SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/X/ Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to ss.240.14a-11(c) orss.240.14a-12
ARCH CAPITAL GROUP LTD.
--------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
Not Applicable
--------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14(a)-6(i)(1) and
0-11.
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
/ / Fee paid previously with preliminary materials.
/ / 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.
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
[Arch Capital Group Ltd. letterhead]
[ ], 2002
Dear shareholder:
I am pleased to invite you to the special meeting of the shareholders of
Arch Capital Group Ltd. to be held on [ ], 2002 at [ ] (local time), at [ ],
Hamilton, Bermuda.
On November 20, 2001, investors led by Warburg Pincus investment funds and
Hellman & Friedman investment funds and certain members of management purchased
from us, for $763.15 million in cash, 35,687,735 series A convertible preference
shares and 3,776,025 class A warrants. The purpose of this investment was to
provide a significant infusion of capital to launch a new underwriting
initiative to meet current and future demand in the global insurance and
reinsurance markets.
The preference shares are convertible into, and the warrants are
exercisable for, our common shares. Assuming full conversion of the preference
shares and full exercise of the warrants, the preference shares and warrants
would represent approximately 64.8% and 6.9% of our outstanding common shares.
However, the rules of the Nasdaq Stock Market, on which our common shares are
traded, prevent us from issuing, at a price less than the greater of their book
or market value, common shares (or securities convertible into or exercisable
for common shares) representing more than 19.9% of the number or voting power of
our common shares outstanding prior to that issuance, unless that issuance is
approved by our shareholders. In addition, our bye-laws currently limit the
voting power of specified shareholders to 9.9% of the outstanding voting power
of our shares. Accordingly, at the special general meeting, you will be asked to
vote on the following matters:
o the issuance of common shares upon conversion or exercise of these new
securities in excess of the maximum amount of common shares that is
permitted under Nasdaq Stock Market rules to be issued without
shareholder approval, and the provision for voting power of the
preference shares in excess of the maximum amount that is permitted
under Nasdaq Stock Market rules without shareholder approval;
o amendments to our bye-law limiting voting power of specified
shareholders to 9.9% of the voting power of our shares and our bye-law
concerning election of subsidiary directors; and
o the election of certain individuals as designated company directors so
that they may be elected directors of certain of our non-U.S.
subsidiaries.
The enclosed proxy statement provides you with detailed information
regarding these proposals.
-2-
Our board of directors has unanimously approved each of the proposals and
recommends that you vote for them. If the first two proposals described above
are not approved, the investors have the right to convert their existing
preference shares and warrants into identical securities of our subsidiary that
holds all of our core insurance and reinsurance operations, as more fully
described in this proxy statement.
Your vote is very important. Whether or not you plan to attend the meeting,
please sign the enclosed proxy card and mail it promptly in the enclosed
envelope.
Sincerely,
[signature logo]
Robert Clements
Chairman of the Board
This proxy statement and accompanying form of proxy are dated [ ], 2002 and
are first being mailed to shareholders on or about [ ], 2002.
-3-
ARCH CAPITAL GROUP LTD.
NOTICE OF SPECIAL GENERAL MEETING
Time: [ ] (local time)
Date: [ ], 2002
Place: [ ]
[ ]
Hamilton, Bermuda
Purpose:
To consider and vote on the following proposals:
o PROPOSAL 1: To approve the issuance by Arch Capital Group Ltd., a
Bermuda company ("ACGL"), of common shares issuable upon conversion of
the series A convertible preference shares or exercise of the class A
warrants (including by operation of anti-dilution adjustments in the
class A warrants) issued under the subscription agreements dated
October 24, 2001, as amended November 20, 2001 and January 3, 2002,
entered into between ACGL and various investors, to the extent that
such common shares and the 140,380 common shares issued on November
20, 2001 represent more than 19.9% of the number or voting power of
our common shares issued and outstanding on November 19, 2001, and to
approve the provision of full voting power of the preference shares
issued under the subscription agreements to the extent that such
preference shares and the 140,380 common shares issued on November 20,
2001 represent more than 19.9% of the voting power of all of our
shares outstanding on November 19, 2001. This approval is being sought
in compliance with the rules applicable to companies whose securities
trade on the Nasdaq Stock Market and is referred to as the Requisite
Nasdaq Approval.
o PROPOSAL 2: To adopt an amendment to our Bye-Law 45 as set forth in
Appendix A of, and as more fully described in, this proxy statement,
which would change the limitation on voting rights of shareholders so
that the limitation would apply only to votes conferred (directly or
indirectly or by attribution) by shares of ACGL directly, indirectly
or constructively owned by any U.S. person.
o PROPOSAL 3: To adopt an amendment to our Bye-Law 75 as set forth in
Appendix B of this proxy statement, which would expressly provide that
the directors of our Cayman Islands and Barbados subsidiaries, as well
as our Bermuda subsidiaries, must be elected by our shareholders as
persons designated to be elected as directors of such subsidiaries.
o PROPOSAL 4: To elect certain individuals as designated company
directors so that they may be elected directors of certain of our
non-U.S. subsidiaries.
o PROPOSAL 5: To conduct other business if properly raised.
Only shareholders of record as of the close of business on [ ], 2002 may
vote at the special general meeting.
Your vote is very important. Please complete, sign, date and return your
proxy card in the enclosed envelope promptly.
[signature logo]
Louis T. Petrillo
Senior Vice President, General
Counsel and Secretary
Hamilton, Bermuda
[ ], 2002
-2-
TABLE OF CONTENTS
Page
THE SPECIAL GENERAL MEETING...................................................1
Time and Place.............................................................1
Record Date; Voting at the Special General Meeting.........................1
Limitation on Voting.......................................................1
Quorum; Votes Required for Approval........................................3
Voting and Revocation of Proxies...........................................4
Solicitation of Proxies....................................................4
Other Matters..............................................................5
THE INVESTMENT................................................................6
General....................................................................6
Background of the Investment...............................................7
Subscription Agreement.....................................................9
Certificate of Designations for Preference Shares.........................14
Class A Warrants..........................................................16
Shareholders Agreement....................................................17
Employment Arrangements...................................................22
Interests of Certain Persons..............................................26
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...............29
CERTAIN TAX CONSIDERATIONS...................................................36
PROPOSAL 1-- APPROVAL OF ISSUANCE OF COMMON SHARES UPON CONVERSION OF
PREFERENCE SHARES AND EXERCISE OF CLASS A WARRANTS AND FULL VOTING
POWER OF PREFERENCE SHARES...............................................40
Purpose and Effect of Shareholder Approval................................40
Consequences of Not Approving This Proposal...............................41
Required Vote.............................................................42
PROPOSAL 2-- AMENDMENTS TO BYE-LAW 45........................................43
Current Bye-Law 45........................................................43
Purpose and Effect of the Proposed Amendments.............................43
Required Vote.............................................................44
PROPOSAL 3-- AMENDMENTS TO BYE-LAW 75........................................45
Current Bye-Law 75........................................................45
Purpose and Effect of the Amendments......................................45
Required Vote.............................................................45
PROPOSAL 4-- ELECTION OF SUBSIDIARY DIRECTOR.................................46
Required Vote.............................................................47
WHERE YOU CAN FIND MORE INFORMATION..........................................48
APPENDIX A-- Proposed Amended and Restated Bye-Law 45.......................A-1
APPENDIX B-- Proposed Amended and Restated Bye-Law 75.......................B-1
APPENDIX C-- Form of Proxy..................................................C-1
-i-
THE SPECIAL GENERAL MEETING
We are furnishing this proxy statement to holders of our shares in
connection with the solicitation of proxies by our board of directors to vote at
the special general meeting and at any adjournments and postponements of the
special general meeting.
Time and Place
The special general meeting will be held at [ ] (local time) on [ ], 2002
at [ ], Hamilton, Bermuda.
