UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 13D
Under the Securities Exchange Act of 1934
USF&G CORPORATION
(Name of Issuer)
Common Stock, $2.50 par value
(Title of Class of Securities)
903290 10 4
(CUSIP Number)
Bruce A. Backberg
The St. Paul Companies, Inc.
385 Washington Street
Saint Paul, Minnesota 55102
(612) 310-7911
(Name, Address and Telephone Number
of Person Authorized to Receive
Notices and Communications)
January 19, 1998
(Date of Event which Requires Filing of this Statement)
If a filing person has previously filed a statement on Schedule 13G to report
the acquisition which is the subject of this Schedule 13D, and is filing this
schedule because of Rule 13d-1(b)(3) or (4), check the following box [ ].
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CUSIP NO. 903290 10 4 PAGE 2 OF 18 PAGES
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1. NAME OF REPORTING PERSON
S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
The St. Paul Companies, Inc.
I.R.S. Identification No. 41-0518860
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2. CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP
(A) [ ]
(B) [ ]
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3. SEC USE ONLY
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4. SOURCE OF FUNDS
OO
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5. CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS
REQUIRED PURSUANT TO ITEMS 2(d) OR 2(e) [ ]
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6. CITIZENSHIP OR PLACE OF ORGANIZATION Organized under the laws of the
State of Minnesota
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7. SOLE VOTING POWER
NUMBER OF 23,181,596*
SHARES ----------------------------------------
BENEFICIALLY 8. SHARED VOTING POWER
OWNED BY 0
EACH ----------------------------------------
REPORTING 9. SOLE DISPOSITIVE POWER
PERSON 23,181,596*
WITH ----------------------------------------
10. SHARED DISPOSITIVE POWER
0
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11. AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING
PERSON
23,181,596*
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12. CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES
CERTAIN SHARES
[ ]
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13. PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
16.6%
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14. TYPE OF REPORTING PERSON
CO, HC
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CUSIP NO. 903290 10 4 PAGE 3 OF 18 PAGES
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* The shares of common stock, par value $2.50 per share (the "USF&G Common
Stock"), of USF&G Corporation ("USF&G") covered by this statement on
Schedule 13D are purchasable by The St. Paul Companies, Inc. ("St. Paul")
upon exercise of an option granted to St. Paul on January 19, 1998, and
described in Item 4 hereof. Prior to the exercise of the option, St. Paul
is not entitled to any rights as a shareholder of USF&G as to the shares of
USF&G Common Stock covered by the option. The option may only be exercised
upon the occurrence of certain events referred to in Item 4 hereof, none of
which has occurred as of the date hereof. St. Paul therefore disclaims any
beneficial ownership of the shares of USF&G Common Stock which are
purchasable by St. Paul upon exercise of the option. If the option were
exercised, St. Paul would have the sole right to vote or to dispose of the
shares of USF&G Common Stock issued as a result of such exercise.
ITEM 1. SECURITY AND ISSUER
This statement on Schedule 13D relates to shares of common stock, par
value $2.50 per share (the "USF&G Common Stock"), of USF&G Corporation, a
Maryland corporation ("USF&G"). The address of the principal executive offices
of USF&G is 6225 Centennial Way, Baltimore, Maryland 21209.
ITEM 2. IDENTITY AND BACKGROUND
(a) - (c) and (f). This statement on Schedule 13D is being filed by The
St. Paul Companies, Inc. ("St. Paul"). St. Paul is organized as a general
business corporation under the laws of the State of Minnesota, and the address
of its principal business and principal office is 385 Washington Street, St.
Paul, Minnesota 55102. St. Paul is a holding company which through its
subsidiaries is primarily engaged in providing property/casualty insurance and
reinsurance underwriting. St. Paul also has a presence in the investment
banking/asset management industry through its majority ownership of The John
Nuveen Company.
The names of the directors and executive officers of St. Paul, their
business addresses and principal occupations and the business addresses of their
principal employers are set forth in Annex A attached hereto, which is
incorporated herein by reference in its entirety.
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CUSIP NO. 903290 10 4 PAGE 4 OF 18 PAGES
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(d) and (e). During the last five years, none of St. Paul, or, to the
knowledge of St. Paul, any of the persons listed on Annex A, has (i) been
convicted in a criminal proceeding (excluding traffic violations or similar
misdemeanors) or (ii) been 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 future
violations of, or prohibiting or mandating activities subject to, Federal or
State securities laws or finding any violations with respect to such laws.
ITEM 3. SOURCES AND AMOUNT OF FUNDS
As described in the response to Item 4 (which response is incorporated
herein by reference), the shares of USF&G Common Stock to which this Schedule
13D relates have not been purchased by St. Paul. Rather, in connection with, and
as a condition to, St. Paul and USF&G entering into the Merger Agreement (as
defined in the response to Item 4), USF&G granted St. Paul an option to purchase
up to 23,181,596 shares of USF&G Common Stock (subject to possible adjustment as
provided in the Stock Option Agreement (as defined in the response to Item 4))
at an exercise price of $22.00 per share.
ITEM 4. PURPOSE OF TRANSACTION
On January 19, 1998, USF&G, St. Paul and SP Merger Corporation, a
Maryland corporation and wholly-owned subsidiary of St. Paul ("Merger Sub"),
entered into an Agreement and Plan of Merger (the "Merger Agreement") pursuant
to which Merger Sub would be merged with and into USF&G (the "Merger"). As a
result of the Merger, USF&G would become a wholly-owned subsidiary of St. Paul.
Upon the terms and subject to the conditions of the Merger Agreement,
each share of USF&G Common Stock issued and outstanding immediately prior to the
effective time of the Merger (other than shares of USF&G Common Stock owned by
St. Paul or any direct or indirect subsidiary of St. Paul or by USF&G or any
direct or indirect subsidiary of USF&G (in each case not held on behalf of third
parties)) will be converted into, and become exchangeable for, the right to
receive that number of shares (the "Exchange Ratio") of common stock, no par
value, of St. Paul (the "St. Paul Common Stock") determined by dividing $22 by
the average of the daily average per share high and low sales
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CUSIP NO. 903290 10 4 PAGE 5 OF 18 PAGES
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prices of one share of St. Paul Common Stock as reported on the New York Stock
Exchange, Inc. ("NYSE") composite tape for each of the 20 trading days ending on
the third trading day prior to the date of the meeting at which USF&G's
shareholders vote on the Merger (the "Average St. Paul Price"), provided, that,
if the Average St. Paul Price is less than $74 the Exchange Ratio will be
0.2973, and if the Average St. Paul Price is greater than $78, the Exchange
Ratio will be 0.2821.
Consummation of the Merger is subject to, among other things, certain
regulatory approvals, approval of the Merger by the shareholders of USF&G and
the approval of the issuance of shares of St. Paul Common Stock pursuant to the
Merger Agreement by the shareholders of St. Paul.
Pursuant to the Merger Agreement, the charter of USF&G as in effect
immediately prior to the effective time of the Merger will remain the charter of
USF&G as the surviving corporation in the Merger but will be amended as
contemplated in the Merger Agreement. The Merger Agreement provides that upon
consummation of the Merger the bylaws of USF&G will be replaced by the bylaws of
Merger Sub in effect at the effective time of the Merger. In addition, at the
effective time of the Merger, the directors of Merger Sub at such effective time
will be the directors of USF&G until their successors have been duly elected or
appointed and qualified or until their earlier death, resignation or removal in
accordance with the charter and bylaws. The officers of USF&G at the effective
time of the Merger, from and after such effective time, will remain the officers
of USF&G until their successors have been duly elected or appointed and
qualified or until their earlier death, resignation or removal in accordance
with the charter and bylaws.
The Merger Agreement also provides that promptly after the effective
time of the Merger, St. Paul will increase the size of its board of directors
and will cause Mr. Norman P. Blake, Jr. (the current Chairman of the Board of
Directors of USF&G) and two additional directors of USF&G determined by the
Board Governance Committee of St. Paul to be appointed to St. Paul's board of
directors. In addition, subject to its fiduciary duties under applicable law,
St. Paul has agreed to nominate two (or, if the effective time of the Merger
occurs on or after August 15, 1998, three) of such directors for election to St.
Paul's board of directors at its first annual meeting with a mailing date after
the effective time of the Merger.
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CUSIP NO. 903290 10 4 PAGE 6 OF 18 PAGES
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In addition, the Merger Agreement contains certain customary
restrictions on the conduct of the business of USF&G pending consummation of the
Merger. Pursuant to the Merger Agreement, USF&G has agreed, among other things,
(1) to conduct its business in all material respects in the ordinary and usual
course and not to enter into any new line of business; (2) to use its reasonable
best efforts to preserve its business organization intact and maintain its
existing relations and goodwill with customers, suppliers, reinsurers,
distributors, creditors, lessors, employees and business associates; (3) not to
(i) issue, sell, pledge, dispose of or encumber any capital stock owned by it in
any of its subsidiaries, (ii) amend its charter or bylaws or amend, modify or
terminate its shareholders' rights agreement, (iii) split, combine or reclassify
its capital stock, (iv) authorize, declare, set aside or pay any dividend in
respect of any capital stock other than dividends from its direct or indirect
wholly-owned subsidiaries and other than regular quarterly cash dividends paid
by USF&G on USF&G Common Stock not in excess of $.07 per share or (v)
repurchase, redeem or otherwise acquire, except in certain circumstances, any
shares of its stock or any securities convertible into or exchangeable or
exercisable for any shares of its stock; (4) that neither it nor any of its
subsidiaries will, except as specifically permitted under the Merger Agreement,
(i) issue, sell, pledge, dispose of or encumber any shares of, or securities
convertible into or exchangeable or exercisable for, or options, warrants,
calls, commitments or rights of any kind to acquire any shares of, its capital
stock or any class of securities convertible into or exchangeable for any other
property or assets (other than shares of USF&G Common Stock issuable pursuant to
options outstanding on the date hereof under any of USF&G's stock plans or upon
conversion of USF&G's convertible notes), (ii) other than in the ordinary and
usual course of business, transfer, lease, license, guarantee, sell, mortgage,
pledge, dispose of or encumber any other material property or assets (including
capital stock of any of its subsidiaries) or take any action to incur or modify
any material indebtedness or other material liability, (iii) make capital
expenditures in excess of certain specified amounts or (iv) make any acquisition
of, or investment in, the assets or stock of any other person or entity (other
than a subsidiary of USF&G) except for ordinary course investment activities or
as otherwise permitted by Section 6.1(a) of the Merger Agreement; or (5) that
neither it nor any of its subsidiaries will enter into any agreement containing
any provision or covenant limiting in any material respect the ability of USF&G
or any of its
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CUSIP NO. 903290 10 4 PAGE 7 OF 18 PAGES
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subsidiaries or affiliate to (i) sell any products or services of or to any
other person, (ii) engage in any line of business or (iii) compete with or to
obtain products or services from any person or limiting the ability of any
person to provide products or services to USF&G or any of its subsidiaries or
affiliates.
Concurrently with the execution of the Merger Agreement, St. Paul and
USF&G entered into a stock option agreement, dated as of January 19, 1998 (the
"Stock Option Agreement"), pursuant to which USF&G granted St. Paul an
irrevocable option (the "Option") to purchase, subject to the terms thereof, up
to 23,181,596 shares of USF&G Common Stock (which number represents 19.9% of the
shares of USF&G Common Stock outstanding on the date of the Stock Option
Agreement), subject to adjustment in accordance with the terms of the Stock
Option Agreement, at a price per share in cash of $22.00 per share (the "Option
Purchase Price"). The Stock Option Agreement provides that St. Paul may exercise
the Option, in whole or in part, at any time, or from time to time, following
the occurrence of one of the events set forth in Section 2(d) thereof (each a
"Triggering Event") and prior to the termination of the Option in accordance
with the terms of the Stock Option Agreement.
A "Triggering Event" would occur if (a) any person (other than St. Paul
or any of its subsidiaries) acquires beneficial ownership (as such term is
defined in Rule 13d-3 under the Securities Exchange Act of 1934 (the "Exchange
Act")) or the right to acquire beneficial ownership of, or any "group" (as such
term is defined under the Exchange Act) is formed which beneficially owns or has
the right to acquire beneficial ownership of, USF&G Common Stock (other than
trust account shares) aggregating 15 percent or more of the then outstanding
USF&G Common Stock; (b) a Company Acquisition Proposal (as defined in Section
6.2 of the Merger Agreement) is made to USF&G or any of its subsidiaries or any
of its shareholders or any person publicly announces an intention to make a
Company Acquisition Proposal with respect to USF&G or any of its subsidiaries
and thereafter the Merger Agreement is terminated by either St. Paul or USF&G
due to the failure to obtain the approval of the Merger from USF&G's
shareholders; (c) the Merger Agreement is terminated by USF&G as a result of the
provisions of the Merger Agreement permitting USF&G to terminate in order to
enter into an agreement concerning a Superior Proposal (as defined in Section
6.2 of the Merger Agreement) and St. Paul does not make an offer that the board
of directors of USF&G determines is at least as
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CUSIP NO. 903290 10 4 PAGE 8 OF 18 PAGES
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favorable, from a financial point of view, to the shareholders of USF&G as the
Superior Proposal; (d) the Merger Agreement is terminated by St. Paul after
USF&G has entered into a binding agreement for a Superior Proposal or if the
board of directors of USF&G withdraws or modifies its recommendation of the
Merger; or (e) USF&G notifies St. Paul in writing that it intends to enter into
an agreement for a Superior Proposal, and St. Paul notifies USF&G in writing
that it does not intend to match the Superior Proposal referred to in USF&G's
notification.
Pursuant to the Stock Option Agreement, at any time the Option is
exercisable, St. Paul may elect, by sending a Cash Exercise Notice (as defined
in the Stock Option Agreement), in lieu of exercising the Option for shares of
USF&G Common Stock, to have USF&G pay cash in an amount equal to the Spread (as
defined below) multiplied by all or such portion of the shares subject to the
Option as St. Paul specifies. The term "Spread" is defined in the Stock Option
Agreement as the excess, if any, over the Option Purchase Price of the higher of
(i) if applicable, the highest price per share of USF&G Common Stock paid or
proposed to be paid in cash or property by any person pursuant to any Company
Acquisition Proposal (the "Alternative Purchase Price") or (ii) the closing
price of the shares of USF&G Common Stock on the NYSE composite tape on the last
trading day immediately prior to the date of the Cash Exercise Notice (the
"Closing Price").
The Stock Option Agreement provides that, if by the first anniversary
of the date the Merger Agreement is terminated pursuant to the terms thereof
(the "Merger Termination Date"), neither St. Paul nor any other person has
acquired more than fifty percent (excluding the shares of USF&G Common Stock
purchased pursuant to the Option) of the outstanding USF&G Common Stock, then
USF&G has the right to purchase (the "Repurchase Right") all, but not less than
all, of the shares of USF&G Common Stock acquired upon exercise of the Option at
the greater of (a) the Option Purchase Price or (b) the average of the last
sales prices for shares of USF&G Common Stock on the five trading days ending
five days prior to the date USF&G gives written notice of its intention to
exercise the Repurchase Right. If USF&G does not exercise the Repurchase Right
within thirty days following the end of the one-year period after the Merger
Termination Date, the Repurchase Right lapses.
The Stock Option Agreement also provides that at any time prior to the
first anniversary of the Merger
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CUSIP NO. 903290 10 4 PAGE 9 OF 18 PAGES
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Termination Date, St. Paul will have the right to sell (the "Sale Right") to
USF&G all, but not less than all, of the shares of USF&G Common Stock acquired
upon exercise of the Option at the greater of (a) the Option Purchase Price, or
(b) the average of the last sales prices for USF&G Common Stock on the five
trading days ending five days prior to the date St. Paul gives written notice of
its intention to exercise the Sale Right. If St. Paul does not exercise the Sale
Right prior to the first anniversary of the Merger Termination Date, the Sale
Right terminates.
The Stock Option Agreement provides that the right to exercise the
Option will terminate at the earliest of (a) the effective time of the Merger,
(b) if the Option is not exercised, the date 60 days after the date the Option
first becomes exercisable and (c) if not then exercisable, thirty days after
termination of the Merger Agreement in accordance with its terms (the "Option
Termination Date").
The Stock Option Agreement provides that in no event will St. Paul's
Total Profit (as defined below) exceed $75 million and, if it otherwise would
exceed such amount, St. Paul will repay such excess amount to USF&G in cash (or
the purchase price for purposes of repurchase of shares of USF&G Common Stock or
the sale of shares of USF&G Common Stock purchased upon exercise of the Option,
as applicable, will be reduced) so that St. Paul's Total Profit will not exceed
$75 million after taking into account the foregoing actions. The Stock Option
Agreement further provides that the Option may not be exercised for a number of
shares of USF&G Common Stock as would, as of the date of the Stock Exercise
Notice (as defined in the Stock Option Agreement), result in a Notional Total
Profit (as defined below) of more than $75 million and, if exercise of the
Option otherwise would exceed such amount, St. Paul, at its discretion, may
increase the Option Purchase Price for that number of shares of USF&G Common
Stock set forth in the Stock Exercise Notice so that the Notional Total Profit
will not exceed $75 million.
The term "Total Profit" is defined in the Stock Option Agreement as the
aggregate amount (before taxes) of the following: (a) (i) the amount of cash
received by St. Paul as the Termination Fee (described in Section 8.5 of the
Merger Agreement) and the amount received by St. Paul as cash in lieu of shares
of USF&G Common Stock (as described above), less (ii) any repayment of such cash
to USF&G, (b) (i) the amount received by St. Paul pursuant to USF&G's repurchase
of shares of USF&G Common Stock (as described
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CUSIP NO. 903290 10 4 PAGE 10 OF 18 PAGES
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above), less (ii) St. Paul's purchase price for such shares of USF&G Common
Stock, and (c) (i) the net cash amounts received by St. Paul pursuant to the
sale of shares of USF&G Common Stock (or any other securities into or for which
such shares of USF&G Common Stock are converted or exchanged) to any
unaffiliated party, less (ii) St. Paul's purchase price for such shares of USF&G
Common Stock.
As used in the Stock Option Agreement the term "Notional Total Profit,"
with respect to any number of shares of USF&G Common Stock as to which St. Paul
may propose to exercise the Option, will be the Total Profit determined as of
the date of the Stock Exercise Notice assuming that the Option was exercised on
such date for such number of shares of USF&G Common Stock and assuming that such
shares of USF&G Common Stock together with all other shares of USF&G Common
Stock acquired upon exercise of the Option and held by St. Paul and its
affiliates as of such date, were sold for cash at the closing market price for
the USF&G Common Stock as of the close of business on the preceding trading day.
The purpose of the transaction contemplated by the Stock Option
Agreement is to enable St. Paul to consummate the transactions contemplated by
the Merger Agreement. The Stock Option Agreement and certain terms and
provisions of the Merger Agreement could have the effect of discouraging persons
who now or prior to the effective time of the Merger might be interested in
acquiring all or a significant interest in USF&G from considering or proposing
such an acquisition and would likely increase the cost to the acquiror of any
such acquisition.
The preceding description of certain terms and provisions of the Merger
Agreement and the Stock Option Agreement does not purport to be complete and is
qualified in its entirety by reference to the text of the Merger Agreement and
the Stock Option Agreement, copies of which are attached hereto as Exhibits 1
and 2, respectively, and which are incorporated by reference herein.
Upon consummation of the Merger, the shares of USF&G Common Stock would
cease to be listed on the NYSE and the Pacific Stock Exchange and would become
eligible for termination of registration pursuant to Section 12(g)(4) of the
Securities Exchange Act of 1934, as amended.
Except as set forth in this statement on Schedule 13D, in the Merger
Agreement and in the Stock Option
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CUSIP NO. 903290 10 4 PAGE 11 OF 18 PAGES
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Agreement, neither St. Paul nor, to the best of St. Paul's knowledge, any of the
individuals named on Annex A hereto, has any additional plans or proposals which
relate to or would result in any of the actions specified in subparagraphs (a)
through (j) of Item 4 of Schedule 13D.
ITEM 5. INTERESTS IN SECURITIES OF THE ISSUER
(a) - (b) By reason of its execution of the Stock Option Agreement, St.
Paul might be deemed to have beneficial ownership of and sole voting and
dispositive power with respect to the shares of USF&G Common Stock subject to
the Option and, accordingly, might be deemed to beneficially own 23,181,596
shares of USF&G Common Stock as a result of the Stock Option Agreement. Based on
the number of shares of USF&G Common Stock subject to the Option and the number
of shares of USF&G Common Stock outstanding as of January 16, 1998 as
represented to St. Paul by USF&G in the Merger Agreement (116,470,432), St. Paul
would beneficially own approximately 16.6% of the outstanding USF&G Common Stock
following exercise of the Option. St. Paul expressly disclaims, however, any
beneficial ownership of the 23,181,596 shares of USF&G Common Stock which are
obtainable by St. Paul upon exercise of the Option, because the Option is
exercisable only in the circumstances set forth in Item 4 above and none of such
circumstances has occurred as of the date hereof.
Neither St. Paul nor, to the best of St. Paul's knowledge, any of the
individuals named in Annex A hereto owns any USF&G Common Stock.
(c) Neither St. Paul nor, to the best of St. Paul's knowledge, any of
the individuals named in Annex A hereto has effected any transaction in USF&G
Common Stock during the past 60 days.
(d) So long as St. Paul has not purchased any USF&G Common Stock
subject to the Option, St. Paul does not have the right to receive or the power
to direct the receipt of dividends from, or the proceeds from the sale of, any
shares of USF&G Common Stock.
(e) Not applicable.
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CUSIP NO. 903290 10 4 PAGE 12 OF 18 PAGES
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ITEM 6. CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR
RELATIONSHIPS WITH RESPECT TO SECURITIES OF THE
ISSUER
Other than the Merger Agreement and the Stock Option Agreement
described in the response to Item 4 (which response is incorporated herein by
reference) and the transactions contemplated thereby, there are no contracts,
arrangements, understandings or relationships between St. Paul and any other
person, or, to the best knowledge of St. Paul, among any of the persons listed
on Annex A hereto and any other person, with respect to shares of USF&G Common
Stock.
ITEM 7. MATERIAL TO BE FILED AS EXHIBITS
Exhibit 1 Agreement and Plan of Merger, dated as of
January 19, 1998, among USF&G, St. Paul and
Merger Sub.
Exhibit 2 Stock Option Agreement, dated as of January
19, 1998, between USF&G and St. Paul.
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SIGNATURE
After reasonable 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: January 28, 1998
THE ST. PAUL COMPANIES, INC.
By: /s/ Bruce A. Backberg
Name: Bruce A. Backberg
Title: Senior Vice President,
Chief Legal Counsel
and Corporate Secretary
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CUSIP NO. 903290 10 4 PAGE 14 OF 18 PAGES
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ANNEX A
DIRECTORS AND EXECUTIVE OFFICERS OF
THE ST. PAUL COMPANIES, INC.
The name, present principal occupation or employment and the name and
address of such employer of each of the directors and executive officers of The
St. Paul Companies, Inc. is set forth below. The business address of each
director and executive officer is The St. Paul Companies, Inc., 385 Washington
Street, Saint Paul, Minnesota 55102. Except as set forth below, each of the
directors and executive officers is a citizen of the United States.
