolidated financial position of the Company and its
Subsidiaries as of its date and each of the consolidated statements of income
and of changes in financial position included in or incorporated by reference
into the Company Reports (including any related notes and schedules) fairly
presents, or will fairly present, the consolidated results of operations,
retained earnings and changes in financial position, as the case may be, of the
Company and its Subsidiaries for the periods set forth therein (subject, in the
case of unaudited statements, to notes and normal year-end audit adjustments
that will not be material in amount or effect), in each case in accordance with
generally accepted accounting principles ("GAAP") consistently applied during
the periods involved, except as may be noted therein.
(b) The Company has delivered or made available to Parent true and complete
copies of the annual and quarterly statements of each of the Company Insurance
Subsidiaries as filed with the applicable insurance regulatory authorities for
the three years ended December 31, 1998 and the quarterly period ended March
31, 1999 and June 30, 1999, including all exhibits, interrogatories, notes,
schedules and any actuarial opinions, affirmations or certifications or other
supporting documents filed in connection therewith (collectively, the
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"Company SAP Statements"). The Company SAP Statements were prepared in
conformity with statutory accounting practices prescribed or permitted by the
applicable insurance regulatory authority consistently applied for the periods
covered thereby and present fairly the statutory financial position of such
Company Insurance Subsidiaries for the respective periods then ended. The
Company SAP Statements complied in all material respects with all applicable
laws, rules and regulations when filed, and no material deficiency has been
asserted with respect to any Company SAP Statements by the applicable insurance
regulatory body or any other governmental agency or body. The annual statutory
balance sheets and income statements included in the Company SAP Statements
have been audited by Ernst & Young LLP and the Company has delivered or made
available to Parent true and complete copies of all audit opinions related
thereto. The Company has delivered or made available to Parent true and
complete copies of all examination reports of insurance departments and any
insurance regulatory agencies since January 1, 1995 relating to the Company
Insurance Subsidiaries.
4.7. Absence of Certain Changes.
Except as disclosed in the Company Reports filed prior to the date hereof or
in Company press releases or other public announcements prior to the date
hereof (the "Public Announcements") or as set forth in Section 4.7 or Section
4.8 of the Company Disclosure Schedule and except as otherwise provided in or
contemplated by this Agreement, since December 31, 1998 (the "Company Audit
Date"), the Company and its Subsidiaries have conducted their respective
businesses only in, and have not engaged in any material transaction other than
according to, the ordinary and usual course of such businesses and there has
not been: (a) any change in the financial condition, properties, business or
results of operations of the Company and its Subsidiaries, or any transaction,
commitment, dispute or other event, or any other development or combination of
developments that, individually or in the aggregate, has had or is reasonably
likely to result in a Company Material Adverse Effect; (b) any material damage,
destruction or other casualty loss with respect to any material asset or
property owned, leased or otherwise used by the Company or any of its
Subsidiaries, whether or not covered by insurance; (c) any authorization,
declaration, setting aside or payment of any dividend or other distribution in
respect of the capital stock of the Company, except as permitted by Section 6.1
hereof; (d) any change by the Company in accounting principles, practices or
methods other than as required by changes in applicable GAAP or statutory
accounting principles; (e) any material addition to the Company's consolidated
reserves for unpaid losses and loss adjustment expenses prior to the date of
this Agreement; (f) any material change in the accounting, actuarial,
investment, reserving, underwriting or claims administration policies,
practices, procedures, methods, assumptions or principles of any Company
Insurance Subsidiary; or (g) any repurchase or redemption of any Shares. Since
the Company Audit Date, except as provided for herein or as disclosed in the
Company Reports or Public Announcements filed or made prior to the date hereof
or as set forth in Section 4.7 of the Company Disclosure Schedule, there has
not been any increase in the compensation payable or that could become payable
by the Company or any of its Subsidiaries to officers at the senior vice
president level or above or key employees or any amendment of any of the
Company Compensation and Benefit Plans (as defined in Section 4.9(a)).
4.8. Litigation and Liabilities.
Except as disclosed in the Company Reports or in the Public Announcements
filed or made prior to the date hereof or as set forth in Section 4.8 of the
Company Disclosure Schedule, there are no (a) actions, suits, claims,
proceedings or investigations (or, to the knowledge of the Responsible
Executive Officers of the Company, any basis for any person to assert any claim
reasonably likely to result in liability or any other adverse determination)
pending against, or to the knowledge of the Responsible Executive Officers of
the Company, threatened against or affecting, the Company or any of its
Subsidiaries or any of their respective properties before any Governmental
Entity or otherwise that (i) individually or in the aggregate would be expected
to have a Company Material Adverse Effect, (ii) in any manner challenges or
seeks to prevent, enjoin, alter or delay the transactions contemplated hereby
or (iii) alleges criminal action or inaction or (b) liabilities, debts, claims
or obligations of any nature on the date of this Agreement, whether accrued,
absolute, direct or indirect, contingent or otherwise, whether due or to become
due, that would be required to be included on a balance sheet prepared in
accordance with GAAP on the date hereof, and there is no existing condition or
set
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of circumstances that would reasonably be expected to result in such a
liability ("Company Liabilities"), except (i) Company Liabilities incurred in
the ordinary and usual course of business and consistent with past practice
since December 31, 1998, (ii) Company Liabilities incurred in connection with
or as a result of the transactions contemplated by this Agreement and (iii)
Company Liabilities that would not reasonably be expected to have a Company
Material Adverse Effect.
As of the date hereof, neither the Company, its Subsidiaries nor any of
their respective properties is subject to any order, writ, judgment,
injunction, decree, determination or award having, or that would reasonably be
expected to have, a Company Material Adverse Effect or that would prevent or
delay the consummation of the transactions contemplated hereby. Except as
disclosed in the Company Reports, there are no pending or, to the knowledge of
the Responsible Executive Officers of the Company, threatened claims for
indemnification by the Company or any of its Subsidiaries in favor of
directors, officers, employees and agents of the Company or any of its
Subsidiaries.
4.9. Employee Benefits.
(a) Except as set forth in Section 4.9(a) of the Company Disclosure
Schedule, none of the Company or any of its Subsidiaries maintains, is a party
to, participates in or has any liability or contingent liability with respect
to:
(i) any "employee welfare benefit plan" or "employee pension benefit
plan" (as those terms are defined in sections 3(1) and 3(2) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"),
respectively), other than a "multiemployer plan" (as defined in section
3(37) of ERISA);
(ii) any retirement or deferred compensation plan, incentive
compensation plan, stock plan, unemployment compensation plan, vacation
pay, severance pay, bonus or benefit arrangement, insurance or
hospitalization program or any other fringe benefit arrangements for any
current or former employee, director, consultant or agent, whether pursuant
to contract, arrangement, custom or informal understanding, which does not
constitute an employee benefit plan (as defined in section 3(3) of ERISA);
or
(iii) any employment agreement or consulting agreement.
(b) A true and correct copy of each of the plans, arrangements, and
agreements listed in Section 4.9(b) of the Company Disclosure Schedule
(referred to hereinafter as "Employee Benefit Plans"), and all contracts
relating thereto, or to the funding thereof, including, without limitation, all
trust agreements, insurance contracts, administration contracts, investment
management agreements, subscription and participation agreements, and record
keeping agreements, each as in effect on the date hereof, has been supplied to
the Parent. In the case of any Employee Benefit Plan which is not in written
form, the Parent has been supplied with an accurate description of such
Employee Benefit Plan as in effect on the date hereof. A true and correct copy
of the most recent annual report, actuarial report, accountant's opinion of the
plan's financial statements, summary plan description and Internal Revenue
Service determination letter with respect to each Employee Benefit Plan, to the
extent applicable, and a current schedule of assets (and the fair market value
thereof assuming liquidation of any asset which is not readily tradable) held
with respect to any funded Employee Benefit Plan has been supplied to the
Purchaser, and there have been no material changes in the financial condition
in the respective plans from that stated in the annual reports and actuarial
reports supplied.
(c) As to all Employee Benefit Plans:
(i) All Employee Benefit Plans comply and have been administered in form
and in operation in all material respects with all applicable requirements
of Law, and no event has occurred which will or could cause any such
Employee Benefit Plan to fail to comply with such requirements and no
notice has been issued by any governmental authority questioning or
challenging such compliance.
(ii) All Employee Benefit Plans which are employee pension benefit plans
comply in all material respects in form and in operation with all
applicable requirements of sections 401(a) and 501(a) of the
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Internal Revenue Code of 1986, as amended (the "Code"); there have been no
amendments to such plans which are not the subject of a favorable
determination letter issued with respect thereto by the Internal Revenue
Service or for which the time to file a timely request for a determination
letter has lapsed; and no event has occurred which will or could give rise
to disqualification of any such plan under such sections or to a tax under
section 511 of the Code.
(iii) None of the assets of any Employee Benefit Plan are invested in
employer securities or employer real property.
(iv) There have been no "prohibited transactions" (as described in
section 406 of ERISA or section 4975 of the Code) with respect to any
Employee Benefit Plan and none of the Company or any of its Subsidiaries
has engaged in any prohibited transaction.
(v) There have been no acts or omissions by the Company which have given
rise to or may give rise to fines, penalties, taxes or related charges
under section 502 of ERISA or Chapters 43, 47 or 68 of the Code for which
the Company or any of its Subsidiaries may be liable.
(vi) Except as set forth in Section 4.9(c) of the Company Disclosure
Schedule, none of the payments contemplated by the Employee Benefit Plans
would, in the aggregate, constitute excess parachute payments (as defined
in section 280G of the Code (without regard to subsection (b)(4) thereof)).
(vii) There are no actions, suits or claims (other than routine claims
for benefits) pending or threatened involving any Employee Benefit Plan or
the assets thereof and no facts exist which could give rise to any such
actions, suits or claims (other than routine claims for benefits).
(viii) No Employee Benefit Plan is subject to Title IV of ERISA.
(ix) Each Employee Benefit Plan which constitutes a "group health plan"
(as defined in section 607(i) of ERISA or section 4980B(g)(2) of the Code),
including any plans of current and former Affiliates which must be taken
into account under sections 4980B and 414(t) of the Code or section 601 of
ERISA, have been operated in material compliance with applicable law,
including coverage requirements of section 4980B of the Code and section
601 of ERISA to the extent such requirements are applicable, except where
failure to do so would not have a Company Material Adverse Effect.
(x) None of the Company or any of its Subsidiaries has any liability or
contingent liability for providing, under any Employee Benefit Plan or
otherwise, any post-retirement medical or life insurance benefits, other
than statutory liability for providing group health plan continuation
coverage under Part 6 of Title I of ERISA and section 4980B of the Code.
(xi) Actuarially adequate accruals for all obligations under the
Employee Benefit Plans are reflected in the financial statements of the
Company and such obligations include a pro rata amount of the contributions
and PBGC premiums which would otherwise have been made in accordance with
past practices and applicable law for the plan years which include the
Closing Date.
(d) None of the Company nor any of its Subsidiaries contributes to, has
contributed to, or has any liability or contingent liability with respect to a
multiemployer plan (as defined in section 3(37) of ERISA).
(e) Section 4.9(e) of the Company Disclosure Schedule describes in all
material respects all employment contracts and similar arrangements between the
Company or any of its Subsidiaries and their respective executive officers, and
all plans and arrangements pursuant to which the Company or any of its
Subsidiaries is obligated to make any payment or confer any benefit upon any
officer, director, employee or agent of the Company or any of its Subsidiaries
as a result of or in connection with any of the transactions contemplated by
this Agreement or any transaction or transactions resulting in a change in
control of the Company or any of its Subsidiaries. Except as set forth in
Section 4.9(e) of the Company Disclosure Schedule, the Merger will not (i)
entitle any employees of the Company or its Subsidiaries to severance pay, (ii)
accelerate the time of payment
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or vesting or trigger any payment of compensation or benefits under, increase
the amount payable or trigger any other material obligation pursuant to, any
Employee Benefit Plan, or (iii) result in any breach or violation of, or
default under, any Employee Benefit Plan.
(f) All Employee Benefit Plans covering current or former non-U.S. employees
of the Company and its Subsidiaries comply in all material respects with
applicable local law. The Company and its Subsidiaries have no material
unfunded liabilities with respect to any Employee Benefit Plan that covers such
non-U.S. employees.
4.10. Compliance with Laws; Permits.
Except as set forth in the Company Reports or Public Announcements filed or
made prior to the date hereof or Section 4.10 of the Company Disclosure
Schedule, the businesses of each of the Company and its Subsidiaries have been,
and are being, conducted in compliance with all applicable federal, state,
local or foreign laws, statutes, ordinances, rules, regulations, judgments,
orders, injunctions, decrees, arbitration awards, agency requirements, licenses
or permits (including insurance laws and regulations) of any Governmental
Entity ("Laws"), and all notices, reports, documents and other information
required to be filed thereunder within the last three years were properly filed
and were in compliance with such Laws, except in any such case for
noncompliance that, individually or in the aggregate, would not reasonably be
expected to have a Company Material Adverse Effect or prevent or materially
impair the ability of the Company to consummate the transactions contemplated
by this Agreement. Except as set forth in the Company Reports filed prior to
the date hereof or if Section 4.10 of the Company Disclosure Schedule and
except for routine examinations by state governmental entities charged with
supervision of insurance companies ("Insurance Regulators"), no investigation
or review by any governmental entity with respect to the Company or any of its
Subsidiaries is pending or, to the knowledge of the Responsible Executive
Officers of the Company, threatened, nor has any governmental entity indicated
an intention to conduct the same, except for those the outcome of which would
not, individually or in the aggregate, reasonably be expected to have a Company
Material Adverse Effect or prevent or materially impair the ability of the
Company to consummate the transactions contemplated by this Agreement. No
material change is required in the Company's or any of its Subsidiaries'
processes, properties or procedures in connection with any such Laws, and the
Company has not received any notice or communication of any material
noncompliance with any such Laws that has not been cured as of the date hereof.
The Company and its Subsidiaries each has all permits, licenses, franchises,
variances, exemptions, orders and other governmental authorizations, consents
and approvals necessary to conduct its business as presently conducted except
those the absence of which would not, individually or in the aggregate, have a
Company Material Adverse Effect or prevent or materially impair the ability of
the Company to consummate the Merger and the other transactions contemplated by
this Agreement.
4.11. Intellectual Property.
The Company and its Subsidiaries own or possess, or have all necessary
rights and licenses in, all patents, patent rights, licenses, inventions
(whether or not patentable or reduced to practice), copyrights (whether
registered or unregistered), know-how (including trade secrets and other
unpatented and/or unpatentable proprietary or confidential information, systems
or procedures), registered and unregistered trademarks, service marks and trade
names and other intellectual property rights (collectively, "Intellectual
Property") necessary to conduct their business as conducted and proposed to be
conducted, except such Intellectual Property the failure to own, possess, have
all rights and licenses in would not have a Company Material Adverse Effect.
Neither the Company nor any of its Subsidiaries has received any unresolved
notice of, or is aware of any fact or circumstance that would give any Person a
right to assert, infringement or misappropriation of, or conflict with,
asserted rights of others or invalidity or unenforceability of any Intellectual
Property owned by the Company or any of its Subsidiaries. To the knowledge of
the Responsible Executive Officers of the Company, the use of such Intellectual
Property to conduct the business and operations of the Company and its
Subsidiaries as conducted or proposed to be conducted does not infringe on the
rights of any Person, except such infringement
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that would not have a Company Material Adverse Effect. To the knowledge of the
Responsible Executive Officers of the Company, no Person is challenging,
infringing on or otherwise violating any right of the Company or any of its
Subsidiaries with respect to any Intellectual Property owned by or licensed to
the Company or any of its Subsidiaries. Neither the execution of this Agreement
nor the consummation of the transactions contemplated hereby will result in a
loss or limitation in the rights and licenses of the Company to use or enjoy
the benefit of any Intellectual Property employed by the Company or any of its
Subsidiaries in connection with its business as conducted or proposed to be
conducted, except for such loss or limitation which would not have a Company
Material Adverse Effect.
4.12. Year 2000 Compliance.
The Company has established an implementation plan and budgeted a reasonably
sufficient amount of capital and resources to institute software systems which
include design, performance and functionality and which are intended to ensure
(it being acknowledged and agreed by the parties hereto that such intention may
never be realized) that such software systems do not cause the Company to
experience invalid or incorrect results or abnormal software operation related
to calendar year 2000, except where such invalid or incorrect results or
abnormal software operation would not, individually or in the aggregate, have a
Company Material Adverse Effect. Such plan and budget envision the creation of
software systems which include calendar year 2000 date conversion and
compatibility capabilities. As of the date of this Agreement, such plan, in
respect of the business of the Company, is generally proceeding on schedule.
4.13. Environmental Laws.
Except for matters arising from the ordinary business activities of the
Company Insurance Subsidiaries or to the extent that any inaccuracy in any of
the following representations, individually or in the aggregate with any other
inaccuracy under the following representations, would not reasonably be
expected to have a Company Material Adverse Effect, (a) each of the Company and
each of its Subsidiaries is in compliance with all Environmental Laws
applicable to the properties, assets or businesses of the Company and its
Subsidiaries, and possesses and complies with and has possessed and complied
with all Environmental Permits required under such laws; (b) none of the
Company and its Subsidiaries has received any Environmental Claim, and none of
the Company and its Subsidiaries is aware, after reasonable inquiry, of any
threatened Environmental Claim or of any Environmental Claim pending or
threatened against any entity for which the Company or any of its Subsidiaries
may be responsible; (c) none of the Company and its Subsidiaries has assumed,
contractually or by operation of law, any liabilities or obligations under any
Environmental Laws; (d) there are no present or, to the best knowledge of the
Company, past events, conditions, circumstances, practices, plans or legal
requirements that would reasonably be expected to result in liability to the
Company or any of its Subsidiaries under Environmental Laws, or reasonably be
expected to increase the burden on the Company or any of its Subsidiaries of
complying with Environmental Laws or of obtaining, renewing, or complying with
all Environmental Permits required under such laws; (e) there are and, to the
best knowledge of the Company, there have been no Hazardous Materials or other
conditions at or from any property owned, operated or otherwise used by the
Company or any of its Subsidiaries now or, to the best knowledge of the
Company, in the past that would reasonably be expected to give rise to
liability of the Company or any of its Subsidiaries under any Environmental Law
and (f) the Company has provided to Parent all Environmental Reports in the
possession or control of the Company or any of its Subsidiaries.
4.14. Investment Company.
Neither the Company nor any of its Subsidiaries is an "investment company"
as defined under the Investment Company Act of 1940, as amended, and neither
the Company nor any of its Subsidiaries sponsors any person that is such an
investment company.
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4.15. Takeover Statutes.
No restrictive provision of any "fair price," "moratorium," "control share"
or other similar anti-takeover statute or regulation, including, but not
limited to, (S) 203 of the DGCL, (each a "Takeover Statute") or restrictive
provision of any applicable anti-takeover provision in the Certificate of
Incorporation or Bylaws of the Company, is, or at the Effective Time will be,
applicable to the Company, Parent, the Shares, the Merger or any other
transaction contemplated by this Agreement.
4.16. Taxes.
Except as set forth in Section 4.16 of the Company Disclosure Schedule:
(a) the Company and each of its Subsidiaries have timely and accurately
filed all Tax Returns (as defined in Section 9.12 (b)) which are required by
all applicable laws to be filed by them, and have paid, or made adequate
provision for the payment of, all Taxes (as defined in Section 9.12 (b)) which
have or may become due and payable pursuant to said Tax Returns and all other
Taxes, governmental charges and assessments received to date other than those
Taxes being contested in good faith for which adequate provision has been made
on the most recent balance sheet included in the Company Reports. The Tax
Returns of the Company and its Subsidiaries have been prepared, in all material
respects, in accordance with all applicable laws consistently applied;
(b) all Taxes which the Company and its Subsidiaries are required by law to
withhold and collect have been duly withheld and collected, and have been paid
over, in a timely manner, to the proper Taxing Authorities (as defined in
Section 9.12 (b)) to the extent due and payable;
(c) no liens for Taxes exist with respect to any of the assets or properties
of the Company or its Subsidiaries, except for statutory liens for Taxes not
yet due or payable or that are being contested in good faith; and
(d) there is no audit, examination, deficiency, or refund litigation pending
with respect to any Taxes and during the past three years no Taxing Authority
has given written notice of the commencement of any audit, examination,
deficiency or refund litigation, with respect to any Taxes.