Record Date; Voting at the Special General Meeting
Our board of directors has fixed the close of business on [ ], 2002 as the
record date for determination of the shareholders entitled to notice of and to
vote at the special general meeting and any and all postponements or
adjournments of the meeting. On the record date, there were [15,641,958] common
shares outstanding and entitled to vote, subject to the limitations in our
bye-laws described below. At that date, there were an estimated [37] holders of
record and [1,768] beneficial holders of the common shares. On the record date,
there were 35,687,735 preference shares outstanding and entitled to vote,
subject to the limitations in the certificate of designations and our bye-laws
described below. There were 23 holders of record and beneficial holders of the
preference shares. Each holder of record of shares on the record date is
entitled to cast one vote per share, subject to the limitations described below.
A shareholder may vote in person or by a properly executed proxy on each
proposal put forth at the special general meeting.
The holders of our series A convertible preference shares, as well as The
Trident Partnership, L.P. and Marsh & McLennan Risk Capital Holdings Ltd., have
agreed to vote all of their voting shares in favor of all proposals at the
special general meeting. Our directors and executive officers have also advised
us that they intend to vote all of their voting shares in favor of all proposals
at the special general meeting. We believe that, after giving effect to the
limitations on voting described below, such holders will represent approximately
45.2% of the votes entitled to be cast at the meeting.
Limitation on Voting
Limitation Under Bye-Law 45. Under our bye-laws, if the votes conferred by
the Controlled Shares (as defined below) of any person would otherwise represent
more than 9.9% of the voting power of all shares entitled to vote generally at
an election of directors, the votes conferred by the Controlled Shares of such
person, unless the exception described below applies, will be reduced by
whatever amount is necessary so that after any such reduction the votes
conferred by the Controlled Shares of such person will constitute 9.9% of the
total voting power of all shares entitled to vote generally at an election of
directors.
This voting limitation, as it currently exists in our bye-laws, will apply
to the voting at the special general meeting. One of the proposals to be
considered at the special general meeting is to amend this voting limitation.
-2-
"Controlled Shares" in reference to any person means:
(1) all shares of Arch Capital Group Ltd. directly, indirectly or
constructively owned by such person within the meaning of Section 958
of the Internal Revenue Code of 1986; and
(2) all shares of Arch Capital Group Ltd. directly, indirectly or
constructively owned by such person or any other person with which
such first person is part of a "group" within the meaning of Section
13(d)(3) of the Securities Exchange Act of 1934 and the rules and
regulations promulgated thereunder; provided that this clause (2) will
not (a) restrict the ability of any person to vote any shares that
were (x) converted from shares of Arch Capital Group (U.S.) Inc. owned
by such person on September 8, 2000 as described in any Schedule 13G
or 13D filed with the United States Securities and Exchange Commission
prior to such date or (y) issued upon exercise of warrants owned by
such person on September 8, 2000 as described in any Schedule 13G or
13D filed with the United States Securities and Exchange Commission
prior to such date, which warrants were assumed by Arch Capital Group
Ltd. upon consummation of the reorganization, provided that the voting
power conferred by the Controlled Shares of such person will not in
any event exceed the greater of the voting power of such Controlled
Shares after giving effect to the reduction required by our bye-laws
as described above and the voting power of the Controlled Shares so
converted without giving effect to such reduction, or (b) apply to any
person or group that the board, by the affirmative vote of at least
seventy-five percent (75%) of the entire board, may exempt from the
provisions of this clause (2).
The limitations contained above will not restrict the ability of any person
to vote with respect to any matter other than the election of directors any
shares that were (x) converted from shares of Arch Capital Group (U.S.) Inc.
owned by such person on September 8, 2000 as described in any Schedule 13G or
13D filed with the United States Securities and Exchange Commission prior to
such date or (y) issued upon exercise of warrants owned by such person on
September 8, 2000 as described in any Schedule 13G or 13D filed with the United
States Securities and Exchange Commission prior to such date, which warrants
were assumed by Arch Capital Group Ltd. on November 8, 2000, provided that the
voting power conferred by the Controlled Shares of such person will not in any
event exceed the greater of (a) the voting power of such Controlled Shares after
giving effect to the reduction required by our bye-laws as described above and
(b) the voting power of the Controlled Shares so converted without giving effect
to such reduction.
Notwithstanding the provisions of our bye-laws described above, after
having applied such provisions as best as they consider reasonably practicable,
the board may make such final adjustments to the aggregate number of votes
conferred by the Controlled Shares of any person that they consider fair and
reasonable in all the circumstances to ensure that such votes represent 9.9% of
the aggregate voting power of the votes conferred by all shares of Arch Capital
Group Ltd. entitled to vote generally at an election of directors.
-3-
Limitations Under Certificate of Designations. Prior to the receipt of the
Requisite Nasdaq Approval, if the aggregate votes conferred by the preference
shares then outstanding, together with (x) any common shares issued upon
conversion of any preference shares or upon exercise of any class A warrants
issued under the subscription agreements (including by operation of the
anti-dilution adjustments in the class A warrants) and (y) the 140,380 common
shares issued in cancellation of the class A warrants in connection with the
transactions under the subscription agreements (together, the "Aggregate
Potential Votes") would exceed 19.9% of the total votes entitled to be cast by
the common shares issued and outstanding on November 19, 2001 (the "Total Base
Votes"), then the vote of each preference share will be reduced proportionately
(in relation to the total number of preference shares then outstanding) so that,
after giving effect to such reduction, the Aggregate Potential Votes do not
exceed 19.9% of the Total Base Votes.
Prior to the receipt of the Requisite Regulatory Approval, if the votes
conferred by common shares and preference shares beneficially owned by a given
person would otherwise represent more than 9.9% of the voting power of all
shares entitled to vote generally at an election of directors, the vote of each
preference share held by such person will be reduced by whatever amount is
necessary so that after any such reduction, the votes conferred by the common
shares and preference shares beneficially owned by such person, constitutes 9.9%
of the total voting power of all shares of the company entitled to vote
generally at any election of directors. "Requisite Regulatory Approval" means
approval by the insurance authorities in the States of Florida, Missouri,
Nebraska and Wisconsin of the acquisition of greater than 9.9% of the total
voting power of all shares of the company entitled to vote generally in the
election of directors by the principal investors referred to under "The
Investment -- General."
Until such time as any waiting period with respect to the acquisition of
preference shares by Orbital Holdings, Ltd. and Insurance Private Equity
Investors, L.P. required to expire under the federal antitrust statute has
expired or been terminated, the preference shares held by them will not have any
votes with respect to the election of directors.
Quorum; Votes Required for Approval
The presence of two or more persons representing, in person or by properly
executed proxy, not less than a majority of the voting power of our shares
outstanding and entitled to vote at the special general meeting is necessary to
constitute a quorum. If a quorum is not present, the special general meeting may
be adjourned from time to time until a quorum is obtained.
The affirmative vote of a majority of the voting power of the shares
represented at the special general meeting will be required for approval of each
of the proposals except Proposal 2.
The affirmative vote of at least 65% of the voting power of our outstanding
shares is necessary to approve Proposal 2, regarding the amendments to bye-law
45. Therefore, a failure to send in a signed proxy card or vote in person at the
meeting will have the effect of a vote against Proposal 2.
Several of our officers and directors will be present at the special
general meeting and available to respond to questions.
-4-
An automated system administered by our transfer agent will tabulate votes
cast by proxy at the special general meeting, and our transfer agent will
tabulate votes cast in person.
Abstentions and broker non-votes (i.e., shares held by a broker which are
represented at the meeting but with respect to which such broker does not have
discretionary authority to vote on a particular proposal) will be counted for
purposes of determining whether or not a quorum exists. Abstentions and broker
non-votes will generally not be counted for any other purpose, except that
abstentions with respect to Proposal 2 will have the same effect as negative
votes.
Voting and Revocation of Proxies
All shareholders should complete, sign and return the enclosed proxy card.
All shares represented at the special general meeting by properly executed
proxies received before or at the special general meeting, unless those proxies
have been revoked, will be voted at the special general meeting, including any
postponement or adjournment of the special general meeting. If no instructions
are indicated on a properly executed proxy, the proxies will be deemed to be FOR
approval of each of the proposals described in this proxy statement.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by either:
o filing, including by facsimile, with the Secretary of the company,
before the vote at the special general meeting is taken, a written
notice of revocation bearing a later date than the date of the proxy
or a later-dated proxy relating to the same shares, or
o attending the special general meeting and voting in person.
