T
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Preliminary
Proxy Statement
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£
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Confidential,
for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
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£
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Definitive
Proxy Statement
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£
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Definitive
Additional Materials
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£
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Soliciting
Material Pursuant to Rule 14a-11(c) or Rule 14a-12
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PROFESSIONALS
DIRECT, INC.
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(Name
of Registrant as Specified in Its Charter)
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(Name
of Person(s) Filing Proxy Statement, if Other Than the
Registrant)
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£
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No
fee required.
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£
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Fee
computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
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(1)
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Title
of each class of securities to which transaction
applies:
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(2)
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Aggregate
number of securities to which transaction applies:
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(3)
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Per
unit price or other underlying value of transaction computed
pursuant to
Exchange Act Rule 0-11 (set forth the amount on which the file
fee is
calculated and state how it was determined):
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(4)
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Proposed
maximum aggregate value of transaction:
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(5)
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Total
fee paid:
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T
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Fee
paid previously with preliminary materials.
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£
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Check
box if any part of the fee is offset as provided by Exchange
Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee
was paid
previously. Identify the previous filing by registration
statement number or the Form or Schedule and the date of its
filing.
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(1)
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Amount
previously paid:
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(2)
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Form,
Schedule or Registration Statement No.:
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(3)
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Filing
Party:
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(4)
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Date
Filed:
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[______],
2007
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Sincerely,
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Stephen
M. Tuuk
President
and Chief Executive Officer
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Notice
of Special Meeting of
Shareholders
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Date:
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[________],
2007
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Time:
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10:00
a.m., local time
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Place:
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Crowne
Plaza Grand Rapids
5700
– 28th
Street, S.E.
Grand
Rapids, Michigan 49546
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(i)
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To
adopt and approve the Agreement and Plan of Merger dated as of
June 25,
2007, by and among Professionals Direct, Inc., The Hanover Insurance
Group, Inc., and its wholly-owned indirect subsidiary Hanover
Acquisition
Corp., referred to as the merger agreement, and the merger of
Hanover
Acquisition Corp. with and into Professionals Direct, Inc., referred
to as
the merger. Upon completion of the merger, Professionals
Direct, Inc. will be the surviving corporation in the merger
and will be a
wholly-owned indirect subsidiary of The Hanover Insurance Group,
Inc. Shareholders of Professionals Direct, Inc. will have the
right to receive $69.61 in cash, without interest, for each share
of
Professionals Direct, Inc. stock owned;
and
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(ii)
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To
transact any other business that may properly come before the
special
meeting or any adjournments or postponements of the
meeting.
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[______],
2007
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By
Order of the Board of Directors,
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Stephen
M. Tuuk
President
and Chief Executive Officer
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Page
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SUMMARY
TERM SHEET
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1
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QUESTIONS
AND ANSWERS ABOUT THE SPECIAL MEETING AND THE MERGER
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7
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CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
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11
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THE
SPECIAL MEETING
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12
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Date,
Time and Place
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12
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Matters
to Be Considered
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12
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Record
Date and Quorum
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12
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Required
Vote
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12
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Voting
by Proxy; Revocability of Proxy
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13
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Effect
of Abstentions and Broker Non-Votes
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14
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Shares
Owned by Company Directors and Executive Officers
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14
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Solicitation
of Proxies
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14
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THE
MERGER
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15
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Introduction
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15
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The
Parties to the Merger
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15
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Background
of the Merger
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15
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Recommendation
of the Special Committee and Board of Directors
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18
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Reasons
for the Merger
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18
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Opinion
of PhiloSmith
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19
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Material
U.S. Federal Income Tax Consequences
|
24
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Certain
Effects of the Merger
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25
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Effects
on the Company and Our Shareholders If the Merger Is Not
Completed
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26
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Governmental
and Regulatory Approvals
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26
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Interests
of Our Directors and Executive Officers in the Merger
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27
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THE
MERGER AGREEMENT
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29
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Structure
of the Merger
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29
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Closing
of the Merger
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29
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Merger
Consideration and Conversion of the Company Common Shares
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30
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Exchange
of Share Certificates
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30
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Representations
and Warranties
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30
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Covenants
Relating to Conduct of Business
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32
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No
Solicitations and Change in Recommendation by the Company
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33
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Regulatory
Approvals
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35
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Indemnification
and Insurance
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35
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Other
Covenants and Agreements
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35
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Conditions
to the Closing of the Merger
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35
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Termination
of the Merger Agreement
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37
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Termination
Fee
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38
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Governing
Law
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39
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Amendments,
Extensions and Waivers of the Merger Agreement
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39
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OWNERSHIP
OF PROFESSIONALS DIRECT STOCK
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40
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RELATED
MATTERS
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41
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Market
for Common Equity
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41
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Shareholder
Proposals
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41
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Other
Matters
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41
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Where
You Can Obtain Additional Information
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41
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Summary
Term Sheet
|
|
·
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Submitting
a later-dated proxy by mail.
|
|
·
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Sending
a written notice to the Secretary of the Company. You must send
any written notice of a revocation of a proxy so as to be delivered
before
the taking of the vote at the special
meeting.
|
|
·
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Attending
the special meeting and voting in person. If your shares are
held in the name of a broker or other nominee, you must obtain
a proxy,
executed in your favor, from the broker or other nominee that holds
your
shares to be able to vote at the special
meeting.
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·
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adoption
and approval of the merger agreement and merger by the affirmative
vote of
holders of a majority of the Company’s issued and outstanding common
shares;
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·
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the
absence of any legal prohibitions against the
merger;
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·
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approval
of the merger by the Michigan insurance
regulators;
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·
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no
Company material adverse effect or downgrade of the Company’s A.M. Best
rating below “A-“; and
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·
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material
compliance by both the Company and Hanover of their representations,
warranties, covenants and agreements under the merger
agreement.
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·
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by
Hanover or the Company if the merger is not consummated by December
31,
2007, and the terminating party’s material breach of the agreement did not
primarily contribute to the failure of the merger to close by such
date;
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·
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by
Hanover or the Company if the Michigan insurance regulators fail
to
approve the merger or any other governmental entity issues a final
non-appealable order or ruling preventing the
merger;
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·
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by
Hanover or the Company if Company shareholders fail to adopt and
approve
the merger agreement and merger at the special meeting or at an
adjournment or postponement of the special
meeting;
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·
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by
Hanover or the Company if the other party materially breaches or
fails to
perform its representations, warranties or covenants in the merger
agreement, subject to the ability of the breaching party to cure
the
breach within the time period set forth in the merger
agreement;
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·
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by
Hanover if our board of directors (i) withdraws its recommendation
or
approval in respect of the merger agreement or the merger, (ii)
modifies
its recommendation or approval in respect of the merger agreement
or the
merger in a manner adverse to Hanover, (iii) fails to recommend
to
shareholders of the Company that they approve the merger, (iv)
fails, at
the written request of Hanover, to publicly reaffirm within five
business
days after the request, its recommendation or approval in respect
of the
merger agreement or the merger, which public reaffirmation must
also
include, if requested by Hanover, the unconditional rejection of
any other
acquisition transaction, or (v) recommends any proposal other than
by
Hanover or the Purchaser with respect to certain acquisition
transactions;
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·
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by
Hanover if a court or other governmental entity issues a final
non-appealable order or ruling that in the reasonable judgment
of Hanover
(i) prohibits the merger, (ii) is reasonably likely to have a material
adverse effect on the business, operations, assets, financial condition
or
results of operations of the Company and its subsidiaries considered
as a
whole, (iii) prohibits or limits Hanover from exercising all material
rights and privileges pertaining to ownership of the Company or
any of
Parent’s subsidiaries or a material portion of their assets, (iv) compels
Hanover, the Company or their respective subsidiaries to dispose
or hold
separate a material portion of their businesses or assets, or (v)
imposes
any materially burdensome conditions or restrictions on Parent,
the
Company or their respective subsidiaries;
and
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·
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by
the Company if we intend to enter into a definitive acquisition
agreement
for a “superior proposal,” as described in the section in this proxy
statement entitled “The Merger Agreement – No Solicitations and Change in
Recommendation by the Company,” and the Company satisfies each of the
required steps for terminating the merger agreement in such event,
including paying Hanover and the Purchaser up to $300,000 of their
transaction expenses and the termination fee specified in the merger
agreement.