4.17. Labor Matters.
The Company is not aware that any officer, director, executive or key
employee of the Company or any of its Subsidiaries or any group of employees of
the Company or any of its Subsidiaries has any plans to terminate his, her or
its employment with the Company or any of its Subsidiaries (other than as
previously described to Parent in writing). Except as described in Section 4.17
of the Company Disclosure Letter, (a) the Company and its Subsidiaries have
complied with all laws relating to the employment of labor, including
provisions thereof relating to wages, hours, equal opportunity, and collective
bargaining, and (b) no labor dispute with employees of the Company or any of
its Subsidiaries exists or, to the knowledge of the Responsible Executive
Officers of the Company, is threatened. Neither the Company nor any of its
Subsidiaries is a party to or otherwise bound by any collective bargaining
agreement, contract or other agreement or understanding with a labor union or
labor organization. There are no strikes, work stoppages or labor disputes
pending or, to the knowledge of the Responsible Executive Officers of the
Company, threatened with respect to the employees of the Company or any of its
Subsidiaries. There is no representation claim or petition or complaint pending
before the National Labor Relations Board or any state or local labor agency
and, to the knowledge of the Responsible Executive Officers of the Company, no
question concerning representation has been raised or threatened. No charges
with respect to or relating to the business of the Company or any its
Subsidiaries are pending before the Equal Employment Opportunity Commission, or
any state or local agency responsible for the prevention of unlawful employment
practices, which would if adversely determined have a Company Material Adverse
Effect.
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4.18. Title to Property.
Except as set forth in the Company Reports or in Section 4.18 of the Company
Disclosure Schedule, the Company and each of its Subsidiaries have good and
indefeasible title to all of their properties and assets, free and clear of all
material defects and all encumbrances, except liens for taxes not yet due and
payable and such encumbrances or other imperfections of title, if any, as do
not materially detract from the value of or interfere with the present use of
the property affected thereby or which would not reasonably be expected to have
a Company Material Adverse Effect, and except for encumbrances which secure
indebtedness reflected in the financial statements included in the Company
Reports.
4.19. Material Contracts.
All of the material Contracts of the Company and its Subsidiaries are in
full force and effect and are valid, binding and enforceable against the
Company or its Subsidiaries in accordance with their respective terms. True and
complete copies of all such material Contracts have been delivered or otherwise
made available by the Company to Parent. Except as set forth in Section 4.19 of
the Company Disclosure Schedule, neither the Company nor any of its
Subsidiaries is, has received any notice or has any knowledge that any other
party is, in default in any respect under any Contract to which the Company or
any of its Subsidiaries is a party or the assets, business or operations
thereof may be bound or affected or under which it or its Subsidiaries'
respective assets, business or operations receives benefits, except for those
defaults that have not had or would not reasonably be expected to have,
individually or in the aggregate, a Company Material Adverse Effect, and there
has not occurred any event that with the lapse of time or the giving of notice
would constitute such a default. Neither the Company nor any of its
Subsidiaries is party to any agreement containing any provision or covenant
that would reasonably be expected to have a Company Material Adverse Effect on
the ability of the Company or any of its Subsidiaries, assuming the
consummation of the transactions contemplated by this Agreement, to (a) sell
any products or services of or to any other person, (b) engage in any line of
business or (c) compete with or to obtain products or services from any person
or limiting the ability of any person to provide products or services to the
Company or any of its Subsidiaries.
Subject to obtaining the Private Consents and except as set forth in Section
4.19 of the Company Disclosure Schedule, neither the Company nor any of its
Subsidiaries is a party to or bound by any contract, agreement or arrangement
which would cause the rights or obligations of any party thereto to change upon
the consummation of the Merger, except for any such contract, agreement or
arrangement which would not reasonably be expected to have, individually or in
the aggregate, a Company Material Adverse Effect.
4.20. Brokers and Finders.
Neither the Company nor any of its executive officers, directors or
employees has employed any broker or finder or incurred any liability for any
brokerage fees, commissions or finders fees in connection with the Merger or
the other transactions contemplated in this Agreement, except that the Company
has employed Goldman, Sachs & Co. as its financial advisor, the arrangements
with respect to which have been disclosed to Parent prior to the date hereof.
4.21. Insurance Matters.
(a) The Company has heretofore provided or otherwise made available to
Parent true, complete and correct copies of all material fire and casualty,
general liability, business interruption, product liability and other insurance
policies maintained by the Company and its Subsidiaries. All such policies are
in full force and effect and no event has occurred that would give any
insurance carrier a right to terminate any such policy. Neither the Company nor
any of its Subsidiaries has been denied or had any policy of insurance revoked
or rescinded. All such policies are adequate to insure against risks to which
the Company and its properties are exposed in such amounts and subject to such
terms as are commercially reasonable.
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(b) Except as otherwise would not, individually or in the aggregate, be
reasonably likely to have a Company Material Adverse Effect, all policies,
binders, slips, certificates, annuity contracts and participation agreements
and other agreements of insurance, whether individual or group, in effect as of
the date hereof (including all applications, supplements, endorsements, riders
and ancillary agreements in connection therewith) that are issued by the
Company Insurance Subsidiaries (the "Company Insurance Contracts") and any and
all marketing materials, are, to the extent required under applicable law, on
forms approved by applicable insurance regulatory authorities or which have
been filed and not objected to by such authorities within the period provided
for objection, and such forms comply in all material respects with the
insurance statutes, regulations and rules applicable thereto and, as to premium
rates established by the Company or any Company Insurance Subsidiary which are
required to be filed with or approved by insurance regulatory authorities, the
rates have been so filed or approved, the premiums charged conform thereto in
all material respects, and such premiums comply in all material respects with
the insurance statutes, regulations and rules applicable thereto.
(c) All reinsurance and coinsurance treaties or agreements, including
retrocessional agreements, to which the Company or any Company Insurance
Subsidiary is a party or under which the Company or any Company Insurance
Subsidiary has any existing rights, obligations or liabilities are in full
force and effect except for such treaties or agreements the failure to be in
full force and effect as individually or in the aggregate are not reasonably
likely to have a Company Material Adverse Effect. Neither the Company nor any
Company Insurance Subsidiary, nor, to the knowledge of the Responsible
Executive Officers of the Company, any other party to a reinsurance or
coinsurance treaty or agreement to which the Company or any Company Insurance
Subsidiary is a party, is in default in any material respect as to any
provision thereof, and no such agreement contains any provision providing that
the other party thereto may (whether with notice, lapse of time or both)
terminate such agreement solely by reason of the transactions contemplated by
this Agreement. The Company has not received any notice to the effect that the
financial condition of any other party to any such agreement is impaired with
the result that a default thereunder may reasonably be anticipated, whether or
not such default may be cured by the operation of any offset clause in such
agreement. No insurer or reinsurer or group of affiliated insurers or
reinsurers accounted for the direction to the Company and the Company Insurance
Subsidiaries or the ceding by the Company and the Company Insurance
Subsidiaries of insurance or reinsurance business in an aggregate amount equal
to two percent or more of the consolidated gross premium income of the Company
and the Company Insurance Subsidiaries for the year ended December 31, 1998.
(d) Prior to the date hereof, the Company has delivered or made available to
Parent a true and complete copy of any actuarial reports prepared by actuaries,
independent or otherwise, with respect to the Company or any Company Insurance
Subsidiary since December 31, 1995, and all attachments, addenda, supplements
and modifications thereto (the "Company Actuarial Analyses"). The information
and data furnished by the Company or any Company Insurance Subsidiary to its
independent actuaries in connection with the preparation of the Company
Actuarial Analyses were accurate in all material respects. Furthermore, to the
knowledge of the Responsible Executive Officers of the Company, each Company
Actuarial Analysis was based upon an accurate inventory of policies in force
for the Company and the Company Insurance Subsidiaries, as the case may be, at
the relevant time of preparation, was prepared using appropriate modeling
procedures accurately applied and in conformity with generally accepted
actuarial standards consistently applied, and the projections contained therein
were properly prepared in accordance with the assumptions stated therein.
4.22. Liabilities and Reserves.
(a) The reserves carried on the Company SAP Statements of each Company
Insurance Subsidiary for the year ended December 31, 1998 for future insurance
policy benefits, losses, claims and similar purposes (including claims
litigation) are in compliance in all material respects with the requirements
for reserves established by the insurance departments of the state of domicile
of such Company Insurance Subsidiary, were determined in all material respects
in accordance with generally accepted actuarial standards and principles
consistently applied, were determined in accordance with SAP and are fairly
stated in all material respects in
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accordance with sound actuarial and statutory accounting principles. Such
reserves were adequate in the aggregate to cover the total amount of all
reasonably anticipated liabilities of the Company and each Company Insurance
Subsidiary under all outstanding insurance, reinsurance and other applicable
agreements as of the respective dates of such Company SAP Statements. The
admitted assets of the Company and each Company Insurance Subsidiary as
determined under applicable Laws are in an amount at least equal to the
minimum amounts required by applicable Laws. In addition, the Company has
delivered or made available to Parent copies of all work papers used as the
basis for establishing the reserves for the Company and the Company Insurance
Subsidiaries at December 31, 1997 and December 31, 1998, respectively. With
respect to the quarterly period ended June 30, 1999, the Company will
establish the reserves set forth in Section 4.22 of the Company Disclosure
Schedule.
(b) Except for regular periodic assessments in the ordinary course of
business or assessments based on developments which are publicly known within
the insurance industry, to the knowledge of the Responsible Executive Officers
of the Company, no claim or assessment is pending or threatened against any
Company Insurance Subsidiary which is peculiar or unique to such Company
Insurance Subsidiary by any state insurance guaranty associations in
connection with such association's fund relating to insolvent insurers which
if determined adversely would, individually or in the aggregate, be reasonably
likely to have a Company Material Adverse Effect.
ARTICLE V
Representations and Warranties of
Parent and Merger Subsidiary
Parent and Merger Subsidiary hereby, jointly and severally, represent and
warrant to the Company that:
5.1. Merger Subsidiary.
(a) Merger Subsidiary is a corporation duly organized, validly existing and
in good standing under the laws of the State of Delaware.
(b) The authorized capital stock of Merger Subsidiary consists of 1,000
shares of common stock, par value $.01 per share, all of which are validly
issued and outstanding and are, and at the Effective Time will be, owned
solely by Parent, and there are (i) no other voting securities of Merger
Subsidiary, (ii) no securities of Merger Subsidiary convertible into or
exchangeable for shares of common stock or other voting securities of Merger
Subsidiary and (iii) no options or other rights to acquire from Merger
Subsidiary, and no obligations of Merger Subsidiary to issue or deliver,
shares of common stock or other voting securities or securities convertible
into or exchangeable for shares of common stock or other voting securities of
Merger Subsidiary.
(c) Merger Subsidiary has not conducted any business prior to the date
hereof and has no, and prior to the Effective Time will have no, assets,
liabilities or obligations of any nature other than those incident to its
formation and pursuant to this Agreement and the Merger and the other
transactions contemplated by this Agreement.
5.2. Organization, Good Standing and Qualification.
Parent is a company incorporated with limited liability, validly existing
and in good standing under the Cayman Islands Companies Law, and each of its
Subsidiaries is a corporation or other entity duly organized, validly existing
and in good standing under the laws of its respective jurisdiction of
organization. Neither Parent nor Merger Subsidiary is required to be
authorized, qualified, licensed or domesticated as a foreign corporation under
any United States federal, state or local corporate law. Parent has made
available to the Company a complete and correct copy of Parent's and each
Subsidiaries' charter and by-laws or other organizational documents, each as
amended to and as in effect as of the date hereof.
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5.3. Capitalization.
The authorized capital stock of Parent consists of 300 million Parent
Shares, of which 194,059,295 shares were outstanding as of the close of
business on October 25, 1999, and 10 million other shares, none of which are
outstanding. All of the outstanding Parent Shares have been duly authorized and
are validly issued, fully paid and nonassessable. Parent has no commitments to
issue or deliver Parent Shares, except that, as of September 30, 1999, there
were an aggregate of not greater than 40,000,000 Parent Shares reserved for
issuance pursuant to Parent's employee benefit plans existing on the date
hereof (the "Parent Stock Plans"), and 500,000 shares of Parent preferred stock
subject to issuance pursuant to the Parent Rights Agreement. Each of the
outstanding shares of capital stock or other securities of each of Parent's
Subsidiaries is duly authorized, validly issued, fully paid and nonassessable
and owned by Parent or a direct or indirect wholly-owned subsidiary of Parent,
free and clear of any lien, pledge, security interest, claim or other
encumbrance. There are no preemptive or other outstanding rights, options,
warrants, conversion rights, stock appreciation rights, redemption rights,
repurchase rights, agreements, arrangements or commitments to issue or sell any
shares of capital stock or other securities of Parent or any of its
Subsidiaries or any securities or obligations convertible or exchangeable into
or exercisable for, or giving any Person a right to subscribe for or acquire,
any securities of Parent or any of its Subsidiaries, and no securities or
obligations evidencing such rights are authorized, issued or outstanding.
Parent does not have outstanding any bonds, debentures, notes or other
obligations the holders of which have the right to vote (or, except as referred
to in this Section 5.3, convertible into or exercisable for securities having
the right to vote) with the stockholders of Parent on any matter.
5.4. Corporate Authority.
(a) Each of Parent and Merger Subsidiary has all requisite corporate power
and authority and has taken all corporate action necessary in order to execute,
deliver and perform its obligations under this Agreement, the Stock Option
Agreement and to consummate the Merger. This Agreement is a valid and binding
obligation of each of Parent and Merger Subsidiary, as the case may be,
enforceable against Parent and Merger Subsidiary in accordance with its terms,
except as enforceability may be limited or affected by bankruptcy, insolvency,
reorganization, moratorium, fraudulent conveyance and other similar laws and
equitable principles now or hereafter in effect and affecting the rights and
remedies of creditors generally.
(b) The Board of Directors of Parent (at a meeting duly called and held) has
approved this Agreement and the Merger and the other transactions contemplated
hereby and thereby. The Parent Shares, when issued in connection with the
consummation of the transactions contemplated hereby, will be validly issued,
fully paid and nonassessable, and no stockholder of Parent will have any
preemptive right of subscription or purchase is respect thereof. The Parent
Shares, when so issued, will be registered under the Securities Act and
Exchange Act and registered or exempt from registration under any applicable
state securities or "blue sky" laws.
5.5. Governmental Filings; No Violations.
(a) Except for all filings, permits, authorizations, consents and approvals
as may be required under, and compliance with other applicable requirements of,
the Securities Act, the Exchange Act, the HSR Act, state securities or "blue
sky" laws, state takeover laws, state and foreign insurance regulatory laws and
commissions, including Lloyd's of London and the U.K. Treasury Department, and
except as may result from any facts or circumstances relating solely to the
Company or its Affiliates, in connection with the execution and delivery of
this Agreement by Parent and Merger Subsidiary and the consummation by Parent
and Merger Subsidiary of the Merger and the other transactions contemplated
hereby and thereby, there are no filings, authorizations, consents, approvals
or notices required with or by any Court, administrative agency, commission,
government or regulatory authority, domestic or foreign, except those that the
failure to make or obtain would not, individually or in the aggregate, have a
Parent Material Adverse Effect or prevent, materially delay or materially
impair the ability of Parent or Merger Subsidiary to consummate transactions
contemplated by this Agreement.
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(b) Subject to compliance with the filings described in Section 5.5(a), the
execution, delivery and performance of the Stock Option Agreement by Parent and
this Agreement by Parent and the Merger Subsidiary, as the case may be, does
not, and the consummation by Parent or Merger Subsidiary of the Merger and the
other transactions contemplated hereby or thereby will not, constitute or
result in (i) a breach or violation of, or a default under, the certificate of
incorporation or bylaws of Parent or Merger Subsidiary, or the comparable
governing instruments of any of Parent's other Subsidiaries, or (ii) a breach
or violation of, or a default under, the acceleration of any obligations (with
or without notice, lapse of time or both) pursuant to, any Contracts binding
upon Parent or any of its Subsidiaries, except for any conflict, breach,
violation, default or acceleration that would not reasonably be expected to
have a Parent Material Adverse Effect or prevent, materially delay or
materially impair the ability of Parent or Merger Subsidiary to consummate the
transactions contemplated by this Agreement, as the case may be.
5.6. Parent Reports; Financial Statements.
Parent has delivered or made available to the Company true and complete
copies of each registration statement, report, proxy statement or information
statement prepared by it since September 30, 1998 (the "Parent Audit Date"),
including (a) Parent's Annual Report on Form 10-K for the year ended September
30, 1998, (b) Parent's definitive Proxy Statement for its 1999 Annual Meeting
of Stockholders, and (c) Parent's Quarterly Reports on Form 10-Q for the
quarterly periods ended December 31, 1998, March 31, 1999 and June 30, 1999,
each in the form (including exhibits, annexes and any amendments thereto) filed
with the SEC (collectively, including any such reports filed between the date
hereof and the Effective Time, the "Parent Reports"). As of their respective
dates, the Parent Reports complied, and any Parent Reports filed with the SEC
between the date hereof and the Effective Time will comply, as to form in all
material respects with the requirements of the Securities Act or the Exchange
Act, as applicable, and the rules and regulations of the SEC. As of their
respective dates, the Parent Reports did not, and any Parent Reports filed with
the SEC between the date hereof and the Effective Time will not, contain any
untrue statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements made therein, in light
of the circumstances under which they were made, not misleading. Each of the
consolidated balance sheets included in or incorporated by reference into the
Parent Reports (including the related notes and schedules) fairly presents, or
will fairly present, the consolidated financial position of Parent and its
Subsidiaries as of its date and each of the consolidated statements of income
and of changes in financial position included in or incorporated by reference
into the Parent Reports (including any related notes and schedules) fairly
presents, or will fairly present, the consolidated results of operations,
retained earnings and changes in financial position, as the case may be, of
Parent and its Subsidiaries for the periods set forth therein (subject, in the
case of unaudited statements, to notes and normal year-end audit adjustments
that will not be material in amount or effect), in each case in accordance with
GAAP consistently applied during the periods involved, except as may be noted
therein.
5.7. Absence of Certain Changes.
Except as disclosed in the Parent Reports filed prior to the date hereof and
except as otherwise provided in or contemplated by this Agreement, since the
Parent Audit Date, Parent and its Subsidiaries have conducted their respective
businesses only in, and have not engaged in any material transaction other than
according to, the ordinary and usual course of such businesses and there has
not been any change in the financial condition, properties, business or results
of operations of Parent and its Subsidiaries, or any transaction, commitment,
dispute or other event, or any other development or combination of developments
that, individually or in the aggregate, has had or is reasonably likely to
result in a Parent Material Adverse Effect.
5.8. Litigation and Liabilities.
Except as disclosed in the Parent Reports filed prior to the date hereof,
there are no (a) civil, criminal or administrative actions, suits, claims,
hearings, investigations, proceedings, judgments, decrees, orders or
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injunctions outstanding, pending or, to the knowledge of the Responsible
Executive Officers of Parent, threatened against Parent or any of its
Subsidiaries or (b) obligations or liabilities of any nature, whether or not
accrued, contingent or otherwise and whether or not required to be disclosed
("Parent Liabilities") other than (i) Parent Liabilities incurred since
December 31, 1998 in the ordinary and usual course of business and consistent
with past practice, (ii) Parent Liabilities incurred in connection with or as a
result of the transactions contemplated by this Agreement, (iii) Parent
Liabilities incurred in connection with or as a result of the acquisition of
the property and casualty business of Cigna and (iv) Parent Liabilities that
would not reasonably be expected to have a Parent Material Adverse Effect.