In order to vote in person at the special general meeting, shareholders
must attend the special general meeting and cast their vote in accordance with
the voting procedures established for the special general meeting. Attendance at
the special general meeting will not in and of itself constitute a revocation of
a proxy. Any written notice of revocation or subsequent proxy must be sent so as
to be delivered at or before the taking of the vote at the special general
meeting to Arch Capital Group Ltd., [ ], Hamilton, Bermuda, Facsimile: [ ],
Attention: Secretary.
Solicitation of Proxies
Proxies are being solicited by and on behalf of the board of directors. In
addition to the use of the mails, proxies may be solicited by personal
interview, telephone, telegram, facsimile and advertisement in periodicals and
postings, in each case by our directors, officers and employees.
We have retained MacKenzie Partners, Inc. to aid in the solicitation of
proxies and to verify records related to the solicitation. We will pay MacKenzie
Partners, Inc. fees of not more than $4,500 plus expense reimbursement for its
services. Brokerage houses, nominees, fiduciaries and other custodians will be
requested to forward solicitation materials to beneficial owners and will be
reimbursed for their reasonable expenses incurred in so doing. We may request by
telephone, facsimile, mail, electronic mail or other means of communication the
return of the proxy cards.
-5-
Other Matters
As of the date of this proxy statement, our board of directors knows of no
matters that will be presented for consideration at the special general meeting,
other than as described in this proxy statement. If any other matters shall
properly come before the special general meeting or any adjournments or
postponements of the special general meeting and shall be voted on, the enclosed
proxies will be deemed to confer discretionary authority on the individuals
named as proxies therein to vote the shares represented by such proxies as to
any of those matters. The persons named as proxies intend to vote or not vote in
accordance with the recommendation of our board of directors and management.
-6-
THE INVESTMENT
General
On October 24, 2001, we announced our intention to launch a new
underwriting initiative to meet current and future demand in the global
insurance marketplace. On that date, we entered into a subscription agreement
with Warburg Pincus investment funds and Hellman & Friedman investment funds.
Under the agreement, these investors agreed to purchase an aggregate of $750.0
million of our series A convertible preference shares and our class A warrants.
We refer to the Warburg Pincus investors and the Hellman & Friedman investors as
the "principal investors." At the same time, we also entered into a management
subscription agreement whereby certain members of our management (or entities
affiliated with them) agreed to purchase an aggregate of $13.15 million of the
preference shares and class A warrants.
Prior to the closing on November 20, 2001, the principal investors assigned
portions of their commitments to third parties. At closing, we issued the
following numbers of preference shares and class A warrants for the aggregate
dollar amounts specified:
Aggregate
Preference Class A Dollar
Shares Warrants Amount
-------------- ------------- --------------
Warburg Pincus investors............................ 18,939,311 2,003,918 $405,000,000
Hellman & Friedman investors........................ 10,521,839 1,113,289 225,000,000
Trident II, L.P. and co-investment funds............ 1,636,729 173,178 35,000,000
Farallon Capital investors.......................... 1,169,093 123,698 25,000,000
Insurance Private Equity Investors, L.L.C. 2,338,186 247,397 50,000,000
(affiliated with GE Asset Management)..........
Orbital Holdings, Ltd. 467,637 49,479 10,000,000
(affiliated with GE Capital)...................
Management investors................................ 614,940 65,066 13,150,000
-------------- ------------- --------------
Total...................................... 35,687,735 3,776,025 $763,150,000
============== ============= ==============
We may be required to issue additional preference shares under certain
circumstances, as described under "--Subscription Agreement-- Purchase Price
Adjustments."
In a related transaction, upon closing of the investment, 905,397
previously existing class A warrants held by Marsh & McLennan Risk Capital
Holdings, Ltd. were canceled in exchange for 140,380 newly issued common shares,
and 1,770,601 class B warrants held by Marsh & McLennan Risk Capital Holdings
were canceled in exchange for a cash payment by us of $7.50 per class B warrant
(approximately $13.3 million in the aggregate). See note (3) under "Security
Ownership of Certain Beneficial Owners and Management" for a description of the
class B warrants. Marsh & McLennan Risk Capital Holdings' pre-existing right to
have an observer attend meetings of our board of directors was terminated, and
The Trident Partnership, L.P.'s pre-existing right to designate a director for
election to our board of directors was terminated. We were released from our
remaining $11.0 million capital commitment to Trident II, L.P. for new
investments.
-7-
Background of the Investment
The events of September 11, 2001 accelerated both demand and the already
improving pricing conditions in the insurance and reinsurance marketplace in the
U.S. and the rest of the world.
In early October 2001, representatives of Warburg Pincus and Hellman &
Friedman, John M. Pasquesi and Robert Clements, the chairman of ACGL, began to
discuss opportunities to address this need. Originally Warburg Pincus and
Hellman & Friedman wanted to participate in these opportunities, together with
Mr. Clements, through a newly formed vehicle. In such case, neither ACGL nor its
shareholders would have been able to participate or, at best, ACGL would have
been able to participate only through a limited equity investment in the new
vehicle.
Mr. Clements and Peter A. Appel, the president and chief executive officer
of ACGL, engaged in intensive discussions with representatives of Warburg Pincus
and Hellman & Friedman and their legal counsel regarding an equity investment by
Warburg Pincus and Hellman & Friedman. Messrs. Clements and Appel sought to
assist them in understanding ACGL and to persuade them of the opportunities
presented to the investors and ACGL's shareholders by structuring the investment
as an investment in ACGL, rather than an existing subsidiary of ACGL or a newly
formed vehicle, as well as in structuring the investment so that the investors
would receive appropriate assurances as to the book value of ACGL at the time of
investment.
During the week of October 15 and through October 23, Messrs. Clements and
Appel, representatives of Warburg Pincus and Hellman & Friedman, their legal
counsel and legal counsel for ACGL negotiated a term sheet and, then, definitive
documentation with respect to the investment. Representatives of Credit Suisse
First Boston Corporation ("CSFB"), ACGL's financial advisor, reviewed drafts of
the term sheet and definitive documentation. Representatives of Warburg Pincus
and Hellman & Friedman, their legal counsel and other advisors interviewed
officers of ACGL and reviewed ACGL's books and records as part of their due
diligence. On October 19 and at various times thereafter, Messrs. Clements and
Appel updated members of the board on the status of the negotiations and the
proposed terms thereof.
As these discussions were ongoing, Messrs. Clements and Appel also
contacted Paul B. Ingrey, Dwight R. Evans and Marc Grandisson, among others, to
form the management team for our new underwriting initiative and negotiated the
terms of their employment. In connection with entering into employment
agreements with ACGL and its Bermuda reinsurance subsidiary, it was proposed
that Messrs. Ingrey, Evans and Grandisson would be granted restricted shares and
options to purchase common shares of ACGL. In addition, they, along with Messrs.
Clements, Pasquesi and Appel, would be given the opportunity to participate in
the investment in ACGL along with Warburg Pincus and Hellman & Friedman, on the
same economic terms. Messrs. Clements and Appel also discussed with the
investors proposed incentive compensation arrangements for existing management.
On October 23, 2001, our board of directors held a meeting to discuss and
evaluate the investment and the related transactions. The term sheet and drafts
of the definitive documentation were circulated to the board. The board of
directors discussed, among themselves and with representatives of ACGL's
financial advisor and legal counsel, the terms of the investment and related
transactions, including employment/retention and compensation arrangements for
new and existing management.
-8-
Representatives of CSFB made a presentation concerning the investment. At
the close of their presentation, the representatives of CSFB orally expressed
the opinion of CSFB to the board of directors of ACGL, subsequently confirmed in
writing on October 24, 2001, that, as of that date and based on and subject to
the assumptions, limitations and qualifications set forth in the written
opinion, the aggregate consideration to be received by ACGL in the investment
was fair to ACGL from a financial point of view. CSFB's opinion was directed to
ACGL's board of directors for its information in connection with its
consideration of the investment and does not constitute a recommendation as to
how any shareholder of ACGL should vote or act on any matter relating to the
investment. In particular, the opinion did not address the merits of a vote for
or against Proposal 1 set forth in this proxy statement.