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Questions
and Answers About the Special Meeting and the
Merger
|
Q.
|
Who
sent me this proxy
statement?
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A.
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The
Company’s board of directors sent you this proxy statement and proxy
card. We began mailing this proxy statement and proxy card on
or about [_______], 2007. We will pay for this solicitation,
including the cost of printing and mailing proxy materials to our
shareholders. Proxies will be solicited by mail and may be
solicited, for no additional compensation, by officers, directors
or
employees of the Company or its subsidiaries, by telephone, facsimile,
electronic mail or in person. Brokerage houses and other
custodians, nominees and fiduciaries may be requested to forward
soliciting material to the beneficial owners of common shares of
the
Company, and will be reimbursed for their related
expenses.
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Q.
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Why
did I receive this proxy statement and proxy
card?
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A.
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You
received this proxy statement and proxy card because you are being
asked
to attend a special meeting of the Company’s shareholders and because you
owned our common shares as of [_______], 2007, the record date
of the
special meeting. This proxy statement contains important
information about the special meeting and the business to be transacted
at
the special meeting.
You
should carefully read this proxy statement, including its appendices
and
the other documents we refer to in this proxy statement, because
they
contain important information about the merger, the merger agreement
and
the special meeting of the shareholders of the Company. The
enclosed voting materials allow you to vote your shares without
attending
the special meeting.
Your
vote is very important. We encourage you to vote as soon as
possible.
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Q.
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What
does it mean if I receive more than one proxy
card?
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A.
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It
means that you have multiple accounts at the transfer agent and/or
with
stockbrokers. Please sign and return all proxy cards to ensure
that all your shares are voted. Details are outlined in the
enclosed proxy card.
|
Q.
|
When
and where is the special
meeting?
|
A.
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The
special meeting will be held on [________], 2007, at the Crowne
Plaza
Grand Rapids, 5700 – 28th Street, S.E., Grand Rapids, Michigan 49546, at
10:00 a.m. local time.
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Q.
|
What
is the purpose of the special meeting and what am I being asked
to vote
on?
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A.
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At
the special meeting, you are being asked to vote on a proposal
to adopt
and approve the merger agreement and proposed merger. A copy of
the merger agreement is attached to this proxy statement as Appendix
A and
is incorporated into this proxy statement by
reference. Pursuant to the terms and conditions of the merger
agreement, the Purchaser will merge with and into the Company,
and each
outstanding common share of the Company, other than common shares
owned by
the Company and its subsidiaries, will be converted into the right
to
receive $69.61 in cash, without interest. As a result of the
merger, the Company will become a wholly-owned indirect subsidiary
of
Hanover, and the Company common shares will no longer be publicly
traded
and will be deregistered under the Securities Exchange Act of
1934.
|
Q.
|
What
vote is required to adopt the merger agreement and approve the
merger?
|
A.
|
In
order for the merger agreement and merger to be adopted and approved,
holders of a majority of the Company common shares outstanding
as of the
close of business on the record date must vote “FOR”
the
|
Q.
|
What
do I need to do now?
|
A.
|
After
reading and considering the information contained in this proxy
statement,
please submit your proxy as soon as possible. You may submit
your proxy by returning the enclosed proxy card. If you intend
to submit your proxy by mail it must be received by the Company
prior to
commencement of voting at the special meeting. Details are
outlined in the enclosed proxy card. In addition, if you hold
your shares through a broker or other nominee, you may be able
to submit
your proxy through the Internet or by telephone in accordance with
instructions your broker or nominee
provides.
|
Q.
|
What
is the proposed
transaction?
|
A.
|
The
proposed transaction is the merger of a wholly-owned indirect subsidiary
of Hanover with and into the Company. As a result of the
merger, the Company will become a wholly-owned indirect subsidiary
of
Hanover, and Company common shares will no longer be publicly traded
and
will be deregistered under the Securities Exchange Act of
1934.
|
Q.
|
If
the merger is completed, what will I receive for my common
shares?
|
A.
|
You
will receive $69.61 in cash, without interest, for each Company
common
share you own.
|
Q.
|
Do
any of the Company’s executive officers or directors have any interests in
the merger that may differ from or be in addition to my interests
as a
shareholder?
|
A.
|
Yes. In
considering the recommendation of the board of directors with respect
to
the merger agreement, you should be aware that some of the Company’s
directors and executive officers have interests in the merger that
are in
addition to, and may be different from, the interests of our shareholders
generally. For descriptions of these interests, please see the
section in this proxy statement entitled “The Merger – Interests of Our
Directors and Executive Officers in the
Merger.”
|
Q.
|
How
does the Company’s board recommend I
vote?
|
A.
|
The
Company’s board of directors, acting upon the unanimous recommendation
of
a special committee of the board comprised entirely of independent
directors, unanimously recommends that you vote “FOR” the adoption and
approval of the merger agreement and merger because the board believes
that the merger agreement and merger are fair to and in the best
interests
of the Company and its shareholders. For a more complete
description of our board’s reasons for recommending the merger agreement
and merger, see the section in this proxy statement entitled “The Merger –
Reasons for the Merger.”
|
Q.
|
What
happens if I do not return my proxy card or attend the special
meeting and
vote in person?
|
A.
|
Because
the affirmative vote of holders of a majority of the issued and
outstanding common shares as of the close of business on the record
date
is needed to adopt and approve the merger agreement and merger,
the
failure to submit your proxy or vote in person will have the same
effect
as a vote “AGAINST” the adoption and approval of the merger agreement and
merger. Abstentions and broker non-votes also will have the
same effect as a vote “AGAINST” the adoption and approval of the merger
agreement and merger.
The
Company’s board of directors urges you to complete, date, sign and return
the accompanying proxy card, or, in the event you hold your shares
through
a broker or other nominee, to follow the separate voting instructions
received from your broker or other
nominee.
|
Q.
|
May
I change my vote after I have
voted?
|
A.
|
Yes. You
can revoke your proxy at any time before it is voted at the special
meeting by any of the following
methods:
|
|
·
|
Submitting
a later-dated proxy by mail. If you submit your later-dated
proxy by mail it must be received by the Company prior to the commencement
of voting at the special meeting.
|
|
·
|
Sending
a written notice to the Secretary of the Company that is delivered
before
the special meeting to:
|
|
·
|
Attending
the special meeting and voting in person. If your shares are
held in the name of a broker or other nominee, you must obtain
a proxy,
executed in your favor, from the broker or other nominee that holds
your
shares to be able to vote at the special
meeting.
|
|
If
your shares are held in the name of a broker or other nominee,
you should
follow the instructions of your broker or other nominee regarding
the
revocation of proxies. If your broker or other nominee allows
you to submit a proxy by telephone or the Internet, you may be
able to
change your vote by submitting a proxy again by telephone or through
the
Internet.
|
Q.
|
If
my broker or bank holds my shares in “street name,” will my broker or bank
vote my shares for me?
|
A.
|
Your
broker or bank will not be able to vote your shares without instructions
from you. You should instruct your broker or bank to vote your
shares following the procedure provided by your broker or
bank. Without instructions, your shares will not be voted,
which will have the same effect as if you voted “AGAINST” the adoption and
approval of the merger agreement and
merger.
|
Q.
|
Will
I have the right to dissent from the merger and obtain a separate
appraisal for my shares?
|
A.
|
No. Shareholders
are not entitled to dissent from the merger, or obtain a separate
appraisal and payment for their common shares in connection with
the
merger.
|
Q.
|
When
is the merger expected to be
completed?
|
A.