5.9. Brokers and Finders.
Neither Parent nor any of its executive officers, directors or employees has
employed any broker or finder or incurred any liability for any brokerage fees,
commissions or finders fees in connection with the Merger or the other
transactions contemplated in this Agreement, except that Parent has employed
Credit Suisse First Boston Corporation as its financial advisors, the
arrangements with respect to which have been disclosed to the Company prior to
the date hereof.
5.10. Financing.
Parent or Merger Subsidiary has on the date hereof and will have at the
Effective Time sufficient cash, assets readily convertible into cash and
borrowing availability under committed credit facilities to consummate the
Merger (including payment of the Cash Component of the Merger Consideration)
and the transactions contemplated hereby on a timely basis in accordance with
this Agreement.
ARTICLE VI
Covenants
6.1. Interim Operations of the Company.
Except as expressly contemplated by this Agreement or the Stock Option
Agreement or consented to in writing by Parent (in its sole discretion), during
the period from the date of this Agreement to the Effective Time, the Company
and its Subsidiaries will conduct their operations only in, and neither the
Company nor any of its Subsidiaries shall take any action except in, the
ordinary and usual course of business and consistent with past practice, and
the Company and its Subsidiaries will use their best efforts to preserve intact
their business organization, to keep available the services of their officers
and key employees and to maintain advantageous relationships with ceding
companies, customers, licensors, licensees, suppliers, contractors,
distributors, business partners and others having business relationships with
the Company or its Subsidiaries, as the case may be. Without limiting the
generality of the foregoing, prior to the Effective Time, neither the Company
nor any of its Subsidiaries will, without the prior written consent of Parent
(such consent to be given or withheld in Parent's sole discretion):
(a) except as expressly contemplated by this Agreement, split, combine or
reclassify any shares of its capital stock or other securities, declare, pay,
set aside for payment or consummate any dividend or other distribution payable
in cash, stock, property or otherwise in respect of its capital stock or other
securities, or directly or indirectly redeem, purchase or otherwise acquire any
shares of its capital stock or other securities other than regular quarterly
cash dividends paid by the Company not in excess of $0.04 per share;
(b) authorize for issuance, issue, sell, pledge, dispose of, encumber,
deliver or agree or commit to issue, sell, pledge or deliver (whether through
the issuance or granting of any options, warrants, commitments, subscriptions,
rights to purchase or otherwise) any capital stock of any class of the Company
or any Subsidiary
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or any securities convertible into or exercisable or exchangeable for shares of
capital stock of any class of the Company or any Subsidiary, except as required
by options outstanding on the date hereof pursuant to the Company Stock Plans
and agreements disclosed in Section 4.9(a) of the Company Disclosure Schedule,
or amend any of the terms of any such securities or agreements outstanding as
of the date hereof;
(c) (i) incur any material indebtedness not previously approved by Parent,
(ii) incur any other indebtedness except in the ordinary course of business,
(iii) pledge or otherwise encumber shares of capital stock of the Company or
its Subsidiaries or (iv) mortgage or pledge any of its material assets,
tangible or intangible, or create any lien thereupon other than (A) liens for
Taxes or other assessments or charges of Governmental Authorities that are not
yet delinquent or that are being contested in good faith by appropriate
proceedings, in each case, with respect to which adequate reserves or other
appropriate provisions are being maintained to the extent required by GAAP; (B)
statutory liens of landlords and mortgagees of landlords and liens of carriers,
warehousemen, mechanics, materialmen and other liens imposed by Law and created
in the ordinary course of business for amounts not yet more than 30 days
overdue or that are being contested in good faith by appropriate proceedings,
in each case, with respect to which adequate reserves or other appropriate
provisions are being maintained to the extent required by GAAP; (C) leases or
subleases, easements, rights-of-way, covenants and consents that do not
interfere materially with the ordinary conduct of the business of the Company
or detract materially from the value of the property to which they attach or
materially impair the use thereof to the Company; (D) liens granted by the
Company to lenders pursuant to credit agreements in existence on the date
hereof and (E) Liens granted in the ordinary course of business and consistent
with past practice;
(d) except as may be required by Law or as contemplated by this Agreement,
enter into, adopt, amend or terminate any bonus, profit sharing, compensation,
severance, termination, stock option, stock appreciation right, restricted
stock, performance unit, stock equivalent, stock purchase agreement, pension,
retirement, deferred compensation, employment, severance or other Employee
Benefit Plan; or enter into or amend any employment or severance agreement
with, increase in any material manner the salary, wages, bonus, commission, or
other compensation or benefits of any director or executive officer of the
Company or any of its Subsidiaries, except with respect to new employees
employed in the ordinary course of business and those agreements with key
employees previously disclosed to Parent; or increase in any manner the salary,
wages, bonus, commission, or other compensation or benefits of any other
officer, employee or agent of the Company or any of its Subsidiaries except for
increases in the ordinary course of business and consistent with past practice;
or pay any benefit not required by any plan and arrangement as in effect as of
the date hereof (including, without limitation, the granting of stock options,
stock appreciation rights or performance units);
(e) acquire (by merger, amalgamation, consolidation or acquisition of stock
or assets) any corporation, partnership or other business organization or
division thereof or make any material investment either by purchase of stock or
securities, contributions to capital, property transfer or acquisition
(including by lease) of any material amount of properties or assets of any
other individual or entity;
(f) except as expressly required herein, pay, discharge or satisfy any
claims, liabilities or obligations (absolute, accrued, contingent or
otherwise), other than the payment, discharge or satisfaction in the ordinary
course of business and consistent with past practice of liabilities (x)
reflected or reserved against on the consolidated balance sheet of the Company
dated June 30, 1999 (the "Latest Balance Sheet") or (y) incurred in connection
with the transactions contemplated by this Agreement or in the ordinary course
of business and consistent with past practice;
(g) amend the certificate of incorporation or any similar document of the
Company or any of its Subsidiaries;
(h) adopt a plan of complete or partial liquidation or resolutions providing
for the complete or partial liquidation, dissolution, merger, consolidation,
restructuring, recapitalization or other reorganization of the Company or any
of its Subsidiaries;
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(i) enter into any new lines of business (whether or not part of the
insurance or reinsurance business), change any material policy forms, change
the pricing formula for material insurance policies, materially change its
investment policies or guidelines or otherwise make material changes to the
operation of its business or change its loss reserve methodology other than as
expressly provided in this Agreement;
(j) invest any investment securities of the Company in investments that are
not rated in one of the four highest categories by a "nationally recognized
statistical rating agency," as defined in the rules or regulations of the SEC;
(k) sell (whether by merger, consolidation or otherwise), lease, encumber,
transfer or dispose of any assets outside the ordinary course of business
consistent with past practices or any assets that are material to the Company
or any of its Subsidiaries, or enter into any material commitment or
transaction outside the ordinary course of business consistent with past
practices (except with respect to any assets related to RGB Underwriting
Agencies, Ltd.);
(l) authorize or make or commit to make any capital expenditures, except for
transactions in the ordinary course of business consistent with past practice
(but in no event in excess of $100,000 in the aggregate) or pursuant to
agreements or commitments entered into by the Company or any of its
Subsidiaries prior to the date hereof, unless otherwise reserved against in the
Latest Balance Sheet;
(m) make any Tax elections or settle or compromise any material United
States federal, state, local or other foreign income tax liability, or waive or
extend the statute of limitations in respect of any such Taxes;
(n) pay or agree to pay in settlement or compromise of any suits or claims
of liability against the Company, any of its Subsidiaries or its directors,
officers, employees or agents more than an aggregate of $1,000,000 for all such
suits and claims, it being understood that without the prior written consent of
Parent, no such settlement or compromise shall be entered into involving non-
monetary obligations;
(o) except as expressly contemplated by this Agreement or pursuant to
agreements or commitments entered into by the Company or any of its
Subsidiaries prior to the date hereof and disclosed in Section 6.1 of the
Company Disclosure Schedule, knowingly take any action likely to materially
decrease or diminish the assets or net worth of the Company or any of its
Subsidiaries (except for reserves in the ordinary course of business and
consistent with past practice);
(p) except as may be required as a result of a change in law or in GAAP,
change any of the accounting principles or practices used by it;
(q) enter into any agreement providing for the acceleration or payment or
performance or other consequence as a result of a change in control of the
Company or any of its Subsidiaries; or
(r) take any action or agree, in writing or otherwise, to take any of the
foregoing actions or any action that would make any representation or warranty
in Article IV hereof materially untrue or incorrect.
6.2. Interim Operations of Merger Subsidiary.
During the period from the date of this Agreement to the Effective Time,
Merger Subsidiary shall not engage in any activities of any nature except as
provided in or contemplated by this Agreement.
6.3. No Solicitation.
From and after the date hereof, neither the Company nor any of its
Subsidiaries shall (whether directly or indirectly through its or their
officers, directors, agents, representatives, advisors or other intermediaries
(collectively, "Representatives")), nor shall the Company or any of its
Subsidiaries authorize or permit any of
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its or their Representatives to, (a) solicit, initiate, encourage (including by
way of furnishing information) or take any action knowingly to facilitate the
submission of any inquiries, proposals or offers (whether or not in writing)
from any person relating to, other than the transactions contemplated by this
Agreement and the Stock Option Agreement, (i) any acquisition or purchase of
15% or more of the consolidated assets of the Company and its Subsidiaries or
of 15% or more of any class of equity securities of the Company or any of its
Subsidiaries, (ii) any tender offer (including a self tender offer) or exchange
offer that if consummated would result in any person beneficially owning 15% or
more of any class of equity securities of the Company or any of its material
Subsidiaries (including through the ownership of securities convertible or
exercisable into or exchangeable for equity securities of the Company), (iii)
any merger, consolidation, business combination, sale of substantially all the
assets, recapitalization, liquidation, dissolution or similar transaction
involving the Company or any of its Subsidiaries whose assets, individually or
in the aggregate, constitute 15% or more of the consolidated assets of the
Company or (iv) any other transaction the consummation of which would or would
reasonably be expected to impede, interfere with, prevent or materially delay
the Merger (any of the foregoing, a "Transaction Proposal"), or agree to or
endorse any Transaction Proposal, or (b) enter into or participate in any
discussions or negotiations regarding any of the foregoing, or furnish to any
other person any information with respect to its business, properties or assets
in connection with any of the foregoing, or otherwise cooperate in any way
with, or knowingly assist or participate in, facilitate or encourage, any
effort or attempt by any other person to do or seek any of the foregoing;
provided, however, that the foregoing shall not prohibit the Company, prior to
the receipt of the Company Requisite Vote, (A) from complying with Rule 14e-2
and Rule 14d-9 under the Exchange Act with regard to a bona fide tender offer
or exchange offer or (B) from participating in negotiations or discussions with
or furnishing information to any person in connection with an unsolicited bona
fide Transaction Proposal which is submitted in writing by such person to the
Board of Directors of the Company after the date of this Agreement and prior to
the Company Requisite Vote; provided further, however, that prior to
participating in any such discussions or negotiations or furnishing any
information, (i) the Company receives from such person an executed
confidentiality agreement on terms not less favorable to the Company than the
Confidentiality Agreement, a copy of which shall be provided only for
informational purposes to Parent, and (ii) the Board of Directors of the
Company shall have concluded in good faith, based on the advice of its outside
financial advisors, that such Transaction Proposal is reasonably likely to be
or to result in a Superior Proposal, and based on the written advice of its
outside legal counsel, that participating in such negotiations or discussions
or furnishing such information is required in order to prevent the Board of
Directors of the Company from breaching its fiduciary duties to its
stockholders under the DGCL; and provided, further, that the Board of Directors
of the Company shall not take any of the foregoing actions unless it provides
Parent with contemporaneous notice thereof. If the Board of Directors of the
Company receives a Transaction Proposal, then the Company shall promptly inform
Parent in writing of the terms and conditions of such proposal and the identity
of the person making it. The Company agrees that it will keep Parent informed,
on a current basis, of the terms of any such proposals or offers and, to the
extent disclosure is not prohibited by the terms of any confidentiality
agreement with the party making such Transaction Proposal, the status of any
such material discussions or negotiations. The Company agrees to immediately
cease and cause its Representatives to cease any and all existing activities,
discussions or negotiations with any parties conducted heretofore with respect
to any of the foregoing, and shall use its reasonable best efforts to cause any
such parties in possession of confidential information about the Company that
was furnished by or on behalf of the Company to return or destroy all such
information in the possession of any such party or in the possession of any
agent or advisor of any such party. The Company agrees not to release any third
party from, or waive any provisions of, any confidentiality or standstill
agreement to which such party or its Subsidiaries is a party. The Company shall
ensure that its officers, directors and employees and any investment banker or
other Representative retained by it are aware of the restrictions described in
this Section 6.3. "Superior Proposal" means any of the transactions described
in clause (i), (ii) or (iii) of the definition of Transaction Proposal (with
all of the percentages included in the definition of such term raised to 51%
for purposes of this definition) with respect to which any required financing
is committed or, in the good faith judgment of the Board of Directors of the
Company, based on the written advice of its outside financial advisors, is
reasonably capable of being financed by the person making the proposal, and
with respect to which the Board of Directors of the Company shall have
concluded in good faith, based on the written advice of its outside legal
counsel and financial
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advisors, is reasonably capable of being completed, taking into account all
legal, financial, regulatory and other aspects of the Transaction Proposal and
the person making the proposal, and would, if consummated, result in a
transaction more favorable to the Company's stockholders from a financial point
of view than the transactions contemplated by this Agreement.
6.4. Information Supplied.
Each of the Company and Parent agree, as to itself and its Subsidiaries,
that none of the information supplied or to be supplied by it or its
Subsidiaries for inclusion or incorporation by reference in (a) the
Registration Statement on Form S-4 (including any amendments thereto) to be
filed with the SEC by Parent in connection with the issuance of Parent Shares
in the Merger (including the proxy statement and prospectus (the
"Prospectus/Proxy Statement") constituting a part thereof) (such Registration
Statement, as amended or supplemented, the "S-4 Registration Statement") will,
at the time the S-4 Registration Statement (or any post-effective amendment)
becomes effective under the Securities Act, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein, not misleading, (b) the
Prospectus/Proxy Statement and any amendment or supplement thereto will, at the
date of mailing to stockholders and at the times of the meetings of
stockholders of the Company and Parent to be held in connection with the
Merger, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading and (c) the Statement on Schedule 13E-3 (such statement, as
amended or supplemented, is herein referred to as the "Schedule 13E-3") to be
filed with the SEC by Parent will, at the time it is first filed with the SEC,
and at any time it is amended or supplemented 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 they
are made, not misleading.
6.5. Stockholders Meeting.
Whether or not the Board of Directors of the Company shall take any action
permitted by the third sentence of this Section 6.5, the Company shall cause a
meeting of its stockholders (the "Stockholders Meeting") to be duly called and
held as soon as practicable after the date of this Agreement for the purpose of
voting on the adoption of this Agreement. The Board of Directors of the Company
shall (i) include in the Proxy Statement/Prospectus the recommendation
described in Section 4.4 (the "Company Board Recommendation") and the written
opinion of Goldman, Sachs & Co., dated the date of this Agreement, to the
effect that, as of the date hereof, the Merger Consideration is fair, from a
financial point of view, to the holders of Company Common Stock and (ii) use
its reasonable best efforts to obtain the necessary vote in favor of the
adoption of this Agreement by its stockholders. The Board of Directors of the
Company shall not withdraw, amend, modify or qualify in a manner adverse to
Parent the Company Board Recommendation (or announce publicly its intention to
do so), except that prior to the receipt of the Company Requisite Vote, the
Board of Directors of the Company shall be permitted to withdraw, amend, modify
or materially qualify in a manner adverse to Parent the Company Board
Recommendation (or publicly announce its intention to do so), upon three
business days' prior notice to Parent, but only if (i)(A) the Company has
complied with Section 6.3, (B) an unsolicited bona fide written Transaction
Proposal with respect to the Company shall have been made after the date of
this Agreement by any person other than Parent or its affiliates and such
proposal is pending at the time of such action and (C) the Board of Directors
of the Company shall have concluded in good faith, on the basis of the advice
of its outside financial advisors (confirmed in writing to the Board of
Directors), that such Transaction Proposal is a Superior Proposal (as defined
in Section 6.3), or (ii) there has been any change in the financial condition,
properties, business or results of operations of Parent and its Subsidiaries,
or any transaction, commitment, dispute or other event, or any other
development or combination of developments that, individually or in the
aggregate, has had or is reasonably likely to result in a Parent Material
Adverse Effect, and, on the basis of advice of its outside legal counsel
(confirmed in writing to the Board of Directors), that the Board of Directors
is required to withdraw, amend or modify the Company Board Recommendation in
order to prevent it from breaching its fiduciary duties to the stockholders of
the Company under the DGCL.
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6.6. Filings; Other Actions; Notification.
(a) Parent and the Company shall as promptly as practicable prepare and file
with the SEC the Prospectus/Proxy Statement or an amendment or supplement
thereto, and Parent shall as promptly as practicable prepare and file with the
SEC the S-4 Registration Statement, or an amendment or supplement thereto, and
the Schedule 13E-3 as promptly as practicable. Parent and the Company each
shall use its reasonable best efforts to have the S-4 Registration Statement
declared effective under the Securities Act as promptly as practicable after
such filing, and promptly thereafter mail the Prospectus/Proxy Statement to the
respective stockholders of each of the Company and Parent. Parent shall also
use its reasonable best efforts to obtain prior to the effective date of the S-
4 Registration Statement all necessary state securities law or "blue sky"
permits and approvals required in connection with the Merger and to consummate
the other transactions contemplated by this Agreement and will pay all expenses
incident thereto. Parent further agrees to file as promptly as practicable
following the Effective Time a post-effective amendment to the S-4 Registration
Statement to convert it to a Form S-3 shelf registration covering resales of
Parent Shares by affiliates of the Company and to cause the same to become
effective.
(b) The Company and Parent each shall from the date hereof until the
Effective Time cooperate with the other and use (and shall cause their
respective Subsidiaries to use) its reasonable best efforts to cause to be done
all things necessary, proper or advisable on its part under this Agreement and
applicable Laws to cause the conditions to closing set forth in Article VII to
be satisfied and otherwise to consummate and make effective the Merger and the
other transactions contemplated by this Agreement as soon as practicable,
including preparing and filing as promptly as practicable all documentation to
effect all necessary notices, reports and other filings and to obtain as
promptly as practicable all consents, registrations, approvals, permits and
authorizations necessary or advisable to be obtained from any third party
(including rating agencies) and/or any governmental entity in order to
consummate the Merger or any of the other transactions contemplated by this
Agreement; provided, however, that nothing in this Section 6.6 shall require,
or be construed to require, Parent, in connection with the receipt of any
regulatory approval, to proffer to, or agree to (i) sell or hold separate and
agree to sell or to discontinue or limit, before or after the Effective Time,
any assets, businesses, or interest in any assets or businesses of Parent, the
Company or any of their respective Affiliates (or to consent to any sale, or
agreement to sell, or discontinuance or limitation by the Company of any of its
assets or businesses) or (ii) agree to any conditions relating to, or changes
or restriction in, the operations of any such asset or businesses which, in
either case would be reasonably expected to materially and adversely impact the
economic or business benefits to Parent of the transactions contemplated by
this Agreement. Subject to applicable laws relating to the exchange of
information, Parent and the Company shall have the reasonable opportunity to
review in advance and comment on, and to the extent practicable each will
consult the other on, all the information relating to Parent or the Company, as
the case may be, and any of their respective Subsidiaries, that appear in any
filing made with, or written materials submitted to, any third party and/or any
governmental entity in connection with the Merger and the other transactions
contemplated by this Agreement. In exercising the foregoing right, each of the
Company and Parent shall act reasonably and as promptly as practicable.