After the discussions and the presentation, the board unanimously approved
the subscription agreements with the Warburg Pincus and Hellman & Friedman
investors and with management and the transactions contemplated thereby, and
recommended that the bye-law amendments, the issuance of the common shares upon
conversion of the preference shares and exercise of the class A warrants and the
provision of full voting power to the preference shares be approved by our
shareholders. In addition, the board unanimously determined to appoint two
additional directors to the company's board of directors, Mr. Pasquesi, who was
appointed as vice-chairman of the board, and Mr. Ingrey.
On October 23, 2001, we entered into employment and compensation
arrangements with new and existing management.
On October 24, 2001, we executed the definitive documentation relating to
the investments.
On November 8, 2001, ACGL, the principal investors, The Trident
Partnership, L.P., Trident II, L.P., Marsh & McLennan Risk Capital Holdings and
employee co-investment funds affiliated with Marsh & McLennan Risk Capital
Holdings entered into an agreement. Under this agreement, the Warburg Pincus
investors assigned their right and commitment to purchase $35.0 million of the
preference shares and class A warrants to Trident II and the co-investment
funds. Marsh & McLennan Risk Capital Holdings agreed to exchange all of its
existing class A warrants for newly issued common shares (assuming that they had
been exercised pursuant to a cashless exercise) and to exchange all of its class
B warrants for cash at a price equal to $7.50 per class B warrant. See note (3)
under "Security Ownership of Certain Beneficial Owners and Management" for a
description of the class B warrants. In addition, the board observer and board
nomination rights of Marsh & McLennan Risk Capital Holdings and The Trident
Partnership were terminated, and we were also released from our remaining $11.0
million capital commitment to Trident II for new investments.
On November 20, 2001, ACGL, the principal investors and investment funds
affiliated with Farallon Capital, GE Asset Management and GE Capital entered
into assignment agreements pursuant to which the principal investors assigned
portions of their rights and commitments to purchase preference shares and class
A warrants.
On November 20, 2001, we issued the preference shares and class A warrants
under the subscription agreements, as amended, and related documents in exchange
for $763.15 million in cash.
-9-
On December 11, 2001, we announced that Constantine Iordanou will join our
management team and our board of directors. On December 20, 2001, we entered
into an employment agreement with Mr. Iordanou and, effective January 1, 2002,
granted Mr. Iordanou options and restricted shares.
Subscription Agreement
Set forth below is a summary of the material terms of the subscription
agreement with the investors (other than the management investors). You should
read this summary in conjunction with the agreement and the amendment thereto,
which are incorporated herein by reference. The subscription agreement was filed
as an exhibit to our quarterly report on Form 10-Q filed with the SEC on
November 14, 2001, and an amendment to the subscription agreement was filed as
an exhibit to our current report on Form 8-K filed with the SEC on January 4,
2002.
Purchase Price. The purchase price for the preference shares and class A
warrants paid at closing was based on the book value of our common shares as of
June 30, 2001. The number of preference shares issued to each investor was equal
to the total dollar amount of that investor's investment divided by the
estimated per share price as determined under the subscription agreement
(approximately $21.384). The number of warrants issued to each investor was
equal to the Adjusted Warrant Amount times the number of common shares issuable
upon exercise of all outstanding class A warrants (2,531,079) divided by the
number of common shares outstanding as of June 30, 2001 (12,863,079). The
"Adjusted Warrant Amount" was equal to one-half of the quotient of the total
dollar amount of that investor's investment divided by the difference of the
estimated per share price minus $1.50. There would have been an adjustment to
the purchase price if any of the transactions contemplated by the subscription
agreement or the options granted to management concurrently therewith had
triggered an anti-dilution adjustment under our existing class A warrants or
class B warrants, but all holders of those warrants waived any rights to any
anti-dilution adjustment with respect to the issuance under the subscription
agreements or the grants to management contemplated thereby. On October 23,
2001, the last trading day prior to our entering into the subscription
agreements and announcing the transactions, the closing price of our common
shares on the Nasdaq Stock Market was $17.44 per share.
Purchase Price Adjustments. The subscription agreement provides that the
estimated per share price may be adjusted as described below. All determinations
to be made by the investors in connection with the purchase price adjustments
will be made by the principal investors. These adjustments are the sole remedy
for any breach of representations and warranties of the company under the
subscription agreement.
Audit Adjustment. We agreed to engage PricewaterhouseCoopers as independent
accountants to audit our consolidated balance sheet as of June 30, 2001, an
independent actuary (to be selected by us and the principal investors) to review
the reserves for claims and claims expenses on our balance sheet, and an
independent pricing service selected by us and the principal investors to
determine the estimated fair value of our investments in marketable securities
as of the third business day prior to closing. The independent pricing service,
the public accountants and the independent actuary are referred to below as the
independent advisors.
Within 60 days after the closing (or as soon thereafter as practicable),
the independent advisors will deliver to our board of directors and the
principal investors their reports,
-10-
and, based on these reports, the independent public accountants will calculate
the audited per share price. Pursuant to the terms of the subscription
agreement, ACGL and the principal investors have the right to make a full review
of the determinations of the independent advisors contained in their report.
If the audited per share price is greater than the estimated per share
price at closing, each investor will either pay the difference to ACGL in cash
or return the equivalent amount in preference shares. If the estimated per share
price at closing is greater than the audited per share price, ACGL will issue an
amount of preference shares to the investors representing the difference.
Adjustment for Trading Price or Change of Control. In the event that (1)
the closing price of our common shares is at least $30.00 per share for at least
20 out of 30 consecutive trading days or (2) a change of control occurs (either
case, a "Triggering Event"), we agreed to issue and deliver to each investor
additional preference shares such that the audited per share price is adjusted
downward by $1.50 per preference share. For this purpose "change of control"
means the acquisition by any person or group (within the meaning of section
13(d)(3) of the Exchange Act) of beneficial ownership of 40% or more by either
the voting power of our then outstanding common shares or the combined voting
power of our then outstanding voting securities entitled to vote generally in
the election of directors; provided that if such acquisition results in whole or
in part from a transfer of common shares or other voting securities by Marsh &
McLennan Companies, Inc. or any of its subsidiaries, such acquisition will not
constitute a change of control unless such transfer is effected pursuant to an
offer by such acquiror to purchase all of our outstanding common shares.
Final Adjustment. We agreed to make another adjustment at the second
anniversary of closing (or such earlier date as the principal investors request
and the Transaction Committee (described below under "-- Transaction Committee")
agrees) based on an adjustment basket described below.
The adjustment basket will be equal to:
o the difference between value realized upon sale and the book value at
closing (as adjusted based on a pre-determined growth rate) of the
agreed upon non-core businesses; plus
o the difference between the GAAP net book value of all of our insurance
balances with respect to any policy or contract written or having an
effective date prior to November 20, 2001 (i.e., premiums receivable,
unpaid claims and claims expenses recoverable, prepaid reinsurance
premiums, reinsurance balances receivable, deferred policy acquisition
costs, claims and claims expenses, unearned premiums, reinsurance
balances payable, and any other insurance balance attributable to our
"core insurance operations," as defined below) at the time of
determination of the final adjustment and those balances at the
closing; minus
o reductions in book value arising from (without duplication of any
expenses included in the calculation of value realized upon sale of
the non-core businesses or any expense otherwise reflected in the
determination of the per share price) costs and expenses relating to
the investments and transactions provided for under the subscription
agreement, actual losses arising out of breach of representations
under the subscription agreement and certain other costs and expenses.