DIRECTORS
NAME: MICHAEL R. BONSIGNORE
Principal Occupation
and Employer: Chairman and Chief Executive Officer,
Honeywell, Inc.
(manufacturer of automation and control
systems)
Employer's Address: Honeywell Plaza (MN12-5279)
Minneapolis, MN 55408
NAME: JOHN H. DASBURG
Principal Occupation
and Employer: President and Chief Executive Officer,
Northwest Airlines, Inc.
Employer's Address: 5101 Northwest Drive
St. Paul, MN 55111-3034
NAME: W. JOHN DRISCOLL
Principal Occupation: Former Chairman and Chief Executive Officer,
Rock Island Company
(private investment company)
Address: Rock Island Company
332 Minnesota St., Suite 2090
St. Paul, MN 55101-1308
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CUSIP NO. 903290 10 4 PAGE 15 OF 18 PAGES
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NAME: PIERSON M. GRIEVE
Principal Occupation
and Employer: Chairman, Metropolitan Airports Commission,
State of Minnesota
Employer's Address: 4900 IDS Center
80 South 8th Street
Minneapolis, MN 55402
NAME: THOMAS R. HODGSON
Principal Occupation
and Employer: President and Chief Operating Officer,
Abbott Laboratories, Inc.
Employer's Address: 100 Abbott Park Road
Abbott Park, IL 60064-3500
NAME: RONALD JAMES
Principal Occupation
and Employer: Former President and Chief Executive Officer,
Human Resources Group, Ceridian Corporation
Address: 300 Sycamore Lane
Plymouth, MN 55441
NAME: DAVID G. JOHN
Principal Occupation
and Employer: Chairman, The BOC Group PLC
(industrial gases and related products)
Employer's Address: Chertsey Road, Windlesham
Surrey GU20 6HJ England
Citizenship: United Kingdom
NAME: WILLIAM H. KLING
Principal Occupation
and Employer: President, Minnesota Public Radio; and
President, Greenspring Company
(diversified media and catalog marketing)
Employer's Address: 45 East 7th Street
St. Paul, MN 55101
NAME: DOUGLAS W. LEATHERDALE
Principal Occupation
and Employer: Chairman, President and Chief Executive
Officer, The St. Paul Companies, Inc.
Employer's Address: 385 Washington Street
Saint Paul, Minnesota 55102
Citizenship: Canada
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CUSIP NO. 903290 10 4 PAGE 16 OF 18 PAGES
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NAME: BRUCE K. MACLAURY
Principal Occupation
and Employer: President Emeritus, The Brookings Institution
(public policy research and education)
Address: 5109 Yuma Place, NW
Washington, DC 20016
NAME: GLEN D. NELSON, M.D.
Principal Occupation
and Employer: Vice Chairman, Medtronic, Inc.
(manufacturer of biomedical devices)
Employer's Address: 7000 Central Ave., NE
Minneapolis, MN 55432
NAME: ANITA M. PAMPUSCH, PH.D.
Principal Occupation
and Employer: Chairman, The Bush Foundation
Employer's Address: E-900 First National Bank Building
332 Minnesota Street
St. Paul, MN 55101
NAME: GORDON M. SPRENGER
Principal Occupation
and Employer: Executive Officer, Allina Health System
(not-for-profit integrated health care system)
Employer's Address: P.O. Box 9310
Minneapolis, MN 55440-9310
NAME: PATRICK A. THIELE
Principal Occupation
and Employer: Executive Vice President - The St. Paul
Companies, Inc. and Chief Executive Officer
and President, Worldwide Insurance
Operations - St. Paul Fire and Marine
Insurance Company
Employer's Address: 385 Washington Street
Saint Paul, Minnesota 55102
<PAGE>
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CUSIP NO. 903290 10 4 PAGE 17 OF 18 PAGES
- --------------------- --------------------
EXECUTIVE OFFICERS
NAME: DOUGLAS W. LEATHERDALE
Title: Chairman, President and Chief Executive
Officer
Citizenship: Canada
NAME: PATRICK A. THIELE
Title: Executive Vice President - The St. Paul
Companies, Inc. and Chief Executive Officer
and President, Worldwide Insurance
Operations - St. Paul Fire and Marine
Insurance Company
NAME: PAUL J. LISKA
Title: Executive Vice President and Chief Financial
Officer
NAME: MICHAEL J. CONROY
Title: Executive Vice President and Chief
Administrative Officer - St. Paul Fire and
Marine Insurance Company
NAME: JAMES F. DUFFY
Title: President and Chief Executive Officer -
St. Paul Re, Inc.
NAME: MARK L. PABST
Title: President and Chief Executive Officer -
St. Paul International Underwriting
NAME: SUSAN J. ALBRECHT
Title: President - Major Markets - St. Paul Fire
and Marine Insurance Company
NAME: STEPHEN J. KLINGEL
Title: President - Personal Insurance - St. Paul
Fire and Marine Insurance Company
<PAGE>
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CUSIP NO. 903290 10 4 PAGE 18 OF 18 PAGES
- --------------------- --------------------
NAME: JOSEPH B. NARDI
Title: President - Medical Services - St. Paul Fire
and Marine Insurance Company
NAME: JANET R. NELSON
Title: President - Custom Markets - St. Paul Fire
and Marine Insurance Company
NAME: JAMES A. SCHULTE
Title: President - Commercial - St. Paul Fire and
Marine Insurance Company
NAME: HOWARD E. DALTON
Title: Senior Vice President and Chief Accounting
Officer
NAME: JAMES HOM
Title: Senior Vice President -- Corporate Planning
and Development
NAME: GREG A. LEE
Title: Senior Vice President -- Human Resources
NAME: BRUCE A. BACKBERG
Title: Senior Vice President, Chief Legal Counsel
and Corporate Secretary
NAME: KAREN HIMLE
Title: Senior Vice President - Corporate Affairs
NAME: JAMES L. BOUDREAU
Title: Vice President and Treasurer
<PAGE>
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CUSIP NO. 903290 10 4 PAGE 19 OF 19 PAGES
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
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1 Agreement and Plan of Merger, dated as of
January 19, 1998, among The St. Paul Companies,
Inc., SP Merger Corporation and USF&G
Corporation
2 Stock Option Agreement, dated as of January 19,
1998, between The St. Paul Companies, Inc. and
USF&G Corporation
AGREEMENT AND PLAN OF MERGER
Among
USF&G CORPORATION,
THE ST. PAUL COMPANIES, INC.
and
SP MERGER CORPORATION
Dated as of January 19, 1998
<PAGE>
AGREEMENT AND PLAN OF MERGER
----------------------------
AGREEMENT AND PLAN OF MERGER (hereinafter called this "Agreement"),
dated as of January 19, 1998 among USF&G Corporation, a Maryland corporation
(the "Company"), The St. Paul Companies, Inc., a Minnesota corporation
("Parent"), and SP Merger Corporation, a Maryland corporation and a wholly-owned
subsidiary of Parent ("Merger Subsidiary," the Company and Merger Subsidiary
sometimes being hereinafter collectively referred to as the "Constituent
Corporations").
RECITALS
WHEREAS, the respective boards of directors of each of Parent, Merger
Subsidiary and the Company have determined that the merger of Merger Subsidiary
with and into the Company (the "Merger") upon the terms and subject to the
conditions set forth in this Agreement is advisable and have approved the
Merger;
WHEREAS, contemporaneously with the execution and delivery of this
Agreement, as a condition and inducement to Parent's and Merger Subsidiary's
willingness to enter into this Agreement, the Company is entering into a stock
option agreement with Parent (the "Stock Option Agreement"), pursuant to which
the Company has granted to Parent an option to purchase Shares (as defined in
Section 4.1(a)) under the terms and conditions set forth in the Stock Option
Agreement;
WHEREAS, it is intended that, for federal income tax purposes, the
Merger shall qualify as a reorganization under the provisions of Section 368(a)
of the Internal Revenue Code of 1986, as amended, and the rules and regulations
promulgated thereunder (the "Code");
WHEREAS, for financial accounting purposes, it is intended that the
Merger shall be accounted for as a "pooling-of-interests;" and
WHEREAS, the Company, Parent and Merger Subsidiary desire to make
certain representations, warranties, covenants and agreements in connection with
this Agreement.
NOW, THEREFORE, in consideration of the premises, and of the
representations, warranties, covenants and agreements contained herein, the
parties hereto agree as follows:
<PAGE>
ARTICLE I
The Merger; Closing; Effective Time
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) Merger
Subsidiary shall be merged with and into the Company and the separate corporate
existence of Merger Subsidiary shall thereupon cease. The Company shall be the
surviving corporation in the Merger (sometimes hereinafter referred to as the
"Surviving Corporation"), and the separate corporate existence of the Company
with all its rights, privileges, immunities, powers and franchises shall
continue unaffected by the Merger, except as set forth in Article III. The
Merger shall have the effects specified in the Maryland General Corporation Law,
as amended (the "MGCL").
1.2. Closing. The closing of the Merger (the "Closing") shall take
place (i) at the offices of Sullivan & Cromwell, 125 Broad Street, New York, New
York at 9:00 A.M. on the first 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").
1.3. Effective Time. As soon as practicable following the Closing, the
Company and Parent will cause Articles of Merger (the "Maryland Articles of
Merger") to be executed, acknowledged and filed with and accepted for record by
the State Department of Assessments and Taxation of Maryland (the "Department")
as provided in Section 3-107 of the MGCL. The Merger shall become effective at
the time the Department accepts for record the Maryland Articles of Merger or at
such later time agreed by the Company and Parent and established under the
Maryland Articles of Merger, not to exceed 30 days after the Maryland Articles
of Merger are accepted for record by the Department (the "Effective Time").
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<PAGE>
ARTICLE II
Charter and Bylaws
of the Surviving Corporation
2.1. The Charter. The charter of the Company as in effect immediately
prior to the Effective Time shall be the Charter of the Surviving Corporation
(the "Charter"), until duly amended as provided therein or by applicable law,
except that (i) Article Fifth of the Charter shall be amended to read in its
entirety as follows: "The name and address of the resident agent of the
Corporation in this state are James J. Hanks, Jr., 300 East Lombard Street,
Baltimore, Maryland 21202, (ii) Article Sixth of the Charter shall be amended to
read in its entirety as follows: "The aggregate number of shares that the
Corporation shall have the authority to issue is 1,000 shares of Common Stock,
par value $1.00 per share", and (iii) Article Seventh shall be deleted in its
entirety with all subsequent Articles renumbered accordingly.
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 or by applicable law.
ARTICLE III
Officers and Directors
of the Surviving Corporation
3.1. 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 Charter and the Bylaws.
3.2. 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 removal in accordance with the Charter
and the Bylaws.
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<PAGE>
ARTICLE IV
Effect of the Merger on Stock;
Exchange of Certificates
4.1. 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 of common stock, par value $2.50
per share, of the Company (each a "Share" or, collectively, the "Shares") issued
and outstanding immediately prior to the Effective Time (other than Shares owned
by Parent or any direct or indirect Subsidiary of Parent (collectively, the
"Parent Companies") or Shares that are owned by the Company or any direct or
indirect Subsidiary of the Company (and in each case not held on behalf of third
parties) ("Excluded Shares")) shall be converted into, and become exchangeable
for the right to receive (the "Merger Consideration") that number of shares (the
"Exchange Ratio") of common stock, no par value ("Parent Common Stock"), of
Parent determined by dividing $22 by the average of the daily average per share
high and low sales prices of one share of Parent Common Stock as reported on the
New York Stock Exchange, Inc. (the "NYSE") composite transactions reporting
system (as reported in the New York City edition of The Wall Street Journal or,
if not reported thereby, another authoritative source) for each of the 20
trading days ending on the third trading day prior to the Stockholders Meeting
(as defined in Section 6.4 hereof) rounded to the fourth decimal place (the
"Average Parent Price"), provided, that, (i) if the Average Parent Price is less
than $74 (the "Lower Collar"), the Exchange Ratio shall be 0.2973; and (ii) if
the Average Parent Price is greater than $78 (the "Upper Collar" and, together
with the Lower Collar, the "Collars"), the Exchange Ratio shall be 0.2821. At
the Effective Time, all Shares shall no longer be outstanding and shall be
canceled and retired and shall cease to exist, and each certificate (a
"Certificate") formerly representing any of such Shares (other than Excluded
Shares) shall thereafter represent only the right to receive the Merger
Consideration, cash in lieu of fractional shares pursuant to Section 4.2(e), if
any, and any distribution or dividend pursuant to Section 4.2(c).
(b) Cancellation of Shares. Each Share issued and outstanding
immediately prior to the Effective Time and owned by any of the Parent Companies
or owned by the Company or any direct or indirect Subsidiary 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, shall be canceled and retired without payment
of any consideration therefor and shall cease to exist.
(c) Merger Subsidiary. At the Effective Time, each share of Common
Stock, par value $1.00 per share, of Merger Subsidiary issued and outstanding
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<PAGE>
immediately prior to the Effective Time shall be converted into one share of
common stock of the Surviving Corporation.
4.2. 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 selected by
Parent prior to the Effective Time with the Company's prior approval, which
shall not be unreasonably withheld (the "Exchange Agent"), for the benefit of
the holders of Shares, certificates representing the shares of Parent Common
Stock and, after the Effective Time, if applicable, any cash, dividends or other
distributions with respect to the Parent Common Stock to be issued or paid
pursuant to the last sentence of Section 4.1(a) (including cash in lieu of
fractional 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 IV (such certificates
for shares of Parent Common Stock, together with the amount of any dividends or
other distributions payable with respect thereto and any cash in lieu of
fractional Shares, being hereinafter referred to as the "Exchange Fund").
(b) Exchange Procedures. Promptly after the Effective Time, Parent and
the Surviving Corporation shall cause the Exchange Agent to mail to each holder
of record of Shares (other than holders of Excluded 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 shares of Parent Common Stock and (B) any unpaid
dividends and other distributions and cash in lieu of fractional shares. Subject
to Section 4.2(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 shares of Parent Common Stock
that such holder is entitled to receive pursuant to this Article IV, (y) a check
in the amount (after giving effect to any required tax withholdings) of (A) any
cash in lieu of fractional shares plus (B) any unpaid dividends or other
distributions that such holder has the right to receive pursuant to the
provisions of this Article IV, 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 shares of Parent Common Stock,
together with a check for any cash to be paid upon due surrender of the
Certificate 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
-5-
<PAGE>
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 shares of Parent Common
Stock 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 shares of Parent Common Stock 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 (as defined in Section 5.1(d)) or
other entity of any kind or nature.
(c) Distributions with Respect to Unexchanged Shares; Voting. (i) All
shares of Parent Common Stock 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 the Parent Common
Stock, the record date for which is at or 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 the Parent Common Stock shall be paid to any holder of any
unsurrendered Certificate until such Certificate is surrendered for exchange in
accordance with this Article IV. 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 shares of Parent Common
Stock 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 shares of Parent Common Stock and not paid and (B) at
the appropriate payment date, the dividends or other distributions payable with
respect to such whole shares of Parent Common Stock with a record date after the
Effective Time but with a payment date subsequent to surrender.
(ii) Holders of unsurrendered Certificates who were the registered
holders at the Effective Time shall be entitled to vote after the Effective Time
at any meeting of Parent stockholders (or consent in connection with any consent
in lieu of meeting) the number of whole shares of Parent Common Stock
represented by such Certificates, regardless of whether such holders have
exchanged their Certificates.
(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.
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<PAGE>
(e) Fractional Shares. Notwithstanding any other provision of this
Agreement, no fractional shares of Parent Common Stock will be issued and any
holder of Shares entitled to receive a fractional share of Parent Common Stock
but for this Section 4.2(e) shall be entitled to receive a cash payment in lieu
thereof, which payment shall represent such holder's proportionate interest in
the net proceeds from the sale by the Exchange Agent on behalf of such holder of
the aggregate fractional shares of Parent Common Stock that such holder
otherwise would be entitled to receive. Any such sale shall be made by the
Exchange Agent within five business days after the date upon which the
Certificate(s) (or affidavit(s) of loss in lieu thereof) that would otherwise
result in the issuance of such fractional shares of Parent Common Stock have
been received by the Exchange Agent.
(f) Termination of Exchange Fund. Any portion of the Exchange Fund
(including the proceeds of any investments thereof and any Parent Common Stock)
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 IV shall thereafter look only to
Parent for payment of their shares of Parent Common Stock and any cash,
dividends and other distributions in respect thereof payable and/or issuable
pursuant to Section 4.1 and Section 4.2(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
former holder of Shares for any amount properly delivered to a public official
pursuant to applicable abandoned property, escheat or similar laws.
(g) 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 shares of Parent Common Stock
and any cash payable and any unpaid dividends or other distributions in respect
thereof pursuant to Section 4.2(c) upon due surrender of and deliverable in
respect of the Shares represented by such Certificate pursuant to this
Agreement.
(h) Affiliates. Notwithstanding anything herein to the contrary,
Certificates surrendered for exchange by any "affiliate" (defined to mean, with
respect to any Person, any Person that, directly or indirectly, controls or is
controlled by or is under common control with such Person) (as determined
pursuant to Section 6.8) of the Company shall not be exchanged until Parent has
received a written agreement from such Person as provided in Section 6.8 hereof.
-7-
<PAGE>
4.3. Dissenters' Rights. In accordance with Section 3-202 of the MGCL,
no appraisal rights shall be available to holders of Shares in connection with
the Merger.
4.4. 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 shares of Parent Common Stock or securities
convertible or exchangeable into or exercisable for shares of Parent Common
Stock, 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 and the Collars
shall be equitably adjusted.
4.5. Treatment of the Convertible Notes. The Convertible Notes (as
defined in Section 5.1(b)) shall be treated as set forth in Section 6.15.
ARTICLE V
Representations and Warranties
5.1. Representations and Warranties of the Company. Except as set forth
in the corresponding sections or subsections of the disclosure letter delivered
to Parent by the Company on or prior to entering into this Agreement (the
"Company Disclosure Letter"), the Company hereby represents and warrants to
Parent and Merger Subsidiary that:
(a) 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 Maryland 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 and each of the Company and each of
its Subsidiaries has all requisite corporate or similar power and authority to
own and operate its properties and assets and to carry on its business as
presently conducted and is qualified to do business and is in good standing in
each jurisdiction where the ownership or operation of its properties or conduct
of its business requires such qualification, except where the failure to be so
qualified or in such good standing, when taken together with all other such
failures, is not reasonably likely to have a Company Material Adverse Effect (as
defined below). The Company has made available to Parent a complete and correct
copy of the Company's and its Subsidiaries' charter and by-laws or other
organizational documents, each as amended to the date hereof. The Company's and
its Subsidiaries' charter and by-laws or other organizational documents so made
available are in full force and effect.
-8-
<PAGE>
As used in this Agreement, the term (i) "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 and (ii) "Company Material Adverse Effect"
means a material adverse effect on the financial condition, properties, business
or results of the operations of the Company and its Subsidiaries taken as a
whole, other than effects caused by changes in general economic or securities
markets conditions, changes that affect the insurance industry in general,
changes resulting from any event that is designated to be a "catastrophe" by the
Property Claims Services Division of the American Insurance Services Group,
Inc., changes resulting from insurance exposures not known to any of the
Responsible Executive Officers of the Company after due inquiry on or prior to
the date of this Agreement or, if known, disclosed on or prior to the date of
this Agreement to an employee of Parent having substantial responsibility for
due diligence in connection with the transactions contemplated by this
Agreement, and changes resulting from the announcement or proposed consummation
of this Agreement and the transactions contemplated hereby.
For purposes of this Agreement, the term "Responsible Executive
Officers of the Company" shall mean the persons designated as such in Section
5.1(a) of the Company Disclosure Letter.
The Company conducts its insurance operations through the Subsidiaries
listed in Section 5.1(a) of the Company Disclosure Letter (collectively, the
"Company Insurance Subsidiaries"). Each of the Company Insurance Subsidiaries
is, where required, (i) duly licensed or authorized as an insurance company or
reinsurer in its jurisdiction of incorporation, (ii) duly licensed or authorized
as an insurance company and, where applicable, a reinsurer in each other
jurisdiction where it is required to be so licensed or authorized, and (iii)
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 is not reasonably likely to result
in a Company Material Adverse Effect. The Company has made all required filings
under applicable insurance holding company statutes except where the failure to
file is not reasonably likely to have a Company Material Adverse Effect.
Except for the Company Insurance Subsidiaries, 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 that directly or indirectly conducts any activity which is
material to the Company or the ownership of which would
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<PAGE>
require Parent to file a notification form under or observe applicable waiting
periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act").
(b) Capital Structure. The authorized stock of the Company consists of
240,000,000 Shares, of which 116,470,432 Shares were outstanding as of the close
of business on January 15, 1998, and 12,000,000 shares of Preferred Stock, par
value $50.00 per share (the "Preferred Shares"), of which no shares were
outstanding as of the close of business on January 15, 1998. All of the
outstanding Shares have been duly authorized and are validly issued, fully paid
and nonassessable. Other than Shares reserved for issuance under the Stock
Option Agreement, the Company has no commitments to issue or deliver Shares or
Preferred Shares, except that, as of January 15, 1998, there were 10,116,531
Shares subject to issuance pursuant to the Company's Stock Incentive Plan of
1997, Amended and Restated 1993 Stock Plan for Non-Employee Directors, the 1992
Employee Stock Option Plan, Stock Incentive Plan of 1991, Stock Option Plan of
1990, Stock Option Plan of 1987, 1994 Stock Plan for Employees of the Company
and Titan Stock Option Plans (the "Company Stock Plans"), 2,400,000 Preferred
Shares subject to issuance pursuant to the Amended and Restated Rights
Agreement, dated as of March 11, 1997, between the Company and The Bank of New
York, as Rights Agent (the "Rights Agreement"), and 5,181,588 Shares subject to
issuance pursuant to the Company's Zero Coupon Convertible Notes due 2009 (the
"Convertible Notes"). The Company Disclosure Letter contains a list, which is
complete and accurate in all material respects as of the date specified therein,
of each outstanding option to purchase or acquire Shares under each of the
Company Stock Plans (each a "Company Option"), including the plan, the holder,
date of grant, exercise price and number of Shares subject thereto. 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. Except as described above, 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 subsection (b), convertible
into or exercisable for securities having the right to vote) with the
stockholders of the Company on any matter.
(c) Corporate Authority; Approval and Fairness. (i) The Company has all
requisite corporate power and authority and has taken all corporate action
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<PAGE>
necessary in order to execute, deliver and perform its obligations under this
Agreement and the Stock Option Agreement and to consummate, subject only to
approval of the Merger by the holders of at least two-thirds of the outstanding
Shares (the "Company Requisite Vote"), the Merger. This Agreement and the Stock
Option Agreement are valid and binding agreements of the Company enforceable
against the Company in accordance with their respective terms, subject to
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and
similar laws of general applicability relating to or affecting creditors' rights
and to general equity principles (the "Bankruptcy and Equity Exception").
(ii) The board of directors of the Company (A) has approved this
Agreement, the Stock Option Agreement and the Merger and the other transactions
contemplated hereby and thereby, (B) has declared that the Merger and the other
transactions contemplated by this Agreement are advisable and (C) has received
the opinions of each of its financial advisors, Goldman, Sachs & Co. and BT
Alex. Brown Incorporated, to the effect that, as of the dates of such opinions,
the Exchange Ratio is fair from a financial point of view to the holders of
Shares.