(c) The Company and Parent each shall, upon request by the other, furnish
the other with all information concerning itself, its Subsidiaries, directors,
executive officers and stockholders and such other matters as may be reasonably
necessary or advisable in connection with the Prospectus/ Proxy Statement, the
S-4 Registration Statement or any other statement, filing, notice or
application made by or on behalf of Parent, the Company or any of their
respective Subsidiaries to any third party and/or any governmental entity in
connection with the Merger and the transactions contemplated by this Agreement.
(d) The Company and Parent each shall keep the other apprised of the status
of matters relating to completion of the transactions contemplated hereby,
including promptly furnishing the other with copies of notice or other
communications received by Parent or the Company, as the case may be, or any of
its Subsidiaries, from any third party and/or any governmental entity with
respect to the Merger and the other
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transactions contemplated by this Agreement. The Company and Parent each shall
give prompt notice to the other of any change that is reasonably likely to
result in a Company Material Adverse Effect or Parent Material Adverse Effect,
respectively.
6.7. Taxation.
Each of Parent and the Company shall use its reasonable best efforts before
and after the Effective Time to cause the Merger to qualify as a reorganization
under the provisions of Section 368(a) of the Code and to obtain the opinions
of their respective counsel to the effect that the Merger will be treated for
Federal income tax purposes as a reorganization within the meaning of Section
368(a) of the Code, and that each of Parent, Merger Subsidiary and the Company
will be a party to that reorganization within the meaning of Section 368(b) of
the Code. If Parent determines that the Total Cash Consideration will exceed
one-half of the Total Consideration, or counsel to either Parent or the Company
is otherwise unable to provide the anticipated opinion regarding the
qualification of the Merger as a reorganization, Parent and the Company shall
restructure the Merger as described in Section 1.4 hereof, and the opinions of
counsel described in the first sentence of this Section 6.7 shall not be
delivered.
6.8. Access.
Between the date of this Agreement and the Effective Time, Parent and the
Company will each (and shall cause its Subsidiaries to) afford access to
authorized representatives (including, without limitation, attorneys, auditors,
financial advisors and actuaries) of the other during normal business hours to
all its books and records, facilities, accountants and key employees and will
permit such party and its authorized representatives to make such inspections
as they may reasonably require and will cause its officers and employees to
furnish such party and its authorized representatives such financial and
operating data and other information with respect to its business and
properties as such party and its authorized representatives may from time to
time reasonably request. No investigation pursuant to this Section shall affect
or be deemed to modify any representation or warranty made by the Company,
Parent or Merger Subsidiary, and provided, further, that the foregoing shall
not require the Company or Parent to permit any inspection, or to disclose any
information, that (i) in the reasonable judgment of the Company or Parent, as
the case may be, would result in the disclosure of any trade secrets of third
parties or violate any of its obligations with respect to confidentiality if
the Company or Parent, as the case may be, shall have used all reasonable
efforts to obtain the consent of such third party to such inspection or
disclosure or (ii) would violate any attorney-client privilege of the Company
or Parent, as the case may be. All requests for information made pursuant to
this Section 6.8 shall be directed to such Person as may be designated by the
Company and Parent, as the case may be, pursuant to Section 9.6 hereof. All
such information shall be governed by the terms of the Confidentiality
Agreement (as hereinafter defined).
6.9. Affiliates.
At least 10 days prior to the Effective Time, the Company shall deliver to
Parent a list of names and addresses of those Persons who will be, in the
opinion of the Company, "affiliates" of the Company within the meaning of Rule
145 under the Securities Act. The Company shall exercise its best efforts to
deliver or cause to be delivered to Parent, at least 1 day prior to the
Effective Time, from each affiliate of the Company identified in the foregoing
list, a letter in the form attached as Exhibit A. The certificates representing
Parent Common Stock received by such affiliates shall bear a customary legend
regarding applicable Securities Act restrictions.
6.10. Stock Exchange Listing.
Parent shall use its best efforts to cause the Parent Shares to be issued in
the Merger to be approved for listing on the NYSE subject to official notice of
issuance, prior to the Closing Date.
6.11. Publicity.
The Company and Parent shall consult with each other prior to issuing, and
will provide each other with a meaningful opportunity to review, comment upon
and concur with, any press releases or otherwise making
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public announcements with respect to the Merger and the other transactions
contemplated by this Agreement, and prior to making any filings with any third
party and/or any governmental entity with respect thereto, except as may be
required by law, court process or by obligations pursuant to any listing
agreement with or rules of any national securities exchange or interdealer
quotation service.
6.12. Benefits.
(a) At the Effective Time, each outstanding Company Option shall be
canceled, and each outstanding Company Option identified in Section 4.2 of the
Company Disclosure Schedule (the "Roll-Over Options") shall be replaced by an
option (a "Parent Option") to acquire Parent Shares under Parent's existing
stock option plan.
(b) The cancellation of the Roll-Over Options and replacement with Parent
Options shall comply in all respects with, and shall be performed in accordance
with, the methodology prescribed by the provisions of Section 424(a) of the
Code and the regulations thereunder, and each Parent Option shall provide the
option holder with vesting and termination rights that are no less favorable to
him than were provided under the Roll-Over Option for which it was replaced as
of the Effective Time. The parties contemplate that, consistent with the
methodology prescribed by Section 424(a) of the Code and the applicable
regulations thereunder, the Parent Options will be adjusted such that (i) the
difference between the Fair Market Value (as defined below) as of the Closing
Date of the Parent Shares subject to the Parent Option and the aggregate
exercise price of the Parent Option immediately after the Effective Time
remains the same as the aggregate difference between the Implied Value (as
defined below) of the shares of Company Common Stock subject to the Roll-Over
Option and the aggregate exercise price of the Roll-Over Option immediately
prior to the Effective Time, and (ii) the aggregate exercise price of the
Parent Option remains the same as the aggregate exercise price of the Roll-Over
Option. For purposes of this Section 6.12, the "Fair Market Value" of a Parent
Share as of any date shall be the average of the closing prices of Parent
Shares on the New York Stock Exchange as reported in The Wall Street Journal
(New York City edition) for the 5 consecutive trading days ending three trading
days prior to such date and the "Implied Value" of a share of Company Common
Stock shall be equal to the Cash Component plus the Fair Market Value as of the
Closing Date of the Exchange Ratio.
(c) In lieu of the replacement of Roll-Over Options with Parent Options as
provided for in Sections 6.12(a) and (b), if the holder of any such Company
Option so consents in writing, at the Effective Time each outstanding Company
Option with a per share exercise price equal to or greater than the Implied
Value per share of Company Common Stock shall be canceled and replaced with an
option (a "Substitute Parent Option") to acquire a number of Parent Shares
equal to the number of shares of Company Common Stock subject to such Company
Option multiplied by the Implied Value per share of Company Common Stock
divided by the Fair Market Value of a Parent Share as of the Closing Date. Each
Substitute Parent Option shall have an exercise price per Parent Share subject
to such Substitute Parent Option equal to the Fair Market Value per Parent
Share as of the Closing Date. Each Substitute Parent Option shall have a ten-
year term commencing at the Effective Time and shall vest as follows: 1/3 of
the Substitute Parent Options shall become vested on each of the first, second,
and third year anniversaries of the Effective Time provided the employee is
employed by Parent or a Subsidiary of Parent on such date.
(d) As promptly as practicable after the Effective Time, Parent shall issue
to each holder of an outstanding Company Option a document evidencing the
foregoing cancellation and the issuance by Parent of a Parent Option or a
Substitute Parent Option, as applicable, having the terms provided for in
Section 6.12(b) or Section 6.12(c), as applicable, and effective as of the
Effective Time.
(e) If the Parent Options issued pursuant to Section 6.12(a) above are not
already covered by an effective registration statement, Parent will file a
registration statement as promptly as practicable after the Effective Time,
which registration statement will cover the Parent Shares issuable upon
exercise of the Parent Options granted in substitution of the Roll-Over
Options, and Parent will use its reasonable best efforts to cause such
registration statement to become effective under the Securities Act and to
maintain such registration statement in effect until the exercise or
termination of all such Parent Options.
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(f) Parent agrees that, during the period commencing at the Effective Time
and ending on the first anniversary thereof, the employees of the Company and
its Subsidiaries will continue to be provided with benefits under employee
benefit plans (other than plans involving the issuance of Shares) that are no
less favorable in the aggregate than those benefits currently provided by the
Company and its Subsidiaries to such employees. For a period of one year
following the Effective Time, Parent shall provide, or cause the Surviving
Company to provide, severance benefits for Company employees whose employment
is terminated during such period which are at least equal to the severance
benefits provided in Section 6.12(f) of the Company Disclosure Schedule.
Following the Effective Time, Parent shall honor, or shall cause the Surviving
Company to honor, all individual employment or severance agreements in effect
for employees (or former employees) of the Company as of the date hereof to the
extent that such individual agreements are listed in Section 6.12(f) of the
Company Disclosure Schedule; provided, however, that nothing contained herein
shall prevent Parent from amending or terminating any such agreement in
accordance with its terms.
(g) As promptly as possible after the Effective Time, Parent shall grant up
to 168,000 Parent Shares under its 1998 Long-Term Incentive Plan to employees
of the Company and its Subsidiaries designated by the Company's Executive
Committee (subject to the approval by Parent). All such Parent Shares shall be
covered by an appropriate registration statement under the Securities Act and
shall be granted as restricted stock awards ("Parent Restricted Stock") subject
to vesting as follows: 1/3 of the shares of Parent Restricted Stock shall
become vested on each of the first, second, and third year anniversaries of the
Effective Time provided the employee is employed by Parent or a Subsidiary of
Parent on such date.
(h) Parent shall pay to each executive who is a member (an "Executive") of
the Executive Committee of the Company (the "Executive Committee") retention
payments of $200,000 on each of January 1, 2002 and January 1, 2003 if such
Executive continues to be employed by Parent or a Subsidiary of Parent on such
date.
(i) At the Effective Time Parent will grant to each Executive Parent Options
50,000 to purchase Parent Shares with an exercise price equal to the lower of
(i) the Fair Market Value of Parent Shares as of the date of this Agreement and
(ii) the Fair Market Value of Parent Shares as of the Closing Date. Such Parent
Options shall vest as follows: 1/3 of the Parent Options shall become vested on
each of the first, second, and third year anniversaries of the Effective Time
provided the Executive is employed by Parent or a Subsidiary of Parent on such
date.
(j) At the Effective Time Parent will grant to each Executive 32,000 shares
of Parent Restricted Stock which shall become vested as follows: 1/3 of the
Parent Restricted Stock shall become vested on each of the first, second, and
third year anniversaries of the Effective Time provided the Executive is
employed by Parent or a Subsidiary of the Parent on such date. All such Parent
Restricted Stock shall be covered by an appropriate registration statement
under the Securities Act
(k) Parent shall pay to the Executives, annual bonuses equal to 100% of such
Executive's then current base salary payable at the time incentive award
bonuses are normally paid by the Company.
(l) With respect to all employees other than Executives, Parent shall set
annual bonuses at 150% of the Company's previous target annual bonuses, such
annual bonuses to be payable at the time incentive bonuses are normally paid by
the Company.
6.13. Certain Change in Control Matters.
From and after the date hereof, except as set forth on Schedule 6.13 of the
Company Disclosure Schedule, as generally or specifically designated in writing
by Parent or as contemplated by this Agreement, the Company shall take all
action necessary, to the extent permitted under any Employee Benefit Plan or
employment agreement, so that the execution and delivery of this Agreement and
the consummation of the transactions contemplated thereby will not (a) result
in any payment (including, without limitation, severance, unemployment
compensation, golden parachute or otherwise) becoming due to any employees
under any
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Employee Benefit Plan or otherwise, (b) increase any benefits otherwise payable
under any Employee Benefit Plan or otherwise or (c) result in any acceleration
of the time of payment or vesting of any such benefits; provided that to the
extent the Company has entered into agreements with respect to stock option
awards or stock appreciation rights that provide for acceleration of vesting
upon a change in control, such agreements may remain in effect notwithstanding
this Section 6.13.
6.14. Expenses.
Unless this Agreement is terminated pursuant to Sections 8.3(a) or 8.4,
whether or not the Merger is consummated, Parent will pay the reasonable costs
and expenses incurred by the Company in connection with the preparation, filing
and mailing of the Proxy Statement/Prospectus, the filing fees for Governmental
Consents and the reasonable fees and expenses of the attorneys and accountants
of the Company in connection with the preparation of this Agreement and the
Proxy Statement/Prospectus.
6.15. Indemnification; Directors' and Officers' Insurance.
(a) From and after the Effective Time for a period of six years, Parent
agrees that it will indemnify and hold harmless each present and former
director and officer of the Company (when acting in such capacity), determined
as of the Effective Time (each, an "Indemnified Party" and, collectively, the
"Indemnified Parties"), against any costs or expenses (including reasonable
attorneys' fees and expenses), judgments, fines, losses, amounts paid in
settlement claims, damages or liabilities (collectively, "Costs") incurred in
connection with any claim, action, suit, proceeding or investigation, actual or
threatened, whether civil, criminal, administrative or investigative, in whole
or in part based on or arising in whole or in part out of matters existing or
occurring at or prior to the Effective Time, whether asserted or claimed prior
to, at or after the Effective Time, to the fullest extent that the Company
would have been permitted under Delaware law and its certificate of
incorporation or bylaws in effect on the date hereof to indemnify such Person
(and Parent shall also advance expenses as incurred to the fullest extent
permitted under applicable law provided the Person to whom expenses are
advanced provides (i) a written affirmation of his or her good faith belief
that the standard of conduct necessary for indemnification has been met, and
(ii) an undertaking to repay such advances if it is ultimately determined that
such Person is not entitled to indemnification).
(b) Parent shall cause to be maintained, for a period of not less than three
years from the Effective Time, the Company's current directors' and officers'
liability insurance policy to the extent that it provides coverage for events
occurring prior to the Effective Time (the "D&O Insurance") for all present and
former directors and officers of the Company or any subsidiary thereof, so long
as the annual premium therefor would not be in excess of 150% of the last
annual premium paid for the D&O Insurance prior to the date of this Agreement
(150% of such premium, the "Maximum Premium"); provided that Parent may, in
lieu of maintaining such existing D&O Insurance as provided above, cause no
less favorable coverage to be provided under any policy maintained for the
benefit of the directors and officers of Parent or a separate policy provided
by the same insurer. If the existing D&O Insurance expires, is terminated or
canceled by the insurer or if the annual premium would exceed the Maximum
Premium during such period, Parent shall obtain, in lieu of such D&O Insurance,
such comparable directors' and officers' liability insurance as can be obtained
for the remainder of such period for an annualized premium not in excess of the
Maximum Premium and on terms and conditions no less advantageous than the
existing D&O Insurance.
(c) The provisions of this Section are in addition to the rights that an
Indemnified Party may have under the certificate of incorporation, bylaws or
agreements of or with the Company or any of its Subsidiaries or under
applicable law. Parent agrees to pay all costs and expenses (including fees and
expenses of counsel) that may be incurred by any Indemnified Party in
successfully enforcing the indemnity or other obligations under this Section.
The provisions of this Section shall survive the Merger and are intended to be
for the benefit of, and shall be enforceable by, each of the Indemnified
Parties, their heirs and their representatives
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6.16. Purchase of Ordinary Shares.
Prior to the Effective Time, neither the Company, its Subsidiaries nor any
of their directors, officers, employees or affiliates shall, directly or
indirectly, purchase, otherwise acquire, sell or otherwise dispose of any
Ordinary Shares or any other security convertible or exchangeable into or
exercisable for Ordinary Shares or take any other action, except as expressly
set forth in this Agreement, that could reasonably be expected to have any
influence on the price of the Ordinary Shares. The Company shall promptly
notify Parent of, to the extent that the Company has actual knowledge thereof,
any action on the part of any third party to influence the price of the
Ordinary Shares or the intention of any third party to influence the price of
the Ordinary Shares.
6.17. Other Actions by the Company and Parent.
(a) Takeover Statute. If any Takeover Statute is or may become applicable to
the Merger or the other transactions contemplated by this Agreement, each of
Parent and the Company and its board of directors shall grant such approvals
and take such actions as are necessary so that such transactions may be
consummated as promptly as practicable on the terms contemplated by this
Agreement or by the Merger and otherwise act to eliminate or minimize the
effects of such statute or regulation on such transactions.
(b) Notification of Certain Matters. The Company shall give prompt notice to
Parent, and Parent shall give prompt notice to the Company, of any material
failure of the Company or Parent, as the case may be, to comply with or satisfy
any covenant, condition or agreement to be complied with or satisfied by it
hereunder; provided, however, that the delivery of any notice pursuant to this
Section 6.17(b) shall not limit or otherwise affect the remedies available
hereunder to the party receiving such notice.
(c) Consents and Approvals. (i) Each of the Company, Parent and Merger
Subsidiary will use its reasonable best efforts to comply promptly with all
legal requirements which may be imposed on it with respect to this Agreement
and the transactions contemplated hereby, which actions shall include
furnishing all information in connection with approvals of or filings with any
Governmental Entity, including any schedules or reports required to be filed
with the SEC, and including any approvals or filings which are not compulsory
but are desirable to obtain in the reasonable opinion of Parent, Merger
Subsidiary and the Company, and will promptly cooperate with and furnish
information to each other in connection with any such requirements imposed upon
any of them or any of their Subsidiaries in connection with this Agreement and
the transactions contemplated hereby. Each of the Company, Parent and Merger
Subsidiary will, and will cause its Subsidiaries to, take all reasonable
actions necessary to obtain any consent, authorization, order or approval of,
or any exemption by, any Governmental Entity or other public or private third
party required to be obtained or made by Parent, Merger Subsidiary, the Company
or any of their Subsidiaries or necessary in the reasonable opinion of Parent,
Merger Subsidiary or the Company in connection with the Merger or the taking of
any action contemplated thereby or by this Agreement.
(ii) The Company and Parent will (i) take all actions necessary to make
the filings required of it or its Affiliates under the HSR Act with respect
to the transactions contemplated by this Agreement as promptly as
practicable following the date of this Agreement, (ii) comply with any
request for additional information received from the Federal Trade
Commission or the Antitrust Division of the Department of Justice pursuant
to the HSR Act, (iii) cooperate with each other in connection with filings
under the HSR Act and (iv) request early termination of the applicable
waiting period.
(iii) 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 Parent and the Surviving Corporation shall
use all reasonable efforts to take, or cause to be taken, all such
necessary actions.
6.18. Coordination of Dividends.
After the date of this Agreement, Parent and the Company will coordinate
with each other regarding the declaration of dividends in respect of the Parent
Ordinary Shares and the Company Common Stock and the
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record dates and payment dates relating thereto, it being the intention of the
parties that holders of Parent Ordinary Shares and shares of Company Common
Stock will not receive two dividends, or receive no dividends, for any single
calendar quarter with respect to their shares of Company Common Stock and/or
the Parent Ordinary Shares any such holder receives in exchange therefor in the
Merger.