|
We
are working towards completing the merger as quickly as
possible. We expect to complete the merger in the third quarter
of 2007, but we cannot be certain when or if the conditions to
the merger
will be satisfied or, to the extent permitted, waived. The
merger cannot be completed until a number of conditions are satisfied,
including the adoption and approval of the merger agreement and
merger by
the Company’s shareholders at the special meeting and the approval of the
merger by Michigan insurance
regulators.
|
Q.
|
Should
I send in my share certificates
now?
|
A.
|
No. Shortly
after the merger is completed, you will receive a letter of transmittal
with instructions informing you how to send in your share certificates
to
the paying agent in order to receive your cash payment. You
should use the letter of transmittal to exchange share certificates
for
the cash payment to which you are entitled as a result of the
merger. PLEASE DO NOT SEND IN SHARE CERTIFICATES WITH YOUR
PROXY.
|
Q:
|
What
happens if the merger is not
completed?
|
A:
|
If
the merger agreement and merger are not adopted and approved by
the
Company’s shareholders or if the merger is not completed for any other
reason, shareholders will not receive any payment for their shares
in
connection with the merger. Instead, the Company will remain an
independent public company and the Company common shares will continue
to
be quoted on the OTC, subject to continued satisfaction of the
conditions
for such quotation. Under specified circumstances, the Company
may be required to pay Hanover a termination fee and/or reimburse
Hanover
and the Purchaser for their transaction expenses as described in
the sections in this proxy statement entitled “The Merger Agreement –
Termination of the Merger Agreement” and “– Termination
Fee.”
|
Q.
|
Will
I owe taxes as a result of the
merger?
|
A.
|
Yes,
if you recognize taxable gain. The merger will be a taxable
transaction for U.S. federal income tax purposes to U.S. holders
of
Company common shares. As a result, to the extent you recognize
taxable gain, the cash you receive in the merger in exchange for
your
Company common shares will be subject to U.S. federal income tax
and also
may be taxed under applicable state, local and foreign income and
other
tax laws. In general, you will recognize gain or loss equal to
the difference between the amount of cash you receive in the merger
and
the aggregate adjusted tax basis of your Company common
shares. Please refer to the section in this proxy statement
entitled “The Merger – Material U.S. Federal Income Tax Consequences” for
a more detailed explanation of the tax consequences of the
merger. You are urged to consult your own tax advisor to
determine the particular tax consequences to you (including the
application and effect of any state, local or foreign income and
other tax
laws) of the receipt of cash in exchange for Company common shares
pursuant to the merger.
|
Q.
|
Who
can help answer my other
questions?
|
A.
|
If
you need assistance in submitting your proxy or voting your shares
or need
additional copies of the proxy statement or the enclosed proxy
card, you
should contact the Corporate Secretary of the Company at (616)
456-8899. If your broker holds your shares, you should also
call your broker for additional
information.
|
Q.
|
Where
can I find more information about the
Company?
|
A.
|
We
file reports, proxy statements and other information with the Securities
and Exchange Commission. The filings are available to the
public at the SEC’s website, http://www.sec.gov. You may
inspect our SEC filings at the SEC’s public reference
facilities. For a more detailed description of the information
available, please see the section in this proxy statement entitled
“Related Matters – Where You Can Obtain Additional
Information.”
|
Cautionary
Statement Regarding Forward-Looking
Statements
|
|
·
|
the
occurrence of any event, change or other circumstance that could
give rise
to the termination of the merger agreement, including circumstances
that
may require us to pay Hanover and the Purchaser up to $1,200,000
of
expense reimbursements and termination
fees;
|
|
·
|
the
outcome of any legal proceedings that may be instituted against
the
Company, members of our board of directors and others relating
to the
merger agreement;
|
|
·
|
the
inability to complete the merger due to the failure to obtain the
necessary shareholder or regulatory approvals or the failure to
satisfy
other conditions to complete the
merger;
|
|
·
|
the
failure of the merger to close for any other
reason;
|
|
·
|
a
significant delay in the expected completion of the
merger;
|
|
·
|
risks
that the proposed merger disrupts our current plans and
operations;
|
|
·
|
risks
associated with the diversion of management attention from ongoing
business operations;
|
|
·
|
risks
associated with employee retention as a result of the
merger;
|
|
·
|
the
effect of the announcement of the merger on our business relationships,
operating results and business
generally;
|
|
·
|
the
amount of the costs, fees, expenses and charges related to the
merger;
|
|
·
|
future
business, economic and financial conditions and the legal and regulatory
environment in the markets served by the Company’s
subsidiaries;
|
|
·
|
changes
in financial ratings issued by independent organizations, including
A.M.
Best, Standard & Poors and Moody’s;
and
|
|
·
|
changes
in the laws, rules and regulations governing insurance holding
companies
and insurance companies, as well as applicable tax and accounting
matters.
|
The
Special Meeting
|
|
·
|
Submitting
a later-dated proxy by mail.
|
|
·
|
Sending
a written notice to the Secretary of the Company. You must send
any written notice of a revocation of a proxy so as to be delivered
before
the taking of the vote at the special meeting
to:
|
|
P.O.
Box 2679
|
|
·
|
Attending
the special meeting and voting in person. Your attendance at
the special meeting will not in and of itself revoke your
proxy. You must also vote your shares at the special
meeting. If your shares are held in the name of a broker or
other nominee, you must obtain a proxy, executed in your favor,
from the
broker or other nominee that holds your shares to be able to vote
at the
special meeting.
|
The
Merger
|
|
·
|
the
familiarity of the board of directors with the business, results
of
operations, properties and financial condition of the Company and
the
nature of the industry in which the Company operates, based, in
part, upon
presentations by management of the
Company;
|
|
·
|
the
Company’s competitive position and current trends in the industry in which
it operates;
|
|
·
|
the
risks faced by the Company if it remains an independent public
company;
|
|
·
|
the
fact that the merger price is payable entirely in cash, providing
liquidity and certainty of value to the Company’s
shareholders;
|
|
·
|
the
structure and results of the process undertaken by PhiloSmith,
as
independent financial advisor engaged by a special committee of
the board
comprised entirely of independent directors, to identify and solicit
proposals from third parties to enter into a transaction with the
Company;
|
|
·
|
the
offers received from other parties;
|
|
·
|
the
presentation of Philo Smith at the June 22 and June 24, 2007
special
meeting of the board of directors and the opinion of PhiloSmith
that,
based upon and subject to the assumptions, limited procedures
and other
limitations set forth therein, the price to be received by the
shareholders of the Company pursuant to the merger is fair to
such
shareholders from a financial point of view (the opinion is attached
as
Appendix B hereto and is incorporated into this proxy statement
by
reference; Company shareholders are encouraged to read the opinion
in its
entirety);
|
|
·
|
the
unanimous determination of the special committee of the board comprised
entirely of independent directors that the merger agreement and
merger are
fair to and in the best interests of the Company and its shareholders,
and
the committee’s unanimous recommendation to the board that it adopt and
approve the merger agreement and merger and recommend to our shareholders
that they adopt and approve the merger agreement and
merger;
|
|
·
|
the
terms of the merger agreement and the course of negotiations with
Hanover,
including:
|
|
o
|
the
closing conditions to the merger, including the fact that the obligations
of Hanover and the Purchaser under the merger agreement are not
subject to
a financing condition;
|
|
o
|
the
representation and warranty of Hanover that it has sufficient funds
available for it and the Purchaser to consummate the
merger;
|
|
o
|
the
Company’s right, both before and after shareholder approval of the merger
agreement, to engage in negotiations with, and provide information
to, a
third party that makes an unsolicited acquisition proposal if the
board of
directors determines the proposal is reasonably likely to lead
to a
transaction that is more favorable to the Company’s shareholders than the
merger with Hanover;
|
|
o
|
the
amount of the termination fee payable by the Company to Hanover
upon
termination of the merger agreement in certain circumstances, which
at
$900,000 is approximately 3.88% of
the
|
|
o
|
the
circumstances under which the transaction fee would be payable
to Hanover
upon termination of the merger agreement, including the fact that
the
Company would be required to pay only $300,000 of the $900,000
fee upon
termination of the merger agreement by Hanover because the Company
proposed to enter into a definitive acquisition agreement for a
superior
proposal with a third party, with the remaining $600,000 payable
only if
the Company consummated the superior proposal;
and
|
|
o
|
the
structure of the transaction as a merger requiring shareholder
approval,
resulting in detailed public disclosure and a protracted period
of time
prior to consummation of the merger during which an unsolicited
superior
proposal could materialize;
|
|
·
|
the
fact that certain directors and officers of the Company collectively
holding approximately 9.8% of the outstanding Company common shares
committed under separate voting agreements with Hanover to vote
their
shares in favor of the merger, and the terms of the voting agreements,
including a provision under which the agreements terminate upon
termination of the merger
agreement;
|
|
·
|
the
reputation and financial condition of Hanover;
and
|
|
·
|
the
merger price of $69.61 per share represented (i) a premium of
approximately 98.9% over the highest trading price of the Company
common
shares over the three-months prior to April 26, 2007, the date
of the
Company’s public announcement that it had formed a special committee of
the board of directors and engaged PhiloSmith to explore strategic
alternatives to maximize shareholder value, (ii) a multiple of
approximately 15.4 times the Company’s earnings for the 12-month period
ended March 31, 2007, and (ii) a multiple of approximately 1.8
times the
Company’s book value as of March 31, 2007, as reported on the Company’s
Quarterly Report on Form 10-QSB.