(d) Governmental Filings; No Violations. (i) Other than the filings
and/or notices (A) pursuant to Section 1.3 hereof, (B) under the HSR Act, the
Securities Exchange Act of 1934 (the "Securities Exchange Act") and the
Securities Act of 1933, as amended (the "Securities Act"), (C) to comply with
state securities or "blue-sky" laws, (D) required to be made with the NYSE, the
Pacific Stock Exchange, the London Stock Exchange or the Swiss Stock Exchange
and (E) of appropriate documents with, and approval of, the respective
Commissioners of Insurance of the states of Maryland, Illinois, Indiana, Iowa,
Michigan, Mississippi, New York, Ohio, Texas, Vermont and Wisconsin and such
notices and consents as may be required under the insurance laws of any
jurisdiction in which the Company, Parent or any of their respective
subsidiaries is domiciled or does business or is licensed or authorized as an
insurance company, no notices, reports or other filings are required to be made
by the Company with, nor are any consents, registrations, approvals, permits or
authorizations required to be obtained by the Company from, any governmental or
regulatory authority, agency, commission, body or other governmental entity
("Governmental Entity"), in connection with the execution and delivery of this
Agreement and the Stock Option Agreement by the Company and the consummation by
the Company of the Merger and the other transactions contemplated hereby and
thereby, except those that the failure to make or obtain are not, individually
or in the aggregate, reasonably likely to have a Company Material Adverse Effect
or prevent, materially delay or materially impair the ability of the Company to
consummate transactions contemplated by this Agreement and the Stock Option
Agreement.
(ii) The execution, delivery and performance of this Agreement and
the Stock Option Agreement by the Company do not, and the consummation by the
Company of the Merger and the other transactions contemplated
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hereby and thereby will not, constitute or result in (A) a breach or violation
of, or a default under, the charter or by-laws of the Company or the comparable
governing instruments of any of its Subsidiaries, (B) a breach or violation of,
or a default under, the acceleration of any obligations or the creation of a
lien, pledge, security interest or other encumbrance on the assets of the
Company or any of its Subsidiaries (with or without notice, lapse of time or
both) pursuant to, any agreement, lease, contract, note, mortgage, indenture,
arrangement or other obligation ("Contracts") binding upon the Company or any of
its Subsidiaries or (provided, as to consummation, the filings and notices are
made, and approvals are obtained, as referred to in Section 5.1(d)(i)) any Law
(as defined in Section 5.1(i)) or governmental or non-governmental permit or
license to which the Company or any of its Subsidiaries is subject or (C) any
change in the rights or obligations of any party under any of the Contracts,
except, in the case of clause (B) or (C) above, for any breach, violation,
default, acceleration, creation or change that, individually or in the
aggregate, is not reasonably likely to have a Company Material Adverse Effect or
prevent, materially delay or materially impair the ability of the Company to
consummate the transactions contemplated by this Agreement and the Stock Option
Agreement. Section 5.1(d)(ii) of the Company Disclosure Letter sets forth, to
the knowledge of the executive officers of the Company, a good faith 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 are or
may be required prior to consummation of the transactions contemplated by this
Agreement and the Stock Option Agreement (whether or not subject to the
exception set forth with respect to clauses (B) and (C) above).
(e) Company Reports; Financial Statements. The Company has delivered or
made available to Parent each registration statement, report, proxy statement or
information statement prepared by it since December 31, 1996 (the "Audit Date"),
including (i) the Company's Annual Report on Form 10-K for the year ended
December 31, 1996 and (ii) the Company's Quarterly Reports on Form 10-Q for the
periods ended March 31, 1997, June 30, 1997 and September 30, 1997, 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"). 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 in 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,
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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.
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 years ended December 31, 1994, 1995 and 1996 and the quarterly periods ended
March 31, 1997, June 30, 1997 and September 30, 1997, including all exhibits,
interrogatories, notes, schedules and any actuarial opinions, affirmations or
certifications or other supporting documents filed in connection therewith
(collectively, the "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 as at the respective dates
thereof and the results of operations of such 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, 1994 relating to the Company
Insurance Subsidiaries.
(f) Absence of Certain Changes. Except as disclosed in the Company
Reports filed prior to the date hereof, since the 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 (i) any change in the
financial condition, properties, business or results of operations of the
Company and its Subsidiaries or any development or combination of developments
of which any executive officer of the Company has knowledge that, individually
or in the aggregate, has had or is reasonably likely to result in a Company
Material Adverse Effect; (ii) 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; (iii) any authorization, declaration, setting aside or payment of any
dividend or other distribution in respect of the stock of the Company, except as
permitted by Section 6.1(a)
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hereof; (iv) any change by the Company in accounting principles, practices or
methods other than as required by changes in applicable GAAP or statutory
accounting principles; (v) any material addition to the Company's consolidated
reserves for future policy benefits or other policy claims and benefits prior to
the date of this Agreement; or (vi) 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. Since June 30, 1997, except as provided for herein
or as disclosed in the Company Reports filed prior to the date hereof, 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 any amendment of any of the Compensation and Benefit
Plans other than increases or amendments in the ordinary course.
(g) Litigation and Liabilities. Except as disclosed in the Company
Reports filed prior to the date hereof, there are no (i) civil, criminal or
administrative actions, suits, claims, hearings, investigations or proceedings
pending or, to the knowledge of any executive officer of the Company, threatened
against the Company or any of its affiliates or (ii) obligations or liabilities
of any nature, whether or not accrued, contingent or otherwise and whether or
not required to be disclosed, including those relating to environmental and
occupational safety and health matters, or any other facts or circumstances of
which any executive officer of the Company has knowledge that could reasonably
be expected to result in any claims against, or obligations or liabilities of,
the Company or any of its affiliates, except for insurance claims litigation
arising in the ordinary course for which claims reserves have been established
and except for such actions, suits, claims, hearings, investigations,
proceedings, obligations and liabilities as are not, individually or in the
aggregate, reasonably likely 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 and the Stock Option Agreement.
(h) Employee Benefits.
(i) A copy of each bonus, deferred compensation, pension,
retirement, profit-sharing, thrift, savings, employee stock ownership, stock
bonus, stock purchase, restricted stock, stock option, employment, termination,
severance, change of control, compensation, medical, health or other plan,
agreement, policy or arrangement that covers employees, directors, former
employees or former directors of the Company and its Subsidiaries (the
"Compensation and Benefit Plans") and any trust agreement or insurance contract
forming a part of such Compensation and Benefit Plans has been made available to
Parent prior to the date hereof. The Compensation and Benefit Plans are listed
in Section 5.1(h) of the Company Disclosure Letter and any "change of control"
or similar provisions therein are specifically identified in Section 5.1(h) of
the Company Disclosure Letter.
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<PAGE>
(ii) All Compensation and Benefit Plans are in substantial
compliance with all applicable law, including, to the extent applicable, the
Code and the Employee Retirement Income Security Act of 1974, as amended
("ERISA"). Each Compensation and Benefit Plan that is an "employee pension
benefit plan" within the meaning of Section 3(2) of ERISA (a "Pension Plan") and
that is intended to be qualified under Section 401(a) of the Code has received a
favorable determination letter from the Internal Revenue Service (the "IRS"),
and the Company is not aware of any circumstances likely to result in revocation
of any such favorable determination letter. There is no pending or, to the
knowledge of the executive officers of the Company, threatened material
litigation relating to the Compensation and Benefit Plans. Neither the Company
nor any of its Subsidiaries has engaged in a transaction with respect to any
Compensation and Benefit Plan that, assuming the taxable period of such
transaction expired as of the date hereof, would subject the Company or any of
its Subsidiaries to a material tax or penalty imposed by either Section 4975 of
the Code or Section 502 of ERISA.
(iii) As of the date hereof, no liability under Subtitle C or D of
Title IV of ERISA has been or is expected to be incurred by the Company or any
of its Subsidiaries with respect to any ongoing, frozen or terminated
"single-employer plan", within the meaning of Section 4001(a)(15) of ERISA,
currently or formerly maintained by any of them, or the single-employer plan of
any entity which is considered one employer with the Company under Section 4001
of ERISA or Section 414 of the Code (an "ERISA Affiliate"). The Company and its
Subsidiaries have not incurred and do not expect to incur any withdrawal
liability with respect to a multiemployer plan under Subtitle E to Title IV of
ERISA. The Company and its Subsidiaries have not contributed, or been obligated
to contribute, to a multiemployer plan under Subtitle E of Title IV of ERISA at
any time since September 26, 1980. No notice of a "reportable event", within the
meaning of Section 4043 of ERISA for which the 30-day reporting requirement has
not been waived, has been required to be filed for any Pension Plan or by any
ERISA Affiliate within the 12-month period ending on the date hereof or will be
required to be filed in connection with the transactions contemplated by this
Agreement and the Stock Option Agreement.
(iv) All contributions required to be made under the terms of any
Compensation and Benefit Plan as of the date hereof have been timely made or
have been reflected on the most recent consolidated balance sheet filed or
incorporated by reference in the Company Reports prior to the date hereof.
Neither any Pension Plan nor any single-employer plan of an ERISA Affiliate has
an "accumulated funding deficiency" (whether or not waived) within the meaning
of Section 412 of the Code or Section 302 of ERISA. Neither the Company nor its
Subsidiaries has provided, or is required to provide, security to any Pension
Plan or to any single-employer plan of an ERISA Affiliate pursuant to Section
401(a)(29) of the Code.
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<PAGE>
(v) Under each Pension Plan which is a single-employer plan, as
of the last day of the most recent plan year ended prior to the date hereof, the
actuarially determined present value of all "benefit liabilities", within the
meaning of Section 4001(a)(16) of ERISA (as determined on the basis of the
actuarial assumptions contained in the Pension Plan's most recent actuarial
valuation), did not exceed the then current value of the assets of such Pension
Plan, and there has been no material change in the financial condition of such
Pension Plan since the last day of the most recent plan year.
(vi) Neither the Company nor its Subsidiaries have any obligations
for retiree health and life benefits under any Compensation and Benefit Plan,
except as set forth in the Company Disclosure Letter. The Company or its
Subsidiaries may amend or terminate any such plan under the terms of such plan
at any time without incurring any material liability thereunder.
(vii) The change in control contemplated by the Merger will not
(x) entitle any employees of the Company or its Subsidiaries to severance pay,
(y) accelerate the time of payment or vesting or trigger any payment of
compensation or benefits under, increase the amount payable or trigger any other
material obligation pursuant to, any of the Compensation and Benefit Plans or
(z) result in any breach or violation of, or a default under, any of the
Compensation and Benefit Plans.
(viii) All Compensation and 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 Pension Plan that
covers such non-U.S. employees.
(ix) The number of individuals who perform services for the
Company or any of its Subsidiaries on a full-time basis but who are not
employees of the Company or any of its Subsidiaries does not exceed 10% of the
workforce of the Company and its Subsidiaries.
(x) Any amount that could be received (whether in cash or property
or the vesting of property) as a result of any of the transactions contemplated
by this Agreement by any employee, officer, director or independent contractor
of the Company who is a "disqualified individual" (as such term is defined in
proposed Treasury Regulation Section 1.280G-1) under any employment arrangement
would not be characterized as an "excess parachute payment" (as such term is
defined in Section 280G(b)(1) of the Code).
(i) Compliance with Laws; Permits. (i) The business and operations of
the Company and the Company Insurance Subsidiaries have been conducted
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in compliance with all applicable statutes and regulations regulating the
business of insurance and all applicable orders and directives of insurance
regulatory authorities (including federal authorities with respect to variable
insurance and annuity products) and market conduct recommendations resulting
from market conduct examinations of insurance regulatory authorities (including
federal authorities with respect to variable insurance and annuity products)
(collectively, "Insurance Laws"), except where the failure to so conduct such
business and operations would not, individually or in the aggregate, be
reasonably likely to have a Company Material Adverse Effect. Notwithstanding the
generality of the foregoing, except where the failure to do so would not,
individually or in the aggregate, be reasonably likely to have a Company
Material Adverse Effect, each Company Insurance Subsidiary and, to the knowledge
of the executive officers of the Company its agents have marketed, sold and
issued insurance products in compliance, in all material respects, with
Insurance Laws applicable to the business of such Company Insurance Subsidiary
and in the respective jurisdictions in which such products have been sold,
including, without limitation, in compliance with (a) all applicable
prohibitions against "redlining" or withdrawal of business lines, (b) all
applicable requirements relating to the disclosure of the nature of insurance
products as policies of insurance and (c) all applicable requirements relating
to insurance product projections and illustrations. In addition, (i) there is no
pending or, to the knowledge of the executive officers of the Company,
threatened charge by any insurance regulatory authority that any of the Company
Insurance Subsidiaries has violated, nor any pending or, to the knowledge of the
executive officers of the Company, threatened investigation by any insurance
regulatory authority with respect to possible violations of, any applicable
Insurance Laws where such violations would, individually or in the aggregate, be
reasonably likely to have a Company Material Adverse Effect; (ii) none of the
Company Insurance Subsidiaries is subject to any order or decree of any
insurance regulatory authority relating specifically to such Company Insurance
Subsidiary (as opposed to insurance companies generally) which would,
individually or in the aggregate, be reasonably likely to have a Company
Material Adverse Effect; and (iii) the Company Insurance Subsidiaries have filed
all reports required to be filed with any insurance regulatory authority on or
before the date hereof as to which the failure to file such reports would
individually or in the aggregate, be reasonably likely to have a Company
Material Adverse Effect.
(ii) In addition to Insurance Laws, except as set forth in the
Company Reports filed prior to the date hereof, the businesses of each of the
Company and its Subsidiaries have not been, and are not being, conducted in
violation of any federal, state, local or foreign law, statute, ordinance, rule,
regulation, judgment, order, injunction, decree, arbitration award, agency
requirement, license or permit of any Governmental Entity (collectively with
Insurance Laws, "Laws"), except for violations or possible violations that,
individually or in the aggregate, are not reasonably likely 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 and the
Stock
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<PAGE>
Option Agreement. Except as set forth in the Company Reports filed prior to the
date hereof, 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
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 are not, individually or in the aggregate, reasonably likely to have a
Company Material Adverse Effect or prevent or materially burden or materially
impair the ability of the Company to consummate the transactions contemplated by
this Agreement and the Stock Option Agreement. To the knowledge of the executive
officers of the Company, 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,
trademarks, patents, trade names, copyrights, service marks, 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 are not, individually or in the aggregate, reasonably
likely to have a Company Material Adverse Effect or prevent or materially burden
or materially impair the ability of the Company to consummate the Merger and the
other transactions contemplated by this Agreement and the Stock Option
Agreement.
(j) Takeover Statutes. No restrictive provision of any "fair price,"
"moratorium," "control share acquisition" or other similar anti-takeover statute
or regulation (including Section 3-602 of the MGCL) (each a "Takeover Statute")
or restrictive provision of any applicable anti-takeover provision in the
charter or by-laws of the Company is, or at the Effective Time will be,
applicable to the Company, the Shares, the Merger or any other transaction
contemplated by this Agreement or the Stock Option Agreement.
(k) Environmental Matters. Except as disclosed in the Company Reports
filed prior to the date hereof and except for such matters that, alone or in the
aggregate, are not reasonably likely to have a Company Material Adverse Effect:
(i) the Company and its Subsidiaries have complied with all applicable
Environmental Laws; (ii) the properties currently owned or operated by the
Company (including soils, groundwater, surface water, buildings or other
structures) are not contaminated with any Hazardous Substances; (iii) the
properties formerly owned or operated by the Company or any of its Subsidiaries
were not contaminated with Hazardous Substances during the period of ownership
or operation by the Company or any of its Subsidiaries; (iv) neither the Company
nor any of its Subsidiaries is subject to liability for any Hazardous Substance
disposal or contamination on any third party property (excluding policies
written in connection with the insurance business); (v) no Hazardous Substance
has been transported from any of the properties owned or operated by the Company
or any of its Subsidiaries other than as permitted under applicable
Environmental Law; (vi) neither the
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Company nor any of its Subsidiaries has received any written notice, demand,
letter, claim or request for information from any Governmental Entity or third
party indicating that the Company or any of its Subsidiaries may be in violation
of or liable under any Environmental Law; (vii) the Company and its Subsidiaries
are not subject to any court order, administrative order or decree arising under
any Environmental Law and are not subject to any indemnity or other agreement
with any third party relating to liability under any Environmental Law or
relating to Hazardous Substances (excluding policies written in connection with
the insurance business); and (viii) there are no circumstances or conditions
involving the Company or any of its Subsidiaries that could reasonably be
expected to result in any claims, liability, investigations, costs or
restrictions on the ownership, use, or transfer of any property of the Company
pursuant to any Environmental Law.
As used herein, the term "Environmental Law" means any federal, state,
local or foreign law, statute, ordinance, regulation, judgment, order, decree,
arbitration award, agency requirement, license, permit, authorization or
opinion, relating to: (A) the protection, investigation or restoration of the
environment, health and safety, or natural resources, (B) the handling, use,
presence, disposal, release or threatened release of any Hazardous Substance or
(C) noise, odor, wetlands, pollution, contamination or any injury or threat of
injury to persons or property.
As used herein, the term "Hazardous Substance" means any substance that
is: (A) listed, classified or regulated pursuant to any Environmental Law; (B)
any petroleum product or by-product, asbestos-containing material,
lead-containing paint or plumbing, polychlorinated biphenyls, radioactive
materials or radon; or (C) any other substance which may be the subject of
regulatory action by any Government Authority pursuant to any Environmental Law.
(l) Accounting and Tax Matters. As of the date hereof, neither the
Company nor any of its affiliates has taken or agreed to take any action, nor do
the executive officers of the Company have any knowledge of any fact or
circumstance, that would prevent Parent from accounting for the business
combination to be effected by the Merger as a "pooling-of-interests" or prevent
the Merger and the other transactions contemplated by this Agreement from
qualifying as a "reorganization" within the meaning of Section 368(a) of the
Code.
(m) Taxes. Except as provided in Section 5.1(m) of the Company
Disclosure Letter:
(i) the Company and each of its Subsidiaries have filed completely
and correctly in all material respects all Tax Returns (as defined below) which
are required by all applicable laws to be filed by them, and have paid, or made
adequate provision for the payment of, all material Taxes (as defined below)
which have or may
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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;
(ii) all material 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 below) to the extent due and payable;
(iii) no liens for a material amount of 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;
(iv) all of the U.S. Federal income Tax Returns filed by or on
behalf of each of the Company and its Subsidiaries have been examined by and
settled with the Internal Revenue Service, or the statute of limitations with
respect to the relevant Tax liability expired, for all taxable periods through
and including the period ending on the date on which the Effective Time occurs;
and
(v) there is no audit, examination, deficiency, or refund
litigation pending with respect to any material amount of 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 material amount of Taxes;
As used in this Agreement, (i) the term "Tax" (including, with
correlative meaning, the terms "Taxes" and "Taxable") shall mean, with respect
to any Person, (a) 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 amounts imposed by any Taxing Authority, (b) 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 (c) any liability of such
Person for the payment of any amounts of the type described in (a) as a result
of any express or implied obligation to indemnify any other Person; (ii) the
term
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"Tax Return(s)" shall mean all returns, consolidated or otherwise (including
without limitation informational returns), required to be filed with any Taxing
Authority; and (iii) the term "Taxing Authority" shall mean any authority
responsible for the imposition of any Tax.
(n) Labor Matters. 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.
(o) Intellectual Property. (i) The Company and/or each of its
Subsidiaries owns, or is licensed or otherwise possesses legally enforceable
rights to use all patents, trademarks, trade names, service marks, copyrights,
and any applications therefor, technology, know-how, computer software programs
or applications, and tangible or intangible proprietary information or materials
that are used in the business of the Company and its Subsidiaries as currently
conducted, except for any such failures to own, be licensed or possess that,
individually or in the aggregate, are not reasonably likely to have a Company
Material Adverse Effect, and to the knowledge of the executive officers of the
Company all patents, trademarks, trade names, service marks and copyrights held
by the Company and/or its Subsidiaries are valid and subsisting.
(ii) Except as disclosed in Company Reports filed prior to the
date hereof or as is not reasonably likely to have a Company Material Adverse
Effect:
(A) the Company is not, nor will it be as a result of the execution and
delivery of this Agreement or the performance of its obligations hereunder,
in violation of any licenses, sublicenses and other agreements as to which
the Company is a party and pursuant to which the Company is authorized to
use any third-party patents, trademarks, service marks, and copyrights
("Third-Party Intellectual Property Rights");
(B) no claims with respect to (I) the patents, registered and material
unregistered trademarks and service marks, registered copyrights, trade
names, and any applications therefor owned by the Company or any its
Subsidiaries (the "Company Intellectual Property Rights"); (II) any trade
secret material to the Company; or (III) Third-Party Intellectual Property
Rights are currently pending or, to the knowledge of the executive officers
of the Company, are threatened by any Person;
(C) the executive officers of the Company do not know of any valid grounds
for any bona fide claims (I) to the effect that the sale, licensing or use
of any product as now used, sold or licensed or proposed for use, sale or
license by the Company or any of its Subsidiaries, infringes on any
copyright, patent, trademark, service
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mark or trade secret; (II) against the use by the Company or any of its
Subsidiaries, of any trademarks, trade names, trade secrets, copyrights,
patents, technology, know-how or computer software programs and
applications used in the business of the Company or any of its Subsidiaries
as currently conducted or as proposed to be conducted; (III) challenging
the ownership, validity or effectiveness of any of the Company Intellectual
Property Rights or other trade secret material to the Company; or (IV)
challenging the license or legally enforceable right to use of the
Third-Party Intellectual Rights by the Company or any of its Subsidiaries;
and
(D) to the knowledge of the executive officers of the Company, there is no
unauthorized use, infringement or misappropriation of any of the Company
Intellectual Property Rights by any third party, including any employee or
former employee of the Company or any of its Subsidiaries.
(p) Material Contracts. All of the material contracts of the Company
and its Subsidiaries that are required to be described in the Company Reports or
to be filed as exhibits thereto are described in the Company Reports or filed as
exhibits thereto and are in full force and effect. True and complete copies of
all such material contracts have been delivered or have been made available by
the Company to Parent. Neither the Company nor any of its Subsidiaries nor any
other party is in breach of or in default under any such contract except for
such breaches and defaults as individually or in the aggregate have not had and
are not reasonably likely to have a Company Material Adverse Effect. Neither the
Company nor any of its Subsidiaries is party to any agreement containing any
provision or covenant limiting in any material respect the ability of the
Company or any of its Subsidiaries 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.
(q) Rights Plan. (i) The Company has amended the Rights Agreement to
provide that Parent shall not be deemed an Acquiring Person, the Distribution
Date (each as defined in the Rights Agreement) shall not be deemed to occur and
the rights issuable pursuant to the Rights Agreement (the "Rights") will not
separate from the Shares, as a result of entering into this Agreement and/or the
Stock Option Agreement or consummating the Merger and/or the other transactions
contemplated hereby and/or thereby.
(ii) The Company has taken all necessary action with respect to
all of the outstanding Rights so that, as of immediately prior to the Effective
Time, (A) neither the Company nor Parent will have any obligations under the
Rights or the Rights Agreement and (B) the holders of the Rights will have no
rights under the Rights or the Rights Agreement.