6.19. Release and Discharge.
From and after the Effective Time, Parent and Merger Subsidiary do hereby
release and forever discharge the Company, each Subsidiary of the Company and
each officer, director, employee agent, representative, financial advisor and
attorney of the Company or any Subsidiary of the Company (collectively, the
"Company Parties") from any and all actions, causes of action, claims, demands,
debts, damages, loss of services, costs, attorneys' fees, obligations,
judgments, expenses, compensation or liabilities of any nature whatsoever, in
law or in equity, whether known or unknown, contingent or absolute, that Parent
or Merger Subsidiary now have, may have ever had in the past or may have in the
future against the Company Parties by reason of or arising out of any breach or
alleged breach of the Original Agreement or this Agreement (including Sections
6.1, 6.3, 6.5, 6.17(c) or 8.3(a) of the Original Agreement and this Agreement)
occurring prior to the date of this Agreement in connection with or arising out
of the Transaction Proposals made prior to the date of this Agreement by XL
Capital Ltd. The foregoing does not constitute an admission by the Company or
any Company Party that any such breach has occurred. Parent and Merger
Subsidiary agree that they shall, from the date hereof, forbear from
commencing, prosecuting or threatening to commence or prosecute any litigation
in any court or other tribunal against the Company or any Company Party
relating to any breach or alleged breach of the Original Agreement or this
Agreement unless and until consummation of a Transaction Proposal following
termination of this Agreement under circumstances in which Parent has received
or is entitled to receive a termination fee under Section 8.5(b) or 8.5(c) of
this Agreement (the "Forbearance Termination Date"); provided that with respect
to the existing litigation between Parent and the Company, both parties agree
not to file any motions or take any other action in respect of such litigation
until the Forbearance Termination Date; provided, further, both parties agree
that they shall not assert as any defense to any amendment of pleadings or
filing of motions in the foregoing litigation any lapse of time or lateness due
to the forbearance of the other party provided for in this Section 6.19.
ARTICLE VII
Conditions
7.1. Conditions to Each Party's Obligation to Effect the Merger.
The respective obligation of each party to effect the Merger is subject to
the satisfaction or waiver at or prior to the Effective Time of each of the
following conditions:
(a) Stockholder Approval. The Merger shall have been duly approved by
holders of Shares constituting the Company Requisite Vote.
(b) NYSE Listing. The Parent Shares issuable to the Company stockholders
pursuant to this Agreement shall have been authorized for listing on the NYSE
upon official notice of issuance.
(c) Regulatory Consents. The waiting period applicable to the consummation
of the Merger under the HSR Act shall have expired or been terminated. All
regulatory approvals and other actions or approvals by any Governmental Entity
required to permit the consummation of the Merger (including those that are not
compulsory but are desirable to obtain in the reasonable opinion of Parent,
Merger Subsidiary and the Company) (collectively, "Governmental Consents"),
shall have been obtained (provided that any such Governmental Consents shall
have been obtained without any conditions, restrictions or limitations which
would reasonably be expected to materially limit or diminish the benefits to be
derived from the Merger by Parent) and such approvals shall be in full force
and effect.
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(d) Litigation. No court or governmental entity of competent jurisdiction
shall have enacted, issued, promulgated, enforced or entered any law, statute,
ordinance, rule, regulation, judgment, decree, injunction or other order
(whether temporary, preliminary or permanent) that is in effect and restrains,
enjoins or otherwise prohibits consummation of the Merger (collectively, an
"Order") and no governmental entity shall have instituted any proceeding which
continues to be pending seeking any such Order; provided, however, that the
parties hereto shall use their reasonable best efforts to have any such
injunction, order, restraint or prohibition vacated.
(e) S-4. The S-4 Registration Statement shall have become effective under
the Securities Act. No stop order suspending the effectiveness of the S-4
Registration Statement shall have been issued, and no proceeding for that
purpose shall have been initiated or be threatened by the SEC.
7.2. Conditions to Obligations of Parent and Merger Subsidiary.
The obligations of Parent and Merger Subsidiary to effect the Merger are
also subject to the satisfaction or waiver by Parent at or prior to the
Effective Time of the following condition:
Performance of Obligations of the Company. The Company shall have performed
in all material respects all obligations required to be performed by it under
this Agreement at or prior to the Closing Date, and Parent shall have received
a certificate signed on behalf of the Company by an executive officer of the
Company to such effect.
7.3. Conditions to Obligation of the Company.
The obligation of the Company to effect the Merger is also subject to the
satisfaction or waiver by the Company at or prior to the Effective Time of the
following condition:
Performance of Obligations of Parent and Merger Subsidiary. Each of Parent
and Merger Subsidiary shall have performed in all material respects all
obligations required to be performed by it under this Agreement at or prior to
the Closing Date, and the Company shall have received a certificate signed on
behalf of Parent by an executive officer of Parent and on behalf of Merger
Subsidiary by an executive officer of Merger Subsidiary to such effect.
ARTICLE VIII
Termination
8.1. Termination by Mutual Consent.
This Agreement may be terminated and the Merger may be abandoned at any time
prior to the Effective Time, whether before or after the approval by
stockholders of the Company and Parent referred to in Section 7.1(a), by mutual
written consent of the Company by action of their respective Boards of
Directors.
8.2. Termination by Either Parent or the Company.
This Agreement may be terminated and the Merger may be abandoned at any time
prior to the Effective Time by action of the Board of Directors of either
Parent or the Company if (a) the Merger shall not have been consummated by
February 28, 2000, whether such date is before or after the date of approval by
the stockholders of the Company (the "Termination Date"), provided, however,
that the Termination Date shall be extended by 60 days if the sole reason for
the failure to consummate the Merger is the failure to obtain the Government
Consents described in Section 7.1(c); (b) the approval of the Company's
stockholders required by Section 7.1(a) shall not have been obtained at a
meeting duly convened therefor or at any adjournment or postponement thereof;
or (c) any Order permanently restraining, enjoining or otherwise prohibiting
consummation of the Merger shall become final and non-appealable; provided,
that the right to terminate this
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Agreement pursuant to clause (a) or (b) above shall not be available to any
party that has breached in any material respect its obligations under this
Agreement in any manner that shall have caused the occurrence of the failure of
the Merger to be consummated or, in the case of the Company, its stockholder
approval to be obtained.
8.3. Termination by the Company.
This Agreement may be terminated and the Merger may be abandoned at any time
prior to the Effective Time, whether before or after the approval by
stockholders of the Company referred to in Section 7.1(a), by action of the
Board of Directors of the Company if:
(a) (i) the Company is not in material breach of any of the terms of this
Agreement, (ii) the Merger shall not have been approved by the Company's
stockholders as required by Section 7.1(a), (iii) the Board of Directors of the
Company authorizes the Company, subject to complying with the terms of this
Agreement, to enter into a binding written agreement concerning a transaction
that constitutes a Superior Proposal and the Company notifies Parent in writing
that it intends to enter into such an agreement, attaching the most current
version of such agreement to such notice, (iv) Parent does not make, prior to
five business days after receipt of the Company's written notification of its
intention to enter into a binding agreement for a Superior Proposal (the
"Alternative Transaction Notice"), an offer that the Board of Directors of the
Company determines, in good faith after consultation with its financial
advisors, is at least as favorable, as the Superior Proposal, taking into
account the long term prospects and interests of the Company and its
stockholders and (v) the Company prior to such termination pays to Parent in
immediately available funds the fees required to be paid pursuant to Section
8.5; or
(b) there is a breach by Parent of any covenant or agreement contained in
this Agreement that (i) is not curable or, if curable, is not cured within 20
days after written notice of such breach is given by the Company to Parent and
(ii) would cause a condition set forth in Section 7.3 to be incapable of being
satisfied.
Without limiting the generality of the foregoing Section 8.3(a), the Company
agrees and acknowledges (x) that it cannot terminate this Agreement pursuant to
Section 8.3(a) in order to enter into a binding agreement referred to in clause
(iii) of Section 8.3(a) until at least the date falling six business days after
receipt of the Alternative Transaction Notice and (y) to notify Parent promptly
if its intention to enter into a written agreement referred to in its
Alternative Transaction Notice shall change at any time after giving such
notification.
8.4. Termination by Parent.
This Agreement may be terminated and the Merger may be abandoned at any time
prior to the Effective Time, by action of the Board of Directors of Parent if:
(a) the Company enters into a binding agreement for a Superior Proposal;
(b) there is a breach by the Company of any covenant or agreement contained
in this Agreement that (i) is not curable or, if curable, is not cured within
20 days after written notice of such breach is given by the Parent to the
Company and (ii) would cause a condition set forth in Section 7.2 to be
incapable of being satisfied; or
(c) the Company or its Board of Directors shall have (i) withdrawn, modified
or amended in any respect adverse to Parent its recommendation of the adoption
of this Agreement or failed to reconfirm its recommendation of this Agreement
or the Merger within five business days after a written request by Parent to do
so, (ii) failed to mail the Proxy Statement/Prospectus to its stockholders as
promptly as practicable after the Form S-4 is declared effective, unless such
failure was caused by the actions or inactions of Parent or its
representatives, or failed to include in such statement the Company Board
Recommendation, (iii) approved, recommended or entered into an agreement with
respect to, or consummated, any Transaction Proposal from a
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person other than Parent or any of its affiliates, (iv) resolved to do any of
the foregoing or (v) in response to the commencement of any tender offer or
exchange offer for 10% or more of the outstanding Company Common Stock, not
recommended rejection of such tender offer or exchange offer within ten
business days after the commencement thereof (as such term is defined in Rule
14d-2 under the Exchange Act).
8.5. Effect of Termination and Abandonment.
(a) In the event of the termination of this Agreement and the abandonment of
the Merger pursuant to this Article VIII, this Agreement (other than as set
forth in Section 9.1) shall become void and of no effect with no liability on
the part of any party hereto (or of any of its directors, officers, employees,
agents, legal and financial advisors or other representatives); provided,
however, except as otherwise provided herein, no such termination shall relieve
any party hereto of any liability or damages resulting from any willful or
grossly negligent breach of this Agreement
(b) In the event that this Agreement is terminated (i) by the Company
pursuant to Section 8.3(a) or (ii) by Parent pursuant to Section 8.4(a), then
the Company shall promptly, but in no event later than two days after the date
of such termination or date of entrance into an agreement concerning a
transaction that constitutes an Acquisition Proposal or such earlier time as
required by this Agreement, pay to Parent a termination fee of $25 million
payable by wire transfer of same day funds.
(c) In the event that this Agreement is terminated by Parent pursuant to
Section 8.2(b) and prior to, or at the time of, the meeting referred to therein
any Person shall have made an Acquisition Proposal to the Company or any of its
Subsidiaries or any of its stockholders or shall have publicly announced an
intention (whether or not conditional to make an Acquisition Proposal with
respect to the Company or any of its Subsidiaries and, if within 12 months of
such termination, the Company enters into an agreement concerning a transaction
that constitutes an Acquisition Proposal, the Company at the time of entering
into such agreement, shall pay to Parent the termination fee of $25 million
payable by wire transfer of same day funds.
(d) In the event this Agreement is terminated by Parent pursuant to Section
8.4(b), then the Company shall promptly, but in no event later than two
business days after Parent shall have requested payment of its charges and
expenses incurred in connection with the transactions contemplated hereby
("Expenses"), pay to Parent the amount of such Expenses up to a maximum of
$3,000,000 payable by wire transfer of same day funds.
(e) In the event this Agreement is terminated by the Company pursuant to
Section 8.3(b), then Parent shall promptly, but in no event later than two
business days after the Company shall have requested payment of its Expenses,
pay to the Company the amount of such Company Expenses up to a maximum of
$3,000,000 payable by wire transfer of same day funds.
(f) The Company and Parent each acknowledge that the agreements contained in
Sections 8.5(b)-(e) are an integral part of the transactions contemplated by
this Agreement, and that, without these agreements, the Company, Parent and
Merger Subsidiary would not enter into this Agreement; accordingly, if the
Company fails to promptly pay the amount due pursuant to Section 8.5(b),
Section 8.5(c) or Section 8.5(d), or Parent fails to promptly pay the amount
due pursuant to Section 8.5(e), and, in order to obtain such payment, Parent or
the Company, as the case may be, commences a suit which results in a judgment
against Parent or the Company, as the case may be, for any such amount, the
Company shall pay to Parent or Parent shall pay to the Company, as the case may
be, its costs and expenses (including attorneys' fees) in connection with such
suit, together with interest from the date of termination of this Agreement on
the amounts owed at the prime rate of Morgan Guaranty Trust Company of New York
in effect from time to time during such period plus two percent.
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ARTICLE IX
Miscellaneous and General
9.1. Survival.
This Article IX and the agreements of the Company, Parent and Merger
Subsidiary contained in Section 6.7 (Taxation), Section 6.12 (Benefits),
Section 6.15 (Indemnification; Directors' and Officers' Insurance) and 6.19
(Release and Discharge) shall survive the consummation of the Merger. This
Article IX and the agreements of the Company, Parent and Merger Subsidiary
contained in Section 6.14 (Expenses), Section 6.19 (Release and Discharge) and
Section 8.5 (Effect of Termination and Abandonment) shall survive the
termination of this Agreement. All other representations, warranties, covenants
and agreements in this Agreement shall not survive the consummation of the
Merger or the termination of this Agreement.
9.2. Modification or Amendment.
Subject to the provisions of the applicable law, at any time prior to the
Effective Time, the parties hereto may modify or amend this Agreement, by
written agreement executed and delivered by duly authorized officers of the
respective parties.
9.3. Waiver of Conditions.
Any failure of Parent or Merger Subsidiary, on the one hand, or the Company,
on the other hand, to comply with any obligation, covenant, agreement or
condition herein may be waived in writing by the Company or Parent,
respectively, but such waiver or failure to insist upon strict compliance with
such obligation, covenant, agreement or condition shall not operate as a waiver
of, or estoppel with respect to, any subsequent or other failure. Whenever this
Agreement requires or permits consent by or on behalf of any party hereto, such
consent shall be given in writing in a manner consistent with the requirements
for a waiver of compliance as set forth in this Section 9.3.
9.4. Counterparts.
This Agreement may be executed in any number of counterparts, each such
counterpart being deemed to be an original instrument, and all such
counterparts shall together constitute the same agreement.
9.5. Governing Law; Waiver of Jury Trial.
(a) THIS AGREEMENT SHALL BE DEEMED TO BE MADE IN AND IN ALL RESPECTS SHALL
BE INTERPRETED, CONSTRUED AND GOVERNED BY AND IN ACCORDANCE WITH THE LAW OF THE
STATE OF DELAWARE WITHOUT REGARD TO THE CONFLICT OF LAW PRINCIPLES THEREOF.
(b) EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY WHICH MAY ARISE
UNDER THIS AGREEMENT OR THE STOCK OPTION AGREEMENTS IS LIKELY TO INVOLVE
COMPLICATED AND DIFFICULT ISSUES, AND THEREFORE EACH SUCH PARTY HEREBY
IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT SUCH PARTY MAY HAVE TO A TRIAL
BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR THE STOCK OPTION AGREEMENTS, OR THE TRANSACTIONS
CONTEMPLATED BY THIS AGREEMENT OR THE STOCK OPTION AGREEMENTS. EACH PARTY
CERTIFIES AND ACKNOWLEDGES THAT (i) 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 THE FOREGOING WAIVER,
(ii) EACH PARTY UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER,
(iii) EACH PARTY MAKES THIS WAIVER VOLUNTARILY, AND (iv) EACH PARTY HAS BEEN
INDUCED TO ENTER INTO THIS AGREEMENT AND THE STOCK OPTION AGREEMENTS BY, AMONG
OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 9.5.
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9.6. Notices.
Any notice, request, instruction or other document to be given hereunder by
any party to the others shall be in writing and shall be deemed given if
delivered personally or sent by overnight courier or by facsimile to the
parties at the following addresses (or at such other address for a party as
shall be specified by like notice):
If to Parent or Merger Subsidiary: ACE Limited
The ACE Building
30 Woodbourne Avenue
Hamilton HM 08 Bermuda
Facsimile: (441) 295-3997
Attention: General Counsel
Copy to:
Mayer, Brown & Platt
190 South LaSalle Street
Chicago, IL 60603
Facsimile: (312) 701-7711
Attention: Edward S. Best
If to the Company:Capital Re Corporation
1325 Avenue of the Americas
New York, New York 10019
Facsimile: (212) 581-3268
Attention: General Counsel
Copy to:
Hogan & Hartson L.L.P.
111 South Calvert Street
Baltimore, Maryland 21202
Facsimile: (410) 539-6981
Attention: Michael J. Silver
or to such other persons or addresses as may be designated in writing by the
party to receive such notice as provided above.
9.7. Entire Agreement; No Other Representations.
This Agreement (including any exhibits hereto), the Stock Option Agreement,
the Company Disclosure Schedule, any agreements between Parent and stockholders
of the Company to vote in favor of this Agreement and the Merger and against
any competing proposals and the Confidentiality Agreement dated February
5,1998, between Parent and the Company (the "Confidentiality Agreement")
constitute the entire agreement, and supersede all other prior agreements,
understandings, representations and warranties both written and oral, among the
parties, with respect to the subject matter hereof; provided that Parent and
Merger Subsidiary shall not be deemed to have waived or otherwise affected
their rights with respect to any breach or alleged breach of the Original
Agreement other than as provided in Section 6.19. The parties hereto agree that
the Confidentiality Agreement shall be hereby amended to provide that any
provision therein which in any manner would be inconsistent with this Agreement
or the transactions contemplated hereby or thereby shall terminate as of the
date hereof; provided, however, that such provisions of the Confidentiality
Agreement other than subparagraph (a) of the fourth paragraph thereof shall be
reinstated in the event of any termination of this Agreement.
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<PAGE>
9.8. No Third Party Beneficiaries.
Except as provided in Section 6.12 (Benefits), Section 6.15
(Indemnification; Directors' and Officers' Insurance) and Section 6.19 (Release
and Discharge) this Agreement is not intended to confer upon any Person other
than the parties hereto any rights or remedies hereunder.
9.9. Severability.
The provisions of this Agreement shall be deemed severable and the
invalidity or unenforceability of any provision shall not affect the validity
or enforceability or the other provisions hereof. If any provision of this
Agreement, or the application thereof to any Person or any circumstance, is
invalid or unenforceable, (a) a suitable and equitable provision shall be
substituted therefor in order to carry out, so far as may be valid and
enforceable, the intent and purpose of such invalid or unenforceable provision
and (b) the remainder of this Agreement and the application of such provision
to other Persons or circumstances shall not be affected by such invalidity or
unenforceability, nor shall such invalidity or unenforceability affect the
validity or enforceability of such provision, or the application thereof, in
any other jurisdiction.
9.10. Interpretation.
The table of contents and headings herein are for convenience of reference
only, do not constitute part of this Agreement and shall not be deemed to limit
or otherwise affect any of the provisions hereof. Where a reference in this
Agreement is made to a Section or Exhibit, such reference shall be to a Section
of or Exhibit to this Agreement unless otherwise indicated. Whenever the words
"include," "includes" or "including" are used in this Agreement, they shall be
deemed to be followed by the words "without limitation."
9.11. Assignment.
This Agreement shall not be assignable by operation of law or otherwise;
provided, however, that Parent may designate, by written notice to the Company,
another wholly-owned direct or indirect Subsidiary to be a party to the Merger
in lieu of Merger Subsidiary, in which event all references herein to Merger
Subsidiary shall be deemed references to such other Subsidiary, except that all
representations and warranties made herein with respect to Merger Subsidiary as
of the date of this Agreement shall be deemed representations and warranties
made with respect to such other Subsidiary as of the date of such designation.
9.12. Definitions.
(a) Location of Certain Definitions.