|
|
·
|
the
fact that the Company will cease to be a public company following
the
merger and that current shareholders will no longer be able to
participate
in any future increase in value;
|
|
·
|
the
fact that gains from an all-cash transaction are generally taxable
to the
Company’s shareholders for U.S. federal income tax
purposes;
|
|
·
|
the
possibility that the announcement of the merger may distract the
Company’s
management and otherwise disrupt its business, and the resulting
effect on
the Company if the merger does not close;
and
|
|
·
|
the
closing conditions to the merger, including shareholder approval
and
regulatory approvals.
|
|
·
|
reviewed
the merger agreement;
|
|
·
|
reviewed
certain publicly available business and financial information concerning
the Company and the industries in which we
operate;
|
|
·
|
compared
the proposed financial terms of the merger with the publicly available
financial terms of certain transactions involving companies that
PhiloSmith deemed relevant and the consideration received for such
companies;
|
|
·
|
compared
the financial and operating performance of the Company with publicly
available information concerning certain other companies that PhiloSmith
deemed relevant and reviewed the current and historical market
prices of
the Company common shares and certain publicly traded securities
of such
other companies;
|
|
·
|
reviewed
certain internal financial analyses and forecasts prepared by the
management of the Company related to its business;
and
|
|
·
|
performed
such other financial studies and analyses and considered such other
information as PhiloSmith deemed
appropriate.
|
|
·
|
all
P&C insurers with securities traded on NYSE, NASDAQ, AMEX or the
OTC
Bulletin Board;
|
|
·
|
P&C
insurers with market capitalizations under $500
million;
|
|
·
|
P&C
insurers with market capitalizations under $250
million;
|
|
·
|
commercial
P&C insurers with market capitalizations under $1 billion;
and
|
|
·
|
monoline
commercial P&C insurers with market capitalizations under $1
billion.
|
Stock
Price as Multiple of:
|
||||||||||||
Company
Groupings
|
Number
of Companies
|
GAAP
Book Value
|
LTM
Earnings
|
|||||||||
All
P&C insurers
|
101
|
1.4x
|
10.2x
|
|||||||||
P&C
insurers with market cap < $500 million
|
38
|
1.3x
|
10.8x
|
|||||||||
P&C
insurers with market cap < $250 million
|
23
|
1.1x
|
10.5x
|
|||||||||
Commercial
P&C insurers with market cap < $1 billion
|
30
|
1.4x
|
10.9x
|
|||||||||
Monoline
commercial P&C insurers with market cap < $1
billion
|
9
|
1.4x
|
10.1x
|
|||||||||
Professionals
Direct (based on merger price of $69.61 per
share)
|
1.8x
|
15.4x
|
|
·
|
transactions
occurring between June 13, 2002 and June 13, 2007 (last 5
years);
|
|
·
|
transaction
size less than $3 billion in value;
|
|
·
|
transactions
involving a target that resulted in a change of control (buyer
acquiring
more than 51%); and
|
|
·
|
transactions
involving targets that were not shell companies or were not in
distress or
liquidation.
|
Buyer
|
Target
|
Date
Announced
|
|||
D.E.
Shaw & Company, LP
|
James
River Group, Inc.
|
6/11/2007
|
|||
North
Pointe Holdings Corporation
|
Capital
City Holding Co., Inc.
|
5/11/2007
|
|||
Liberty
Mutual Holding Company, Inc.
|
Ohio
Casualty Corporation
|
5/6/2007
|
|||
Alleghany
Corporation
|
Employers
Direct Corp.
|
4/27/2007
|
|||
Zurich
Financial Services AG
|
Bristol
West Holdings, Inc.
|
3/1/2007
|
|||
QBE
Insurance Group Limited
|
Praetorian
Financial Group, Inc.
|
12/12/2006
|
|||
Elara
Holdings, Inc.
|
Direct
General Corporation
|
12/4/2006
|
|||
American
European Group
|
Merchants
Group, Inc.
|
10/31/2006
|
|||
Affordable
Residential Communities, Inc.
|
NLASCO,
Inc.
|
10/6/2006
|
|||
Delek
Group Ltd.
|
Republic
Companies Group, Inc.
|
8/4/2006
|
|||
Investor
Group
|
Sirius
America Insurance Co.
|
4/12/2006
|
|||
New
Affirmative LLC
|
Affirmative
Insurance Holdings, Inc.
|
6/14/2005
|
|||
Mercer
Insurance Group, Inc.
|
Financial
Pacific Ins. Group, Inc.
|
4/29/2005
|
|||
Educators
Mutual Life Insurance Co.
|
Eastern
Holding Company
|
3/17/2005
|
|||
ProAssurance
Corporation
|
NCRIC
Group, Inc.
|
2/28/2005
|
|||
United
National Group, Ltd.
|
Penn-America
Group, Inc.
|
10/14/2004
|
|||
White
Mountains Insurance Group, Ltd.
|
Sirius
International Group
|
12/9/2003
|
|||
Donegal
Mutual Insurance Co.
|
Peninsula
Insurance Group
|
10/30/2003
|
|||
Nationwide
Mutual Insurance Co.
|
THI
Holdings, Inc.
|
3/26/2003
|
Deal
Value
|
Stock
Price as Multiple of:
|
|||||||||||
(millions)
|
GAAP
Book Value
|
LTM
Earnings
|
||||||||||
Selected
comparable transactions (median):
|
$ |
138.8
|
1.5x
|
11.9x
|
||||||||
Hanover
merger with Professionals Direct
|
$ |
23.2
|
1.8x
|
15.4x
|
|
·
|
consistent
top-line and bottom line growth through the
period;
|
|
·
|
compounded
annual growth rate of direct written premium of approximately 16%
through
the period;
|
|
·
|
return
of average equity increasing from 15.8% in 2007 to 17.0% in 2009;
and
|
|
·
|
continued
corporate governance costs of $375,000-$425,000 per year associated
with
being a publicly traded company.