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(r) 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 or the
Stock Option Agreement, except that the Company has employed Goldman, Sachs &
Co. and BT Alex. Brown Incorporated as its financial advisors, the arrangements
with which have been disclosed to Parent prior to the date hereof.
(s) Insurance Matters. (i) 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.
(ii) 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 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 terminate such agreement 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
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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, 1996.
(iii) 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, 1994, and all attachments,
addenda, supplements and modifications thereto (the "Company Actuarial
Analyses"). To the knowledge of the executive officers of the Company, 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 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.
(iv) As of the date hereof, the Company has no reason to believe
that any rating presently held by the Company Insurance Subsidiaries is likely
to be modified, qualified, lowered or placed under surveillance for a possible
downgrade for any reason other than as a result of the transactions contemplated
hereby.
(v) Except as would not reasonably be expected to have a Company
Material Adverse Effect, all annuity contracts and life insurance policies
issued by each Company Insurance Subsidiary meet all definitional or other
requirements for qualification under the Code section applicable (or intended to
be applicable) to such annuity contracts or life insurance policies, including,
without limitation, the following: (A) each life insurance policy meets the
requirements of sections 101(f), 817(h) or 7702 of the Code, as applicable; (B)
no life insurance contract issued by any Company Insurance Company is a
"modified endowment contract" within the meaning of section 7702A of the Code
unless and to the extent that the holders of the policies have been notified of
their classification; (C) each annuity contract issued, entered into or sold by
any Company Insurance Subsidiary qualifies as an annuity under federal tax law;
(D) each annuity contract meets the requirements of, and has been administered
consistent with section 817(h) and 72 of the Code including but not limited to
section 72(s) of the Code (except for those contracts specifically excluded from
such requirement pursuant to section 72(s)(5) of the Code); (E) each annuity
contract intended to qualify under sections 130, 403(a), 403(b) or 408(b) of the
Code contains all provisions required for qualification under such sections of
the Code; (F) each annuity contract marketed as, or in connection with, plans
that are intended to qualify under section 401, 403, 408 or 457 of
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the Code complies with the requirements of such section; and (G) none of the
Company Insurance Subsidiaries have entered into any agreement or are involved
in any discussions or negotiations and there are no audits, examinations,
investigations or other proceedings with the IRS with respect to the failure of
any life insurance policy under section 7702 or 817(h) of the Code or the
failure of any annuity contract to meet the requirements of section 72(s) of the
Code. There are no "hold harmless" indemnification agreements respecting the tax
qualification or treatment of any product or plan sold, issued, entered into or
administered by the Company Insurance Subsidiaries, and there have been no
claims asserted by any Person under such "hold harmless" indemnification
agreements so set forth.
(t) Liabilities and Reserves. (i) The reserves carried on the Company
SAP Statements of each Company Insurance Subsidiary for the year ended December
31, 1996 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, and are fairly stated
in all material respects in 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.
(ii) 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 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.
(u) Investment Advisory Matters. (i) No Company Insurance Subsidiary
maintains any separate account or accounts.
(ii) Each of the Company Insurance Subsidiaries is treated for
federal tax purposes as the owner of the assets underlying the respective life
insurance policies and annuity contracts issued, entered into or sold by it.
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(iii) Neither the Company nor any of its Subsidiaries conducts
activities of or is otherwise deemed under applicable law to control an
"investment adviser," as such term is defined in Section 2(a)(20) of the
Investment Company Act of 1940 (the "1940 Act"), whether or not registered under
the Investment Advisers Act of 1940, as amended, of any Person required to be
registered under the 1940 Act, except that the Company has an indirect 50%
general partnership interest in Pacholder & Company ("Pacholder"), which advises
one registered investment company. Neither the Company nor any of its
Subsidiaries is an "investment company" as defined in the 1940 Act, and neither
the Company nor any of its Subsidiaries is a promoter (as such term is defined
in Section 2(a)(30) of the 1940 Act) of any Person that is such an investment
company.
(iv) Neither the Company nor any of its Subsidiaries conducts
activities of, controls, owns more than a 20% interest in, or is deemed under
applicable law to control any Person that is, an investment adviser as defined
in the Investment Advisers Act of 1940, as amended (whether or not registered
under such Act), other than Pacholder (which has no clients other than Pacholder
Fund, Inc.), Pacholder Associates, Inc., Falcon Asset Management Inc. and USF&G
Realty Advisers, Inc. (together, the "Asset Management Subsidiaries").
5.2. Representations and Warranties of Parent and Merger Subsidiary.
Except as set forth in the corresponding sections or subsections of the
disclosure letter delivered to the Company by Parent on or prior to entering
into this Agreement (the "Parent Disclosure Letter"), Parent and Merger
Subsidiary each hereby represent and warrant to the Company that:
(a) Capitalization of Merger Subsidiary. The authorized stock of Merger
Subsidiary consists of 1,000 shares of Common Stock, par value $1.00 per share,
all of which are validly issued and outstanding. All of the issued and
outstanding stock of Merger Subsidiary is, and at the Effective Time will be,
owned by Parent, and there are (i) no other shares of stock or voting securities
of Merger Subsidiary, (ii) no securities of Merger Subsidiary convertible into
or exchangeable for shares of stock or 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, any stock, voting
securities or securities convertible into or exchangeable for stock or voting
securities of Merger Subsidiary. 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
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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.
(b) Organization, Good Standing and Qualification. Parent is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Minnesota 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 and each of Parent and each of its
Subsidiaries has all requisite corporate or similar power and authority to own
and operate its properties and assets and to carry on its business as presently
conducted and is qualified to do business and is in good standing in each
jurisdiction where the ownership or operation of its properties or conduct of
its business requires such qualification, except where the failure to be so
qualified or in such good standing, when taken together with all other such
failures, is not reasonably likely to have a Parent Material Adverse Effect (as
defined below). Parent has made available to the Company a complete and correct
copy of Parent's and its Subsidiaries' charter and by-laws or other
organizational documents, each as amended to the date hereof. Parent's and its
Subsidiaries' charter and by-laws or other organizational documents so made
available are in full force and effect.
As used in this Agreement, the term "Parent Material Adverse Effect"
means a material adverse effect on the financial condition, properties, business
or results of the operations of Parent and its Subsidiaries taken as a whole,
other than effects caused by changes in general economic or securities markets
conditions, changes that affect the insurance industry in general, changes
resulting from any event that is designated to be a "catastrophe" by the
Property Claims Services Division of the American Insurance Services Group,
Inc., changes resulting from insurance exposures not known to any of the
Responsible Executive Officers of Parent after due inquiry on or prior to the
date of this Agreement or, if known, disclosed on or prior to the date of this
Agreement to an employee of the Company having substantial responsibility for
due diligence in connection with the transactions contemplated by this
Agreement, and changes resulting from the announcement or proposed consummation
of this Agreement and the transactions contemplated hereby.
For purposes of this Agreement, the term "Responsible Executive
Officers of Parent" shall mean the persons designated as such in Section 5.2(b)
of the Parent Disclosure Letter.
Parent conducts its insurance operations through the Subsidiaries
listed in Section 5.2(b) of the Parent Disclosure Letter (collectively, the
"Parent Insurance Subsidiaries"). Each of the Parent Insurance Subsidiaries is,
where required, (i) duly licensed or authorized as an insurance company or a
reinsurer in its jurisdiction of incorporation, (ii) duly licensed or authorized
as an insurance company and, where applicable, a reinsurer in each other
jurisdiction where it is required to be so licensed or
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authorized, and (iii) duly authorized in its jurisdiction of incorporation and
each other applicable jurisdiction to write each line of business reported as
being written in the Parent SAP Statements (as hereinafter defined), except, in
any such case, where the failure to be so licensed or authorized is not
reasonably likely to result in a Parent Material Adverse Effect. Parent has made
all required filings under applicable insurance holding company statutes except
where the failure to file is not reasonably likely to have a Parent Material
Adverse Effect.
Except for the Parent Insurance Subsidiaries, Parent 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
that directly or indirectly conducts any activity which is material to Parent.
(c) Capital Structure. The authorized capital stock of Parent consists
of 240,000,000 shares of Parent Common Stock, of which 83,733,652 shares were
outstanding as of the close of business on January 16, 1998, and shares of
preferred stock, of which 50,000 shares have been designated as Series A Junior
Participating Preferred Stock (the "Parent Series A Preferred Stock"), 1,450,000
shares have been designated as Series B Convertible Preferred Stock (the "Parent
Series B Preferred Stock") and 41,400 shares have been designated as Series C
Cumulative Convertible Preferred Stock (the "Parent Series C Preferred Stock"
and, collectively with the Parent Series A Preferred Stock and the Parent Series
B Preferred Stock, the "Parent Preferred Shares"). As of the close of business
on January 16, 1998, there were no shares of Parent Series A Preferred Stock
outstanding, 955,594 shares of Parent Series B Stock outstanding and no shares
of Parent Series C Preferred Stock outstanding. All of the outstanding Parent
Common Stock and Parent Preferred Shares have been duly authorized and are
validly issued, fully paid and nonassessable. Parent has no commitments to issue
or deliver Common Stock or Parent Preferred Shares, except that, as of January
16, 1998, there were 5,651,858 shares of Parent Common Stock reserved for
issuance pursuant to the Parent stock option and other plans listed on Section
5.2(c) of the Parent Disclosure Letter (the "Parent Stock Plans"), 7,331,026
shares of Parent Common Stock subject to issuance upon conversion of shares of
Parent Series B Preferred Stock and Parent Series C Preferred Stock or Parent's
6% Convertible Subordinated Debentures due 2025, 41,400 shares of Parent Series
C Preferred Stock reserved for issuance upon the exchange of Parent's 6%
Convertible Subordinated Debentures due 2025 and 50,000 shares of Parent Series
A Preferred Stock reserved for issuance pursuant to the Amended and Restated
Shareholder Protection Rights Agreement, dated as of December 4, 1989, as
amended as of March 9, 1990 and as amended and restated as of August 1, 1995,
between Parent and First Chicago Trust Company of New York (the "Parent Rights
Agreement"). Each of the outstanding shares of capital stock of each of Parent's
Subsidiaries is duly authorized, validly issued, fully paid and nonassessable
and, except for directors' qualifying shares, owned by Parent or a
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direct or indirect wholly-owned subsidiary of Parent, free and clear of any
lien, pledge, security interest, claim or other encumbrance. Except as described
above, 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 the
Company 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 subsection (c),
convertible into or exercisable for securities having the right to vote) with
the stockholders of Parent on any matter.
(d) Corporate Authority; Fairness.
(i) Each of the 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 and,
with respect to Parent, under the Stock Option Agreement, and to consummate,
subject only to approval at a meeting of stockholders of the issuance of the
shares of Parent Common Stock required to be issued pursuant to Article IV
hereof by the holders of a majority of the shares of Parent Common Stock present
and voting at the meeting (the "Parent Requisite Vote"), the Merger. This
Agreement is a valid and binding agreement of Parent and Merger Subsidiary,
enforceable against each of Parent and Merger Subsidiary in accordance with its
terms, subject to the Bankruptcy and Equity Exception. The Stock Option
Agreement is a valid and binding agreement of Parent, enforceable against Parent
in accordance with its terms, subject to the Bankruptcy and Equity Exception.
(ii) Prior to the Effective Time, Parent will have taken all
necessary action to permit it to issue the number of shares of Parent Common
Stock required to be issued pursuant to Article IV. The Parent Common Stock,
when issued, will be validly issued, fully paid and nonassessable, and no
stockholder of Parent will have any preemptive right of subscription or purchase
in respect thereof. The Parent Common Stock, when 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.
(iii) The board of directors of Parent has received the opinion of
its financial advisors, Credit Suisse First Boston Corporation, to the effect
that as of the date hereof the Exchange Ratio is fair to Parent from a financial
point of view.
(e) Governmental Filings; No Violations. (i) Other than the filings
and/or notices (A) pursuant to Section 1.3 hereof, (B) under the HSR Act, the
Securities
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Exchange Act and the Securities Act, (C) to comply with state securities or
"blue sky" laws, (D) required to be made with the NYSE or the London Stock
Exchange and (E) of appropriate documents with, and approval of, the respective
Commissioners of Insurance of the states of Maryland, Illinois, Indiana, Iowa,
Michigan, Mississippi, New York, Ohio, Texas, Vermont and Wisconsin and such
notices and consents as may be required under the insurance laws of any
jurisdiction in which the Company, Parent or any of their respective
subsidiaries is domiciled or does business or is licensed or authorized as an
insurance company, no notices, reports or other filings are required to be made
by Parent or Merger Subsidiary with, nor are any consents, registrations,
approvals, permits or authorizations required to be obtained by Parent or Merger
Subsidiary from, any Governmental Entity, in connection with the execution and
delivery of this Agreement by Parent and Merger Subsidiary and of the Stock
Option Agreement by Parent and the consummation by Parent and Merger Subsidiary
of the Merger and the other transactions contemplated hereby and thereby, except
those that the failure to make or obtain are not, individually or in the
aggregate, reasonably likely 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 and the
Stock Option Agreement.
(ii) The execution, delivery and performance of this Agreement by
Parent and Merger Subsidiary and of the Stock Option Agreement by Parent do not,
and the consummation by Parent and Merger Subsidiary of the Merger and the other
transactions contemplated hereby and thereby will not, constitute or result in
(A) a breach or violation of, or a default under, the charter or by-laws of
Parent and Merger Subsidiary or the comparable governing instruments of any of
its Subsidiaries, (B) a breach or violation of, or a default under, the
acceleration of any obligations or the creation of a lien, pledge, security
interest or other encumbrance on the assets of Parent or any of its Subsidiaries
(with or without notice, lapse of time or both) pursuant to, any Contracts
binding upon Parent or any of its Subsidiaries or (provided, as to consummation,
the filings and notices are made, and approvals are obtained, as referred to in
Section 5.2(e)(i)) any Law or governmental or non-governmental permit or license
to which Parent or any of its Subsidiaries is subject or (C) any change in the
rights or obligations of any party under any of the Contracts, except, in the
case of clause (B) or (C) above, for any breach, violation, default,
acceleration, creation or change that, individually or in the aggregate, is not
reasonably likely 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 and the Stock
Option Agreement.
(f) Parent Reports; Financial Statements. Parent has delivered or made
available to the Company each registration statement, report, proxy statement or
information statement prepared by it since December 31, 1996 (the "Parent Audit
Date"), including (i) Parent's Annual Report on Form 10-K for the year ended
December 31,
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1996 and (ii) Parent's Quarterly Reports on Form 10-Q for the periods ended
March 31, 1997, June 30, 1997 and September 30, 1997, each in the form
(including exhibits, annexes and any amendments thereto) filed with the SEC
(collectively, including any such reports filed subsequent to the date hereof,
the "Parent Reports"). As of their respective dates, the Parent Reports did not,
and any Parent 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 in 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 cash flows 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 and cash flows 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.
Parent has delivered or made available to the Company true and complete
copies of the annual and quarterly statements of each of the Parent Insurance
Subsidiaries as filed with the applicable insurance regulatory authorities for
the years ended December 31, 1994, 1995 and 1996 and the quarterly periods ended
March 31, 1997, June 30, 1997 and September 30, 1997, including all exhibits,
interrogatories, notes, schedules and any actuarial opinions, affirmations or
certifications or other supporting documents filed in connection therewith
(collectively, the "Parent SAP Statements"). The Parent 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 Parent Insurance Subsidiaries as at the respective dates
thereof and the results of operations of such Subsidiaries for the respective
periods then ended. The Parent 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 Parent SAP Statements by the
applicable insurance regulatory body or any other governmental agency or body.
The statutory financial statements of certain Parent Insurance Subsidiaries have
been audited by KPMG Peat Marwick LLP, and Parent has delivered to the Company
true and complete copies of such audited statutory financial statements and the
audit opinions relating thereto. Parent has delivered or made available to the
Company true and complete copies of all examination reports of insurance
departments and any insurance regulatory agencies since January 1, 1994 relating
to the Parent Insurance Subsidiaries.
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(g) Absence of Certain Changes. Except as disclosed in the Parent
Reports filed prior to the date hereof, 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 (i) any change in the
financial condition, properties, business or results of operations of Parent and
its Subsidiaries or any development or combination of developments of which any
executive officer of Parent has knowledge that, individually or in the
aggregate, has had or is reasonably likely to result in a Parent Material
Adverse Effect; (ii) any material damage, destruction or other casualty loss
with respect to any material asset or property owned, leased or otherwise used
by Parent or any of its Subsidiaries, whether or not covered by insurance; (iii)
any declaration, setting aside or payment of any dividend or other distribution
in respect of the stock of Parent except as permitted by Section 6.1(b) hereof;
(iv) any change by Parent in accounting principles, practices or methods other
than as required by changes in applicable GAAP or statutory accounting
principles; (v) any material addition to Parent's consolidated loss reserves or
other policy claims and benefits prior to the date of this Agreement; or (vi)
any material change in the accounting, actuarial, investment, reserving,
underwriting or claims administration policies, practices, procedures, methods,
assumptions or principles of any Parent Insurance Subsidiary.
(h) Litigation and Liabilities. Except as disclosed in the Parent
Reports filed prior to the date hereof, there are no (i) civil, criminal or
administrative actions, suits, claims, hearings, investigations or proceedings
pending or, to the knowledge of any executive officer of Parent, threatened
against Parent or any of its affiliates or (ii) obligations or liabilities of
any nature, whether or not accrued, contingent or otherwise and whether or not
required to be disclosed, including those relating to environmental and
occupational safety and health matters, or any other facts or circumstances of
which any executive officer of Parent has knowledge that could reasonably be
expected to result in any claims against, or obligations or liabilities of,
Parent or any of its affiliates, except for insurance claims litigation arising
in the ordinary course for which claims reserves have been established and
except for such actions, suits, claims, hearings, investigations, proceedings,
obligations and liabilities as are not, individually or in the aggregate,
reasonably likely to have a Parent Material Adverse Effect or prevent or
materially impair the ability of Parent or Merger Subsidiary to consummate the
transactions contemplated by this Agreement and the Stock Option Agreement.
(i) Employee Benefits.
(i) Each bonus, deferred compensation, pension, retirement,
profit-sharing, thrift, savings, employee stock ownership, stock bonus, stock
purchase, restricted stock, stock option, employment, termination, severance,
change of control, compensation, medical, health or other plan, agreement,
policy or arrangement that covers employees, directors, former employees or
former directors of Parent and its
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Subsidiaries (the "Parent Compensation and Benefit Plans") is in substantial
compliance with all applicable law, including the Code and ERISA. Each Parent
Compensation and Benefit Plan that is an "employee pension benefit plan" within
the meaning of Section 3(2) of ERISA (a "Parent Pension Plan") and that is
intended to be qualified under Section 401(a) of the Code has received a
favorable determination letter from the IRS, and Parent is not aware of any
circumstances likely to result in revocation of any such favorable determination
letter. There is no pending or, to the knowledge of the executive officers of
Parent, threatened material litigation relating to the Parent Compensation and
Benefit Plans. Neither Parent nor any of its Subsidiaries has engaged in a
transaction with respect to any Parent Compensation and Benefit Plan that,
assuming the taxable period of such transaction expired as of the date hereof,
would subject Parent or any of its Subsidiaries to a material tax or penalty
imposed by either Section 4975 of the Code or Section 502 of ERISA.
(ii) As of the date hereof, no liability under Subtitle C or D of
Title IV of ERISA has been or is expected to be incurred by Parent or any of its
Subsidiaries with respect to any ongoing, frozen or terminated "single-employer
plan," within the meaning of Section 4001(a)(15) of ERISA, currently or formerly
maintained by any of them, or the single-employer plan of an entity which is
considered one employer with Parent under Section 4001 of ERISA or Section 414
of the Code (a "Parent ERISA Affiliate"). Parent and its Subsidiaries have not
incurred and do not expect to incur any withdrawal liability with respect to a
multiemployer plan under Subtitle E to Title IV of ERISA. No notice of a
"reportable event," within the meaning of Section 4043 of ERISA for which the
30-day reporting requirement has not been waived, has been required to be filed
for any Parent Pension Plan or by any Parent ERISA Affiliate within the 12-month
period ending on the date hereof or will be required to be filed in connection
with the transactions contemplated by this Agreement.
(iii) All contributions required to be made under the terms of any
Parent Compensation and Benefit Plan as of the date hereof have been timely made
or have been reflected on the most recent consolidated balance sheet filed or
incorporated by reference in the Parent Reports prior to the date hereof.
Neither any Parent Pension Plan nor any single-employer plan of a Parent ERISA
Affiliate has an "accumulated funding deficiency" (whether or not waived) within
the meaning of Section 412 of the Code or Section 302 of ERISA. Neither Parent
nor its Subsidiaries has provided, or is required to provide, security to any
Parent Pension Plan or to any single-employer plan of a Parent ERISA Affiliate
pursuant to Section 401(a)(29) of the Code.
(iv) Under each Parent Pension Plan which is a single- employer
plan, as of the last day of the most recent plan year ended prior to the date
hereof, the actuarially determined present value of all "benefit liabilities",
within the meaning of Section 4001(a)(16) of ERISA (as determined on the basis
of the actuarial assumptions contained in the Parent Pension Plan's most recent
actuarial valuation), did
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not exceed the then current value of the assets of such Parent Pension Plan, and
there has been no material change in the financial condition of such Parent
Pension Plan since the last day of the most recent plan year.
(v) All Parent Compensation and Benefit Plans covering current or
former non-U.S. employees or former employees of Parent and its Subsidiaries
comply in all material respects with applicable local law. Parent and its
Subsidiaries have no material unfunded liabilities with respect to any Parent
Pension Plan that covers such non-U.S. employees.
(j) Compliance with Laws; Permits. (i) The business and operations of
Parent and the Parent Insurance Subsidiaries have been conducted in compliance
with all applicable Insurance Laws, except where the failure to so conduct such
business and operations would not, individually or in the aggregate, be
reasonably likely to have a Parent Material Adverse Effect. Notwithstanding the
generality of the foregoing, except where the failure to do so would not,
individually or in the aggregate, be reasonably likely to have a Parent Material
Adverse Effect, each Parent Insurance Subsidiary and, to the knowledge of the
executive officers of Parent, its agents have marketed, sold and issued
insurance products in compliance, in all material respects, with Insurance Laws
applicable to the business of such Parent Insurance Subsidiary and in the
respective jurisdictions in which such products have been sold, including,
without limitation, in compliance with (a) all applicable prohibitions against
"redlining" or withdrawal of business lines, (b) all applicable requirements
relating to the disclosure of the nature of insurance products as policies of
insurance and (c) all applicable requirements relating to insurance product
projections and illustrations. In addition, (i) there is no pending or, to the
knowledge of the executive officers of Parent, threatened charge by any
insurance regulatory authority that any of the Parent Insurance Subsidiaries has
violated, nor any pending or, to the knowledge of the executive officers of
Parent, threatened investigation by any insurance regulatory authority with
respect to possible violations of, any applicable Insurance Laws where such
violations would, individually or in the aggregate, be reasonably likely to have
a Parent Material Adverse Effect; (ii) none of the Parent Insurance Subsidiaries
is subject to any order or decree of any insurance regulatory authority relating
specifically to such Parent Insurance Subsidiary (as opposed to insurance
companies generally) which would, individually or in the aggregate, be
reasonably likely to have a Parent Material Adverse Effect; and (iii) the Parent
Insurance Subsidiaries have filed all reports required to be filed with any
insurance regulatory authority on or before the date hereof as to which the
failure to file such reports would, individually or in the aggregate, be
reasonably likely to have a Parent Material Adverse Effect.