<TABLE>
<CAPTION>
Section
-------
<S> <C>
Affiliate.............................................................. 9.12(b)
Agreement.............................................................. Preamble
Alternative Transaction Notice......................................... 8.3(a)
Average Closing Price.................................................. 3.1(a)
Bylaws................................................................. 2.2
Cash Component......................................................... 3.1(a)
Certificate............................................................ 3.1(a)
Certificate of Incorporation........................................... 2.1
Certificate of Merger.................................................. 1.3
Closing................................................................ 1.2
Closing Date........................................................... 1.2
Code................................................................... 4.9
Company................................................................ Preamble
Company Actuarial Analyses............................................. 4.21(d)
Company Audit Date..................................................... 4.7
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Section
-------
<S> <C>
Company Board Recommendation........................................ 6.5
Company Common Stock................................................ 3.1(a)
Preamble to
Company Disclosure Schedule......................................... Article IV
Company Insurance Contracts......................................... 4.21(b)
Company Insurance Subsidiaries...................................... 4.3(a)
Company Liabilities................................................. 4.8
Company Material Adverse Effect..................................... 9.12(b)
Company Option...................................................... 4.2
Company Parties..................................................... 6.19
Company Requisite Vote.............................................. 4.4(a)
Company SAP Agreements.............................................. 4.6(b)
Company Stock Plans................................................. 4.2
Confidentiality Agreement........................................... 9.7
Contracts........................................................... 4.5
Costs............................................................... 6.15(a)
D&O Insurance....................................................... 6.15(b)
DGCL................................................................ 1.1
Effective Time...................................................... 1.3
Employee Benefit Plans.............................................. 4.9(b)
Environmental Claim................................................. 9.12(b)
Environmental Laws.................................................. 9.12(b)
Environmental Permits............................................... 9.12(b)
Environmental Report................................................ 9.12(b)
ERISA............................................................... 4.9(a)(i)
ERISA Affiliate..................................................... 4.9(c)
Exchange Act........................................................ 4.5
Exchange Agent...................................................... 3.2(a)
Exchange Fund....................................................... 3.2(a)
Exchange Ratio...................................................... 3.1(a)
Expenses............................................................ 8.5(d)
GAAP................................................................ 4.6(a)
Governmental Consents............................................... 7.1(c)
Governmental Entity................................................. 4.5
Hazardous Materials................................................. 9.12(b)
HSR Act............................................................. 4.5
Indemnified Parties................................................. 6.15(a)
Insurance Regulators................................................ 4.10
Intellectual Property............................................... 4.11
Latest Balance Sheet................................................ 6.1(f)
Laws................................................................ 4.10
Maximum Premium..................................................... 6.15(b)
Merger.............................................................. Recitals
Merger Consideration................................................ 3.1(a)
Merger Subsidiary................................................... Preamble
NYSE................................................................ 3.1(a)
Order............................................................... 7.1(d)
Parent.............................................................. Preamble
Parent Audit Date................................................... 5.6(a)
Parent Liabilities.................................................. 5.8
Parent Material Adverse Effect...................................... 9.12(b)
</TABLE>
A-39
<PAGE>
<TABLE>
<CAPTION>
Section
-------
<S> <C>
Parent Option........................................................... 6.12(a)
Parent Reports.......................................................... 5.6(a)
Parent Rights Agreement................................................. 3.1(a)
Parent SAP Statements................................................... 5.6(b)
Parent Shares........................................................... 3.1(a)
Parent Stock Plans...................................................... 5.3
Person.................................................................. 3.2(b)
Preferred Shares........................................................ 4.2
Private Consents........................................................ 4.5
Prospectus/Proxy Statement.............................................. 6.4
Representatives......................................................... 6.3
Responsible Executive Officers of the Company........................... 9.12(b)
Roll-Over Options....................................................... 6.12(a)
S-4 Registration Statement.............................................. 6.4
Schedule 13E-3.......................................................... 6.4
SEC..................................................................... 4.6(a)
Secretary............................................................... 1.3
Securities Act.......................................................... 4.6(a)
Share, Shares........................................................... 3.1(a)
Stockholders Meeting.................................................... 6.5
Subsidiary.............................................................. 9.12(b)
Superior Proposal....................................................... 6.3
Surviving Corporation................................................... 1.1
Takeover Statute........................................................ 4.15
Tax, Taxes, Taxable..................................................... 9.12(b)
Taxing Authority........................................................ 9.12(b)
Tax Return.............................................................. 9.12(b)
Termination Date........................................................ 8.2
Total Cash Consideration................................................ 1.4
Total Consideration..................................................... 1.4
Transaction Proposal.................................................... 6.3
</TABLE>
(b) Certain Other Definitions
"Affiliate" of a Person means any other Person who (i) directly or
indirectly through one or more intermediaries controls, is controlled by or is
under common control with, such Person or (ii) owns more than 5% of the capital
stock or equity interest in such Person. "Control" means the possession of the
power, directly or indirectly, to direct or cause the direction of the
management and policies of a Person whether through the ownership of voting
securities, by contract or otherwise.
"Company Material Adverse Effect" means a material adverse effect on the
properties, business, assets, conditions (financial or otherwise), liabilities
or results of operations of the Company and its Subsidiaries taken as a whole,
other than effects caused by changes in general economic conditions or
conditions generally affecting the insurance or reinsurance industry.
"Environmental Claim" means any written or oral notice, claim, demand,
action, suit, complaint, proceeding or other communication by any person
alleging liability or potential liability arising out of, relating to, based on
or resulting from (i) the presence, discharge, emission, release or threatened
release of any Hazardous Materials at any location, whether or not owned,
leased or operated by the Company or any of its Subsidiaries or (ii)
circumstances forming the basis of any violation or alleged violation of any
Environmental Law or Environmental Permit or (iii) otherwise relating to
obligations or liabilities under any Environmental
A-40
<PAGE>
Laws; provided, however, that the term "Environmental Claim" shall not include
any such claim, demand, action, suit, complaint, proceeding or other
communication under an insurance or reinsurance policy issued by the Company.
"Environmental Laws" means all applicable statutes, rules, regulations,
ordinances, orders, decrees and common law, in each case of any Governmental
Entity, as they exist at the date hereof, relating in any manner to
contamination, pollution or protection of human health or the environment,
including without limitation the Comprehensive Environmental Response,
Compensation and Liability Act, the Solid Waste Disposal Act, the Resource
Conservation and Recovery Act, the Clean Air Act, the Clean Water Act, the
Toxic Substances Control Act, the Occupational Safety and Health Act, the
Emergency Planning and Community-Right-to-Know Act, the Safe Drinking Water
Act, all as amended, and similar state laws.
"Environmental Permits" means all permits, licenses, registrations and other
governmental authorizations required for the Company and its Subsidiaries and
the operations of the Company's and its Subsidiaries' facilities to conduct its
business under Environmental Laws.
"Environmental Report" means any report, study, assessment, audit, or other
similar document that addresses any issue of noncompliance with, or liability
under, any Environmental Law that may affect the Company or any of its
Subsidiaries.
"Hazardous Materials" means any gasoline or petroleum (including crude oil
or any fraction thereof) or petroleum products, polychlorinated biphenyls,
urea-formaldehyde insulation, asbestos, pollutants, contaminants,
radioactivity, and any other substances of any kind, whether or not any such
substance is defined as hazardous or toxic under any Environmental Law, that is
regulated pursuant to or could give rise to liability under any Environmental
Law.
"Parent Material Adverse Effect" means a material adverse effect on the
properties, business, assets, conditions (financial or otherwise), liabilities
or results of operations of Parent and its Subsidiaries taken as a whole, other
than effects caused by changes in general economic conditions or conditions
generally affecting the insurance or reinsurance industry.
"Responsible Executive Officers of the Company" shall mean the persons
designated as such in the preamble to the Company Disclosure Schedule.
"Responsible Executive Officers of Parent" shall mean Brian Duperreault, the
Chairman, President and Chief Executive Officer of Parent, Dominic Frederico,
the Chairman, President and Chief Executive Officer of ACE INA Holdings, Inc.,
Christopher Z. Marshall, the Chief Financial Officer of Parent and Peter Mear,
the General Counsel and Secretary of Parent.
"Subsidiary" means, with respect to the Company, Parent or Merger
Subsidiary, as the case may be, any entity, whether incorporated or
unincorporated, of which at least a majority of the securities or ownership
interests having by their terms ordinary voting power to elect a majority of
the board of directors or other persons performing similar functions is
directly or indirectly owned or controlled by such party or by one or more of
its respective Subsidiaries or by such party and any one or more of its
respective Subsidiaries.
"Tax" (including, with correlative meaning, the terms "Taxes" and "Taxable")
shall mean, with respect to any Person, (i) all taxes, domestic or foreign,
including without limitation any income (net, gross or other, including
recapture of any tax items such as investment tax credits), alternative or add-
on minimum tax, gross income, gross receipts, gains, sales, use, leasing,
lease, user, ad valorem, transfer, recording, franchise, profits, property
(real or personal, tangible or intangible), fuel, license, withholding on
amounts paid to or by such Person, payroll, employment, unemployment, social
security, excise, severance, stamp, occupation, premium, environmental or
windfall profit tax, custom, duty or other tax, or other like assessment or
charge of any kind whatsoever, together with any interest, levies, assessments,
charges, penalties, additions to tax or additional
A-41
<PAGE>
amounts imposed by any Taxing Authority, (ii) any joint or several liability of
such Person with any other Person for the payment of any amounts of the type
described in (a) of this definition and (iii) any liability of such Person for
the payment of any amounts of the type described in (i) as a result of any
express or implied obligation to indemnify any other Person.
"Tax Return(s)" shall mean all returns, consolidated or otherwise (including
without limitation informational returns), required to be filed with any Taxing
Authority.
"Taxing Authority" shall mean any authority responsible for the imposition
of any Tax.
In Witness Whereof, this Agreement has been duly executed and delivered by
the duly authorized officers or managers of the parties hereto as of the date
first written above.
Capital Re Corporation
/s/ Jerome F. Jurschak
By: _________________________________
ACE Limited
/s/ Donald Kramer
By: _________________________________
CapRe Acquisition Corp.
/s/ Donald Kramer
By: _________________________________
A-42
<PAGE>
<TABLE>
<CAPTION>
Exhibits
--------
<C> <S>
Exhibit A Company Affiliate Letter
</TABLE>
A-43
<PAGE>
APPENDIX B
THE TRANSFER OF THIS AGREEMENT IS SUBJECT TO CERTAIN RESTRICTIONS
CONTAINED HEREIN AND TO RESALE RESTRICTIONS UNDER THE
SECURITIES ACT OF 1933, AS AMENDED
STOCK OPTION AGREEMENT
This Stock Option Agreement, dated as of June 10, 1999 (the "Agreement"), is
between ACE Limited, a Cayman Islands company (the "Grantee"), and Capital Re
Corporation, a Delaware corporation (the "Grantor").
Whereas, Grantee, CapRe Acquisition Corp., a Delaware corporation and a
wholly owned, direct subsidiary of Grantee (the "Merger Subsidiary"), and
Grantor have entered into an Agreement and Plan of Merger, dated as of the date
hereof (the "Merger Agreement"), pursuant to which Grantee and Grantor intend
to effect a merger of Merger Subsidiary with and into Grantor (the "Merger");
Whereas, as a condition and inducement to Grantee's and Merger Subsidiary's
willingness to enter into the Merger Agreement, Grantee and Merger Subsidiary
have requested that Grantor grant to Grantee an option to purchase up to
3,220,135 fully paid and nonassessable shares of common stock, par value $0.01
per share, of Grantor (the "Common Stock"), upon the terms and subject to the
conditions hereof; and
Whereas, in order to induce Grantee and Merger Subsidiary to enter into the
Merger Agreement, and in consideration thereof, Grantor is willing to grant
Grantee the Option (as defined below).
Now, Therefore, in consideration of the premises and the mutual covenants
and agreements set forth herein, the parties hereto agree as follows:
1. The Option; Adjustments.
(a) Subject to the other terms and conditions set forth herein, Grantor
hereby grants to Grantee an irrevocable option (the "Option") to purchase up to
3,220,135 fully paid and nonassessable shares of Common Stock (the "Shares") at
a cash purchase price equal to $17.40 per share (the "Option Price"); provided,
however, that in no event shall the number of shares for which the Option is
exercisable exceed 9.9% of the shares of Common Stock issued and outstanding at
the time of exercise (without giving effect to the shares of Common Stock
issued or issuable pursuant to the Option) (the "Maximum Applicable
Percentage"). The number of shares of Common Stock purchasable upon exercise of
the Option and the Option Price are subject to adjustment as set forth in this
Agreement.
(b) In the event that any additional shares of Common Stock are issued or
otherwise become outstanding after the date of this Agreement (other than
pursuant to this Agreement), the aggregate number of shares of Common Stock
purchasable upon exercise of the Option (inclusive of shares, if any,
previously purchased upon exercise of the Option) shall automatically be
increased (without any further action on the part of Grantor or Grantee being
necessary) so that, after such issuance, it equals the Maximum Applicable
Percentage. Any such increase shall not affect the Option Price.
2. Exercise; Closing.
(a) Conditions to Exercise; Termination. Grantee or any other person that
shall become a holder of all or part of the Option in accordance with the terms
of this Agreement (each such person being referred to in this Agreement as a
"Holder") may exercise the Option, in whole or in part, by delivering a written
notice thereof as provided in Section 2(d) within 180 days following the
occurrence of a Triggering Event (as defined in Section 2(b)) unless prior to
such Triggering Event the Effective Time (as defined in the Merger Agreement)
B-1
<PAGE>
shall have occurred. If no notice pursuant to the preceding sentence has been
delivered prior thereto, the Option shall terminate upon either (i) the
occurrence of the Effective Time or (ii) the close of business on the earlier
of (x) the day 180 days after the date that Grantee becomes entitled to receive
the Termination Fee (as defined in the Merger Agreement) under Section 8.5(b)
or (c) of the Merger Agreement and (y) the date that Grantee is no longer
potentially entitled to receive the Termination Fee under Section 8.5(b) or (c)
of the Merger Agreement for a reason other than that Grantee has already
received the Termination Fee.
(b) Triggering Event. A "Triggering Event" shall have occurred if the Merger
Agreement is terminated and Grantee then or thereafter becomes entitled to
receive the Termination Fee pursuant to Section 8.5(b) or (c) of the Merger
Agreement.
(c) Notice of Triggering Event by Grantor. Grantor shall notify Grantee
promptly in writing of the occurrence of any Triggering Event, it being
understood that the giving of such notice by Grantor shall not be a condition
to the right of a Holder to exercise the Option.
(d) Notice of Exercise by Grantee. If a Holder shall be entitled to and
wishes to exercise the Option, it shall send to Grantor a written notice (the
date of which is referred to in this Agreement as the "Notice Date") specifying
(i) the total number of shares the Holder will purchase pursuant to such
exercise and (ii) a place and date (a "Closing Date") not earlier than three
business days nor later than 20 business days from the Notice Date for the
closing of such purchase (a "Closing"); provided, that if a filing is required
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the
"HSR Act"), or any other notice, report, filing or approval is required with
respect to any governmental or regulatory authority, court, agency, commission,
body or other governmental entity (a "Governmental Entity") in connection with
such purchase, (x) the Holder or Grantor, as required, promptly after the
giving of such notice shall file the required notice, report, filing or
application for approval and shall expeditiously process the same and (y) the
period of time referred to in clause (ii) above shall commence on the date on
which the Grantee furnishes to Grantor a supplemental written notice setting
forth the Closing Date, which notice shall be furnished as promptly as
practicable after all required notification, reporting or filing periods shall
have expired or been terminated, all required approvals shall have been
obtained and all requisite waiting periods shall have passed. Each of Grantee
and Grantor agrees to use all commercially reasonable efforts to cooperate with
and provide information to Grantor or the Holder, as the case may be, for the
purpose of any required notice, report, filing or application for approval.
(e) Payment of Purchase Price. At each Closing, the Holder shall pay to
Grantor the aggregate purchase price for the shares of Common Stock purchased
pursuant to the exercise of the Option in immediately available funds by a wire
transfer to a bank account designated by Grantor; provided, that failure or
refusal of Grantor to designate such a bank account shall not preclude the
Holder from exercising the Option, in whole or in part.
(f) Delivery of Common Stock. At such Closing, simultaneously with the
payment of the purchase price by the Holder, Grantor shall deliver to the
Holder a certificate or certificates representing the number of shares of
Common Stock purchased by the Holder and, if the Option shall be exercised in
part only, a new Option evidencing the rights of the Holder to purchase the
balance (as adjusted pursuant to Section 1(b)) of the shares of Common Stock
then purchasable under this Agreement.
(g) Restrictive Legend. Certificates for Common Stock delivered at a Closing
may be endorsed with a restrictive legend that shall read substantially as
follows:
"The transfer of the shares represented by this certificate is subject
to resale restrictions arising under the Securities Act of 1933, as
amended."
It is understood and agreed that the above legend shall be removed by delivery
of substitute certificate(s) without such reference if the Holder shall have
delivered to Grantor a copy of a letter from the staff of the Securities and
Exchange Commission, or a written opinion of counsel, in form and substance
reasonably satisfactory to Grantor, to the effect that such legend is not
required for purposes of the Securities Act of 1933,
B-2
<PAGE>
as amended (the "Securities Act"). In addition, such certificates shall bear
any other legend as may be required by applicable law.
(h) Ownership of Record; Tender of Purchase Price; Expenses. Upon the giving
by the Holder to Grantor of a written notice of exercise referred to in Section
2(d) and the tender of the applicable purchase price in immediately available
funds, the Holder shall be deemed to be the holder of record of the shares of
Common Stock issuable upon such exercise, notwithstanding that the stock
transfer books of Grantor shall then be closed or that certificates
representing such shares of Common Stock shall not have been delivered to the
Holder. Grantor shall pay all expenses, and any and all United States federal,
state and local taxes and other charges that may be payable in connection with
the preparation, issue and delivery of stock certificates under this Section 2
in the name of the Holder or its assignee, transferee or designee.
3. Covenants of Grantor. In addition to its other agreements and covenants
in this Agreement, Grantor agrees:
(a) Shares Reserved for Issuance. It will maintain, free from preemptive
rights, sufficient authorized but unissued or treasury shares of Common
Stock to issue the appropriate number of shares of Common Stock pursuant to
the terms of this Agreement so that the Option may be fully exercised
without additional authorization of Common Stock after giving effect to all
other options, warrants, convertible securities and other rights of third
parties to purchase shares of Common Stock from Grantor.
(b) No Avoidance. It will not avoid or seek to avoid (whether by charter
amendment or through reorganization, consolidation, merger, issuance of
rights, dissolution or sale of assets, or by any other voluntary act) the
observance or performance of any of the covenants, agreements or conditions
to be observed or performed under this Agreement by Grantor.
(c) Further Assurances. Promptly after the date of this Agreement, it
will take all actions as may from time to time be required (including (i)
complying with all applicable premerger notification, reporting and waiting
period requirements under the HSR Act and (ii) in the event that prior
notice, report, filing or approval with respect to any Governmental Entity
is necessary under any applicable foreign or United States federal, state
or local law before the Option may be exercised, cooperating fully with the
Holder in preparing and processing the required applications or notices) in
order to permit the Holder to exercise the Option and purchase shares of
Common Stock pursuant to such exercise and to take all action necessary to
protect the rights of the holder against dilution.
(d) Stock Exchange Listing. Subject to applicable law and the rules and
regulations of the New York Stock Exchange, Inc. (the "NYSE"), it will
promptly file an application to list the Shares on the NYSE (to the extent
they are not already listed) and will use all commercially reasonable
efforts to obtain approval of such listing and to effect all necessary
filings by Grantor under the HSR Act and the applicable insurance laws of
each state and foreign jurisdiction; provided, however, that if it is
unable to effect such listing on the NYSE by the Closing Date, it will
nevertheless be obligated to deliver the Shares upon the Closing Date.
4. Representations and Warranties of Grantor.
(a) Merger Agreement. Grantor hereby makes each of the representations and
warranties contained in Sections 4.1, 4.2, 4.4, 4.5 and 4.15 of the Merger
Agreement as they relate to Grantor and this Agreement, as if such
representations were set forth in this Agreement.