-11-
Our "core insurance operations" include:
o Arch Reinsurance Ltd.;
o Arch Capital Group (U.S.) Inc.;
o Arch Reinsurance Company;
o Cross River Insurance Company (including funding for Rock River
Insurance Company);
o Arch Risk Transfer Services Ltd. (including First American Financial
Corporation);
o capital held at Arch Capital Group Ltd., gross of capital to be
invested in unfunded private equity commitments; and
o $2.5 million in segregated assets and liabilities in "cell" accounts
formed by Alternative Insurance Company Limited and Alternative Re,
Ltd.
Non-core businesses are currently defined as American Independent Insurance
Holding Company, Hales & Company Inc., escrow assets under the Folksamerica
disposition agreement, all nonpublic securities held by ACGL, Arch Capital Group
(U.S.) Inc. and Arch Reinsurance Company and all commitments to Trident II,
L.P., Distribution Partners and Innovative Coverage Concepts LLC, as and when
funded.
The adjustment basket will be calculated by our independent auditors as
soon as practicable after the second anniversary of the closing or such earlier
date as the principal investors request and ACGL agrees. ACGL and the principal
investors have the right to make a full review of the adjustment basket
determination. We agreed to cause our subsidiaries to maintain the components
necessary to calculate the adjustment basket under separate ledgers.
If the adjustment basket is less than zero, we agreed to issue additional
preference shares to the investors based on the decrease in the value of the
components of the adjustment basket. If the adjustment basket is greater than
zero, the subscription agreement allows us to use cash in an amount based on the
increase in value of the components of the adjustment basket to repurchase
common shares (other than any common shares issued upon conversion of the
preference shares or exercise of the class A warrants).
In addition, if the adjustment basket is less than zero and in the event
that a Triggering Event occurs, we agreed to issue additional preference shares
to the investors as a further adjustment.
Finally, on the fourth anniversary of the closing, there will be a
calculation of a further adjustment basket based on (1) liabilities in excess of
the Folksamerica escrow assets owed to Folksamerica under the Asset Purchase
Agreement, dated as of January 10, 2000, between ACGL, Arch Reinsurance Ltd.,
Folksamerica Holding Company, Inc. and Folksamerica Reinsurance Company and (2)
specified tax and ERISA matters.
Restrictions on Transfer of Securities. The investors agreed that they will
not, without prior approval of the Transaction Committee, until the earlier of
this special general meeting and March 20, 2002, sell, transfer or otherwise
dispose of, directly or indirectly, any of their preference shares or class A
warrants acquired under the subscription agreements or any common shares issued
upon conversion or exercise of the preference shares or class A warrants.
-12-
The investors agreed not to transfer, in one transaction, or a series of
transactions, to a single person or group, common shares or securities
convertible into common shares representing in excess of either 51% of the votes
then entitled to be cast in the election of directors, or 51% of the then
outstanding common shares (taking into account common shares issuable upon
conversion of the preference shares) without giving all shareholders the right
to participate in such transaction on the same or substantially the same terms
as the investors.
The shareholders agreement also contains transfer restrictions. See
"--Shareholders Agreement-- Restrictions on Transfer."
Dispositions; Pending Acquisition. We agreed to sell, prior to the time of
the audit adjustment described above, the portion of our investment portfolio
specified in a schedule to the agreement, consisting of specified publicly
traded noninvestment grade debt securities and certain equity securities. We
also agreed to use our commercially reasonable efforts to consummate our
acquisition of Rock River Insurance Company.
Information. The investors agreed to give us information regarding their
ownership of our company, ownership information concerning each of them and
other related information in connection with preparing disclosure in filings
under the United States Securities Act of 1933 (the "Securities Act") or the
Exchange Act on issues arising under the Internal Revenue Code, including the
rules applicable to "controlled foreign corporations."
Indemnification; Insurance. We and the investors agreed to maintain all
rights to indemnification in favor of our directors, officers, employees and
agents or any of our subsidiaries with respect to their activities prior to the
closing (except that with respect to the Transaction Committee this covenant
will cover activities after the closing) (as provided for in our organizational
documents in effect on October 24, 2001) in full force and effect for a period
of not less than six years from the closing. The investors agreed not to cause
us to take any action inconsistent with this agreement.
We and the investors also agreed that we will indemnify each of our present
and former directors or officers against liabilities arising before the closing
(including the transactions contemplated by the subscription agreement) and,
with respect to the Transaction Committee, also after the closing. We and the
investors agreed that we will maintain our current level of directors' and
officers' liability insurance coverage for a period of at least six years after
the closing.
Certain Tax Matters. With respect to each taxable year during which any
principal investor owns our shares, we agreed to use reasonable best efforts to
cause us and each of our subsidiaries:
o not to constitute a "passive foreign investment company" within the
meaning of Section 1297 of the Code;
o not to satisfy the gross income requirement set forth in Section
542(a) of the Code;
o not to satisfy the gross income requirement set forth in Section
552(a) of the Code; and
o not to have any related person insurance income within the meaning of
Section 953(c)(2) of the Code.
-13-
In the event that we or any of our subsidiaries constitute a personal holding
company, a foreign personal holding company, a controlled foreign corporation, a
foreign investment company or a passive foreign investment company for U.S.
federal income tax purposes with respect to any taxable year, we agreed to
provide each principal investor with any information it requests to satisfy its
legitimate tax, accounting or other reporting requirements.
Right to Exchange into Subsidiary Shares. We agreed to form a new, wholly
owned subsidiary to hold Arch Reinsurance Ltd. as well as all of the "core
insurance operations" other than Arch Reinsurance Company.
In the event that:
o the proposals to be voted upon at the special general meeting are not
approved before April 20, 2002,
o we fail to obtain the regulatory approvals required in connection with
the investment before May 20, 2002, or
o the adjustments described above under "-- Purchase Price
Adjustments--Final Adjustment" are less than zero and their absolute
value exceeds $250.0 million,
the investors will have the option to exchange their preference shares and class
A warrants, in whole or in part (but not for less than $150.0 million
liquidation preference of preference shares), for preference shares and warrants
of our newly formed subsidiary bearing identical rights and privileges,
including the right to convert into, or be exercised for, common shares of our
newly formed subsidiary, but not including voting limitations to the extent such
limitations are not required pending Requisite Nasdaq Approval or Requisite
Regulatory Approval, as described below.
Investors' Costs and Expenses. We agreed to reimburse the principal
investors for their costs and expenses, and the GE investors for up to $50,000
of their costs and expenses, in connection with the investment and the related
transactions.
Transaction Committee. Until the date of the final determination of the
adjustment basket at the fourth anniversary of closing, approval of the
following actions by the Transaction Committee (as defined below) is deemed to
be approval by the entire board of directors:
o an amendment, modification or waiver of rights by ACGL under the
subscription agreement, the certificate of designation for the
preference shares, the class A warrants or the shareholders agreement;
o the enforcement of obligations of the investors under the above
agreements; or
o approval of actions relating to the disposition of non-core assets.
"Transaction Committee" means a committee of the board of directors
consisting of persons who either (a) were members of our board of directors on
October 22, 2001 and/or (b) were designated as members of the Transaction
Committee by a person who was a member of our board of directors on October 22,
2001. The Transaction Committee currently consists of Robert Clements, Peter A.
Appel, Michael P. Esposito, Jr., James J. Meenaghan and Robert F. Works.
-14-
Certificate of Designations for Preference Shares
Set forth below is a summary of the material terms of the certificate of
designations for the preference shares. You should read this summary in
conjunction with the certificate, which was filed as an exhibit to our current
report on Form 8-K filed with the SEC on January 4, 2002 and is incorporated
herein by reference.
Dividends. The holders of preference shares are entitled to receive
dividends along with holders of our common shares, on an as-converted basis.
Dividends are payable on each outstanding preference share on an as-converted
basis. No dividends may be paid or declared on or with respect to our common
shares prior to the declaration and payment of a dividend on or with respect to
the preference shares. Dividends on the preference shares are non-cumulative.
Ranking. The preference shares rank, with respect to dividends and upon
liquidation, winding up or dissolution:
o on a parity with those shares which, by the terms of our bye-laws or
by such rights, preferences or limitations as fixed by the board of
directors, are specifically entitled to share ratably with the
preference shares, and
o senior to each other class or series of our shares.