|
Multiple
of Projected 2009
Year
End Book Value
|
Multiple
of Projected 2009 Earnings
|
|||||||||
(millions)
|
(millions)
|
|||||||||
Discount
Rate
|
1.1x
|
1.3x
|
1.5x
|
10.0x
|
11.0x
|
12.0x
|
||||
|
13%
|
$15.9
|
$18.8
|
$21.7
|
$22.7
|
$25.0
|
$27.3
|
|
||
14%
|
$15.6
|
$18.4
|
$21.2
|
$22.2
|
$24.4
|
$26.6
|
||||
15%
|
$15.2
|
$17.9
|
$20.7
|
$21.6
|
$23.8
|
$26.0
|
The
Merger Agreement
|
|
·
|
due
incorporation, good standing, qualification and corporate power,
organizational documents and authorizations, licenses and permits
to
conduct its business;
|
|
·
|
capitalization
of the Company and its
subsidiaries;
|
|
·
|
corporate
authority to enter into and perform the merger agreement, enforceability
of the merger agreement, approval and recommendation to the shareholders
of the merger agreement by the Company’s board of directors and the vote
required for shareholder approval;
|
|
·
|
required
governmental filings or consents, absence of conflicts of the merger
agreement and the transactions contemplated thereby with organizational
documents, material contracts, permits or applicable
law;
|
|
·
|
filings
with the SEC, disclosure controls and procedures and financial
statements;
|
|
·
|
absence
of certain changes or events and conduct of business since March
31, 2007,
absence of undisclosed material liabilities, and subordinated
debentures;
|
|
·
|
absence
of material litigation;
|
|
·
|
compliance
with applicable laws, including insurance
laws;
|
|
·
|
tax
matters, including payment of taxes and filing of
returns;
|
|
·
|
employees
and labor matters;
|
|
·
|
employee
benefit plan matters;
|
|
·
|
title
to property and assets owned by the
Company;
|
|
·
|
title
to real property and leases for real
property;
|
|
·
|
environmental
laws and regulations;
|
|
·
|
intellectual
property rights;
|
|
·
|
accuracy
of information contained in this proxy statement and compliance
with SEC
regulations;
|
|
·
|
statutory
statements of subsidiaries filed with insurance regulators, and
examinations by insurance
regulators;
|
|
·
|
conduct
of and matters related to the Company’s insurance subsidiaries, including
conduct of insurance operations through, and insurance licenses
and
authorizations of, subsidiaries;
|
|
·
|
general
insurance coverages;
|
|
·
|
material
contracts;
|
|
·
|
receipt
of the fairness opinion from
PhiloSmith;
|
|
·
|
absence
of change in control payments;
|
|
·
|
absence
of questionable payments;
|
|
·
|
applicability
of the Michigan Business Corporation Act;
and
|
|
·
|
finders’
fees due in connection with the
merger.
|
|
·
|
due
incorporation, good standing, qualification and corporate power
and
authorizations;
|
|
·
|
corporate
authority to enter into and perform the merger agreement, enforceability
of the merger agreement and approval of the merger agreement by
Hanover’s
board of directors;
|
|
·
|
absence
of conflicts of the merger agreement and the transactions contemplated
thereby with organizational documents, material contracts, permits
or
applicable law, and required governmental filings or
consents;
|
|
·
|
availability
of funds to make all required payments in connection with the merger;
and
|
|
·
|
finders’
fees due in connection with the
merger.
|
|
·
|
amend
or propose to amend its organizational
documents;
|
|
·
|
authorize
for issuance, issue, sell, deliver or agree or commit to authorize,
issue,
sell or deliver (whether through the issuance or granting of options,
warrants, commitments, subscriptions, rights to purchase or otherwise)
any
stock of any class or any other securities or equity equivalents,
or amend
any of the terms of any such securities or agreements outstanding
as of
the date of the merger agreement;
|
|
·
|
split,
combine or reclassify any shares of its capital stock, declare,
set aside
or pay any dividend or other distribution (whether in cash, stock
or
property or any combination thereof) in respect of its capital
stock or
redeem or otherwise acquire any of its securities, other than any
dividend
or other distribution to the Company by any of its
subsidiaries;
|
|
·
|
except
in the ordinary course of business consistent with past practice
(including selling professional liability insurance), (i) incur,
assume or
prepay any long-term or short-term debt or issue any debt securities,
except for borrowings under existing lines of credit or prepayments
in the
ordinary course of business; (ii) assume, guarantee, endorse or
otherwise
become liable or responsible (whether directly, contingently or
otherwise)
for any material obligations of any other person, except for obligations
of any subsidiary of the Company; (iii) make any material loan,
advance or
capital contribution to, or investment in, any other person (other
than to
any subsidiary of the Company or any customary loan or advance
to
employees related to advancement of expenses or 401(k) loans, and
not to
exceed $10,000 in the aggregate); (iv) pledge or otherwise encumber
shares
of capital stock of the Company or any of its subsidiaries; or
(v)
mortgage or pledge any of its assets, tangible or intangible, or
create or
suffer to exist any material lien upon such
assets;
|
|
·
|
except
as may be required by law, enter into, adopt, amend or terminate
any
bonus, profit sharing, compensation, severance, termination, stock
option,
stock appreciation right, restricted stock, performance unit, stock
equivalent, stock purchase agreement, pension, retirement, deferred
compensation, employment,
|
|
·
|
acquire,
sell, lease, encumber or dispose of any assets of the Company or
any of
its subsidiaries (except for (i) dispositions of obsolete or worthless
assets, (ii) sales of immaterial assets not in excess of $50,000
in the
aggregate, and (iii) encumbrances created under existing secured
lending
arrangements on assets acquired after the date of the merger agreement),
enter into any contract, agreement or transaction outside the ordinary
course of business consistent with past practice, or modify, amend,
terminate or waive any material rights under any material contract
or
agreement;
|
|
·
|
except
as may be required as a result of a change in law or in generally
accepted
accounting principles (after consultation with Hanover as to the
effect of
any such change), change any of the accounting principles or practices,
any actuarial methodologies (other than any changes to such methodologies
used by the Company’s actuaries twice a year in setting annual loss
reserve picks and consistent with generally accepted actuarial
practice),
or any pricing policy or reserving policy used by it or any of
its
subsidiaries;
|
|
·
|
acquire
(i) by merger, consolidation, acquisition of stock or assets or
otherwise
any corporation, partnership or other business organization or
division
thereof or (ii) any equity interest therein other than any investment
made
in the ordinary course of business;
|
|
·
|
revalue
in any material respect any of its assets, including writing off
notes or
accounts receivable;
|
|
·
|
except
as required as a result of a change in law, make or change any
tax
election, change a tax accounting period, adopt or change any tax
accounting method, file any amended tax return, enter into any
tax closing
agreement, settle any tax claim or assessment relating to the Company
or
any of its subsidiaries, surrender any right to claim a refund
of taxes,
consent to extension or waiver of the statute of limitations applicable
to
any tax, or take any similar
action;
|
|
·
|
pay,
discharge or satisfy any claim, liability or obligation (whether
absolute,
accrued, asserted or unasserted, contingent or otherwise), other
than the
payment, discharge or satisfaction in the ordinary course of business
consistent with past practice of liabilities reflected or reserved
against
in the consolidated financial statements (including the notes thereto)
of
the Company and its subsidiaries contained in SEC reports filed
prior to
the date of the merger agreement or incurred in the ordinary course
of
business consistent with past
practice;
|
|
·
|
settle
or compromise any pending or threatened suit, action or claim relating
to
the transactions contemplated by the merger agreement or material
to the
Company and its subsidiaries taken as a
whole;
|
|
·
|
authorize
any new capital expenditure which when aggregated with all other
new
capital expenditures causes all such new capital expenditures to
exceed
$75,000; or
|
|
·
|
offer
insurance of a type or in a jurisdiction materially different from
the
types and jurisdictions for which they offer insurance on the date
of the
merger agreement.
|
|
·
|
solicit,
initiate, facilitate or encourage (including by way of furnishing
or
disclosing non-public information, or waiving of any standstill
provisions
or agreements) any inquiries or the making of any proposal with
respect to
an “acquisition transaction” (as described
below);
|
|
·
|
negotiate,
explore or otherwise engage in substantive communications in any
way with
any person with respect to an acquisition transaction;
or
|
|
·
|
enter
into any agreement, contract or arrangement requiring it to abandon,
terminate or fail to consummate the merger or any other transactions
contemplated by the merger
agreement.