(b) Shares Reserved for Issuance; Capital Stock. Grantor has taken all
necessary corporate action to authorize and reserve, free from preemptive
rights, and permit it to issue, sufficient authorized but unissued or treasury
shares of Common Stock so that the Option may be fully exercised without
additional authorization of Common Stock after giving effect to all other
options, warrants, convertible securities and other rights of third parties to
purchase shares of Common Stock from Grantor, and all such shares, upon
issuance pursuant to the Option, will be duly authorized, validly issued, fully
paid and nonassessable, and will be delivered free and
B-3
<PAGE>
clear of all claims, liens, encumbrances, and security interests (other than
those created by this Agreement) and not subject to any preemptive rights.
(c) The Shares. No "fair price," "moratorium," "control share acquisition,"
"interested shareholder" or other form of antitakeover statute or regulation,
including without limitation Section 203 of the Delaware General Corporation
Law, or similar provision contained in the certificate of incorporation or by-
laws of Grantor, is or shall be applicable to the acquisition of the Shares
pursuant to this Agreement.
5. Representations and Warranties of Grantee. Grantee represents and
warrants to Grantor that (a) the execution and delivery of this Agreement by
Grantee and the consummation by it of the transactions contemplated hereby have
been duly authorized by all necessary corporate action on the part of Grantee
and this Agreement has been duly executed and delivered by a duly authorized
officer of Grantee and constitutes a valid and binding obligation of Grantee;
and (b) Grantee is acquiring the Option and, if and when it exercises the
Option, will be acquiring the Shares issuable upon the exercise thereof for its
own account and not with a view to distribution or resale in any manner which
would be in violation of the Securities Act.
6. Exchange; Replacement. This Agreement and the Option granted by this
Agreement are exchangeable, without expense, at the option of the Holder, upon
presentation and surrender of this Agreement at the principal office of
Grantor, for other Agreements providing for Options of different denominations
entitling the holder thereof to purchase in the aggregate the same number of
shares of Common Stock purchasable at such time under this Agreement, subject
to corresponding adjustments in the number of shares of Common Stock
purchasable upon exercise so that the aggregate number of such shares under all
stock option agreements issued in respect of this Agreement shall not exceed
the Maximum Applicable Percentage. Unless the context shall require otherwise,
the terms "Agreement" and "Option" as used in this Agreement include any stock
option agreements and related Options for which this Agreement (and the Option
granted by this Agreement) may be exchanged. Upon (i) receipt by Grantor of
evidence reasonably satisfactory to it of the loss, theft, destruction of this
Agreement, or mutilation of this Agreement, (ii) receipt by Grantor of
reasonably satisfactory indemnification in the case of loss, theft or
destruction of this Agreement and (iii) surrender and cancellation of this
Agreement in the case of mutilation, Grantor will execute and deliver a new
Agreement of like tenor and date. Any such new Agreement executed and delivered
shall constitute an additional contractual obligation on the part of Grantor,
whether or not the Agreement so lost, stolen, destroyed or mutilated shall at
any time be enforceable by any person other than the holder of the new
Agreement.
7. Adjustments. In addition to the adjustment to the total number of shares
of Common Stock purchasable upon exercise of the Option pursuant to Section
1(b), the total number of shares of Common Stock purchasable upon the exercise
of the Option and the Option Price shall be subject to adjustment from time to
time as follows:
(a) In the event of any change in the outstanding shares of Common Stock
by reason of stock dividends, split-ups, mergers, recapitalizations,
combinations, subdivisions, conversions, exchanges of shares or the like,
the type and number of shares of Common Stock purchasable upon exercise of
the Option shall be appropriately adjusted, and proper provision shall be
made in the agreements governing any such transaction, so that (i) any
Holder shall receive upon exercise of the Option the number and class of
shares, other securities, property or cash that such Holder would have
received in respect of the shares of Common Stock purchasable upon exercise
of the Option if the Option had been exercised and such shares of Common
Stock had been issued to such Holder immediately prior to such event or the
record date therefor, as applicable, and (ii) in the event any additional
shares of Common Stock are to be issued or otherwise become outstanding as
a result of any such change (other than pursuant to an exercise of the
Option), the number of shares of Common Stock purchasable upon exercise of
the Option shall be increased so that, after such issuance and together
with shares of Common Stock previously issued pursuant to the exercise of
the Option (as adjusted on account of any of the foregoing changes in the
Common Stock), the number of shares so purchasable equals the Maximum
Applicable Percentage of the
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number of shares of Common Stock issued and outstanding immediately after
the consummation of such change.
(b) Whenever the number of shares of Common Stock purchasable upon
exercise of the Option is adjusted as provided in this Section 7, the
Option Price shall be adjusted by multiplying the Option Price by a
fraction, the numerator of which is equal to the number of shares of Common
Stock purchasable prior to the adjustment and the denominator of which is
equal to the number of shares of Common Stock purchasable after the
adjustment.
8. Registration.
(a) Upon the occurrence of a Triggering Event, Grantor shall, at the request
of Grantee delivered in the written notice of exercise of the Option provided
for in Section 2(d), as promptly as practicable prepare, file and keep current
a shelf registration statement under the Securities Act covering any or all
shares issued and issuable pursuant to the Option and shall use all
commercially reasonable efforts to cause such registration statement to become
effective and remain current in order to permit the sale or other disposition
of any shares of Common Stock issued upon total or partial exercise of the
Option ("Option Shares") in accordance with any plan of disposition requested
by Grantee; provided, however, that Grantor may postpone filing a registration
statement relating to a registration request by Grantee under this Section 8
for a period of time (not in excess of 60 days) if in its judgment such filing
would require the disclosure of material information that Grantor has a bona
fide business purpose for preserving as confidential. Grantor will use all
commercially reasonable efforts to cause such registration statement first to
become effective as soon as practicable and then to remain effective for 270
days from the day such registration statement first becomes effective or until
such earlier date as all shares registered shall have been sold by Grantee. In
connection with any such registration, Grantor and Grantee shall provide each
other with representations, warranties, indemnities and other agreements
customarily given in connection with such registrations. If requested by
Grantee in connection with such registration, Grantor shall become a party to
any underwriting agreement relating to the sale of such shares, but only to the
extent of obligating Grantor in respect of representations, warranties,
indemnities, contribution and other agreements customarily made by issuers in
such underwriting agreements.
(b) In the event that Grantee so requests, the closing of the sale or other
disposition of the Common Stock or other securities pursuant to a registration
statement filed pursuant to Section 8(a) shall occur substantially
simultaneously with the exercise of the Option.
9. Repurchase of Option and/or Shares.
(a) Repurchase; Repurchase Price. Upon the occurrence of a Triggering Event,
(i) at the request of a Holder, delivered in writing within 180 days of such
occurrence (or such later period as provided in Section 2(d) with respect to
any required notice or application or in Section 10), Grantor shall repurchase
the Option from the Holder, in whole or in part, at a price (the "Option
Repurchase Price") equal to the number of shares of Common Stock then
purchasable upon exercise of the Option (or such lesser number of shares as may
be designated in the Repurchase Notice (as defined below)) multiplied by the
amount by which the market/offer price (as defined below) exceeds the Option
Price and (ii) at the request of a Holder or any person who has been a Holder
(for purposes of this Section 9 only, each such person being referred to as a
"Holder"), delivered in writing within 180 days of such occurrence (or such
later period as provided in Section 2(d) with respect to any required notice or
application or in Section 10), Grantor shall repurchase such number of Option
Shares from such Holder as the Holder shall designate in the Repurchase Notice
at a price (the "Option Share Repurchase Price") equal to the number of shares
designated multiplied by the market/offer price. The term "market/offer price"
shall mean the highest of (x) the price per share of Common Stock at which a
tender or exchange offer for Common Stock has been made, (y) the price per
share of Common Stock to be paid by any third party pursuant to an agreement
with Grantor and (z) the highest trading price for shares of Common Stock on
the NYSE (or, if the Common Stock is not then listed on the NYSE, any other
national securities exchange or automated quotation system on which the Common
Stock is then listed or quoted) within the six-month
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period immediately preceding the delivery of the Repurchase Notice. In the
event that a tender or exchange offer is made for the Common Stock or an
agreement is entered into for a merger, share exchange, consolidation or
reorganization involving consideration other than cash, the value of the
securities or other property issuable or deliverable in exchange for the Common
Stock shall (I) if such consideration is in securities and such securities are
listed on a national securities exchange, be determined to be the highest
trading price for such securities on such national securities exchange within
the six-month period immediately preceding the delivery of the Repurchase
Notice or (II) if such consideration is not securities, or if in securities and
such securities are not traded on a national securities exchange, be determined
in good faith by a nationally recognized investment banking firm selected by an
investment banking firm designated by Grantee and an investment banking firm
designated by Grantor.
(b) Method of Repurchase. A Holder may exercise its right to require Grantor
to repurchase the Option, in whole or in part, and/or any Option Shares then
owned by such Holder pursuant to this Section 9 by surrendering for such
purpose to Grantor, at its principal office, this Agreement or certificates for
Option Shares, as applicable, accompanied by a written notice or notices
stating that the Holder elects to require Grantor to repurchase the Option
and/or such Option Shares in accordance with the provisions of this Section 9
(each such notice, a "Repurchase Notice"). As promptly as practicable, and in
any event within two business days after the surrender of the Option and/or
certificates representing Option Shares and the receipt of the Repurchase
Notice relating thereto, Grantor shall deliver or cause to be delivered to the
Holder the applicable Option Repurchase Price and/or the Option Share
Repurchase Price. Any Holder shall have the right to require that the
repurchase of Option Shares shall occur immediately after the exercise of all
or part of the Option. In the event that the Repurchase Notice shall request
the repurchase of the Option in part, Grantor shall deliver with the Option
Repurchase Price a new Stock Option Agreement evidencing the right of the
Holder to purchase that number of shares of Common Stock purchasable pursuant
to the Option at the time of delivery of the Repurchase Notice minus the number
of shares of Common Stock represented by that portion of the Option then being
repurchased.
(c) Effect of Statutory or Regulatory Restraints on Repurchase. To the
extent that, upon or following the delivery of a Repurchase Notice, Grantor is
prohibited under applicable law or regulation from repurchasing the Option (or
portion thereof) and/or any Option Shares subject to such Repurchase Notice
(and Grantor will undertake to use all commercially reasonable efforts to
obtain all required regulatory and legal approvals and to file any required
notices as promptly as practicable in order to accomplish such repurchase),
Grantor shall immediately so notify the Holder in writing and thereafter
deliver or cause to be delivered, from time to time, to the Holder the portion
of the Option Repurchase Price and the Option Share Repurchase Price that
Grantor is no longer prohibited from delivering, within two business days after
the date on which it is no longer so prohibited; provided, however, that upon
notification by Grantor in writing of such prohibition, the Holder may, within
five days of receipt of such notification from Grantor, revoke in writing its
Repurchase Notice, whether in whole or to the extent of the prohibition,
whereupon, in the latter case, Grantor shall promptly (i) deliver to the Holder
that portion of the Option Repurchase Price and/or the Option Share Repurchase
Price that Grantor is not prohibited from delivering; and (ii) deliver to the
Holder, as appropriate, (A) with respect to the Option, a new Stock Option
Agreement evidencing the right of the Holder to purchase that number of shares
of Common Stock for which the surrendered Stock Option Agreement was
exercisable at the time of delivery of the Repurchase Notice less the number of
shares as to which the Option Repurchase Price has theretofore been delivered
to the Holder, and/or (B) with respect to Option Shares, a certificate for the
Option Shares as to which the Option Share Repurchase Price has not theretofore
been delivered to the Holder. Notwithstanding anything to the contrary in this
Agreement, including, without limitation, the time limitations on the exercise
of the Option, the Holder may give notice of exercise of the Option for 180
days after a notice of revocation has been issued pursuant to this Section 9(c)
and thereafter exercise the Option in accordance with the applicable provisions
of this Agreement.
(d) Acquisition Transactions. In addition to any other restrictions or
covenants, Grantor agrees that, in the event that a Holder delivers a
Repurchase Notice, Grantor shall not enter or agree to enter into an agreement
or
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series of agreements relating to a merger with or into or the consolidation
with any other person or entity, the sale of all or substantially all of the
assets of Grantor or any similar disposition unless the other party or parties
to such agreement or agreements agree to assume in writing Grantor's
obligations under Section 9(a) and, notwithstanding any notice of revocation
delivered pursuant to the proviso to Section 9(c), a Holder may require such
other party or parties to perform Grantor's obligations under Section 9(a)
unless such party or parties are prohibited by law or regulation from such
performance, in which case such party or parties shall be subject to the
obligations of Grantor under Section 9(c).
10. Extension of Exercise Periods. The 180-day periods for exercise of
certain rights under Sections 2 and 9 shall be extended in each such case at
the request of the Holder to the extent necessary to avoid liability by the
Holder under Section 16(b) of the Securities Exchange Act of 1934, as amended,
by reason of such exercise.
11. Limitation of Holder Profit. (a) Notwithstanding any other provision
herein, in no event shall Grantee's Total Profit (as defined below) exceed
$25,000,000, exclusive of any reimbursement of expenses pursuant to Section
8.5(e) of the Merger Agreement (the "Maximum Profit"), and, if it otherwise
would exceed such amount, Grantee, at its sole discretion, shall either (1)
reduce the number of shares subject to the Option (and any Substitute Option),
(2) deliver to Grantor for cancellation shares of Common Stock (or other
securities into which such Option Shares are converted or exchanged), (3) pay
cash to the Grantor or (4) any combination of the foregoing, so that Grantee's
actually realized Total Profit shall not exceed the Maximum Profit after taking
into account the foregoing actions.
(b) For purposes of this Agreement, "Total Profit" shall mean: (1) the
aggregate amount of (a) the excess of (x) the net cash amounts received by
Grantee pursuant to a sale of Option Shares (or securities into which such
shares are converted or exchanged) to any unaffiliated third party within 12
months after the exercise of the Option, over (y) the Grantee's aggregate
purchase price for such Option Shares (or other securities), plus (b) all
amounts received by Grantee on the transfer of the Option (including pursuant
to Section 9), plus (c) all amounts received by Grantee pursuant to Section
8.5(b) or (c) of the Merger Agreement (other than reimbursement in respect of
Expenses), minus (2) all amounts of cash previously paid to Grantor pursuant to
this Section 11 plus the value of the Option Shares (or other securities)
previously delivered to the Grantor for cancellation pursuant to this Section
11.
(c) Notwithstanding any other provision of this Agreement, nothing in this
Agreement shall affect the ability of Grantee to receive, nor relieve Grantor's
obligation to pay, any payment provided for in Section 8.5(b) and (c) of the
Merger Agreement; provided that if and to the extent the Total Profit received
by Grantee would exceed the Maximum Profit following receipt of such payment,
Grantee shall be obligated to comply with the terms of Section 11(a) within 30
days of the latest of (1) the date of receipt of such payment, (2) the date of
receipt of the net cash by Grantee pursuant to the sale of Option Shares (or
securities into which such Option Shares are converted or exchanged) to any
unaffiliated party within 12 months after the exercise of this Option with
respect to such Option Shares and (3) the date of receipt of net cash from the
disposition of the Option.
(d) For purposes of paragraph (a) of this Section and clause (b)(ii) of this
Section, the value of any Option Shares delivered to the Grantor shall be the
market/offer price of such Option Shares.
12. Assignment. Neither party may assign any of its rights or obligations
under this Agreement or the Option to any other person without the express
written consent of the other party except that, (i) Holder may assign this
Agreement to a wholly-owned subsidiary of Holder and (ii) in the event that a
Triggering Event shall have occurred, Grantee may assign the Option, in whole
or in part. Any attempted assignment in contravention of the preceding sentence
shall be null and void.
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<PAGE>
13. Filings; Other Actions. Grantor will use all commercially reasonable
efforts to make all filings with, and to obtain consents of, all third parties
and governmental authorities necessary for the consummation of the transactions
contemplated by this Agreement.
14. Specific Performance. Grantor acknowledges that if Grantor fails to
perform any of its obligations under this Agreement immediate and irreparable
harm or injury would be caused to Grantee and/or the Holder for which money
damages would not be an adequate remedy. In such event, Grantor agrees that
Grantee or a Holder shall have the right, in addition to any other rights it
may have, to specific performance of this Agreement. Accordingly, if Grantee or
a Holder should institute an action or proceeding seeking specific enforcement
of the provisions hereof, Grantor hereby waives the claim or defense that
Grantee or a Holder has an adequate remedy at law and hereby agrees not to
assert in any such action or proceeding the claim or defense that such a remedy
at law exists. Grantor further agrees to waive any requirements for the
securing or posting of any bond in connection with obtaining any such equitable
relief.
15. Severability. If any term, provision, covenant, or restriction contained
in this Agreement is held by a court or a federal or state regulatory agency of
competent jurisdiction to be invalid, void, or unenforceable, the remainder of
the terms, provisions, covenants, and restrictions contained in this Agreement
shall remain in full force and effect, and shall in no way be affected,
impaired, or invalidated. If for any reason such court or regulatory agency
determines that the Holder is not permitted to acquire, or Grantor is not
permitted to repurchase pursuant to Section 9, the full number of shares of
Common Stock provided in Section 1(a) of this Agreement (as adjusted pursuant
to Sections 1(b) and 7 of this Agreement), it is the express intention of
Grantor to allow the Holder to acquire or to require Grantor to repurchase such
lesser number of shares as may be permissible, without any amendment or
modification of this Agreement.
16. Notice. Notices, requests, instructions, or other documents to be given
under this Agreement shall be in writing and shall be deemed given (i) three
business days following sending by registered or certified mail, postage
prepaid, (ii) when sent, if sent by facsimile, provided that receipt of the fax
is promptly confirmed by telephone, (iii) when delivered, if delivered
personally to the intended recipient, and (iv) one business day later, if sent
by overnight delivery via a national courier service, in each case at the
addresses of the parties set forth below, or such other address as may be
designated in writing hereafter, in the same manner, by such party:
If to Grantee or a Holder:
ACE Limited
The ACE Building
30 Woodbourne Avenue
Hamilton HM 08 Bermuda
Attn: Chief Executive Officer
Facsimile: (441) 295-3997
With a copy to:
Mayer, Brown & Platt
190 South LaSalle Street
Chicago, Illinois 60603
Attn: Edward S. Best, Esq.
Facsimile: (312) 701-7711
If to Grantor:
Capital Re Corporation
1325 Avenue of the Americas
New York, New York 10019
Attn: Alan S. Roseman
Facsimile: 212-578-3268
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<PAGE>
With a copy to:
Hogan & Hartson L.L.P.
111 South Calvert Street, Suite 1600
Baltimore, Maryland 21202
Attn: Michael J. Silver, Esq.
Facsimile: 410-539-6981
17. Expenses. Except as otherwise expressly provided in this Agreement or in
the Merger Agreement, all costs and expenses incurred in connection with this
Agreement and the transactions contemplated by this Agreement shall be paid by
the party incurring such expense, including fees and expenses of its own
financial consultants, investment bankers, accountants, and counsel.
18. Entire Agreement. This Agreement, the Stockholder Support Agreement (as
defined in the Merger Agreement) and the Merger Agreement constitute the entire
agreement, and supersede all other prior agreements, understandings,
representations and warranties, both written and oral, between the parties,
with respect to the subject matter of this Agreement. The terms and conditions
of this Agreement shall inure to the benefit of and be binding upon the parties
and their respective successors and permitted assigns. Nothing in this
Agreement, is intended to confer upon any person or entity, other than the
parties to this Agreement, and their respective successors and permitted
assigns, any rights or remedies under this Agreement.