Please see "-- Shareholders Agreement -- Restrictions on Dividends and Share
Repurchases" for a description of a limitation on dividends on, and repurchases
of, our common shares in the shareholders agreement.
Conversion
General. Each preference share is convertible at any time and from time to
time at the option of the holder, initially, into one fully paid and
nonassessable common share, subject to adjustment for certain events as
described below under "-- Adjustments." In connection with the conversion of any
preference shares, no fractional shares will be issued. Instead, we will pay a
cash amount for such fractional interest based on the current market price of
the common shares. Please see "-- Shareholders Agreement -- Restrictions on
Conversion/Exercise" for a description of the limitation on conversion of the
preference shares under the shareholders agreement.
Mandatory Conversion. The preference shares will automatically convert into
common shares following the later of: (a) shareholder approval of the proposals
to be voted on at this special general meeting and the receipt of the Requisite
Regulatory Approvals and (b) 90 days following the consummation of the purchase
price adjustment to be performed at the fourth anniversary of closing (described
above under "-- Subscription Agreement --Purchase Price Adjustments").
Adjustments. The number of common shares into which each preference share
is convertible is subject to adjustment from time to time in the event of:
o share splits or combinations of our common shares;
-15-
o the declaration and payment of dividends on the common shares in
additional common shares;
o the distribution of indebtedness, securities or assets to holders of
our common shares;
o transactions in which our common shares are exchanged (either for
different securities of our company or securities of a different
company); or
o offerings of our common shares, or securities convertible into or
exercisable for common shares, at a price below the market value for
our common shares at the time of issuance, subject to exceptions.
Liquidation Preference. In the event of our voluntary or involuntary
liquidation, dissolution or winding-up, or a reduction or decrease in our share
capital resulting in a distribution of assets to the holders of any class or
series of our shares, each holder of preference shares is entitled to payment
out of our assets available for distribution of an amount equal to the
liquidation preference of $21.00 per preference share held by such holder, plus
all accumulated and unpaid dividends, before any distribution is made on any
common shares. If, in the event of our voluntary or involuntary liquidation,
dissolution or winding up or a reduction or decrease in our share capital, the
amounts payable with respect to preference shares and parity shares are not paid
in full, the holders of preference shares and the parity shares share equally
and ratably in any distribution of share assets in proportion to the full
liquidation preference and all accumulated and unpaid dividends to which each
such holder is entitled.
Voting Rights. Each holder of preference shares is entitled to the number
of votes equal to the number of whole common shares into which all of such
holder's preference shares are convertible, with respect to all matters
submitted for shareholder approval. Except as required by applicable Bermuda law
or by the express terms of the preference shares, holders will vote together
with holders of the common shares as a single class.
The affirmative vote of the holders of at least a majority of the
outstanding preference shares, voting with holders of shares of all other series
of preference shares affected in the same way as a single class, is required to
amend, repeal or change any provisions of the certificate of designations in any
manner which would adversely affect, alter or change the powers, preferences or
special rights of the preference shares and any such securities affected in the
same way. However, the creation, authorization or issuance of any other class or
series of shares or the increase or decrease in the amount of authorized shares
of any such class or series or of the preference shares, or any increase,
decrease or change in the par value of any class or series of shares (including
the preference shares) do not require the consent of the holders of the
preference shares and is not deemed to affect adversely, alter or change the
powers, preferences and special rights of the preference shares. With respect to
any matter on which the holders are entitled to vote as a separate class, each
preference share is entitled to one vote.
Notwithstanding the foregoing, the voting rights of the preference shares
will be limited as follows:
o Prior to receipt of approval for Proposal 2 and the Requisite Nasdaq
Approval, if the votes conferred by the Controlled Shares (as defined
in bye-law 45) of any person, including the preference shares held by
that person, would otherwise represent more than 9.9% of the voting
power of all shares entitled to vote generally at an election of
directors, the vote of each preference share held by that person will
be reduced by whatever amount is necessary
-16-
so that after the reduction, the votes conferred by the Controlled
Shares in question, including preference shares, constitutes 9.9% of
the total voting power of all shares of the company entitled to vote
generally at any election of directors.
o Prior to receipt of the Requisite Nasdaq Approval, if the aggregate
votes conferred by the preference shares then outstanding, together
with any common shares issued upon conversion of any preference
shares, or issued upon exercise of any class A warrants issued under
the subscription agreements (including by operation of the
anti-dilution adjustments in the class A warrants), or issued in
cancellation of the class A warrants in connection with the
subscription agreements (which together constitute the aggregate
potential votes) would exceed 19.9% of the total votes entitled to be
cast by the common shares issued and outstanding on November 19, 2001,
then the vote of each preference share will be reduced proportionately
(in relation to the total number of preference shares then
outstanding) so that, after giving effect to such reduction, the
aggregate potential votes do not exceed 19.9% of the total votes (it
being understood that if both the provision in the preceding bullet
point and the provisions of this bullet point apply, the reduction
provisions of this bullet point shall be applied first).
o Prior to the receipt of Requisite Regulatory Approval, if the votes
conferred by common shares and preference shares beneficially owned by
a given person would otherwise represent more than 9.9% of the voting
power of all shares of the company entitled to vote generally at an
election of directors, the vote of each preference share held by that
person will be reduced by whatever amount is necessary so that after
any reduction, the votes conferred by the common shares and preference
shares beneficially owned by that person constitute 9.9% of the total
voting power of all shares of the company entitled to vote generally
at any election of directors.
In addition, until such time as any waiting period with respect to the
acquisition of preference shares by Orbital Holdings, Ltd. and Insurance Private
Equity Investors, L.P. required to expire under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended, including any extensions thereof, has
expired or been terminated, the preference shares held by those purchasers will
not have any votes with respect to the election of directors.
Class A Warrants
Set forth below is a summary of the material terms of the class A warrants.
You should read this summary in conjunction with the certificate for the class A
warrants, the form of which was filed as an exhibit to our current report on
Form 8-K filed with the SEC on January 4, 2002 and is incorporated herein by
reference.
General. Each class A warrant entitles the holder to purchase one common
share for $20.00. The exercise price is subject to adjustments as discussed in
greater detail below under "-- Anti-Dilution and Other Adjustments." The class A
warrants will expire on September 19, 2002.
Exercise of the Class A Warrants. Holders of the class A warrants may
exercise their purchase rights under the class A warrants by making payment of
the purchase price in cash or through a cashless
-17-
exercise. Holders may effect a cashless exercise by (a) delivering common shares
equivalent in value to the exercise price or (b) accepting a reduction in the
number of common shares deliverable upon exercise of the class A warrant by an
amount which would be equivalent in value to the exercise price. See "--
Shareholders Agreement -- Restrictions on Conversion/Exercise" for a description
of the limitation on exercise of the class A warrants under the shareholders
agreement.
Anti-Dilution and Other Adjustments. The exercise price will be adjusted
from time to time in order to prevent dilution. In addition, certain other
adjustments will be made to the terms of the class A warrants upon extraordinary
corporate events. Such anti-dilution and other adjustments include:
o offerings of our common shares at a price below the market value of
our common shares at the time of issuance will result in an adjustment
to the exercise price under the class A warrants;
o share splits or combinations of our common shares will result in an
adjustment to the exercise price under the class A warrants;
o a reorganization, reclassification, consolidation, merger or sale of
assets may result in the substitution of other securities, cash or
property upon exercise of the class A warrants; and
o issuance of assets or debt securities or rights or warrants to
purchase assets or securities by the company to its shareholders may
result in an adjustment to the exercise price under the class A
warrants.
In addition, our board of directors may make such additional adjustments to
the exercise price or other terms of the class A warrants in order to protect
the rights of the holders of the class A warrants.
Shareholders Agreement
At closing, we entered into a shareholders agreement with the investors.
Set forth below is a summary of the material terms of the terms of the
shareholders agreement. You should read this summary in conjunction with the
agreement, which was filed as an exhibit to our current report on Form 8-K filed
with the SEC on January 4, 2002 and is incorporated herein by reference.