|
|
·
|
the
adoption and approval of the merger agreement and merger by the
requisite
vote of the shareholders of the
Company;
|
|
·
|
the
completion of all filings with, and receipt of all approvals by,
Michigan
insurance regulators that are legally required to consummate the
merger,
the merger agreement and all transactions contemplated
thereby;
|
|
·
|
no
temporary restraining order, preliminary or permanent injunction
or other
order, or other legal restraint or prohibition issued by any court
of
competent jurisdiction in the United States preventing the consummation
of
the merger may be in effect, and no proceeding brought by any
administrative agency or commission or other governmental authority
in the
United States seeking any of the foregoing may be pending; and
there must
not have been any action taken, or any statute, rule, regulation
or order
enacted, entered, enforced or deemed applicable to the merger,
which makes
the consummation of the merger illegal;
and
|
|
·
|
there
must not have been instituted, pending or threatened any action
or
proceeding (or any investigation or other inquiry that would likely
result
in such an action or proceeding) by any governmental authority
before any
governmental authority or court of competent jurisdiction in the
United
States, and there must not be in effect any judgment, decree or
order of
any governmental authority or court of competent jurisdiction in
the
United States, in either case, seeking to prohibit or limit Hanover
from
exercising all material rights and privileges pertaining to its
ownership
of the surviving corporation or the ownership or operation by Hanover
or
any of its subsidiaries of all or a material portion of the business
or
assets of Hanover or any of its subsidiaries, or seeking to compel
Hanover
or any of its subsidiaries to dispose of or hold separate all or
any
material portion of the business or assets of Hanover or any of
its
subsidiaries (including the surviving corporation and its subsidiaries),
or imposing any materially burdensome conditions or restrictions
on
Hanover, the Company or their subsidiaries, as a result of the
merger or
the transactions contemplated by the merger
agreement.
|
|
·
|
the
representations and warranties of the Company must be true and
correct as
of the closing date, except where the failure of such representations
and
warranties to be true and correct does not, individually or in
the
aggregate, have a Company material adverse
effect;
|
|
·
|
the
Company’s performance in all material respects of all agreements and
covenants required to be performed by the Company under the merger
agreement;
|
|
·
|
Stephen
M. Tuuk must have executed and delivered to Hanover an employment
agreement acceptable to Hanover;
and
|
|
·
|
there
must not have occurred after the date of the merger agreement (i)
any
development or developments with relation to the Company or its
subsidiaries that has have, or would reasonably be expected to
have, a
Company material adverse effect, or (ii) any downgrade in the Company’s
A.M. Best rating below “A-.”
|
|
·
|
the
representations and warranties of Hanover and the Purchaser must
be true
and correct as of the closing date, except where the failure to
be true
and correct does not, individually or in the aggregate, have a
Hanover
material adverse effect; and
|
|
·
|
Hanover’s
and the Purchaser’s performance in all material respects of all agreements
and covenants required to be performed by Hanover and the Purchaser
under
the merger agreement.
|
|
·
|
by
mutual written consent of Hanover and the
Company;
|
|
·
|
by
either Hanover or the Company, if:
|
|
o
|
the
merger is not closed by December 31, 2007 (which date may be extended
by
mutual consent of Hanover and the Company) and the terminating
party’s
material breach of the merger agreement did not primarily contribute
to
the failure of the merger to close by such
date;
|
|
o
|
the
shareholders of the Company fail to adopt and approve the merger
agreement
and merger;
|
|
o
|
the
Michigan insurance regulators fail to provide the approval that
is legally
required to consummate the merger and the denial of such approval
is final
and nonappealable; or
|
|
o
|
any
court of competent jurisdiction in the United States or other governmental
authority in the United States issues an order (other than a temporary
restraining order), decree or ruling or takes any other action
restraining, enjoining or otherwise prohibiting the merger, and
such
order, decree, ruling or other action is final and
nonappealable;
|
|
·
|
by
Hanover, if:
|
|
o
|
the
Company breaches any of its representations and warranties contained
in
the merger agreement so that the closing conditions cannot be satisfied,
except for any breach that is capable of being and is cured (other
than by
mere disclosure of the breach) within 20 days after written notice
from
the Purchaser to the Company of such
breach;
|
|
o
|
the
Company breaches in any material respect any of its covenants made
in this
Agreement, except for any breach that is capable of being and is
cured
within 20 days after written notice from the Purchaser to the Company
of
such breach;
|
|
o
|
the
board of directors of the Company (i) withdraws its recommendation
or
approval in respect of the merger agreement or the merger, (ii)
modifies
its recommendation or approval in respect of the merger agreement
or the
merger in a manner adverse to Hanover, (iii) fails to recommend
to
shareholders of the Company that they approve the merger, or (iv)
fails,
at the written request of Hanover, to publicly reaffirm within
five
business days after the request, its recommendation or approval
in respect
of the merger agreement or the merger, which public reaffirmation
must
also include, if requested by Hanover, the unconditional rejection
of any
other acquisition transaction;
|
|
o
|
the
board of directors of the Company recommends any proposal other
than by
Hanover or the Purchaser in respect of an acquisition transaction;
or
|
|
o
|
any
court of competent jurisdiction in the United States or other governmental
authority in the United States issues a judgment, decree or order
that is
final and nonappealable and in the reasonable judgment of Hanover
(i) has
the effect of prohibiting the merger, (ii) individually or in the
aggregate has had, or is reasonably likely to have, a Company material
adverse effect, or (iii) prohibits or limits Hanover from exercising
all
material rights and privileges pertaining to its ownership of the
surviving corporation or the ownership or operation by Hanover
or any of
its subsidiaries of all or a material portion of the business or
assets of
Hanover or any of its subsidiaries, or compels Hanover or any of
its
subsidiaries to dispose of or hold separate all or any material
portion of
the business or assets of Hanover or any of its subsidiaries (including
the surviving corporation and its subsidiaries), or imposes any
materially
burdensome conditions or restrictions on Hanover, the Company or
their
subsidiaries, as a result of the merger or the transactions contemplated
by the merger agreement;
|
|
·
|
by
the Company, if:
|
|
o
|
the
Company intends to enter into a definitive acquisition agreement
with a
third party with respect to a superior proposal, to the extent
otherwise
permitted by the merger agreement,
and
|
|
§
|
the
Company provides written notice to Hanover and the Purchaser of
the
material terms and conditions of the superior proposal that the
board or
the Company intends to accept; and
|
|
§
|
on
or after the fifth business day following delivery of such written
notice,
the board reasonably determines, upon the advice of its financial
advisor,
that such proposal
|
|
o
|
Hanover
or the Purchaser breaches any of its representations and warranties
contained in the merger agreement so that the closing conditions
cannot be
satisfied, except for any breach that is capable of being and is
cured
(other than by mere disclosure of the breach) within 20 days after
written
notice from the Company to Hanover of such breach;
or
|
|
o
|
either
Hanover or the Purchaser breaches in any material respect any of
its
covenants made in the merger agreement, except for any breach that
is
capable of being and is cured within 20 days after written notice
from the
Company to Hanover of such breach.
|
|
·
|
the
board of directors of the Company (i) withdraws its recommendation
or
approval in respect of the merger agreement or the merger, (ii)
modifies
its recommendation or approval in respect of the merger agreement
or the
merger in a manner adverse to Hanover, (iii) fails to recommend
to
shareholders of the Company that they approve the merger, or (iv)
fails,
at the written request of Hanover, to publicly reaffirm within
five
business days after the request, its recommendation or approval
in respect
of the merger agreement or the merger, which public reaffirmation
must
also include, if requested by Hanover, the unconditional rejection
of any
other acquisition transaction; or
|
|
·
|
the
board of directors of the Company recommends any proposal other
than by
Hanover or the Purchaser in respect of an acquisition
transaction.
|
|
·
|
the
Company breaches any of its representations and warranties contained
in
the merger agreement so that the closing conditions could not be
satisfied, except for any breach that is capable of being and is
cured
(other than by mere disclosure of the breach) within 20 days after
written
notice from the Purchaser to the Company of such breach and except
for a
termination due solely to a Loss Reserve MAE;
or
|
|
·
|
the
Company breaches in any material respect any of its covenants made
in this
Agreement, except for any breach that is capable of being and is
cured
within 20 days after written notice from the Purchaser to the Company
of
such breach.