(ii) In addition to Insurance Laws, except as set forth in the
Parent Reports filed prior to the date hereof, the businesses of each of Parent
and its Subsidiaries have not been, and are not being, conducted in violation of
any Laws, except
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for violations or possible violations that, individually or in the aggregate,
are not reasonably likely to have a Parent Material Adverse Effect or prevent or
materially impair the ability of Parent or Merger Subsidiary to consummate the
transactions contemplated by this Agreement and the Stock Option Agreement.
Except as set forth in the Parent Reports filed prior to the date hereof, no
investigation or review by any Governmental Entity with respect to Parent or any
of its Subsidiaries is pending or, to the knowledge of the executive officers of
Parent, threatened, nor has any Governmental Entity indicated an intention to
conduct the same, except for those the outcome of which are not, individually or
in the aggregate, reasonably likely to have a Company Material Adverse Effect or
prevent or materially burden or materially impair the ability of Parent or
Merger Subsidiary to consummate the transactions contemplated by this Agreement
and the Stock Option Agreement. To the knowledge of the executive officers of
Parent, no material change is required in Parent's or any of its Subsidiaries'
processes, properties or procedures in connection with any such Laws, and Parent
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. Parent and its
Subsidiaries each has all permits, licenses, trademarks, patents, trade names,
copyrights, service marks, 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 are not,
individually or in the aggregate, reasonably likely to have a Parent Material
Adverse Effect or prevent or materially burden or materially impair the ability
of Parent or Merger Subsidiary to consummate the Merger and the other
transactions contemplated by this Agreement and the Stock Option Agreement.
(k) Environmental Matters. Except as disclosed in the Parent Reports
filed prior to the date hereof and except for such matters that, alone or in the
aggregate, are not reasonably likely to have a Parent Material Adverse Effect:
(i) Parent and its Subsidiaries are in substantial compliance with all
applicable Environmental Laws; (ii) the properties currently owned or operated
by Parent (including soils, groundwater, surface water, buildings or other
structures) are not contaminated with any Hazardous Substances; (iii) the
properties formerly owned or operated by Parent or any of its Subsidiaries were
not contaminated with Hazardous Substances during the period of ownership or
operation by Parent or any of its Subsidiaries; (iv) neither Parent nor any of
its Subsidiaries is subject to liability for any Hazardous Substance disposal or
contamination on any third party property (excluding policies written in
connection with the insurance business); (v) no Hazardous Substance has been
transported from any of the properties owned or operated by Parent or any of its
Subsidiaries other than as permitted under applicable Environmental Law; (vi)
neither Parent nor any of its Subsidiaries has received any written notice,
demand, letter, claim or request for information from any Governmental Entity or
third party indicating that Parent or any of its Subsidiaries may be in
violation of or liable under any Environmental Law; (vii) Parent and its
Subsidiaries are not subject to any court order, administrative order or decree
arising under any Environmental Law and are not subject to any indemnity or
other agreement with any
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third party relating to liability under any Environmental Law or relating to
Hazardous Substances (excluding policies written in connection with the
insurance business); and (viii) there are no circumstances or conditions
involving Parent or any of its Subsidiaries that could reasonably be expected to
result in any claims, liability, investigations, costs or restrictions on the
ownership, use, or transfer of any property of Parent pursuant to any
Environmental Law.
(l) Accounting and Tax Matters. As of the date hereof, neither Parent
nor any of its affiliates has taken or agreed to take any action, nor do the
executive officers of Parent have any knowledge of any fact or circumstance,
that would prevent Parent from accounting for the business combination to be
effected by the Merger as a "pooling-of-interests" or prevent the Merger and the
other transactions contemplated by this Agreement from qualifying as a
"reorganization" within the meaning of Section 368(a) of the Code.
(m) Taxes. Except as provided in Section 5.2(m) of the Parent
Disclosure Letter:
(i) Parent and each of its Subsidiaries have filed completely and
correctly in all material respects all Tax Returns which are required by all
applicable laws to be filed by them, and have paid, or made adequate provision
for the payment of, all material Taxes 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 Parent Reports. The Tax Returns of Parent and its
Subsidiaries have been prepared, in all material respects, in accordance with
all applicable laws consistently applied;
(ii) all material Taxes which Parent 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 to
the extent due and payable;
(iii) no liens for a material amount of Taxes exist with respect
to any of the assets or properties of Parent or its Subsidiaries, except for
statutory liens for Taxes not yet due or payable or that are being contested in
good faith;
(iv) all of the U.S. Federal income Tax Returns filed by or on
behalf of each of Parent and its Subsidiaries have been examined by and settled
with the Internal Revenue Service, or the statute of limitations with respect to
the relevant Tax liability expired, for all taxable periods through and
including the period ending on the date on which the Effective Time occurs; and
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(v) there is no audit, examination, deficiency, or refund
litigation pending with respect to any material amount of 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 material amount of Taxes.
(n) Labor Matters. Neither Parent 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.
(o) Material Contracts. All of the material contracts of Parent and its
Subsidiaries that are required to be described in the Parent Reports or to be
filed as exhibits thereto are described in the Parent Reports or filed as
exhibits thereto and are in full force and effect. Neither Parent nor any of its
Subsidiaries nor any other party is in breach of or in default under any such
contract except for such breaches and defaults as individually or in the
aggregate have not had and are not reasonably likely to have a Parent Material
Adverse Effect.
(p) Ownership of Shares. Neither Parent nor any of its Subsidiaries
"Beneficially Owns" or is the "Beneficial Owner" of (as such terms are defined
in the Rights Agreement, as amended, or for purposes of Section 3-601 of the
MGCL) 10% of more of the outstanding Shares.
(q) 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 by this Agreement or the
Stock Option Agreement, except that Parent has employed Credit Suisse First
Boston Corporation as its financial advisor, the arrangements with which have
been disclosed to the Company prior to the date hereof.
(r) Insurance Matters. (i) Except as otherwise would not, individually
or in the aggregate, be reasonably likely to have a Parent 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 Parent Insurance Subsidiaries (the "Parent
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 Parent or any Parent
Insurance Subsidiary which are required to be
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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.
(ii) All reinsurance and coinsurance treaties or agreements,
including retrocessional agreements, to which Parent or any Parent Insurance
Subsidiary is a party or under which Parent or any Parent 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
Parent Material Adverse Effect.
(iii) Prior to the date hereof, Parent has delivered or made
available to the Company a true and complete copy of any actuarial reports
prepared by actuaries, independent or otherwise, with respect to Parent or any
Parent Insurance Subsidiary since December 31, 1994, and all attachments,
addenda, supplements and modifications thereto (the "Parent Actuarial
Analyses"). To the knowledge of the executive officers of Parent, the
information and data furnished by Parent or any Parent Insurance Subsidiary to
its independent actuaries in connection with the preparation of the Parent
Actuarial Analyses were accurate in all material respects. Furthermore, to the
knowledge of the executive officers of Parent, each Parent Actuarial Analysis
was based upon an accurate inventory of policies in force for Parent and the
Parent 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.
(iv) As of the date hereof, Parent has no reason to believe that
any rating presently held by the Parent Insurance Subsidiaries is likely to be
modified, qualified, lowered or placed under surveillance for a possible
downgrade for any reason other than as a result of the transactions contemplated
hereby.
(s) Liabilities and Reserves. (i) The reserves carried on the Parent
SAP Statements of each Parent Insurance Subsidiary for the year ended December
31, 1996 for 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, and are fairly stated in all material respects in
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 Parent and each Parent Insurance
Subsidiary under all outstanding insurance,
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reinsurance and other applicable agreements as of the respective dates of such
Parent SAP Statements. The admitted assets of Parent and each Parent Insurance
Subsidiary as determined under applicable Laws are in an amount at least equal
to the minimum amounts required by applicable Laws.
(ii) 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 executive officers of
Parent, no claim or assessment is pending or threatened against any Parent
Insurance Subsidiary which is peculiar or unique to such Parent 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 Parent
Material Adverse Effect.
ARTICLE VI
Covenants
6.1.(a) Interim Operations of the Company. The Company covenants and
agrees as to itself and its Subsidiaries that, after the date hereof and prior
to the Effective Time (except as otherwise expressly contemplated by this
Agreement or the Stock Option Agreement or set forth in Section 6.1(a) of the
Company Disclosure Letter), without the prior written consent of Parent, which
consent shall not be unreasonably withheld or delayed:
(i) its and its Subsidiaries' businesses shall be conducted in all
material respects in the ordinary and usual course (it being understood and
agreed that nothing contained herein shall permit the Company to enter into or
engage (through acquisition, product extension or otherwise), in any material
respect, in any new line of business);
(ii) to the extent consistent with (a) above it and its
Subsidiaries shall use their reasonable best efforts to preserve its business
organization intact and maintain its existing relations and goodwill with
customers, suppliers, reinsurers, distributors, creditors, lessors, employees
and business associates;
(iii) it shall not (i) issue, sell, pledge, dispose of or encumber
any capital stock owned by it in any of its Subsidiaries; (ii) amend its charter
or by-laws or amend, modify or terminate the Rights Agreement; (iii) split,
combine or reclassify its outstanding shares of stock; (iv) authorize, declare,
set aside or pay any dividend payable in cash, stock or property in respect of
any capital stock other than dividends from its direct or indirect wholly-owned
Subsidiaries and other than regular quarterly cash
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dividends paid by the Company not in excess of $.07 per share; or (v)
repurchase, redeem or otherwise acquire, except in connection with any of the
Company Stock Plans, or permit any of its Subsidiaries to purchase or otherwise
acquire, any shares of its stock or any securities convertible into or
exchangeable or exercisable for any shares of its stock;
(iv) neither it nor any of its Subsidiaries shall (i) except as
permitted under clause (v), issue, sell, pledge, dispose of or encumber any (x)
shares of, or securities convertible into or exchangeable or exercisable for, or
options, warrants, calls, commitments or rights of any kind to acquire any
shares of, its capital stock of any class or (y) securities convertible into or
exchangeable for any other property or assets (other than Shares issuable
pursuant to options outstanding on the date hereof under any of the Company
Stock Plans or upon conversion of the Convertible Notes); (ii) other than in the
ordinary and usual course of business, transfer, lease, license, guarantee,
sell, mortgage, pledge, dispose of or encumber any other material property or
assets (including capital stock of any of its Subsidiaries) or take any action
to incur or modify any material indebtedness or other material liability; (iii)
other than for information systems, make or authorize or commit for any capital
expenditures other than in amounts less than $20.0 million individually and
$20.0 million in the aggregate; or (iv) make or authorize or commit for any
capital expenditures for information systems except for amounts which,
individually or in the aggregate, are less than $25.0 million; or (v) make any
acquisition of, or investment in, the assets or stock of any other Person or
entity (other than a Subsidiary) except for ordinary course investment
activities or as otherwise permitted by Section 6.1(a);
(v) neither it nor any of its Subsidiaries shall terminate,
establish, adopt, enter into, make any new grants or awards under, amend or
otherwise modify, any Compensation and Benefit Plans or increase the salary,
wage, bonus or other compensation of any employees except increases for
employees of the Company occurring in the ordinary and usual course of business
(which shall include, but not be limited to, (i) regular annual grants of
options under the Company Stock Plans, the number of Company Options subject to
and the recipient of each such grant to be determined in consultation with
Parent; provided that the vesting of such options shall not accelerate as a
result of the change in control contemplated by the Merger and provided,
further, that the maximum number of Shares issuable pursuant to such options
shall be calculated in accordance with past practice and the terms of the
Company Stock Plans and shall not exceed 3,300,000 Shares (each such option,
when granted, shall be a Company Option), (ii) grants and payment of awards
under the Company's Management Incentive Plan and Long-Term Incentive Plan in
accordance with the terms of such plans and (iii) salary increases for those
employees who have a rank of vice president or higher in accordance with the
Company's normal salary guidelines and annual salary pool which, in the
aggregate, do not exceed 4% of their aggregate current salaries, and salary
increases for other employees which do not exceed, in the aggregate, 3.5% of
their aggregate current salaries) and except reasonable retention arrangements
which are
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necessary for the operation of the Company entered into with the prior written
consent of Parent, which consent shall not be unreasonably withheld.
(vi) neither it nor any of its Subsidiaries shall pay, discharge,
settle or satisfy (x) any insurance claim, liability or obligation (absolute,
accrued, asserted or unasserted, contingent or otherwise) for amounts in excess
of $2,500,000 or (y) any non-insurance claim, liability or obligation (including
extra-contractual obligations), other than (I) the payment, discharge or
satisfaction of such claims, liabilities or obligations in the ordinary and
usual course of business for amounts not in excess of $500,000 or (II) ordinary
course repayment of indebtedness or payment of contractual obligations when due;
(vii) neither it nor any of its Subsidiaries shall make or change
any Tax election, settle any material audit, file any amended tax returns or
permit any insurance policy naming it as a beneficiary or loss-payable payee to
be canceled or terminated except in the ordinary and usual course of business;
(viii) neither it nor any of its Subsidiaries shall enter into any
agreement containing any provision or covenant limiting in any material respect
the ability of the Company or any Subsidiary or affiliate 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 or affiliates;
(ix) neither it nor any of its Subsidiaries shall enter into any
(x) new quota share or reinsurance transaction pursuant to which $2,000,000 or
more in annual ceded written premiums are ceded by the Company Insurance
Subsidiaries or (y) renewal, extension or modification of an existing treaty or
other program pursuant to which $15,000,000 or more in annual ceded written
premiums are ceded by the Company Insurance Subsidiaries;
(x) neither it nor any of its Subsidiaries shall take any action
that would cause any of its representations and warranties herein to become
untrue in any material respect; and
(xi) neither it nor any of its Subsidiaries will authorize or
enter into an agreement to do any of the foregoing.
6.1.(b) Interim Operations of Parent. Parent covenants and agrees as to
itself and its Subsidiaries that, after the date hereof and prior to the
Effective Time (except as otherwise expressly contemplated by this Agreement or
the Stock Option Agreement or as set forth in Section 6.1(b) of the Parent
Disclosure Letter), without the
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prior written consent of the Company, which consent shall not be unreasonably
withheld or delayed:
(i) its and its Subsidiaries' businesses shall be conducted in the
ordinary and usual course;
(ii) to the extent consistent with (i) above, each of it and its
Subsidiaries shall use their reasonable best efforts to preserve its business
organization intact and maintain its existing relations and goodwill with
customers, suppliers, reinsurers, distributors, creditors, lessors, employees
and business associates;
(iii) it shall not (v) issue, sell, pledge, dispose of or encumber
any capital stock owned by it in any of its Significant Subsidiaries (as defined
in Regulation S-X under the Securities Exchange Act); (w) amend its charter; (x)
split, combine or reclassify its outstanding shares of stock; (y) authorize,
declare, set aside or pay any dividend payable in cash, stock or property in
respect of any capital stock other than dividends from its direct or indirect
wholly-owned Subsidiaries and other than regular quarterly cash dividends paid
by Parent not in excess of $0.47 per share; or (z) repurchase, redeem or
otherwise acquire, except in connection with any of the Parent Stock Plans, or
permit any of its Subsidiaries to purchase or otherwise acquire, any shares of
its stock or any securities convertible into or exchangeable or exercisable for
any shares of its stock if such purchase, redemption or acquisition would
preclude Parent's accounting for the Merger as a pooling-of-interests;
(iv) except for ordinary course investment activities, neither it
nor any of its Subsidiaries shall make any acquisition of, or investment in,
assets or stock of any other Person or entity (other than a Subsidiary) in
excess of $2.0 billion in the aggregate;
(v) neither it nor any of its Subsidiaries shall take any action
that would cause any of its representations and warranties herein to become
untrue in any material respect; and
(vi) neither it nor any of its Subsidiaries will authorize or
enter into an agreement to do any of the foregoing.
6.2. Company Acquisition Proposals. From the date hereof until the
termination hereof and except as expressly permitted by the following provisions
of this Section 6.2, the Company will not, and will not permit or cause any of
its Subsidiaries or any of the executive officers and directors of it or its
Subsidiaries to, and shall direct and use its best efforts to cause its and its
Subsidiaries' employees, agents and representatives (including any investment
banker, attorney or accountant retained by it or any of its Subsidiaries) not
to, directly or indirectly, initiate, solicit, or knowingly encourage or
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otherwise intentionally facilitate any inquiries or the making of any proposal
or offer (other than the Merger) with respect to a merger, reorganization, share
exchange, consolidation or similar transaction involving, or any purchase of all
or a substantial portion of the assets or any equity securities of, it or any of
its Subsidiaries (any such proposal or offer being hereinafter referred to as a
"Company Acquisition Proposal"). The Company will not, and will not permit or
cause any of its Subsidiaries or any of the officers and directors of it or its
Subsidiaries to and shall direct and use its best efforts to cause its and its
Subsidiaries' employees, agents and representatives (including any investment
banker, attorney or accountant retained by it or any of its Subsidiaries) not
to, directly or indirectly, engage in any negotiations concerning, or provide
any confidential information or data to, or have any discussions with, any
Person relating to a Company Acquisition Proposal, whether made before or after
the date of this Agreement, or otherwise intentionally facilitate any effort or
attempt to make or implement a Company Acquisition Proposal (including, without
limitation, by means of an amendment to the Rights Agreement); provided,
however, that nothing contained in this Agreement shall prevent the Company or
its Board of Directors from complying with Rule 14e-2 promulgated under the
Exchange Act with regard to a Company Acquisition Proposal or at any time prior
to the time that the Merger shall have been approved by the Company Requisite
Vote (A) providing information in response to a request therefor by a Person who
has made an unsolicited bona fide written Company Acquisition Proposal if the
Board of Directors receives from the Person so requesting such information an
executed confidentiality agreement the terms of which are (without regard to the
terms of the Company Acquisition Proposal) (x) no less favorable to the Company
and (y) no less restrictive on the Person requesting such information than those
contained in the Company Confidentiality Letter (as defined in Section 9.7); (B)
engaging in any negotiations or discussions with any Person who has made an
unsolicited bona fide written Company Acquisition Proposal; or (C) recommending
such a Company Acquisition Proposal to the stockholders of the Company, if and
only to the extent that, (i) in each such case referred to in clause (A), (B) or
(C) above, the Board of Directors of the Company determines in good faith after
consultation with outside legal counsel that such action is necessary in order
for its directors to comply with their respective fiduciary duties under
applicable law and (ii) in each case referred to in clause (B) or (C) above, the
Board of Directors of the Company determines in good faith (after consultation
with its financial advisor) that such Company Acquisition Proposal, if accepted,
is reasonably likely to be consummated, taking into account all legal, financial
and regulatory aspects of the 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 transaction contemplated by
this Agreement (any such more favorable Company Acquisition Proposal being
referred to in this Agreement as a "Superior Proposal"). The Company will
immediately cease and cause to be terminated any existing activities,
discussions or negotiations with any parties conducted heretofore with respect
to any of the foregoing. The Company agrees that it will take the necessary
steps to promptly inform the individuals or entities referred to in the first
sentence hereof of the
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obligations undertaken in this Section 6.2 and in the Confidentiality Agreements
(as defined in Section 9.7). The Company will promptly notify Parent if after
the date hereof any such inquiries, proposals or offers are received by, any
such information is requested from, or any such discussions or negotiations are
sought to be initiated or continued with, any of its representatives indicating,
in connection with such notice, the name of such Person and the material terms
and conditions of any proposals or offers and thereafter shall keep Parent
informed, on a current basis, on the status and terms of any such proposals or
offers and the status of any such negotiations or discussions. The Company also
will promptly request each Person that has heretofore executed a confidentiality
agreement in connection with its consideration of a Company Acquisition Proposal
to return or destroy all confidential information heretofore furnished to such
Person by or on behalf of it or any of its Subsidiaries. Notwithstanding the
foregoing, nothing in this Section 6.2 shall be deemed to prevent the Company
from selling or disposing of the capital stock or assets of any Subsidiary (or
any actions in preparation or contemplation thereof) to the extent such sale or
disposition is permitted by Section 6.1(a).
6.3. Information Supplied. The Company and Parent each agrees, 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 (i) the Registration Statement on Form S-4 to be filed with the SEC by Parent
in connection with the issuance of shares of Parent Common Stock in the Merger
(including the joint proxy statement and prospectus (the "Prospectus/Proxy
Statement") constituting a part thereof) (the "S-4 Registration Statement")
will, at the time the S-4 Registration Statement 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, in light of the circumstances under which they were made,
not misleading, and (ii) 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.
6.4. Stockholders Meetings. The Company will take, in accordance with
its charter and bylaws, all action necessary to convene a meeting of holders of
Shares (the "Stockholders Meeting") as promptly as practicable after the S-4
Registration Statement is declared effective to consider and vote upon the
approval of the Merger, and the Company's board of directors, subject to
fiduciary obligations under applicable law, will recommend such approval by its
stockholders, will not withdraw or modify such recommendation and shall take all
lawful action to solicit such approval; provided that the Company's board of
directors may modify or withdraw such recommendation following receipt of a
Superior Proposal. Parent will take, in accordance with its charter and by-laws,
all action necessary to convene a meeting of holders of Parent Common
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Stock (the "Parent Stockholders Meeting") as promptly as practicable after the
S-4 Registration Statement is declared effective to consider and vote upon the
approval of the issuance of Parent Common Stock in the Merger, and Parent's
board of directors, subject to fiduciary obligations under applicable law, will
recommend such approval by its stockholders, will not withdraw or modify such
recommendation and will take all lawful action to solicit such approval. Prior
to the Parent Stockholders Meeting, Parent shall not enter into any agreement
relating to a Parent Acquisition Proposal that is conditioned upon the Merger
not being consummated (it being understood the Parent shall remain obligated
both before and after the date of the Parent Stockholders Meeting to perform the
covenants set forth in Section 6.5(c) in accordance with the provisions
thereof).
6.5. Filings; Other Actions; Notification. (a) Parent and the Company
shall promptly prepare and file with the SEC the Prospectus/Proxy Statement, and
Parent shall prepare and file with the SEC the S-4 Registration Statement 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 the Stock Option Agreement and will pay all
expenses incident thereto.
(b) The Company and Parent each shall use all reasonable efforts to
cause to be delivered to the other party and its directors a letter of its
independent auditors, dated (i) the date on which the S-4 Registration Statement
shall become effective and (ii) the Closing Date, and addressed to the other
party and its directors, in form and substance customary for "comfort" letters
delivered by independent public accountants in connection with registration
statements similar to the S-4 Registration Statement.
(c) 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, the
Stock Option Agreement and applicable Laws to consummate and make effective the
Merger and the other transactions contemplated by this Agreement and the Stock
Option 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 and/or any Governmental Entity in order to
consummate the Merger or any of the other transactions contemplated by this
Agreement and the Stock
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Option Agreement; provided, however, that nothing in this Section 6.5 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 right to review in advance, 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 and the
Stock Option Agreement. In exercising the foregoing right, each of the Company
and Parent shall act reasonably and as promptly as practicable.
(d) 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
and the Stock Option Agreement.
(e) 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 transactions contemplated by this Agreement
and the Stock Option 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.