Board Representation. Following the closing, the Warburg Pincus investors
exercised their right to designate one director to our board and the Hellman &
Friedman investors exercised their right to designate one director to our board.
Kewsong Lee is serving as the designee for the Warburg Pincus investors, and
John L. Bunce, Jr. is serving as the designee for the Hellman & Friedman
investors. Once the Requisite Regulatory Approval and the approvals of Proposal
1 and Proposal 2 have been obtained, we will increase the size of our board to
17 members and the Warburg Pincus investors will have the right to designate or
nominate five additional directors and the Hellman & Friedman investors will
have the right to designate or nominate two additional directors. Continued
representation on our board of directors by the principal investors is based
upon the amount of their retained investment in ACGL according to the following
schedules:
-18-
Warburg Pincus Investors Hellman & Friedman Investors
----------------------------------------------------------------------------------------------------------------------
Percentage Minimum Number of Percentage Minimum Number of
of Original Directors To Be of Original Directors To Be
Investment Held Nominated Investment Held Nominated
---------------------------- ------------------- ------------------ ---------------------------
> 75% 6 > 60% 3
- -
60% < x < 75% 5 35% < x < 60% 2
- -
45% < x < 60% 4 20% < x < 35% 1
- -
30% < x < 45% 3
-
20% < x < 30% 2
-
10% < x < 20% 1
-
Committees of the Board. As long as at least one Warburg Pincus
representative is on the board, each board committee will include at least one
Warburg Pincus representative, and as long as at least one Hellman & Friedman
representative is on the board, each board committee will include at least one
Hellman & Friedman representative. The foregoing is subject to any Nasdaq Stock
Market or SEC restrictions applicable to the audit committee.
Investor Protection Matters. Certain matters require approval by at least
one Warburg Pincus director (if the Warburg Pincus investors hold at least 25%
of their original investment in ACGL) and one Hellman & Friedman director (if
the Hellman & Friedman investors hold at least 50% of their original investment
in ACGL). Such matters include, among other things, subject to exceptions set
forth in the subscription agreements:
o any amendment to our organizational documents or the subscription
agreement;
o any change to our capital structure or the terms of our outstanding
securities;
o the declaration any dividend or other distribution on, or repurchase
of, our securities;
o the issuance of any securities or the grant of any preemptive or
anti-dilutive rights to any holder of our securities, or the grant of
registration rights with respect to any of our securities;
o any amendment to any grants made under the Long Term Incentive Plan
for New Employees (described below under "--Employment Arrangements");
o the incurrence of any material indebtedness;
o our entering into any interested party transactions;
o the acquisition of any material assets;
o the acquisition of equity interests in any other person;
o any change in our independent auditors or any material change in any
method of financial accounting or accounting practice (other than
changes required under U.S. generally accepted accounting principles);
o any sale of material assets;
o significant changes in compensation arrangements with any officer or
key employee;
o our liquidation, dissolution, or certain mergers or consolidations,
sale of all or substantially all of our assets, or similar business
combination;
o entering into any transaction involving in excess of $1,000,000, or,
if such transaction is in the ordinary course of business consistent
with past practice, $5,000,000;
o the approval of our annual plan, annual capital expenditure budget or
the five-year plan of our company; or
-19-
o the removal or appointment of a new chief executive officer or
chairman.
Notwithstanding the required approvals described above, the shareholders
agreement does not grant the principal investors any right or consent to the
extent that such right would result in such party being deemed to "control" any
of our insurance subsidiaries that are domiciled in any state in the United
States, where the exercise of such control would otherwise require the prior
approval of such state.
The rights of the principal investors described above terminate upon the
mandatory conversion of the preference shares described above under "--
Certificate of Designation for Preference Shares --Mandatory Conversion" or the
earlier conversion of all preference shares in accordance with their terms.
Special Board Meetings. We agreed to use best efforts (1) to cause a
special meeting of the board to be called upon the request of at least three
directors and (2) to cause to be submitted, at the 2002 annual general meeting
of our shareholders, a proposal to amend our bye-laws so that a special meeting
of the board may be called by three directors or a majority of the total number
of directors (whichever is fewer), in addition to the chairman of the board and
the president of ACGL.
Voting. The investors agreed to vote all of their voting shares in favor of
the proposals to be submitted for approval at this special general meeting and
in favor of the proposal to approve the restricted share grant to Mr. Clements
and the option grant to Mr. Pasquesi (each as described under "-- Interests of
Certain Persons" below) to be submitted for approval at our next annual general
meeting.
Chairman. The principal investors agreed to take all actions necessary to
cause Robert Clements to be duly elected as chairman of our board of directors
for so long as he is willing and able to serve.
Certain Transactions. The principal investors agreed that, for a period of
two years after the closing, they will not, directly or indirectly, without the
prior approval of a majority of directors who are not affiliated with either
Warburg Pincus or Hellman & Friedman:
o acquire securities or assets from us or any of our subsidiaries,
except as specifically contemplated by the subscription agreements,
the preference shares and the class A warrants,
o engage in any "Rule 13e-3 transaction" (as such term is defined in
Rule 13e-3(a)(3) under the Exchange Act) involving us, or
o engage in any other transaction that would result in the compulsory
acquisition of our common shares.
We and the principal investors have agreed to endeavor to include at all times
two directors on our board who are not affiliated with either Warburg Pincus or
Hellman & Friedman. The prior approval of a majority of such independent
directors is required prior to any change to or elimination of these provisions.
Registration Rights. The shareholders agreement also grants the investors
registration rights described below.
Demand Registration Rights. The principal investors have the right to
request registration of their shares under the Securities Act, at any time and
on not more than five separate occasions each for
-20-
the Warburg Pincus investors, collectively, and the Hellman & Friedman
investors, collectively, so long as the request covers common shares with a
market value on the date of the request of at least $25.0 million.
Piggy-Back Registration Rights. If at any time we propose to register any
common shares under the Securities Act on our own behalf or on behalf of any of
our shareholders (including pursuant to a demand registration as discussed
above), we are required to give reasonably prompt written notice to each
investor of our intention to do so and, upon request of any investor, but
subject to limitations in some cases, include the investor's shares for
registration.
Registration Expenses. We agreed to bear all registration, filing and
related fees (excluding underwriters' discounts or commissions) in connection
with any registration and listing of any common shares pursuant the registration
provisions described above.
Indemnification; Contribution. We agreed to indemnify each investor and its
officers, directors, employees and controlling persons, and each underwriter,
its partners, officers, directors, employees and controlling persons, in any
offering or sale of common shares, against certain liabilities in connection
with these registered offerings. Each investor agreed to indemnify us and our
officers, directors, employees and controlling persons, against certain
liabilities in connection with these registered offerings. In the event that the
indemnification provisions are unavailable, we and the investors agreed to
contribute such amounts as are appropriate to reflect the relative fault of the
parties.
Tag Along/Drag Along Rights. In the event that a Warburg Pincus investor, a
Hellman & Friedman investor or a GE investor proposes to transfer preference
shares, class A warrants or common shares issued upon conversion or exercise of
such securities to a third party, and the net proceeds of such sale are
reasonably expected to exceed $50.0 million, other investors may have rights
under the shareholders agreement to "tag along" in such sale. The following
tag-along rights are provided for in the shareholders agreement:
o The GE investors have tag-along rights only if (1) a Warburg Pincus
investor is the seller or (2) a Hellman & Friedman investor is the
seller and the Warburg Pincus investors also exercise their rights to
tag along in the sale.
o Farallon has tag-along rights only if (1) a Hellman & Friedman
investor is the seller or (2) a Warburg Pincus investor is the seller
and the Hellman & Friedman investors also exercise their rights to tag
along in the sale.
o Trident II has tag-along rights in the event that a Warburg Pincus
investor or a Hellman & Friedman investor is the seller.
Any sale effected in the public markets (including by means of a "block trade"
effected through any registered broker-dealer), or to any distribution to
partners of any partnership in which a Warburg Pincus investor or a Hellman &
Friedman investor, or any of their respective affiliates, is the general partner
will not give rise to any tag-along rights.