|
Ownership
of Professionals Direct
Stock
|
Name
of Beneficial Owner(1)
|
Amount
and Nature of
Beneficial
Ownership(2)
|
Percentage
of
Class(3)
|
|||||
Stephen
M. Tuuk(4)
(5)
|
16,675
|
5.0%
|
|||||
Stephen
M. Westfield(5)
|
10,200
|
3.1%
|
|||||
David
W. Crooks
|
11,000
|
3.3%
|
|||||
Thomas
F. Dickinson
|
0
|
0.0%
|
|||||
Joseph
A. Fink
|
6,800
|
2.0%
|
|||||
Blake
W. Krueger
|
0
|
0.0%
|
|||||
Tracy
T. Larsen(5)
|
6,000
|
1.8%
|
|||||
Julius
A. Otten
|
0
|
0.0%
|
|||||
Thomas
J. Ryan
|
2,200
|
0.7%
|
|||||
Mary
L. Ursul
|
14,500
|
4.4%
|
|||||
All
directors and executive officers as a group (10 persons)
|
67,375
|
20.2%
|
(1)
|
The
address of each beneficial owner is 5211 Cascade Road, S.E.,
Grand Rapids,
Michigan, 49546.
|
|
(2)
|
The
numbers of shares stated are based on information furnished by
each person
listed and include shares personally owned of record by that
person and
shares which, under applicable regulations, are considered to
be otherwise
beneficially owned by that person. Under these regulations, a
beneficial owner of a security includes any person who, directly
or
indirectly, through any contract, arrangement, understanding,
relationship
or otherwise, has or shares voting power or dispositive power
with respect
to the security. Voting power includes the power to vote or
direct the voting of the security. Dispositive power includes
the power to dispose or direct the disposition of the
security. A person would also be considered the beneficial
owner of a security if the person has a right to acquire beneficial
ownership of the security within 60 days, but no shares listed
are deemed
to be beneficially owned for this reason. These numbers include
shares as to which the listed person is legally entitled to share
voting
or dispositive power by reason of joint ownership, trust or other
contract
or property right, and shares held by spouses and minor children
over whom
the listed person may have substantial influence by reason of
relationship.
|
|
(3)
|
Percentage
of beneficial ownership is based on 333,300 shares of common
stock
outstanding on [______], 2007.
|
|
(4)
|
In
July 2006, Stephen M. Tuuk’s beneficial ownership of Company common shares
increased to 5.003% as a result of the Company’s purchase of 200 common
shares from a shareholder in a single private transaction and
not pursuant
to a publicly announced plan or program.
|
|
(5)
|
This
individual, in his capacity as a shareholder, has executed a
voting
agreement with Hanover. Under the voting agreement, this
individual agrees to vote his common shares in favor of adopting
and
approving the merger agreement and merger and against certain
actions that
may impede or interfere with the merger, and provides an irrevocable
proxy
to Hanover in furtherance thereof. A copy of the voting
agreement substantially in the form executed by this individual
is
attached hereto as Appendix C and is incorporated into this proxy
statement by reference. For additional information regarding
the voting agreement, please see the section in this proxy statement
entitled “The Merger – Interests of Our Directors and Executive Officers
in the Merger.”
|
Related
Matters
|
ARTICLE
I THE MERGER
|
1
|
|
Section
1.1
|
The
Merger.
|
1
|
Section
1.2
|
Effective
Time
|
2
|
Section
1.3
|
Effects
of Merger.
|
2
|
Section
1.4
|
Articles
of Incorporation and Bylaws of Surviving Corporation
|
2
|
Section
1.5
|
Directors
and Officers of Surviving Corporation.
|
2
|
ARTICLE
II CONVERSION OF SHARES
|
3
|
|
Section
2.1
|
Effect
on the Shares and the Purchaser’s Capital Stock.
|
3
|
ARTICLE
III PAYMENT FOR SHARES
|
3
|
|
Section
3.1
|
Payment
For Shares.
|
3
|
ARTICLE
IV REPRESENTATIONS AND WARRANTIES OF THE
COMPANY
|
5
|
|
Section
4.1
|
Organization
|
5
|
Section
4.2
|
Capitalization
|
8
|
Section
4.3
|
Authority
|
8
|
Section
4.4
|
No
Violations; Consents and Approvals.
|
8
|
Section
4.5
|
SEC
Documents; Financial Statements.
|
10
|
Section
4.6
|
Absence
of Certain Changes; No Undisclosed Liabilities; Subordinated
Debentures.
|
11
|
Section
4.7
|
Litigation
|
12
|
Section
4.8
|
Compliance
with Applicable Law
|
12
|
Section
4.9
|
Taxes.
|
14
|
Section
4.10
|
Labor
and Employment Matters.
|
15
|
Section
4.11
|
Employee
Benefit Plans, ERISA.
|
16
|
Section
4.12
|
Title
to Property; Assets.
|
18
|
Section
4.13
|
Real
Properties
|
18
|
Section
4.14
|
Environmental
Matters.
|
19
|
Section
4.15
|
Intellectual
Property.
|
20
|
Section
4.16
|
Information
|
21
|
Section
4.17
|
Insurance
Reports
|
22
|
Section
4.18
|
Insurance
Matters.
|
23
|
Section
4.19
|
General
Insurance.
|
24
|
Section
4.20
|
Certain
Contracts.
|
25
|
Section
4.21
|
Opinion
of Financial Advisor.
|
27
|
Section
4.22
|
Change
in Control Payments.
|
27
|
Section
4.23
|
Questionable
Payments.
|
27
|
Section
4.24
|
Michigan
Acts
|
27
|
Section
4.25
|
Broker’s
Fees
|
27
|
Section
4.26
|
No
Other Representations or Warranties
|
27
|
ARTICLE
V REPRESENTATIONS AND WARRANTIES OF PARENT AND THE
PURCHASER
|
28
|
|
Section
5.1
|
Organization
|
28
|
Section
5.2
|
Authority
|
28
|
Section
5.3
|
No
Violations; Consents and Approvals.
|
28
|
Section
5.4
|
Financing
|
29
|
Section
5.5
|
Broker’s
Fees
|
29
|
ARTICLE
VI COVENANTS
|
29
|
|
Section
6.1
|
Conduct
of Business of the Company
|
29
|
Section
6.2
|
No
Solicitation.
|
32
|
Section
6.3
|
Insurance
Regulatory Filings.
|
35
|
Section
6.4
|
Proxy
Statement; Shareholder Meeting.
|
35
|
Section
6.5
|
Access
to Information
|
36
|
Section
6.6
|
Reasonable
Best Efforts, Other Actions
|
37
|
Section
6.7
|
Public
Announcements
|
37
|
Section
6.8
|
Notification
of Certain Matters
|
37
|
Section
6.9
|
Indemnification
and Insurance.
|
38
|
Section
6.10
|
Expenses
|
39
|
Section
6.11
|
Obligations
of the Purchaser
|
39
|
Section
6.12
|
401(k)
Plan
|
39
|
ARTICLE
VII CONDITIONS TO THE OBLIGATIONS OF PARENT, THE PURCHASER AND
THE COMPANY
|
39
|
|
Section
7.1
|
Conditions
to Obligation of Each Party to Effect the Merger.
|
39
|
Section
7.2
|
Additional
Conditions to Obligations of Parent and Purchaser.
|
40
|
Section
7.3
|
Additional
Conditions to Obligations of the Company
|
41
|
ARTICLE
VIII TERMINATION AND ABANDONMENT
|
41
|
|
Section
8.1
|
Termination
|
41
|
Section
8.2
|
Termination
by Parent
|
42
|
Section
8.3
|
Termination
by the Company
|
43
|
Section
8.4
|
Procedure
for Termination
|
43
|
Section
8.5
|
Effect
of Termination
|
43
|
Section
8.6
|
Termination
Fee
|
43
|
ARTICLE
IX DEFINITIONS
|
45
|
|
Section
9.1
|
Terms
Defined in Agreement
|
45
|
ARTICLE
X MISCELLANEOUS
|
47
|
|
Section
10.1
|
Amendment
and Modification.