6.6. Taxation and Accounting. Subject to Section 6.2 and Parent's
rights under the Stock Option Agreement, neither Parent nor the Company shall
take or cause to be taken any action, whether before or after the Effective
Time, that would disqualify the Merger as a "pooling of interests" for
accounting purposes or as a "reorganization" within the meaning of Section
368(a) of the Code. Each of Parent and
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the Company agrees to use its reasonable best efforts to cure any impediment to
the qualification of the Merger as a "pooling of interests" for accounting
purposes or as a "reorganization" within the meaning of Section 368(a) of the
Code.
6.7. Access. Upon reasonable notice, and except as may otherwise be
required by applicable law, the Company and Parent each shall (and shall cause
its Subsidiaries to) afford the other's executive officers, employees, counsel,
accountants and other authorized representatives ("Representatives") access,
during normal business hours throughout the period prior to the Effective Time,
to its properties, books, contracts and records and, during such period, each
shall (and shall cause its Subsidiaries to) furnish promptly to the other all
information concerning its business, properties and personnel as may reasonably
be requested, provided that 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 shall be
directed to an executive officer of the Company or Parent, as the case may be,
or such Person as may be designated by either of its executive officers, as the
case may be. All such information shall be governed by the terms of the
Confidentiality Agreements (as hereinafter defined).
6.8. Affiliates. (i) At least 45 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 and for the purposes of
applicable interpretations regarding the pooling-of-interests method of
accounting. The Company shall exercise its best efforts to deliver or cause to
be delivered to Parent, at least 30 days 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-1 (the "Company Affiliates Letter"). The certificates
representing Parent Common Stock received by such affiliates shall bear a
customary legend regarding applicable Securities Act restrictions and "pooling
restrictions."
(ii) At the election of an affiliate of the Company who is an
employee of the Company at the Effective Time and who is required to and so
provides a letter in the form attached as Exhibit A-1, Parent shall employ, or
shall cause the Surviving Corporation to employ, such affiliate of the Company
until the date of publication of results covering at least 30 days of combined
operations of the Company and Parent in the form of a quarterly earnings report,
an effective registration statement
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filed with the Commission, a report on Form 8-K or any other public filing or
announcement which includes such combined results of operations.
(iii) At least 45 days prior to the Effective Time, Parent shall
deliver to the Company a list of names and addresses of those Persons who will
be, in the opinion of the Parent, "affiliates" of Parent for the purposes of
applicable interpretations regarding the pooling-of-interests method of
accounting. Parent shall exercise its best efforts to deliver or cause to be
delivered to the Company, at least 30 days prior to the Effective Time, from
each of such affiliates of Parent identified in the foregoing list, a letter in
the form attached as Exhibit A-2 (the "Parent Affiliates Letter").
6.9. Stock Exchange Listing. Parent shall use its best efforts to cause
the shares of Parent Common Stock 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.
6.10. Publicity. The initial press release shall be a joint press
release in the form previously agreed upon by the Company and Parent and
thereafter 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 public
announcements with respect to the Merger and the other transactions contemplated
by this Agreement and the Stock Option Agreement and prior to making any filings
with any third party and/or any Governmental Entity (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 interdealer quotation service.
6.11. Benefits. (a) Stock Options.
(i) At the Effective Time, each Company Option whether vested or
unvested, without any action on the part of the holder, shall be deemed to
constitute an option to acquire, on the same terms and conditions as were
applicable under such Company Option, a number of shares of Parent Common Stock
equivalent to (x) the number of Shares that could have been purchased
immediately prior to the Effective Time under such Company Option multiplied by
(y) the Exchange Ratio (rounded down to the nearest whole number), at a price
per share of Parent Common Stock (rounded up to the nearest whole cent) equal to
the aggregate exercise price for the Shares otherwise purchasable pursuant to
such Company Option divided by the number of shares of Parent Common Stock
determined above; provided, however, that the foregoing provisions shall be
subject to such adjustments as are necessary in order to satisfy the
requirements of Section 424(a) of the Code in the case of any Company Option to
which Section 422 of the Code applies. At or prior to the Effective Time, the
Company shall make all necessary arrangements with respect to the Company Stock
Plans to permit the assumption of the unexercised Company Options by Parent
pursuant to this Section.
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(ii) Effective at the Effective Time, Parent shall assume each
Company Option in accordance with the terms of the relevant Company Stock Plan
under which it was issued and the stock option agreement by which it is
evidenced. At or prior to the Effective Time, Parent shall take all corporate
action necessary to reserve for issuance a sufficient number of shares of Parent
Common Stock for delivery upon exercise of Company Options and payment of Vested
Stock Units (as defined below) assumed by it in accordance with this Section. At
the Effective Time, all vested stock units allocated to each director's account
under the Company's Amended and Restated 1993 Stock Plan for Non-Employee
Directors ("Vested Stock Units"), without any action on the part of the
director, shall be paid, on the same terms and conditions as are applicable
under such plan, in a number of shares of Parent Common Stock equal to the
number of Vested Stock Units allocated to the director's account in such plan
multiplied by the Exchange Ratio (rounded down to the nearest whole number). As
soon as practicable, and in no event later than 10 days after the Effective
Time, Parent shall file a registration statement on Form S-3 or Form S-8, as the
case may be (or any successor or other appropriate forms), or another
appropriate form (or shall cause such Company Option or Vested Stock Unit to be
deemed to be issued pursuant to a Parent Stock Plan for which shares of Parent
Common Stock have previously been registered pursuant to an appropriate
registration form) with respect to the Parent Common Stock subject to such
Company Options or payable pursuant to such Vested Stock Unit, and shall use its
best efforts to maintain the effectiveness of such registration statements (and
maintain the current status of the prospectus or prospectuses contained therein)
for so long as such Company Options remain outstanding.
(b) Employee Benefits. 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 Corporation to provide, severance benefits for Company employees whose
employment is terminated during such period which are at least equal to the
severance benefits provided on Section 6.11(b) of the Company Disclosure Letter.
Following the Effective Time, Parent shall honor, or shall cause the Surviving
Corporation 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 6.11(b) of
the Company Disclosure Letter; provided, however, that nothing contained herein
shall prevent Parent from amending or terminating any such agreement in
accordance with its terms.
6.12. Expenses. The Surviving Corporation shall pay all charges and
expenses, including those of the Exchange Agent, in connection with the
transactions
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contemplated in Article IV, and Parent shall reimburse the Surviving Corporation
for such charges and expenses. Except as otherwise provided in Sections 8.5(b)
and 8.5(c), whether or not the Merger is consummated, all costs and expenses
incurred in connection with this Agreement, the Stock Option Agreement and the
Merger and the other transactions contemplated by this Agreement and the Stock
Option Agreement shall be paid by the party incurring such expense, except that
expenses incurred in connection with the filing fee for the S-4 Registration
Statement and printing and mailing the Prospectus/Proxy Statement and the S-4
Registration Statement shall be shared equally by Parent and the Company.
6.13. Indemnification; Directors' and Officers' Insurance. (a) From and
after the Effective Time, 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 Maryland law and its
charter or by-laws 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
(x) a written affirmation of his or her good faith belief that the standard of
conduct necessary for indemnification has been met, and (y) 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
six 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 200%
of the last annual premium paid for the D&O Insurance prior to the date of this
Agreement (200% 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 six-year 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
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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.
6.14. Election to Parent's Board of Directors. Promptly after the
Effective Time of the Merger, Parent shall increase the size of its Board of
Directors and shall cause Mr. Norman P. Blake, Jr. and two additional directors
of the Company determined by the Board Governance Committee of Parent to be
appointed to Parent's board of directors (such directors to be appointed to such
committees of the Board of Directors as the Board Governance Committee of the
Board of Directors of Parent shall determine). In addition, subject to its
fiduciary duties under applicable law, Parent agrees to nominate two, or if the
Effective Time occurs on or after August 15, 1998, three, of such directors for
election to Parent's Board of Directors at its first annual meeting with a
mailing date after the Effective Time.
6.15. Convertible Notes. The Company shall take all necessary action to
enter into a supplemental indenture prior to the Effective Time with the Trustee
(as defined in the Convertible Notes) pursuant to the indenture under which the
Convertible Notes were issued to provide, among other things, that on and after
the Effective Time the Convertible Notes will be convertible only into the
Merger Consideration.
6.16. Satisfaction of Section 15 of the 1940 Act.
(a) The Company shall use commercially reasonable efforts to cause
Pacholder to use commercially reasonable efforts to cause the board of directors
of Pacholder Fund, Inc. ("Pacholder Fund") to approve, and to solicit the
shareholders of Pacholder Fund as promptly as practicable with regard to the
approval of, a new investment advisory agreement with Pacholder, to be effective
on or as promptly as practicable after the Effective Time, pursuant to the
provisions of Section 15 of the 1940 Act, and consistent with all requirements
of the 1940 Act applicable thereto, provided that such agreement is identical in
all respects to the existing agreement other than the term of the agreement.
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(b) The Company shall use commercially reasonable efforts to cause
Pacholder to use commercially reasonable efforts to secure the satisfaction of
the conditions set forth in Section 15(f)(1) of the 1940 Act with respect to
Pacholder Fund.
(c) In the alternative, the covenant contained in this Section 6.16
shall be deemed to be complied with if Parent and Merger Subsidiary shall have
received an opinion from counsel reasonably acceptable to Parent and Merger
Subsidiary in form and substance satisfactory to such Persons and dated the
Closing Date, to the effect that consummation of the Merger will not result in
an "assignment" (within the meaning of the 1940 Act) of the investment advisory
agreement between Pacholder and Pacholder Fund.
6.17. Advisory Contract Consents. As promptly as practicable, the
Company shall cause the non-registered investment company advisory clients of
the Asset Management Subsidiaries to be informed of the transactions
contemplated by this Agreement and shall give such clients an opportunity to
terminate their advisory contracts with such Asset Management Subsidiaries or
any of their affiliates. Unless written consent is required by the terms of such
advisory contracts, the Company shall satisfy this obligation to the extent that
applicable law permits insofar as it relates to non-registered investment
company advisory clients by providing them with the notice contemplated by the
first sentence of this Section and obtaining such clients' consent in the form
of actual or implied consent by way of informing such clients of the Asset
Management Subsidiaries' intention to continue the advisory services, pursuant
to the Asset Management Subsidiaries' existing contracts with such clients,
subject to such clients' right to terminate such contracts within sixty (60)
days of receipt of such notice, and that each such client's consent will be
implied if it continues to accept the services without rejection during such
specified sixty-day period.
6.18. Other Actions by the Company and Parent.
(a) Rights. The Company shall take all necessary action with respect to
all of the outstanding Rights so that, immediately prior to the Effective Time,
(x) neither the Company nor Parent will have any obligations under the Rights or
the Rights Agreement and (y) the holders of the Rights will have no rights under
the Rights or the Rights Agreement.
(b) Takeover Statute. If any Takeover Statute is or may become
applicable to the Merger or the other transactions contemplated by this
Agreement or the Stock Option 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 Stock Option
Agreement, as the case may be, or by the Merger and otherwise act to eliminate
or minimize the effects of such statute or regulation on such transactions.
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(c) Dividends. The Company shall coordinate with Parent the
declaration, setting of record dates and payment dates of dividends on Shares so
that holders of Shares do not receive dividends on both Shares and Parent Common
Stock received in the Merger in respect of any calendar quarter or portion
thereof or fail to receive a dividend on either Shares or Parent Common Stock
received in the Merger in respect of any calendar quarter.
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 and shall have been
duly approved by the sole stockholder of Merger Subsidiary in accordance with
applicable law, and the issuance of Parent Common Stock pursuant to the Merger
shall have been duly approved by the holders of Parent Common Stock constituting
the Parent Requisite Vote.
(b) NYSE Listing. The shares of Parent Common Stock 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. Other than the filing provided for in Section 1.3, all other
notices, reports and other filings required to be made prior to the Effective
Time by the Company or Parent or any of their respective Subsidiaries with, and
all consents, registrations, approvals, permits and authorizations required to
be obtained prior to the Effective Time by the Company or Parent or any of their
respective Subsidiaries from, any Governmental Entity (collectively,
"Governmental Consents"), in connection with the execution and delivery of this
Agreement and the consummation of the Merger and the other transactions
contemplated by this Agreement or by the Stock Option Agreement shall have been
made or obtained (as the case may be), except where the failure to make any such
filing(s) or obtain any such Governmental Consent(s) would not reasonably be
expected to result in an aggregate loss of $50.0 million or more in annual net
written premiums for Parent, the Company and their respective Subsidiaries in
all jurisdictions requiring such filing(s) or Governmental Consent(s) in the
event such filing(s) is (are) not made or such Consent(s) is (are) not obtained.
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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.
(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 conditions:
(a) Representations and Warranties. (i) To the actual knowledge of the
Responsible Executive Officers of the Company on the date of this Agreement, the
representations and warranties of the Company set forth in this Agreement shall
not have been untrue or incorrect in any material respect as of the date of this
Agreement; and (ii) the representations and warranties of the Company set forth
in this Agreement shall be true and correct as of the Closing Date as though
made on and as of the Closing Date (except to the extent any such representation
or warranty expressly speaks as of an earlier date) except where the failure of
such representations and warranties to be so true and correct (without giving
effect to any qualifications as to "Company Material Adverse Effect", "material"
or similar qualifications) would not, individually or in the aggregate,
reasonably be expected to have a Company Material Adverse Effect; and Parent
shall have received a certificate signed on behalf of the Company by an
executive officer of the Company to the effect stated in the foregoing clauses
(i) and (ii).
(b) 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 and the Stock Option 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.
(c) Consents. The Company shall have obtained the consent or approval
of each Person whose consent or approval shall be required under any Contract
(other than as set forth on Section 7.2(c) of the Company Disclosure Letter) to
which the Company or any of its Subsidiaries is a party, except those for which
the failure to obtain
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such consents or approvals, individually or in the aggregate, is not reasonably
likely to have a Company Material Adverse Effect or is not reasonably likely to
prevent or materially impair the ability of the Company to consummate the
transactions contemplated by this Agreement.
(d) Tax Opinion. Parent shall have received the opinion of Sullivan &
Cromwell, counsel to Parent, dated the Closing Date, 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. In rendering such opinion, Sullivan &
Cromwell shall require delivery of and rely upon the representations letters
delivered by Parent, Merger Subsidiary and the Company substantially in the
forms of Section 7.3(d)(1) and Section 7.3(d)(2) of the Company Disclosure
Letter prior to the Closing Date.
(e) Accountant Letters. Parent shall have received, in form and
substance reasonably satisfactory to Parent, from each of KPMG Peat Marwick LLP
(or its successor) and Ernst & Young (or its successor) a favorable letter,
dated the Closing Date, regarding the appropriateness of "pooling-of-interests"
accounting treatment for the Merger.
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 conditions:
(a) Representations and Warranties. (i) To the actual knowledge of the
Responsible Executive Officers of Parent on the date of this Agreement, the
representations and warranties of Parent and Merger Subsidiary set forth in this
Agreement shall not have been untrue or incorrect in any material respect as of
the date of this Agreement; and (ii) the representations and warranties of
Parent and Merger Subsidiary set forth in this Agreement shall be true and
correct as of the Closing Date as though made on and as of the Closing Date
(except to the extent any such representation or warranty expressly speaks as of
an earlier date) except where the failure of such representations and warranties
to be so true and correct (without giving effect to any qualifications as to
"Parent Material Adverse Effect," "material" or similar qualifications) would
not, individually or in the aggregate, reasonably be expected to have a Parent
Material Adverse Effect; 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 the effect
stated in the foregoing clauses (i) and (ii).
(b) Performance of Obligations of Parent and Merger Subsidiary. Each of
Parent and Merger Subsidiary shall have performed in all material respects all
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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.
(c) Consents Under Agreements. Parent shall have obtained the consent
or approval of each Person whose consent or approval shall be required in order
to consummate the transactions contemplated by this Agreement under any Contract
to which Parent or any of its Subsidiaries is a party, except those for which
failure to obtain such consents and approvals, individually or in the aggregate,
is not reasonably likely to have a Parent Material Adverse Effect or is not
reasonably likely to prevent or to materially burden or materially impair the
ability of Parent to consummate the transactions contemplated by this Agreement.
(d) Tax Opinion. The Company shall have received the opinion of Piper &
Marbury L.L.P., counsel to the Company, dated the Closing Date, 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. In rendering
such opinion, Piper & Marbury L.L.P. shall require delivery of and rely upon the
representations letters delivered by Parent, Merger Subsidiary and the Company
substantially in the forms of Section 7.3(d)(1) and Section 7.3(d)(2) of the
Company Disclosure Letter prior to the Closing Date.
(e) Accountant Letters. The Company shall have received, in form and
substance reasonably satisfactory to the Company, from each of KPMG Peat Marwick
LLP (or its successor) and Ernst & Young (or its successor) a favorable letter,
dated the Closing Date, regarding the appropriateness of "pooling-of-interests"
accounting treatment for the Merger.
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 and Parent 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
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Time by action of the Board of Directors of either Parent or the Company if (i)
the Merger shall not have been consummated by August 15, 1998, whether such date
is before or after the date of approval by the stockholders of the Company or
Parent (the "Termination Date"); provided, however, that if either Parent or the
Company determines that additional time is necessary in connection with
obtaining any Governmental Consents, the Termination Date may be extended by
Parent or the Company from time to time by written notice to the other party to
a date not beyond December 15, 1998, (ii) 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,
(iii) the approval of Parent's stockholders as 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 (iv) any Order permanently restraining, enjoining or
otherwise prohibiting consummation of the Merger shall become final and
non-appealable (whether before or after the approval by the stockholders of the
Company or Parent); provided, that the right to terminate this Agreement
pursuant to clause (i) 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 proximately contributed to the occurrence of the failure
of the Merger to be consummated.
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:
(a) if (i) the Company is not in material breach of Section 6.2, (ii)
the Merger shall not have been approved by the Company Requisite Vote, (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, within five business days of receipt of the Company's written
notification of its intention to enter into a binding agreement for a Superior
Proposal, 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, from a financial point of view, to the stockholders of the Company as
the Superior Proposal and (v) if so requested in writing by Parent prior to the
Company's termination pursuant to this Section 8.3(a), the Company prior to such
termination pays to Parent in immediately available funds the fees required to
be paid pursuant to Section 8.5. The Company agrees (x) that it will not enter
into a binding agreement referred to in clause (iii) above until at least the
sixth business day after it has provided the notice to Parent required thereby
and (y) to notify Parent promptly if its intention to enter into a written
agreement referred to in its notification shall change at any time after giving
such notification.
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(b) if there is a breach by Parent or Merger Subsidiary of any
representation, warranty, covenant or agreement contained in this Agreement that
cannot be cured and would cause a condition set forth in Section 7.3(a) or
7.3(b) to be incapable of being satisfied.
8.4. Termination by Parent. 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 the stockholders of Parent referred to in Section
7.1(a), by action of the Board of Directors of Parent if (a) the Company enters
into a binding agreement for a Superior Proposal or the Board of Directors of
the Company shall have withdrawn or adversely modified its approval or
recommendation of this Agreement or the Merger 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 or (b) there is a breach by the Company of
any representation, warranty, covenant or agreement contained in this Agreement
that cannot be cured and would cause a condition set forth in Section 7.2(a) or
7.2(b) to be incapable of being satisfied.
8.5. Effect of Termination and Abandonment. (a) In the event of
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 (i) a Company Acquisition Proposal shall have
been made to the Company or any of its Subsidiaries or any of its stockholders
or any Person shall have publicly announced an intention (whether or not
conditional) to make a Company Acquisition Proposal with respect to the Company
or any of its Subsidiaries and thereafter this Agreement is terminated by either
Parent or the Company pursuant to Section 8.2(ii) or (ii) this Agreement is
terminated (x) by the Company pursuant to Section 8.3(a) or (y) by Parent
pursuant to Section 8.4(a), then the Company shall promptly, but in no event
later than two days after the date Parent makes a written request for payment,
pay Parent a termination fee of $70,000,000 and shall promptly, but in no event
later than two days after being notified of such by Parent, pay to Parent an
amount equal to all of the charges and expenses incurred by Parent or Merger
Subsidiary in connection with this Agreement and the Stock Option Agreement and
the transactions contemplated by this Agreement and the Stock Option Agreement
up to a maximum amount of $5,000,000, in each case payable by wire transfer of
same day funds.
(c) In the event that (i) a proposal or offer with respect to a merger,
reorganization, share exchange, consolidation or similar transaction involving,
or any
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purchase of all or a substantial portion of the assets or equity securities of,
Parent or any of its Subsidiaries (a "Parent Acquisition Proposal") shall have
been made to Parent or any of its Subsidiaries or any Person shall have publicly
announced an intention (whether or not conditional) to make a Parent Acquisition
Proposal with respect to Parent or any of its Subsidiaries and thereafter this
Agreement is terminated by either Parent or the Company pursuant to Section
8.2(iii) or (ii) Parent has withdrawn or modified in a manner adverse to the
Company its recommendation contemplated by Section 6.4 and thereafter this
Agreement is terminated by either Parent or the Company pursuant to Section
8.2(iii), then Parent shall promptly, but in no event later than two days after
the date the Company makes a written request for payment, pay the Company a
termination fee of $70,000,000 and shall promptly, but in no event later than
two days after being notified of such by the Company, pay to the Company an
amount equal to all of the charges and expenses incurred by the Company in
connection with this Agreement and the Stock Option Agreement and the
transactions contemplated by this Agreement and the Stock Option Agreement up to
a maximum amount of $5,000,000, in each case payable by wire transfer of same
day funds.
(d) The Company and Parent each acknowledge that the agreements
contained in Sections 8.5(b) and (c) 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),
or Parent fails to promptly pay the amount due pursuant to Section 8.5(c), 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 the fee set forth in this Section 8.5, 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 Chemical Bank in effect from time to time during such
period plus two percent.
ARTICLE IX
Miscellaneous and General
9.1. Survival. This Article IX and the agreements of the Company,
Parent and Merger Subsidiary contained in Section 6.6 (Taxation and Accounting),
Section 6.11 (Benefits), Section 6.13 (Indemnification; Directors' and Officers'
Insurance) and Section 6.14 (Election to Parent's Board of Directors) shall
survive the consummation of the Merger. This Article IX, the agreements of the
Company, Parent and Merger Subsidiary contained in Section 6.12 (Expenses) and
Section 8.5 (Effect of Termination and Abandonment) shall survive the
termination of this Agreement. All other representations,
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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. The conditions to each of the parties'
obligations to consummate the Merger are for the sole benefit of such party and
may be waived by such party in whole or in part to the extent permitted by
applicable law.
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 MARYLAND 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 AGREEMENT 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 AGREEMENT, OR THE TRANSACTIONS
CONTEMPLATED BY THIS AGREEMENT OR THE STOCK OPTION AGREEMENT. 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 AGREEMENT 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 delivered
personally or sent by registered or certified mail, postage prepaid, or by
facsimile:
if to Parent or Merger Subsidiary
The St. Paul Companies, Inc.
385 Washington Street
Saint Paul, Minnesota 55102
Attention: President
fax: (612) 310-3378
(with a copy to Joseph B. Frumkin, Esq.,
Sullivan & Cromwell
125 Broad Street
New York, NY 10004
fax: (212) 558-3588)
if to the Company
USF&G Corporation
6225 Smith Avenue
Baltimore, Maryland 21209
Attention: President
fax: (410) 205-6802
(with a copy to John R. Ettinger, Esq.,
Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
fax: (212) 450-4800
and a copy to
R.W. Smith Jr., Esq.