19. Governing Law and Venue; Waiver of Jury Trial.
(a) This Agreement shall be deemed to be made in and in all respects shall
be interpreted, construed and governed by and in accordance with Delaware law
without regard to the conflict of law principles thereof. The parties
irrevocably and unconditionally consent to submit to the exclusive jurisdiction
of the courts of the State of Delaware and of the United States of America
located in Wilmington, Delaware (the "Delaware Courts") for any litigation
arising out of or relating to this Agreement and the transactions contemplated
by this Agreement (and agree not to commence any litigation relating thereto
except in such Delaware Courts), waive any objection to the laying of venue of
any such litigation in the Delaware Courts and agree not to plead or claim in
any Delaware Court that such litigation brought therein has been brought in an
inconvenient forum.
(b) EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY WHICH MAY ARISE
UNDER THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES, AND
THEREFORE EACH SUCH PARTY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT SUCH
PARTY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR
INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT, OR THE TRANSACTIONS
CONTEMPLATED BY THIS AGREEMENT. EACH PARTY CERTIFIES AND ACKNOWLEDGES THAT (i)
NO REPRESENTATIVE, AGENT OR ATTORNEY OF THE OTHER PARTY HAS REPRESENTED,
EXPRESSLY OR OTHERWISE, THAT THE OTHER PARTY WOULD NOT, IN THE EVENT OF
LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, (ii) EACH PARTY UNDERSTANDS
AND HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER, (iii) EACH PARTY MAKES THIS
WAIVER VOLUNTARILY, AND (iv) EACH PARTY HAS BEEN INDUCED TO ENTER INTO THIS
AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS
SECTION 19.
20. Captions. The Section and paragraph captions in this Agreement are for
convenience of reference only, do not constitute part of this Agreement and
shall not be deemed to limit or otherwise affect any of the provisions of this
Agreement.
21. Amendments. This Agreement may not be changed, amended or modified
orally, but may be changed only by an agreement in writing signed by the party
against whom any waiver, change, amendment, modification or discharge may be
sought.
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<PAGE>
22. Counterparts. This Agreement may be executed in any number of
counterparts, each of which, when executed, shall be deemed to be an original
and all of which together shall constitute one and the same document.
23. Public Announcement. Grantee and Grantor shall consult with each other
prior to issuing, and will provide each other with a meaningful opportunity to
review and comment upon, any press releases or otherwise making public
announcements with respect to the Option and prior to making any filings with
any third party and/or Governmental Entity (as defined in the Merger Agreement)
(including any national securities exchange) with respect thereto, except as
may be required by law, court process or by obligations pursuant to any listing
agreement with or rules of any national securities exchange or interdealer
quotation system.
24. Survival. All representations and warranties contained in this Agreement
shall survive delivery of and payment for the Shares.
In Witness Whereof, Grantee and Grantor have caused this Agreement to be
duly executed and delivered on the day and year first above written.
Capital Re Corporation
By: /s/ Jerome F. Jurschak
Name: Jerome F. Jurschak
Title: Chief Executive Officer
Ace Limited
By: /s/ Brian Duperreault
Name: Brian Duperreault
Title:Chairman, President and
Chief Executive Officer
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[Goldman Sachs LOGO]
APPENDIX C
October 26, 1999
Board of Directors
Capital Re Corporation
1325 Avenue of the Americas
New York, NY 10019
Gentlemen and Madame:
You have requested our opinion as to the fairness from a financial point of
view to the holders (other than ACE (as defined below)) of the outstanding
shares of Common Stock, par value $.01 per share (the "Shares"), of Capital Re
Corporation (the "Company") of the Merger Consideration (as defined below) to
be received for the Shares pursuant to the Amended and Restated Agreement and
Plan of Merger dated as of October 26, 1999 among ACE Limited ("ACE"), CapRe
Acquisition Corp., a wholly-owned subsidiary of ACE, and the Company (the
"Agreement"). The Merger Consideration per Share shall consist of (i) 0.65 of
an ordinary share, par value $.041666667 per share (the "ACE Shares"), of ACE
(the "Exchange Ratio") and (ii) an amount of cash (the "Cash Component") equal
to the greater of (A) $1.30 and (B) the difference (if positive) between (I)
$14.00 and (II) the product of (1) 0.65 multiplied by (2) the average closing
price of an ACE Share on the New York Stock Exchange as reported in The Wall
Street Journal (New York City edition) for the five consecutive trading days
ending three trading days prior to the closing date under the Agreement;
provided that the Cash Component shall in no event exceed $4.68.
Goldman, Sachs & Co., as part of its investment banking business, is
continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, competitive
biddings, secondary distributions of listed and unlisted securities, private
placements and valuations for estate, corporate and other purposes. We are
familiar with the Company having provided certain investment banking services
to the Company from time to time, including having acted as managing
underwriter of the initial public offering of 6,325,000 Shares in April 1992,
managing underwriter for a public offering of $100 million of 7.75% debentures
due November 1, 2002 in December 1992, managing underwriter for a public
offering of $75 million of 7.65% company obligated mandatorily redeemable
preferred securities of Capital Re LLC in May 1994 and managing underwriter of
a public offering of 3,450,000 Shares in February 1996. We also advised the
Company on the sale of $75 million of Shares to ACE (the "Financing") and we
acted as financial advisor in connection with, and participated in certain of
the negotiations leading to, the Agreement. Goldman, Sachs & Co. provides a
full range of financial advisory and securities services, may in the future
provide financial advisory services to ACE, and, in the course of its normal
trading activities may from time to time effect transactions and hold
securities, including derivative securities, of the Company or ACE for its own
account and for the accounts of customers.
In connection with this opinion, we have reviewed, among other things, the
Agreement and Plan of Merger dated June 10, 1999 among ACE, CapRe Acquisition
Corp., and the Company; the Agreement; the Registration
<PAGE>
Capital Re Corporation
October 26, 1999
Page Two
Statement on Form S-4, as in effect on the date hereof, including the proxy
statement/prospectus, dated September 3, 1999, contained therein; Annual
Reports to Stockholders and Annual Reports on Form 10-K of the Company and ACE
for the five fiscal years ended December 31, 1998 and September 30, 1998,
respectively; certain interim reports to stockholders and Quarterly Reports on
Form 10-Q of the Company and ACE; and certain internal financial analyses and
forecasts for the Company prepared by its management. We have also reviewed a
liquidation analysis for the Company prepared by its management assuming a
downgrade of the outstanding financial strength ratings of the Company's
principal operating subsidiaries Capital Reinsurance Company and KRE
Reinsurance Ltd. (the "Ratings"). We also have held discussions with members
of the senior management of the Company and ACE regarding the strategic
rationale for, and the potential benefits of, the transaction contemplated by
the Agreement, and the past and current business operations, financial
condition and future prospects of their respective companies. In addition, we
have reviewed the reported price and trading activity for the Shares and the
ACE Shares, compared certain financial and stock market information for the
Company and ACE with similar information for certain other companies the
securities of which are publicly traded, reviewed the financial terms of
certain recent business combinations in the financial guaranty insurance and
mortgage guaranty insurance industries and performed such other studies and
analyses as we considered appropriate.
You have informed us that you believe, and you have instructed us to assume
for purposes of this opinion, that without a transaction of the type
contemplated by the Agreement, the Company's reinsurance exposure to entities
affiliated with International Financial Services Life Insurance Company, and
certain potential losses related to its support for the underwriting of RGB
Syndicate 490, would result in a downgrade of the Ratings in the immediate
future and that such downgrade would have a profound negative impact on the
business operations and the financial condition of the Company. We also have
assumed that all material governmental, regulatory or other consents and
approvals necessary for the consummation of the transaction contemplated by
the Agreement will be obtained without any adverse effect on the Company or
ACE or on the contemplated benefits of the transaction contemplated by the
Agreement. As you are aware, we were not requested to solicit, and did not
solicit, interest from third parties with respect to an acquisition of or
other business combination with the Company. As you are also aware, the
Company received an unsolicited proposal from XL Capital Ltd. to acquire all
of the outstanding Shares. Our opinion does not address the relative merits of
the transaction contemplated by the Agreement as compared to any alternative
business transaction that might be available to the Company.
We have relied upon the accuracy and completeness of all of the financial
and other information, including the liquidation analysis, reviewed by us and
have assumed such accuracy and completeness for purposes of rendering this
opinion. As you are aware, ACE did not make available to us in writing its
forecasts of expected future performance. Accordingly, our review with respect
to such information was limited to discussions with senior managers of ACE
about the earnings and growth estimates of research analysts covering ACE. We
are not actuaries and our services did not include any actuarial
determinations or an attempt to evaluate actuarial assumptions for the Company
or ACE. In addition, we have not made an independent evaluation or appraisal
of the assets and liabilities of the Company or ACE or any of their
subsidiaries and we have not been furnished with any such evaluation or
appraisal. Our advisory services and the opinion expressed herein are provided
for the information and assistance of the Board of Directors of the Company in
connection with its consideration of the transaction contemplated by the
Agreement and such opinion does not constitute a recommendation as to how any
holder of Shares should vote with respect to such transaction.
Based upon and subject to the foregoing and based upon such other matters
as we consider relevant, it is our opinion that as of the date hereof the
Merger Consideration to be received by the holders of Shares is fair from a
financial point of view to the holders (other than ACE) of Shares.
Very truly yours,
/s/ Goldman, Sachs & Co.
_____________________________________
(GOLDMAN, SACHS & CO.)
<PAGE>
APPENDIX D
DELAWARE GENERAL CORPORATION LAW
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 Section
228 of this title shall be entitled to an appraisal by the Court of Chancery of
the fair value of the stockholder's 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 stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and
the words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one 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 Section 251 (other than a merger effected pursuant to
Section 251(G) of this title), Section 252, Section 254, Section 257, Section
258, Section 263 or Section 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 and to vote at the
meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. 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 subsection (f) of Section 251 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
Sections 251, 252, 254, 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 designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. 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.
<PAGE>
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under Section 253 of this title is not owned by
the parent corporation 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.
(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
such meeting with respect to shares for which appraisal rights are
available pursuant to subsection (b) or (c) hereof 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. Each stockholder
electing to demand the appraisal of such stockholder's shares shall deliver
to the corporation, before the taking of the vote on the merger or
consolidation, a written demand for appraisal of such stockholder's 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 stockholder's 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 Section 228
or Section 253 of this title, each constituent corporation, either before
the effective date of the merger or consolidation or within ten 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; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. 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 holder's 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 holder's 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 holder's 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
D-2
<PAGE>
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) hereof and who is otherwise entitled to appraisal
rights, may file 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 shall have the right to withdraw such
stockholder's demand for appraisal and to accept the terms offered upon the
merger or consolidation. 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) 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 stockholder's 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) hereof,
whichever is later.
(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 determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of the merger
or consolidation, together with a fair rate of 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. In determining
the fair rate of interest, the Court may consider all relevant factors,
including the rate of interest which the surviving or resulting corporation
would have had to pay to borrow money during the pendency of the proceeding.
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, permit discovery or other pretrial proceedings and may
proceed to trial upon the appraisal prior to the final determination of the
stockholder entitled to an appraisal. Any stockholder whose name appears on the
list filed by the surviving or
D-3
<PAGE>
resulting corporation pursuant to subsection(f) of this section and who has
submitted such stockholder's 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. Interest may be simple or compound, as the
Court may direct. 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 Court's 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.
(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 attorney's 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 stockholder's
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.
(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.
D-4
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers.
ACE is a Cayman Islands company. Section 100 of ACE's Articles of
Association contains provisions with respect to indemnification of ACE's
officers and directors. Such provisions provide that ACE shall indemnify, in
accordance with and to the full extent now or hereafter permitted by law, any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (including, without limitation, an
action by or in the right of ACE), by reason of his acting as a director,
officer, employee or agent of, or his acting in any other capacity for or on
behalf of, ACE, against any liability or expense actually and reasonably
incurred by such person in respect thereof. ACE may also advance the expenses
of defending any such act, suit or proceeding in accordance with and to the
full extent now or hereafter permitted by law.
Such indemnification and advancement of expenses are not exclusive of any
other right to indemnification or advancement of expenses provided by law or
otherwise. The Companies Law (Revised) of the Cayman Islands does not set out
any specific restrictions on the ability of a company to indemnify officers or
directors. However, the application of basic principles and certain
Commonwealth case law which is likely to be persuasive in the Cayman Islands
would indicate that indemnification is generally permissible except in the
event that there has been fraud or wilful default on the part of the officer or
director or reckless disregard of his duties and obligations to the company.
Directors and officers of ACE are also provided with indemnification against
certain liabilities pursuant to a directors and officers liability insurance
policy. Coverage is afforded for any loss that the insureds become legally
obligated to pay by reason of any claim or claims first made against the
insureds or any of them during the policy period from any wrongful acts that
are actually or allegedly caused, committed or attempted by the insureds prior
to the end of the policy period. Wrongful acts are defined as any actual or
alleged error, misstatement, misleading statement or act, omission, neglect or
breach of duty by the insureds while acting in their individual or collective
capacities as directors or officers of ACE, or any other matter claimed against
them by reason of their being directors or officers of ACE. Certain of ACE's
directors are provided, by their employer, with indemnification against certain
liabilities incurred as directors of ACE.
Item 21. Exhibits and Financial Statement Schedules.
(a) The following exhibits are filed herewith or incorporated herein by
reference:
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S> <C>
2.1 Amended and Restated Agreement and Plan of Merger, dated as of October 26,
1999, among ACE, CapRe Acquisition Corp. and Capital Re (included as
Appendix A to the Proxy Statement/Prospectus contained in this
registration statement).
2.2 Stock Option Agreement, dated as of June 10, 1999 by and between Capital
Re as issuer and ACE as grantee (included as Appendix B to the Proxy
Statement/Prospectus contained in this registration statement).
2.3 Stockholder Support Agreement, dated as of June 10, 1999, between ACE and
MP Investments, Inc. (Incorporated by reference to similarly numbered
exhibit to Registration Statement on Form S-4 (333-86499) of ACE Limited)
2.4 Stockholder Support Agreement, dated as of June 10, 1999, between ACE and
Constellation Investments, Inc. (Incorporated by reference to similarly
numbered exhibit to Registration Statement on Form S-4 (333-86499) of ACE
Limited)
2.5 First Amendment to Amended and Restated Plan of Merger dated as of
November 29, 1999 among ACE, CapRe Acquisition Corp. and Capital Re.
</TABLE>
II-1
<PAGE>
<TABLE>
<S> <C> <C>
5 Opinion of Maples and Calder regarding the legality of the ACE ordinary
shares to be registered under this registration statement.
8.1 Opinion of Mayer, Brown & Platt regarding certain United States federal
income tax consequences of the merger.
8.2 Opinion of Hogan & Hartson L.L.P. regarding certain United States federal
income tax consequences of the merger.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Ernst & Young LLP.
23.3 Consent of Mayer, Brown & Platt (included in the opinion filed as Exhibit
8.1 to this registration statement).
23.4 Consent of Hogan & Hartson L.L.P. (included in the opinion filed as
Exhibit 8.2 to this registration statement).
23.5 Consent of Maples and Calder (included in the opinion filed as Exhibit 5
to this registration statement).
24.1 Power of Attorney*
99.1 Form of Proxy for holders of Capital Re common stock.
99.2 Consent of Goldman, Sachs & Co.
99.3 Consent of Credit Suisse First Boston Corporation*
</TABLE>
- --------
*Previously filed.
Item 22. Undertakings.
(1) The undersigned registrant hereby undertakes as follows: that prior
to any public reoffering of the securities registered hereunder through use
of a prospectus which is a part of this registration statement, by any
person or party who is deemed to be an underwriter within the meaning of
Rule 145(c), the issuer undertakes that such reoffering prospectus will
contain the information called for by the applicable registration form with
respect to reofferings by persons who may be deemed underwriters, in
addition to the information called for by the other items of the applicable
form.
(2) The registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph (1) immediately preceding, or (ii) that purports to
meet the requirements of Section 10(a)(3) of the Act and is used in
connection with an offering of securities subject to Rule 415, will be
filed as a part of an amendment to the registration statement and will not
be used until such amendment is effective, and that, for purposes of
determining any liability under the Securities Act of 1933, each such post-
effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
(3) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of
the registrant's annual report pursuant to section 13(a) or section 15(d)
of the Securities Exchange Act of 1934, as amended (and, where applicable,
each filing of an employee benefit plan's annual report pursuant to Section
15(d) of the Securities Exchange Act of 1934, as amended) that is
incorporated by reference in the registration statement shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
The undersigned registrant also hereby undertakes:
(1) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers or persons
controlling the registrant pursuant to the provisions described
II-2
<PAGE>
under Item 20 above, or otherwise, the registrant has been informed that in
the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of
expense incurred or paid by a director, officer or controlling person of
the registrant in the successful defense of any action, suit or proceeding)
is asserted against the registrant by such director, officer or controlling
person in connection with the securities being registered, the registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act of 1933 and will be governed by the final
adjudication of such issue.
(2) To respond to requests for information that is incorporated by
reference into the proxy statement/prospectus pursuant to Items 4, 10(b),
11 or 13 of Form S-4, within one business day of receipt of such request,
and to send the incorporated documents by first class mail or other equally
prompt means. This includes information contained in documents filed
subsequent to the effective date of the registration statement through the
date of responding to the request; and
(3) To supply by means of a post-effective amendment all information
concerning the transaction and the company being acquired involved therein,
that was not the subject of and included in the registration statement when
it became effective.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Hamilton, Bermuda, on
November 29, 1999.
ACE Limited
/s/ Brian Duperreault
By: ________________________________
Name: Brian Duperreault
Title: Chairman and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
Brian Duperreault Chairman and Chief Executive November 29, 1999
____________________________________ Officer; Director
Brian Duperreault
Christopher Z. Marshall Chief Financial Officer; November 29, 1999
____________________________________ (Principal Financial
Christopher Z. Marshall Officer)
Robert A. Blee Chief Accounting Officer; November 29, 1999
____________________________________ (Principal Accounting
Robert A. Blee Officer)
* Vice Chairman; Director November 29, 1999
____________________________________
Donald Kramer
* Director November 29, 1999
____________________________________
Michael G. Atieh
* Director November 29, 1999
____________________________________
Bruce L. Crockett
* Director November 29, 1999
____________________________________
Meryl D. Hartzband
* Director November 29, 1999
____________________________________
Robert M. Hernandez
* Director November 29, 1999
____________________________________
Roberto Mendoza
* Director November 29, 1999
____________________________________
Peter Menikoff
* Director November 29, 1999
____________________________________
Thomas J. Neff
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* Director November 29, 1999
____________________________________
Glen M. Renfrew
* Director November 29, 1999
____________________________________
Robert Ripp
* Director November 29, 1999
____________________________________
Walter A. Scott
* Director November 29, 1999
____________________________________
Dermott F. Smurfit
* Director November 29, 1999
____________________________________
Robert W. Staley
* Director November 29, 1999
____________________________________
Gary M. Stuart
* Director November 29, 1999
____________________________________
Sidney F. Wentz
</TABLE>
Christopher Z. Marshall
*By:______________________
Attorney-in-Fact
AUTHORIZED REPRESENTATIVE
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the undersigned as the duly
authorized representative of ACE Limited in the United States.
/s/ Brian Duperreault
_________________________________
Brian Duperreault
November 29, 1999
II-5
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
2.5 First Amendment to Amended and Restated Plan of Merger dated as of
November 29, 1999 among ACE, CapRe Acquisition Corp. and Capital Re.
5 Opinion of Maples and Calder regarding the legality of the ACE
ordinary shares to be registered under this registration statement.
8.1 Opinion of Mayer, Brown & Platt regarding certain United States
federal income tax consequences of the merger.
8.2 Opinion of Hogan & Hartson L.L.P. regarding certain United States
federal income tax consequences of the merger.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Ernst & Young LLP.
99.1 Form of Proxy for holders of Capital Re common stock.
99.2 Consent of Goldman, Sachs & Co.
</TABLE>