|
47
|
Section
10.2
|
Waiver.
|
47
|
Section
10.3
|
Survivability;
Investigations
|
47
|
Section
10.4
|
Notices
|
47
|
Section
10.5
|
Assignment;
No Third Party Beneficiaries.
|
48
|
Section
10.6
|
Governing
Law.
|
49
|
Section
10.7
|
Counterparts.
|
49
|
Section
10.8
|
Certain
Disclosure Matters.
|
49
|
Section
10.9
|
Interpretation.
|
49
|
Section
10.10
|
Entire
Agreement.
|
50
|
Section
10.11
|
Waiver
of Jury Trial.
|
50
|
Acquisition
Transaction
|
6.2(a)
|
||
Agreement
|
Preamble
|
||
Board
|
Recitals
|
||
Business
Day
|
10.9
|
||
Certificate
of Merger
|
1.2
|
||
Certificates
|
3.1(a)
|
||
Closing
|
1.1(c)
|
||
Code
|
3.1(d)
|
||
Company
|
Preamble
|
||
Company
Contract
|
4.20(a)
|
||
Company
Financial Advisor
|
4.21
|
||
Company
Intellectual Property Rights
|
4.15(b)
|
||
Company
Material Adverse Effect
|
4.1(a)
|
||
Company
Permits
|
4.8(c)
|
||
Company
Plan
|
6.12
|
||
Company
Preferred Stock
|
4.2
|
||
Company
Shareholder Approval
|
4.3
|
||
Confidentiality
Agreement
|
6.5
|
||
Constituent
Corporations
|
Preamble
|
||
Continuation
Coverage
|
6.9(b)
|
||
Disclosure
Letter
|
Article
IV
|
||
Effective
Time
|
1.2
|
||
Employee
or Employees
|
4.10(a)
|
||
Environmental
Laws
|
4.14(a)
|
||
ERISA
|
4.11(a)
|
||
ERISA
Affiliate
|
4.11(a)
|
||
Exchange
Act
|
4.4(b)
|
||
Expense
Payment
|
8.6(a)
|
||
Final
Fee
|
8.6(b)
|
||
Governmental
Authority or Governmental Authorities
|
4.8(c)
|
||
Holding
Company Act Reports
|
4.17(c)
|
Indemnified
Parties
|
6.9(a)
|
||
Insurance
Company SAP Statements
|
4.17(a)
|
||
Insurance
Company Subsidiary
|
4.1(c)
|
||
Insurance
Filings
|
6.3(a)
|
||
Insurance
Laws
|
4.8(a)
|
||
Insurance
Policies
|
4.19(a)
|
||
Insurance
Regulators
|
4.8(a)
|
||
Insurance
Services Subsidiary
|
4.1(c)
|
||
Intellectual
Property
|
4.15(a)
|
||
Interim
Fee
|
8.6(b)
|
||
IRS
|
4.9(a)
|
||
Laws
|
4.4(a)
|
||
Leased
Real Property
|
4.13(b)
|
||
Liens
|
4.1(b)
|
||
Loss
and ALAE Ratio
|
4.1(a)
|
||
Loss
Reserves
|
4.1(a)
|
||
Loss
Reserve MAE
|
4.1(a)
|
||
Maximum
Amount
|
6.9(b)
|
||
MBCA
|
Recitals
|
||
Merger
|
1.1(a)
|
||
Merger
Price
|
2.1(a)
|
||
Michigan
Insurance Regulators
|
7.1(b)
|
||
Modified
Merger Agreement
|
6.2(d)
|
||
Other
Reports and Statements
|
4.17(c)
|
||
Parent
|
Preamble
|
||
Parent
Material Adverse Effect
|
5.3(a)
|
||
Paying
Agent
|
3.1(a)
|
||
PDIC
Report
|
4.1(a)
|
||
Plans
|
4.11(a)
|
||
Proxy
Statement
|
6.4(a)
|
||
Purchaser
|
Preamble
|
||
Real
Estate Leases
|
4.13(b)
|
||
Representatives
|
6.2(a)
|
||
SAP
|
4.17(b)
|
||
SEC
|
4.4(b)
|
||
SEC
Documents
|
4.5(a)
|
||
Selected
Retained Reserves
|
4.1(a)
|
||
Share
or Shares
|
2.1(a)
|
||
Shareholder
Meeting
|
6.4(b)
|
||
SOX
|
4.5(d)
|
||
Superior
Proposal
|
6.2(e)
|
||
Surviving
Corporation
|
1.1(a)
|
||
Tail
Coverage
|
6.9(b)
|
||
Tax
or Taxes
|
4.9(a)
|
||
Tax
Returns
|
4.9(a)
|
||
Termination
Fee
|
8.6(a)
|
Termination
Transaction
|
8.6(f)
|
||
Third
Party Confidentiality Agreement
|
6.2(b)
|
||
Updated
Disclosure Letter
|
6.8
|
Tracy
T. Larsen
Chairman,
Special Committee of the
Board
of Directors, Professionals Direct, Inc.
300
Ottawa Avenue N.W.
Suite
500
Grand
Rapids, Michigan 49503
Facsimile:
(616) 742-3999
|
|
with
a copy to:
|
|
Barnes
& Thornburg LLP
300
Ottawa Avenue N.W.
Suite
500
Grand
Rapids, Michigan 49503
Facsimile:
(616) 742-3999
Attention: R.
Paul Guerre, Esq.
|
|
The
Hanover Insurance Group, Inc.
440
Lincoln St.
Worcester,
MA 01653
Facsimile:
(508) 855-2732
Attention: Mr.
Andrew S. Robinson
|
|
with
a copy to:
|
|
The
Hanover Insurance Group, Inc.
440
Lincoln St.
Worcester,
MA 01653
Facsimile:
(508) 926-1693
Attention: Mr.
Charles F. Cronin
|
|
with
a copy to:
|
|
Dykema
Gossett, PLLC
400
Renaissance Center
Detroit,
MI 48243
Facsimile:
(313) 568-6832
Attention:
Thomas S. Vaughn, Esq.
|
THE
HANOVER INSURANCE GROUP, INC.
|
||
By:
|
/s/ Andrew S. Robinson | |
Name:
|
Andrew
S. Robinson
|
|
Title:
|
Senior
Vice President
|
|
“Parent”
|
||
HANOVER
ACQUISITION CORP.
|
||
By:
|
/s/ Andrew S. Robinson | |
Name:
|
Andrew
S. Robinson
|
|
Title:
|
Vice
President
|
|
“Purchaser”
|
||
PROFESSIONALS
DIRECT, INC.
|
||
By:
|
/s/ Stephen M. Tuuk | |
Name:
|
Stephen
M. Tuuk
|
|
Title:
|
President
and Chief Executive Officer
|
|
“Company”
|
|
THE
HANOVER INSURANCE GROUP, INC.
|
||
By:
|
|||
Name:
|
|||
Title:
|
|||
HANOVER
ACQUISITION CORP.
|
|||
By:
|
|||
Name:
|
|||
Title:
|
|||
STOCKHOLDER
|
|||
By:
|
|||
[Name]
|
Proxy
|
PROFESSIONALS
DIRECT, INC.
5211
Cascade Road, S.E.
Grand
Rapids, Michigan 49546
Special
Meeting of Shareholders
To
be held September 7, 2007
|
1.
|
Adoption
and approval of the Agreement and Plan of Merger dated as
of June 25,
2007, by and among Professionals Direct, Inc., The Hanover
Insurance
Group, Inc., and its wholly-owned subsidiary Hanover Acquisition
Corp.,
and the merger of Hanover Acquisition Corp. with and into
Professionals
Direct, Inc.
|
For
|
Against
|
Abstain
|
|
Dated:
_______________, 2007
|
||
Shareholder
Name
(shown
on stock certificate or address label)
|
||
Place
Label
Here
|
||
By:
|
||
Representative
capacity, if any
|