Piper & Marbury L.L.P.
36 S. Charles Street
Baltimore, MD 21201)
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 Company Disclosure Letter, the Parent
Disclosure
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Letter, the Stock Option Agreement and the Confidentiality Agreement, dated
March 28, 1997 (the "Company Confidentiality Letter"), and October 28, 1997 (the
"Parent Confidentiality Letter"), between Parent and the Company (the
"Confidentiality Agreements") 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.
The parties hereto agree that the Confidentiality Agreements shall be hereby
amended to provide that any provision therein which in any manner would be
inconsistent with this Agreement, the Stock Option Agreement or the transactions
contemplated hereby or thereby shall terminate as of the date hereof; provided,
however, that such provisions of the Confidentiality Agreements shall be
reinstated in the event of any termination of this Agreement.
9.8. No Third Party Beneficiaries. Except as provided in Section 6.13
(Indemnification; Directors' and Officers' Insurance) and Section 6.14 (Election
to Parent's Board of Directors), this Agreement is not intended to confer upon
any Person other than the parties hereto any rights or remedies hereunder.
9.9. Obligations of Parent and of the Company. Whenever this Agreement
requires a Subsidiary of Parent to take any action, such requirement shall be
deemed to include an undertaking on the part of Parent to cause such Subsidiary
to take such action. Whenever this Agreement requires a Subsidiary of the
Company to take any action, such requirement shall be deemed to include an
undertaking on the part of the Company to cause such Subsidiary to take such
action and, after the Effective Time, on the part of the Surviving Corporation
to cause such Subsidiary to take such action.
9.10. 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.
9.11. 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."
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9.12. 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 Constituent Corporation 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.
9.13. Location of Certain Definitions.
Section
affiliate............................................................4.2(e)
Agreement..........................................................Preamble
Asset Management Subsidiaries....................................5.1(u)(iv)
Audit Date...........................................................5.1(e)
Average Parent Price.................................................4.1(a)
Bankruptcy and Equity Exception...................................5.1(c)(i)
Beneficially Owns....................................................5.2(p)
Beneficial Owner.....................................................5.2(p)
Bylaws..................................................................2.2
Certificate..........................................................4.1(a)
Charter.................................................................2.1
Closing.................................................................1.2
Closing Date............................................................1.2
Code...............................................................Recitals
Collars..............................................................4.1(a)
Company............................................................Preamble
Company Acquisition Proposal............................................6.2
Company Actuarial Analyses......................................5.1(s)(iii)
Company Affiliates Letter............................................6.8(i)
Company Confidentiality Letter..........................................9.7
Company Disclosure Letter...............................................5.1
Company Insurance Contracts.......................................5.1(s)(i)
Company Insurance Subsidiaries.......................................5.1(a)
Company Intellectual Property Rights..........................5.1(o)(ii)(B)
Company Material Adverse Effect......................................5.1(a)
Company Option.......................................................5.1(b)
Company Reports......................................................5.1(e)
Company Requisite Vote............................................5.1(c)(i)
Company SAP Statements...............................................5.1(e)
Company Stock Plans..................................................5.1(b)
Compensation and Benefit Plans....................................5.1(h)(i)
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Confidentiality Agreements..............................................9.7
Constituent Corporations...........................................Preamble
Convertible Notes....................................................5.1(b)
Contracts........................................................5.1(d)(ii)
Costs...............................................................6.13(a)
D&O Insurance.......................................................6.13(b)
Department..............................................................1.3
Effective Time..........................................................1.3
Environmental Law....................................................5.1(k)
ERISA............................................................5.1(h)(ii)
ERISA Affiliate.................................................5.1(h)(iii)
Exchange Agent.......................................................4.2(a)
Exchange Fund........................................................4.2(a)
Exchange Ratio.......................................................4.1(a)
Excluded Shares......................................................4.1(a)
GAAP.................................................................5.1(e)
Governmental Consents................................................7.1(c)
Governmental Entity...............................................5.1(d)(i)
Hazardous Substance..................................................5.1(k)
HSR Act..............................................................5.1(a)
Indemnified Parties.................................................6.13(a)
Insurance Laws....................................................5.1(i)(i)
IRS..............................................................5.1(h)(ii)
Laws.............................................................5.1(i)(ii)
Lower Collar.........................................................4.1(a)
Maryland Articles of Merger.............................................1.3
Maximum Premium.....................................................6.13(b)
Merger.............................................................Recitals
Merger Consideration.................................................4.1(a)
Merger Subsidiary..................................................Preamble
MGCL....................................................................1.1
NYSE.................................................................4.1(a)
Order................................................................7.1(d)
Pacholder.......................................................5.1(u)(iii)
Pacholder Fund......................................................6.16(a)
Parent.............................................................Preamble
Parent Acquisition Proposal..........................................8.5(c)
Parent Actuarial Analyses.......................................5.2(r)(iii)
Parent Affiliates Letter...........................................6.8(iii)
Parent Audit Date....................................................5.2(f)
Parent Common Stock..................................................4.1(a)
Parent Companies.....................................................4.1(a)
Parent Compensation and Benefits Plans............................5.2(i)(i)
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Parent Confidentiality Letter...........................................9.7
Parent Disclosure Letter................................................5.2
Parent ERISA Affiliate...........................................5.2(i)(ii)
Parent Insurance Contracts........................................5.2(r)(i)
Parent Insurance Subsidiaries........................................5.2(b)
Parent Material Adverse Effect.......................................5.2(b)
Parent Pension Plan...............................................5.2(i)(i)
Parent Preferred Shares..............................................5.2(c)
Parent Reports.......................................................5.2(f)
Parent Requisite Vote.............................................5.2(d)(i)
Parent Rights Agreement..............................................5.2(c)
Parent SAP Statements................................................5.2(f)
Parent Series A Preferred Stock......................................5.2(c)
Parent Series B Preferred Stock......................................5.2(c)
Parent Series C Preferred Stock......................................5.2(c)
Parent Stockholder Meeting..............................................6.4
Parent Stock Plans...................................................5.2(c)
Pension Plan.....................................................5.1(h)(ii)
Person...............................................................4.2(b)
Preferred Shares.....................................................5.1(b)
Prospectus/ Proxy Statement.............................................6.3
Representatives.........................................................6.7
Responsible Executive Officers of Parent.............................5.2(b)
Responsible Executive Officers of the Company........................5.1(a)
Rights............................................................5.1(q)(i)
Rights Agreement.....................................................5.1(b)
S-4 Registration Statement..............................................6.3
SEC..................................................................5.1(e)
Securities Act....................................................5.1(d)(i)
Securities Exchange Act...........................................5.1(d)(i)
Share, Shares........................................................4.1(a)
Stockholders Meeting....................................................6.4
Stock Option Agreement.............................................Recitals
Subsidiary...........................................................5.1(a)
Superior Proposal.......................................................6.2
Surviving Corporation...................................................1.1
Takeover Statute.....................................................5.1(j)
Tax, Taxes, Taxable..................................................5.1(m)
Taxing Authority.....................................................5.1(m)
Tax Return(s)........................................................5.1(m)
Termination Date........................................................8.2
Third-Party Intellectual Property Rights......................5.1(o)(ii)(A)
Vested Stock Units..............................................6.11(a)(ii)
Upper Collar.........................................................4.1(a)
1940 Act........................................................5.1(u)(iii)
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IN WITNESS WHEREOF, this Agreement has been duly executed and delivered
by the duly authorized officers of the parties hereto as of the date first
written above.
USF&G CORPORATION
By: /s/ Norman P. Blake, Jr.
--------------------------------------------
Name: Norman P. Blake, Jr.
Title: Chairman of the Board, President
and Chief Executive Officer
THE ST. PAUL COMPANIES, INC.
By: /s/ Douglas W. Leatherdale
--------------------------------------------
Name: Douglas W. Leatherdale
Title: Chairman of the Board, President
and Chief Executive Officer
SP MERGER CORPORATION
By: /s/ Douglas W. Leatherdale
--------------------------------------------
Name: Douglas W. Leatherdale
Title: President
<PAGE>
EXHIBIT A-1
[FORM OF COMPANY AFFILIATE LETTER]
[Date]
USF&G Corporation
6225 Smith Avenue
Baltimore, Maryland 21209
The St. Paul Companies, Inc.
385 Washington Street
St. Paul, Minnesota 55102
Ladies and Gentlemen:
I have been advised that as of the date hereof, I may be deemed to be
an "affiliate" of USF&G Corporation, a Maryland corporation (the "Company"), as
such term (i) is defined for purposes of paragraphs (c) and (d) of Rule 145 of
the Rules and Regulations (the "Rules and Regulations") of the Securities and
Exchange Commission (the "Commission") under the Securities Act of 1933, as
amended (the "Securities Act"), or (ii) is used in and for purposes of
Accounting Series Releases 130 and 135, as amended, of the Commission. Pursuant
to the terms of the Agreement and Plan of Merger dated as of January 19, 1998,
as it may be amended, supplemented or modified from time to time (the "Merger
Agreement"), among the Company, The St. Paul Companies, Inc., a Minnesota
corporation ("Parent"), and SP Merger Corporation, a Maryland corporation and a
wholly owned subsidiary of Parent ("Merger Sub"), Merger Sub will be merged with
and into the Company (the "Merger"). Capitalized terms used herein but not
defined herein shall have the meanings ascribed to such terms in the Merger
Agreement.
I further understand that the Merger will be treated for financial
accounting purposes as a "pooling of interests" in accordance with generally
accepted accounting principles and that the Staff of the Commission has issued
certain guidelines that should be followed to ensure the pooling of the
entities.
In consideration of the agreements contained herein, Parent's reliance
on this letter in connection with the consummation of the Merger and for other
good and
A-1-1
<PAGE>
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, I hereby represent, warrant and agree that (i) I will not make any
sale or transfer or otherwise dispose of my interests in, or acquire or sell
options or other securities relating to securities of the Company or Parent that
would be intended to reduce my risk relative to, any shares of Common Stock,
without par value, of Parent (the "Parent Common Stock") or Common Stock, par
value $2.50 per share, of the Company ("Company Common Stock") until after such
time as results covering at least 30 days of combined operations of the Company
and Parent have been published by Parent, in the form of a quarterly earnings
report, an effective registration statement filed with the Commission, a report
to the Commission on Form 10-K, 10-Q or 8-K, or any other public filing or
announcement which includes such combined results of operations, and (ii) I will
not make any sale, transfer or other disposition of any shares of Parent Common
Stock received by me pursuant to the Merger in violation of the Securities Act
or the rules and regulations thereunder. I have been advised that the issuance
of the shares of Parent Common Stock pursuant to the Merger will have been
registered with the Commission under the Securities Act on a Registration
Statement on Form S-4. I have also been advised, however, that since I may be
deemed to be an affiliate of the Company at the time the Merger is submitted for
a vote of the shareholders of the Company, the Parent Common Stock received by
me may be disposed by me only (i) pursuant to an effective registration under
the Securities Act, (ii) in conformity with the volume and other limitations of
Rule 145 promulgated by the Commission under the Securities Act, or (iii) in
reliance upon an exemption from registration that is available under the
Securities Act.
I also understand that instructions will be given to Parent's transfer
agent with respect to the Parent Common Stock to be received by me pursuant to
the Merger and that there may be placed on the certificates representing such
shares of Parent Common Stock, or any substitutes therefor, a legend stating in
substance as follows:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ISSUED IN A
TRANSACTION TO WHICH RULE 145 PROMULGATED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, APPLIES AND MAY ONLY BE SOLD OR OTHERWISE TRANSFERRED
IN COMPLIANCE WITH THE REQUIREMENTS OF RULE 145 OR PURSUANT TO A
REGISTRATION STATEMENT UNDER THAT ACT OR AN EXEMPTION FROM SUCH
REGISTRATION."
It is understood and agreed that the legend set forth above shall be
removed upon surrender of certificates bearing such legend by delivery of
substitute certificates without such legend if I shall have delivered to Parent
an opinion of counsel, in form and substance reasonably satisfactory to Parent,
to the effect that the sale or disposition of the shares represented by the
surrendered certificates may be effected
A-1-2
<PAGE>
without registration of the offering, sale and delivery of such shares under the
Securities Act.
I further understand and agree that Parent is under no obligation to
register the sale, transfer or other disposition of the Parent Common Stock by
me or on my behalf under the Securities Act or to take any other action
necessary in order to make compliance with an exemption form such registration
available.
Execution of this letter should not be considered an admission on my
part that I am an "affiliate" of the Company as described in the first paragraph
of this letter, or as a waiver of any rights I may have to object to any claim
that I am such an affiliate on or after the date of this letter.
This letter agreement constitutes the complete understanding between
Parent and me concerning the subject matter hereof. Any notice required to be
sent to either party hereunder shall be sent by registered or certified mail,
return receipt requested, using the addresses set forth herein or such other
address as shall be furnished in writing by the parties. This letter agreement
shall be governed by and construed and interpreted in accordance with, the laws
of the State of Maryland.
A-1-3
<PAGE>
If you are in agreement with the foregoing, please so indicate by
signing below and returning a copy of this letter to the undersigned, at which
time this letter shall become a binding agreement between us.
Very truly yours,
By:_______________________
Name:
Address:
Accepted this ____ day
of __________, 1998.
USF&G Corporation
By:_______________________
Name:
Title:
The St. Paul Companies, Inc.
By:_______________________
Name:
Title:
A-1-4
<PAGE>
EXHIBIT A-2
[FORM OF PARENT AFFILIATE LETTER]
[Date]
USF&G Corporation
6225 Smith Avenue
Baltimore, Maryland 21209
The St. Paul Companies, Inc.
385 Washington Street
St. Paul, Minnesota 55102
Ladies and Gentlemen:
I have been advised that as of the date hereof, I may be deemed to be
an "affiliate" of The St. Paul Companies, Inc., a Minnesota corporation
("Parent"), as such term (i) is defined for purposes of paragraphs (c) and (d)
of Rule 145 of the Rules and Regulations (the "Rules and Regulations") of the
Securities and Exchange Commission (the "Commission") under the Securities Act
of 1933, as amended (the "Securities Act"), or (ii) is used in and for purposes
of Accounting Series Releases 130 and 135, as amended, of the Commission.
Pursuant to the terms of the Agreement and Plan of Merger (the "Merger
Agreement"), dated as of January 19, 1998, as it may be amended, supplemented or
modified from time to time, among USF&G Corporation, a Maryland corporation (the
"Company"), Parent, and SP Merger Corporation, a Maryland corporation and a
wholly owned subsidiary of Parent ("Merger Sub"), Merger Sub will be merged with
and into the Company (the "Merger"). Capitalized terms used herein but not
defined herein shall have the meanings ascribed to such terms in the Merger
Agreement.
I further understand that the Merger will be treated for financial
accounting purposes as a "pooling of interests" in accordance with generally
accepted accounting principles and that the Staff of the Commission has issued
certain guidelines that should be followed to ensure the pooling of the
entities.
In consideration of the agreements contained herein, the Company's
reliance on this letter in connection with the consummation of the Merger and
for other good and valuable consideration, the receipt and sufficiency of which
are hereby
A-2-1
<PAGE>
acknowledged, I hereby represent, warrant and agree that I will not make any
sale or transfer or otherwise dispose of my interests in, or acquire or sell
options or other securities relating to securities of the Company or Parent that
would be intended to reduce my risk relative to, any shares of Common Stock,
without par value, of Parent (the "Parent Common Stock") or Common Stock, par
value $2.50 per share, of the Company (the "Company Common Stock") 30 days of
combined operations of the Company and Parent have been published by Parent, in
the form of a quarterly earnings report, an effective registration statement
filed with the Commission, a report to the Commission on Form 10-K, 10-Q or 8-K,
or any other public filing or announcement which includes such combined results
of operations.
Execution of this letter should not be considered an admission on my
part that I am an "affiliate" of Parent as described in the first paragraph of
this letter, or as a waiver of any rights I may have to object to any claim that
I am such an affiliate on or after the date of this letter.
This letter agreement constitutes the complete understanding between
the Company and me concerning the subject matter hereof. Any notice required to
be sent to either party hereunder shall be sent by registered or certified mail,
return receipt requested, using the addresses set forth herein or such other
address as shall be furnished in writing by the parties. This letter agreement
shall be governed by and construed and interpreted in accordance with, the laws
of the Commonwealth of Minnesota.
A-2-2
<PAGE>
If you are in agreement with the foregoing, please so indicate by
signing below and returning a copy of this letter to the undersigned, at which
time this letter shall become a binding agreement between us.
Very truly yours,
------------------------
Name:
Address:
Accepted this ____ day of ___________, 1998.
The St. Paul Companies, Inc.
By:______________________
Name:
Title:
USF&G Corporation
By:______________________
Name:
Title:
A-2-3
<PAGE>
TABLE OF CONTENTS
Page
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RECITALS
ARTICLE I
The Merger; Closing; Effective Time
1.1. The Merger..............................................................2
1.2. Closing.................................................................2
1.3. Effective Time..........................................................2
ARTICLE II
Charter and Bylaws
of the Surviving Corporation
2.1. The Charter.............................................................3
2.2. The Bylaws..............................................................3
ARTICLE III
Officers and Directors
of the Surviving Corporation
3.1. Directors...............................................................3
3.2. Officers................................................................3
ARTICLE IV
Effect of the Merger on Stock;
Exchange of Certificates
4.1. Effect on Stock.........................................................4
(a) Merger Consideration............................................4
(b) Cancellation of Shares..........................................4
(c) Merger Subsidiary...............................................4
4.2. Exchange of Certificates for Shares.....................................5
(a) Exchange Agent..................................................5
(b) Exchange Procedures.............................................5
(c) Distributions with Respect to Unexchanged Shares; Voting........6
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Page
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(d) Transfers.......................................................6
(e) Fractional Shares...............................................7
(f) Termination of Exchange Fund....................................7
(g) Lost, Stolen or Destroyed Certificates..........................7
(h) Affiliates......................................................7
4.3. Dissenters' Rights......................................................8
4.4. Adjustments to Prevent Dilution.........................................8
4.5. Treatment of the Convertible Notes......................................8
ARTICLE V
Representations and Warranties
5.1. Representations and Warranties of the Company...........................8
(a) Organization, Good Standing and Qualification...................8
(b) Capital Structure..............................................10
(c) Corporate Authority; Approval and Fairness.....................10
(d) Governmental Filings; No Violations............................11
(e) Company Reports; Financial Statements..........................12
(f) Absence of Certain Changes.....................................13
(g) Litigation and Liabilities.....................................14
(h) Employee Benefits..............................................14
(i) Compliance with Laws; Permits..................................16
(j) Takeover Statutes..............................................18
(k) Environmental Matters..........................................18
(l) Accounting and Tax Matters.....................................19
(m) Taxes..........................................................19
(n) Labor Matters..................................................21
(o) Intellectual Property..........................................21
(p) Material Contracts.............................................22
(q) Rights Plan....................................................22
(r) Brokers and Finders............................................23
(s) Insurance Matters..............................................23
(t) Liabilities and Reserves.......................................25
(u) Investment Advisory Matters....................................25
5.2. Representations and Warranties of Parent and Merger Subsidiary.........26
(a) Capitalization of Merger Subsidiary............................26
(b) Organization, Good Standing and Qualification..................27
(c) Capital Structure..............................................28
(d) Corporate Authority; Fairness..................................29
(e) Governmental Filings; No Violations............................29
-ii-
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Page
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(f) Parent Reports; Financial Statements...........................30
(g) Absence of Certain Changes.....................................32
(h) Litigation and Liabilities.....................................32
(i) Employee Benefits..............................................32
(j) Compliance with Laws; Permits..................................34
(k) Environmental Matters..........................................35
(l) Accounting and Tax Matters.....................................36
(m) Taxes..........................................................36
(n) Labor Matters..................................................37
(o) Material Contracts.............................................37
(p) Ownership of Shares............................................37
(q) Brokers and Finders............................................37
(r) Insurance Matters..............................................37
(s) Liabilities and Reserves.......................................38
ARTICLE VI
Covenants
6.1.(a)Interim Operations of the Company.....................................39
6.1.(b)Interim Operations of Parent..........................................41
6.2. Company Acquisition Proposals.........................................42
6.3. Information Supplied..................................................44
6.4. Stockholders Meetings.................................................44
6.5. Filings; Other Actions; Notification..................................45
6.6. Taxation and Accounting...............................................46
6.7. Access................................................................47
6.8. Affiliates............................................................47
6.9. Stock Exchange Listing................................................48
6.10. Publicity.............................................................48
6.11. Benefits..............................................................48
(a) Stock Options..................................................48
(b) Employee Benefits..............................................49
6.12. Expenses..............................................................49
6.13. Indemnification; Directors' and Officers' Insurance...................50
6.14. Election to Parent's Board of Directors...............................51
6.15. Convertible Notes.....................................................51
6.16. Satisfaction of Section 15 of the 1940 Act............................51
6.17. Advisory Contract Consents............................................52
6.18. Other Actions by the Company and Parent...............................52
(a) Rights.........................................................52
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<PAGE>
Page
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(b) Takeover Statute...............................................52
(c) Dividends......................................................53
ARTICLE VII
Conditions
7.1. Conditions to Each Party's Obligation to Effect the Merger.............53
(a) Stockholder Approval...........................................53
(b) NYSE Listing...................................................53
(c) Regulatory Consents............................................53
(d) Litigation.....................................................54
(e) S-4............................................................54
7.2. Conditions to Obligations of Parent and Merger Subsidiary..............54
(a) Representations and Warranties.................................54
(b) Performance of Obligations of the Company......................54
(c) Consents.......................................................54
(d) Tax Opinion....................................................55
(e) Accountant Letters.............................................55
7.3. Conditions to Obligation of the Company................................55
(a) Representations and Warranties.................................55
(b) Performance of Obligations of Parent and Merger
Subsidiary...................................................55
(c) Consents Under Agreements......................................56
(d) Tax Opinion....................................................56
(e) Accountant Letters.............................................56
ARTICLE VIII
Termination
8.1. Termination by Mutual Consent..........................................56
8.2. Termination by Either Parent or the Company............................56
8.3. Termination by the Company.............................................57
8.4. Termination by Parent..................................................58
8.5. Effect of Termination and Abandonment..................................58
-iv-
<PAGE>
Page
ARTICLE IX
Miscellaneous and General
9.1. Survival...............................................................59
9.2. Modification or Amendment..............................................60
9.3. Waiver of Conditions...................................................60
9.4. Counterparts...........................................................60
9.5. GOVERNING LAW; WAIVER OF JURY TRIAL....................................60
9.6. Notices................................................................61
9.7. Entire Agreement; No Other Representations.............................61
9.8. No Third Party Beneficiaries...........................................62
9.9. Obligations of Parent and of the Company...............................62
9.10. Severability...........................................................62
9.11. Interpretation.........................................................62
9.12. Assignment.............................................................63
9.13. Location of Certain Definitions........................................63
EXHIBITS
Exhibit A-1 - Form of Company Affiliate Letter
Exhibit A-2 - Form of Parent Affiliate Letter
-v-
STOCK OPTION AGREEMENT
----------------------
STOCK OPTION AGREEMENT, dated as of January 19, 1998 (the "Agreement"),
between The St. Paul Companies, Inc., a Minnesota corporation (the "Grantee"),
and USF&G Corporation, a Maryland corporation (the "Grantor").
WHEREAS, the Grantee, SP Merger Corporation, a Maryland corporation and
a wholly owned subsidiary of the Grantee ("Newco"), and the Grantor are entering
into an Agreement and Plan of Merger, dated as of the date hereof (the "Merger
Agreement"), which provides, among other things, for the merger of the Newco
with and into Grantor (the "Merger");
WHEREAS, as a condition and inducement to Grantee's and Newco's
willingness to enter into the Merger Agreement, the Grantee and Newco have
requested that the Grantor grant to the Grantee an option to purchase up to
shares of Common Stock, par value $2.50 per share, of the Grantor (the
"Common Stock"), upon the terms and subject to the conditions hereof; and
WHEREAS, in order to induce the Grantee and Newco to enter into the
Merger Agreement, the Grantor is willing to grant the Grantee the requested
option.
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; Exercise; Adjustments; Payment of Spread. (a)
Contemporaneously herewith the Grantee, Newco and the Grantor are entering into
the Merger Agreement. Subject to the other terms and conditions set forth
herein, the Grantor hereby grants to the Grantee an irrevocable option (the
"Option") to purchase up to 23,181,596 shares of Common Stock (the "Shares") at
a cash purchase price equal to $22.00 per share (the "Purchase Price"). The
Option may be exercised by the Grantee, in whole or in part, at any time, or
from time to time, following (but not prior to) the occurrence of one of the
events set forth in Section 2(d) hereof, and prior to the termination of the
Option in accordance with the terms of this Agreement.
(b) In the event the Grantee wishes to exercise the Option, the Grantee
shall send a written notice to the Grantor (the "Stock Exercise Notice")
specifying a date
<PAGE>
(subject to the HSR Act (as defined below) and applicable insurance regulatory
approvals) not later than 10 business days and not earlier than three business
days following the date such notice is given for the closing of such purchase.
In the event of any change in the number of issued and outstanding shares of
Common Stock by reason of any stock dividend, stock split, split-up,
recapitalization, merger or other change in the corporate or capital structure
of the Grantor, the number of Shares subject to this Option and the purchase
price per Share shall be appropriately adjusted to restore the Grantee to its
rights hereunder, including its right to purchase Shares representing 19.9% of
the capital stock of the Grantor entitled to vote generally for the election of
the directors of the Grantor which is issued and outstanding immediately prior
to the exercise of the Option.
(c) If at any time the Option is then exercisable pursuant to the terms
of Section 1(a) hereof, the Grantee may elect, in lieu of exercising the Option
to purchase Shares provided in Section 1(a) hereof, to send a written notice to
the Grantor (the "Cash Exercise Notice") specifying a date not later than 20
business days and not earlier than 10 business days following the date such
notice is given on which date the Grantor shall pay to the Grantee an amount in
cash equal to the Spread (as hereinafter defined) multiplied by all or such
portion of the Shares subject to the Option as Grantee shall specify. As used
herein "Spread" shall mean the excess, if any, over the Purchase Price of the
higher of (x) if applicable, the highest price per share of Common Stock
(including any brokerage commissions, transfer taxes and soliciting dealers'
fees) paid or proposed to be paid by any person pursuant to any Company
Acquisition Proposal (as defined in the Merger Agreement) (the "Alternative
Purchase Price") or (y) the closing price of the shares of Common Stock on the
NYSE Composite Tape on the last trading day immediately prior to the date of the
Cash Exercise Notice (the "Closing Price"). If the Alternative Purchase Price
includes any property other than cash, the Alternative Purchase Price shall be
the sum of (i) the fixed cash amount, if any, included in the Alternative
Purchase Price plus (ii) the fair market value of such other property. If such
other property consists of securities with an existing public trading market,
the average of the closing prices (or the average of the closing bid and asked
prices if closing prices are unavailable) for such securities in their principal
public trading market on the five trading days ending five days prior to the
date of
-2-
<PAGE>
the Cash Exercise Notice shall be deemed to equal the fair market value of such
property. If such other property consists of something other than cash or
securities with an existing public trading market and, as of the payment date
for the Spread, agreement on the value of such other property has not been
reached, the Alternative Purchase Price shall be deemed to equal the Closing
Price. Upon exercise of its right to receive cash pursuant to this Section 1(c),
the obligations of the Grantor to deliver Shares pursuant to Section 3 shall be
terminated with respect to such number of Shares for which the Grantee shall
have elected to be paid the Spread.
2. Conditions to Delivery of Shares. The Grantor's obligation to
deliver Shares upon exercise of the Option is subject only to the conditions
that:
(a) No preliminary or permanent injunction or other order issued by any
federal or state court of competent jurisdiction in the United States
prohibiting the delivery of the Shares shall be in effect; and
(b) Any applicable waiting periods under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976 (the "HSR Act") shall have expired or
been terminated; and
(c) Any approval required to be obtained prior to the delivery of the
Shares under the insurance laws of any state or foreign jurisdiction shall
have been obtained and be in full force and effect; and
(d) (i) any person (other than Grantee or any of its subsidiaries)
shall have acquired beneficial ownership (as such term is defined in Rule
13d-3 under the Exchange Act) or the right to acquire beneficial ownership
of, or any "group" (as such term is defined under the Exchange Act) shall
have been formed which beneficially owns or has the right to acquire
beneficial ownership of, shares of Common Stock (other than trust account
shares) aggregating 15 percent or more of the then outstanding Common
Stock; (ii) in the event a Company Acquisition Proposal shall have been
made to Grantor or any of its Subsidiaries or any of
-3-
<PAGE>
its stockholders or any person shall have publicly announced an intention
(whether or not conditional) to make a Company Acquisition Proposal with
respect to Grantor or any of its Subsidiaries and thereafter the Merger
Agreement is terminated by either Grantor or Grantee pursuant to Section
8.2(ii) of the Merger Agreement; (iii) the Merger Agreement is terminated
by Grantor pursuant to Section 8.3(a) of the Merger Agreement; (iv) the
Merger Agreement is terminated by Grantee pursuant to Section 8.4(a) of the
Merger Agreement; or (v) Grantor shall have delivered to Grantee the
written notification pursuant to Section 8.3(a)(iii) of the Merger
Agreement and Grantee shall have notified Grantor in writing that Grantee
does not intend to match the Superior Proposal (as defined in the Merger
Agreement) referred to in such notification. As used in this Agreement,
"person" shall have the meaning specified in Sections 3(a)(9) and 13(d)(3)
of the Exchange Act.
3. The Closing. (a) Any closing hereunder shall take place on the date
specified by the Grantee in its Stock Exercise Notice or Cash Exercise Notice,
as the case may be, at 9:00 A.M., local time, at the offices of Sullivan &
Cromwell, 125 Broad Street, New York, New York, or, if the conditions set forth
in Section 2(a), (b) or (c) have not then been satisfied, on the second business
day following the satisfaction of such conditions, or at such other time and
place as the parties hereto may agree (the "Closing Date"). On the Closing Date,
(i) in the event of a closing pursuant to Section 1(b) hereof, the Grantor will
deliver to the Grantee a certificate or certificates, representing the Shares in
the denominations designated by the Grantee in its Stock Exercise Notice and the
Grantee will purchase such Shares from the Grantor at the price per Share equal
to the Purchase Price or (ii) in the event of a closing pursuant to Section 1(c)
hereof, the Grantor will deliver to the Grantee cash in an amount determined
pursuant to Section 1(c) hereof. Any payment made by the Grantee to the Grantor,
or by the Grantor to the Grantee, pursuant to this Agreement shall be made by
certified or official bank check or by wire transfer of federal funds to a bank
designated by the party receiving such funds.
-4-
<PAGE>
(b) The certificates representing the Shares shall bear an appropriate
legend relating to the fact that such Shares have not been registered under the
Securities Act of 1933, as amended (the "Securities Act").
4. Representations and Warranties of the Grantor. The Grantor
represents and warrants to the Grantee that (a) the Grantor is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Maryland and has the requisite corporate power and authority to enter
into and perform this Agreement; (b) the execution and delivery of this
Agreement by the Grantor and the consummation by it of the transactions
contemplated hereby have been duly authorized by the Board of Directors of the
Grantor and this Agreement has been duly executed and delivered by a duly
authorized officer of the Grantor and constitutes a valid and binding obligation
of the Grantor, enforceable in accordance with its terms, subject to bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium and similar laws of
general applicability relating to or affecting creditors' rights and to general
equity principles; (c) the Grantor has taken all necessary corporate action to
authorize and reserve the Shares issuable upon exercise of the Option and the
Shares, when issued and delivered by the Grantor upon exercise of the Option and
paid for by Grantee as contemplated hereby, will be duly authorized, validly
issued, fully paid and non-assessable and free of preemptive rights; (d) except
as otherwise required by the HSR Act and applicable insurance laws, the
execution and delivery of this Agreement by the Grantor and the consummation by
it of the transactions contemplated hereby do not require the consent, waiver,
approval or authorization of or any filing with any person or public authority
and will not violate, result in a breach of or the acceleration of any
obligation under, or constitute a default under, any provision of Grantor's
charter or by-laws, or any material indenture, mortgage, lien, lease, agreement,
contract, instrument, order, law, rule, regulation, judgment, ordinance, or
decree, or restriction by which the Grantor or any of its subsidiaries or any of
their respective properties or assets is bound; (e) no "fair price",
"moratorium", "control share acquisition," "interested shareholder" or other
form of antitakeover statute or regulation, including without limitation,
Section 3-602 of the Maryland General Corporation Law, or similar provision
contained in the charter or by-laws of Grantor, is or shall be applicable to
-5-
<PAGE>
the acquisition of Shares pursuant to this Agreement; and (f) the Grantor has
taken all corporate action necessary so that any Shares acquired pursuant to
this Agreement shall not be counted for purposes of determining the number of
shares of Common Stock beneficially owned by the Grantee or any of its
Affiliates or Associates (as such terms are defined in the Rights Agreement)
pursuant to the Amended and Restated Rights Agreement, dated as of March 11,
1997, between Grantor and The Bank of New York, as Rights Agent (the "Rights
Agreement").
5. Representations and Warranties of the Grantee. The Grantee
represents and warrants to the Grantor that (a) the execution and delivery of
this Agreement by the Grantee and the consummation by it of the transactions
contemplated hereby have been duly authorized by all necessary corporate action
on the part of the Grantee and this Agreement has been duly executed and
delivered by a duly authorized officer of the Grantee and constitutes a valid
and binding obligation of Grantee; and (b) the 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. Listing of Shares; Filings; Governmental Consents. Subject to
applicable law and the rules and regulations of the New York Stock Exchange,
Inc. (the "NYSE"), after the Option becomes exercisable hereunder, the Grantor
will promptly file an application to list the Shares on the NYSE and will use
its reasonable best efforts to obtain approval of such listing and to effect all
necessary filings by the Grantor under the HSR Act and the applicable insurance
laws of each state and foreign jurisdiction; provided, however, that if the
Grantor is unable to effect such listing on the NYSE by the Closing Date, the
Grantor will nevertheless be obligated to deliver the Shares upon the Closing
Date. Each of the parties hereto will use its reasonable best efforts to obtain
consents of all third parties and governmental authorities, if any, necessary to
the consummation of the transactions contemplated.
7. Repurchase of Shares. If by the date that is the first anniversary
of the date the Merger Agreement was terminated pursuant to the terms thereof
(the "Merger Termination Date"), neither the Grantee nor any other Person
-6-
<PAGE>
has acquired more than fifty percent (excluding the Shares) of the shares of
outstanding Common Stock, then the Grantor has the right to purchase (the
"Repurchase Right") all, but not less than all, of the Shares acquired upon
exercise of this Option at the greater of (i) the Purchase Price or (ii) the
average of the last sales prices for shares of Common Stock on the five trading
days ending five days prior to the date the Grantor gives written notice of its
intention to exercise the Repurchase Right. If the Grantor does not exercise the
Repurchase Right within thirty days following the end of the one year period
after the Merger Termination Date, the Repurchase Right lapses. In the event the
Grantor wishes to exercise the Repurchase Right, the Grantor shall send a
written notice to the Grantee specifying a date (not later than 20 business days
and not earlier than 10 business days following the date such notice is given)
for the closing of such purchase.
8. Sale of Shares. At any time prior to the first anniversary of the
Merger Termination Date, the Grantee shall have the right to sell (the "Sale
Right") to the Grantor all, but not less than all, of the Shares acquired upon
exercise of this Option at the greater of (i) the Purchase Price, or (ii) the
average of the last sales prices for shares of Common Stock on the five trading
days ending five days prior to the date the Grantee gives written notice of its
intention to exercise the Sale Right. If the Grantee does not exercise the Sale
Right prior to the first anniversary of the Merger Termination Date, the Sale
Right terminates. In the event the Grantee wishes to exercise the Sale Right,
the Grantee shall send a written notice to the Grantor specifying a date not
later than 20 business days and not earlier than 10 business days following the
date such notice is given for the closing of such sale.
9. Registration Rights. (a) In the event that the Grantee shall desire
to sell any of the Shares within three years after the purchase of such Shares
pursuant hereto, and such sale requires, in the opinion of counsel to the
Grantee, which opinion shall be reasonably satisfactory to the Grantor and its
counsel, registration of such Shares under the Securities Act, the Grantor will
cooperate with the Grantee and any underwriters in registering such Shares for
resale, including, without limitation, promptly filing a registration statement
which complies with the requirements of applicable federal and state securities
laws, and entering into an underwriting agreement with such under-
-7-
<PAGE>
writers upon such terms and conditions as are customarily contained in
underwriting agreements with respect to secondary distributions; provided that
the Grantor shall not be required to have declared effective more than two
registration statements hereunder and shall be entitled to delay the filing or
effectiveness of any registration statement for up to 120 days if the offering
would, in the judgment of the Board of Directors of the Grantor, require
premature disclosure of any material corporate development or material
transaction involving the Grantor or interfere with any previously planned
securities offering by the Company.
(b) If the Common Stock is registered pursuant to the provisions of
this Section 9, the Grantor agrees (i) to furnish copies of the registration
statement and the prospectus relating to the Shares covered thereby in such
numbers as the Grantee may from time to time reasonably request and (ii) if any
event shall occur as a result of which it becomes necessary to amend or
supplement any registration statement or prospectus, to prepare and file under
the applicable securities laws such amendments and supplements as may be
necessary to keep available for at least 45 days a prospectus covering the
Common Stock meeting the requirements of such securities laws, and to furnish
the Grantee such numbers of copies of the registration statement and prospectus
as amended or supplemented as may reasonably be requested. The Grantor shall
bear the cost of the registration, including, but not limited to, all registra-
tion and filing fees, printing expenses, and fees and disbursements of counsel
and accountants for the Grantor, except that the Grantee shall pay the fees and
disbursements of its counsel, and the underwriting fees and selling commissions
applicable to the shares of Common Stock sold by the Grantee. The Grantor shall
indemnify and hold harmless (i) Grantee, its affiliates and its officers and
directors and (ii) each underwriter and each person who controls any underwriter
within the meaning of the Securities Act or the Securities Exchange Act of 1934,
as amended (collectively, the "Underwriters") ((i) and (ii) being referred to as
"Indemnified Parties") against any losses, claims, damages, liabilities or
expenses, to which the Indemnified Parties may become subject, insofar as such
losses, claims, damages, liabilities (or actions in respect thereof) and
expenses arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained or incorporated by reference in any
registration statement
-8-
<PAGE>
filed pursuant to this paragraph, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading; provided,
however, that the Grantor will not be liable in any such case to the extent that
any such loss, liability, claim, damage or expense arises out of or is based
upon an untrue statement or alleged untrue statement in or omission or alleged
omission from any such documents in reliance upon and in conformity with written
information furnished to the Grantor by the Indemnified Parties expressly for
use or incorporation by reference therein.
(c) The Grantee and the Underwriters shall indemnify and hold harmless
the Grantor, its affiliates and its officers and directors against any losses,
claims, damages, liabilities or expenses to which the Grantor, its affiliates
and its officers and directors may become subject, insofar as such losses,
claims, damages, liabilities (or actions in respect thereof) and expenses arise
out of or are based upon any untrue statement of any material fact contained or
incorporated by reference in any registration statement filed pursuant to this
paragraph, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or omission
or alleged omission was made in reliance upon and in conformity with written
information furnished to the Grantor by the Grantee or the Underwriters, as
applicable, specifically for use or incorporation by reference therein.
10. Expenses. Each party hereto shall pay its own expenses incurred in
connection with this Agreement, except as otherwise specifically provided
herein.
11. Specific Performance. The Grantor acknowledges that if the Grantor
fails to perform any of its obligations under this Agreement immediate and
irreparable harm or injury would be caused to the Grantee for which money
damages would not be an adequate remedy. In such event, the Grantor agrees that
the Grantee shall have the right, in addition to any other rights it may have,
to specific performance of this Agreement. Accordingly, if the Grantee should
institute an action or proceeding seeking
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specific enforcement of the provisions hereof, the Grantor hereby waives the
claim or defense that the Grantee 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. The Grantor further agrees to waive any
requirements for the securing or posting of any bond in connection with
obtaining any such equitable relief.
12. Notice. All notices, requests, demands and other communications
hereunder shall be deemed to have been duly given and made if in writing and if
served by personal delivery upon the party for whom it is intended or delivered
by registered or certified mail, return receipt requested, or if sent by
facsimile transmission, upon receipt of oral confirmation that such transmission
has been received, to the person at the address set forth below, or such other
address as may be designated in writing hereafter, in the same manner, by such
person:
If to the Grantee:
The St. Paul Companies, Inc.
385 Washington Street
St. Paul, MN 55102
Attn: Chief Executive Officer
Telecopy: (612) 310-3378
With a copy to:
Sullivan & Cromwell
125 Broad Street
New York, NY 10004
Attn: Joseph B. Frumkin, Esq.
Telecopy: (212) 558-3588
If to the Grantor:
USF&G Corporation
6225 Centennial Way
Baltimore, MD 21208
Attn: Chief Executive Officer
Telecopy: (410) 205-6802
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With a copy to:
Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
Attn: John R. Ettinger, Esq.
Telecopy: (212) 450-4800
13. Parties in Interest. This Agreement shall inure to the benefit of
and be binding upon the parties named herein and their respective successors and
assigns; provided, however, that such successor in interest or assigns shall
agree to be bound by the provisions of this Agreement. Nothing in this
Agreement, express or implied, is intended to confer upon any person other than
the Grantor or the Grantee, or their successors or assigns, any rights or
remedies under or by reason of this Agreement.
14. Entire Agreement; Amendments. This Agreement, together with the
Merger Agreement and the other documents referred to therein, contains the
entire agreement between the parties hereto with respect to the subject matter
hereof and supersedes all prior and contemporaneous agreements and
understandings, oral or written, with respect to such transactions. 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.
15. Assignment. No party to this Agreement may assign any of its rights
or obligations under this Agreement without the prior written consent of the
other party hereto, except that the Grantee may assign its rights and obliga-
tions hereunder to any of its direct or indirect wholly owned subsidiaries
(including Newco), but no such transfer shall relieve the Grantee of its
obligations hereunder if such transferee does not perform such obligations.
16. Headings. The section headings herein are for convenience only and
shall not affect the construction of this Agreement.
17. 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.
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18. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Maryland(regardless of the laws that
might otherwise govern under applicable Maryland principles of conflicts of
law).
19. Termination. The right to exercise the Option granted pursuant to
this Agreement shall terminate at the earliest of (i) the Effective Time (as
defined in the Merger Agreement) (ii) if the Option is not exercised within 60
days after first becoming exercisable and (iii) if not then exercisable, thirty
days after termination of the Merger Agreement in accordance with its terms (the
dates referred to in clause (ii) and (iii) being hereinafter referred to as the
"Termination Date"); provided that, if the Option cannot be exercised or the
Shares cannot be delivered to Grantee upon such exercise because the conditions
set forth in Section 2(a), (b) or (c) hereof have not yet been satisfied, the
Termination Date shall be extended until thirty days after such impediment to
exercise or delivery has been removed.
All representations and warranties contained in this Agreement shall
survive delivery of and payment for the Shares.
20. Profit Limitation. (a) Notwithstanding any other provision of this
Agreement or the Merger Agreement, in no event shall the Grantee's Total Profit
(as hereinafter defined) exceed $75 million and, if it otherwise would exceed
such amount, the Grantee shall repay such excess amount to Grantor in cash (or
the purchase price for purposes of Section 7 or 8, as applicable, shall be
reduced) so that Grantee's Total Profit shall not exceed $75 million after
taking into account the foregoing actions.
Notwithstanding any other provision of this Agreement, this Option may
not be exercised for a number of Shares as would, as of the date of the Stock
Exercise Notice, result in a Notional Total Profit (as defined below) of more
than $75 million and, if exercise of the Option otherwise would exceed such
amount, the Grantee, at its discretion, may increase the Purchase Price for that
number of Shares set forth in the Stock Exercise Notice so that the Notional
Total Profit shall not exceed $75 million; provided, that nothing in this
sentence shall restrict any
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exercise of the Option permitted hereby on any subsequent date at the Purchase
Price set forth in Section 1(a) hereof.
As used herein, the term "Total Profit" shall mean the aggregate amount
(before taxes) of the following: (i) (x) the amount of cash received by Grantee
pursuant to Section 8.5 of the Merger Agreement and Section 1(c) hereof, less
(y) any repayment of such cash to Grantor, (ii) (x) the amount received by
Grantee pursuant to the Grantor's repurchase of Shares pursuant to Sections 7 or
8 hereof, less (y) the Grantee's purchase price for such Shares, and (iii) (x)
the net cash amounts received by Grantee pursuant to the sale of Shares (or any
other securities into or for which such Shares are converted or exchanged) to
any unaffiliated party, less (y) the Grantee's purchase price for such Shares.
As used herein, the term "Notional Total Profit" with respect to any
number of Shares as to which Grantee may propose to exercise this Option shall
be the Total Profit determined as of the date of the Stock Exercise Notice
assuming that this Option were exercised on such date for such number of Shares
and assuming that such Shares, together with all other Shares acquired upon
exercise of the Option and held by Grantee and its affiliates as of such date,
were sold for cash at the closing market price for the Common Stock as of the
close of business on the preceding trading day (less customary brokerage
commissions).
21. Severability. If any term, provision, covenant or restriction of
this Agreement is held by a court of competent jurisdiction to be invalid, void
or unenforceable, the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall remain in full force and effect and shall
in no way be affected, impaired or invalidated.
22. Public Announcement. The initial press release referring to this
Option shall be a joint press release in the form previously agreed by Grantor
and Grantee and thereafter the Grantee and the Grantor 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 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
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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.
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IN WITNESS WHEREOF, the Grantee and the Grantor have caused this
Agreement to be duly executed and delivered on the day and year first above
written.
USF&G CORPORATION
By: /s/ Norman P. Blake, Jr.
----------------------------------------
Name: Norman P. Blake, Jr.
Title: Chairman of the Board, President
and Chief Executive Officer
THE ST. PAUL COMPANIES, INC.
By: /s/ Douglas W. Leatherdale
----------------------------------------
Name: Douglas W. Leatherdale
Title: Chairman of the Board, President
and Chief Executive Officer