-21-
In the event that a Warburg Pincus investor and/or a Hellman & Friedman
investor proposes to transfer preference shares, class A warrants or common
shares issued upon conversion or exercise of such securities representing either
51% of the votes then entitled to be cast in the election of directors, or 51%
of our then outstanding common shares (taking into account common shares
issuable upon conversion of preference shares) in a transaction, or in a series
of related transactions, to a single person or group, the Warburg Pincus
investors and the Hellman & Friedman investors have the right to require that
Trident II participate in such transaction on a ratable basis.
Restrictions on Transfer. Each investor has agreed not to sell more than
one-third of the shares purchased in its original investment until the earliest
to occur of
o November 20, 2002,
o the occurrence of any event that would cause our outstanding class B
warrants to become exercisable, or
o our completion of a registered public offering of common shares the
net proceeds to us of which exceed $25.0 million.
Restrictions on Conversion/Exercise. The investors agreed that the
aggregate number of common shares issuable upon conversion of the preference
shares or exercise of the class A warrants (including by operation of the
anti-dilution provisions therein) issued under the subscription agreements will
be limited to an amount that, together with the 140,380 common shares issued to
Marsh & McLennan Risk Capital Holdings Ltd. on November 20, 2001 in cancellation
of its existing class A warrants, is equal to 19.9% of the number or voting
power of our common shares issued and outstanding prior to closing, unless and
until we receive the Requisite Nasdaq Approval. The maximum amount that may be
converted or exercised by any investor is equal to that investor's ratable
portion of the total amount that may be converted or exercised by all investors.
The investors agreed that they will require their transferees to agree to this
restriction.
Prior to receipt of the Requisite Regulatory Approval, the investors agreed
not to convert any preference shares or exercise class A warrants issued under
the subscription agreements unless all necessary approvals for the ownership of
common shares issued upon such conversion or exercise have been obtained. In
addition, each GE investor has agreed not to convert any preference shares or
exercise any class A warrants until such time as any required waiting period
under the HSR Act has expired or been terminated.
Restrictions on Dividends and Share Repurchases. We agreed not to declare
any dividend or make any other distribution on our common shares, and not to
repurchase any common shares, until we have repurchased from the principal
investors, on a pro rata basis based on the amount of each principal investor's
retained investment in the company at the time of such repurchase, preference
shares having an aggregate value of $250.0 million, at a per share price
acceptable to the principal investors (subject to the exception described under
"-- The Subscription Agreement -- Purchase Price Adjustments -- Final
Adjustment").
Termination. The shareholders agreement terminates upon the earlier to
occur of:
o November 20, 2011; or
-22-
o mutual written agreement of us and the principal investors.
Employment Arrangements
In connection with the transaction, Arch Reinsurance Ltd. appointed a new
management team, consisting of Paul B. Ingrey, Dwight R. Evans and Marc
Grandisson. In addition, we appointed John M. Pasquesi as executive vice
chairman of ACGL. We also appointed Constantine Iordanou as chief executive of
Arch Capital Group (U.S.) Inc. Set forth below is a summary of the material
terms of the terms of the employment, restricted share and option agreements
with each of Messrs. Ingrey, Evans, Grandisson, Pasquesi and Iordanou. You
should read these summaries in conjunction with our new 2001 Long-Term Incentive
Plan for New Employees (the "Incentive Plan") and the employment, restricted
share and option agreements, which were filed as an exhibit to the registration
statement on Form S-8 filed with the SEC on January 4, 2002, our quarterly
report on Form 10-Q filed with the SEC on November 14, 2001 or our current
report on Form 8-K filed with the SEC on January 4, 2002, and are incorporated
herein by reference.
Paul B. Ingrey, Dwight R. Evans and Marc Grandisson. Mr. Ingrey has been
appointed to our board of directors and as chief executive officer of Arch
Reinsurance Ltd. His employment agreement provides for an annual base salary of
$750,000.
Mr. Evans has been appointed president of Arch Reinsurance Ltd. His
employment agreement provides for an annual base salary of $500,000.
Mr. Grandisson has been appointed as senior vice president and chief
actuary of Arch Reinsurance Ltd. His employment agreement provides for an annual
base salary of $400,000.
The annual base salary is subject to review annually for increase at the
discretion of the board. The target rate for the annual cash bonus is 100% of
the annual base salary. Messrs. Ingrey, Evans and Grandisson are eligible to
receive annual cash bonuses and stock-based awards at the discretion of our
board and to participate in our employee benefit programs. The initial term of
each employment agreements ends on October 23, 2004, but we or the executive may
terminate his employment at any time. The agreement will be automatically
extended for additional one-year periods, unless we or the executive gives
notice at least 60 days prior to the expiration of the original term or any
extended term. The agreement provides that if the employment of Mr. Ingrey, Mr.
Evans or Mr. Grandisson is terminated without cause or for good reason before
October 23, 2004, he will be entitled to receive an amount equal to his annual
base salary.
Each of Messrs. Ingrey, Evans and Grandisson agreed that, during the
employment period and for the period of two years after termination of
employment, he will not compete with the businesses of the company or any of its
subsidiaries as such businesses exist or are in process or being planned as of
the date of termination. The non-competition period will be one year following
termination if we terminate his employment without cause, he terminates for good
reason or he gives notice of his intent not to extend his employment term in
accordance with the employment agreement. In such case, we may extend the
non-competition period to up to an additional six months following this one-year
period if we pay his base salary for the additional six-month period. Each of
Messrs. Ingrey, Evans and Grandisson also agreed that he will not, for a period
of two years following termination, induce
-23-
or attempt to induce any of our employees to leave his or her position with the
company or induce any customer to cease doing business with us.
On October 23, 2001, as inducements essential to their entering into
employment agreements, we granted Messrs. Ingrey, Evans and Grandisson
restricted shares and options under the Incentive Plan as set forth in the table
below.
Name Options Restricted Shares
---------------------------------- -------- -----------------
Paul B. Ingrey.................... 422,407 422,407
Dwight R. Evans................... 100,000 50,000
Marc Grandisson................... 37,500 12,500
The options are exercisable at $20.00 per share and expire on October 23,
2011. For each of Messrs. Ingrey, Evans and Grandisson, one-third of his options
vested and became exercisable at the closing of the investments, one-third will
become exercisable on October 23, 2002 and the remaining one-third will become
exercisable on October 23, 2003. If we terminate any of Messrs. Ingrey, Evans or
Grandisson without cause, the terminated employee's options will remain
exercisable (to the extent then exercisable) for 90 days following termination
of employment (but not beyond the term of the option). In the event that any
such employee ceases to be an employee due to death or permanent disability, all
such employee's options will vest in full and remain exercisable for the
remainder of the term of the option.
The restricted shares will vest on October 23, 2004, in the case of Messrs.
Ingrey and Evans, and on October 23, 2006, in the case of Mr. Grandisson. If any
of Messrs. Ingrey or Evans is terminated due to his death or permanent
disability, the restricted shares granted to such employee will vest based upon
the following schedule:
Vested Amount
Date of Termination Upon Termination
--------------------------------------------------- ----------------
Prior to first anniversary of grant date........... 1/3 of shares
Prior to second anniversary of grant date, but
after first anniversary of grant date.............. 2/3 of shares
After second anniversary of grant date............. All shares
If Mr. Grandisson is terminated due to his death or permanent disability, the
restricted shares granted to him will vest based upon the following schedule:
Vested Amount
Date of Termination Upon Termination
---------------------------------------------------- ----------------
Prior to first anniversary of grant date............ 1/5 of shares
Prior to second anniversary of grant date, but
after first anniversary of grant date............... 2/5 of shares
Prior to third anniversary of grant date, but
after second anniversary of grant date.............. 3/5 of shares
Prior to fourth anniversary of grant date, but
-24-
after third anniversary of grant date............... 4/5 of shares
After fourth anniversary of grant date.............. All shares
Any unvested shares will be forfeited if the employee otherwise terminates his
service with us. Further, in the event that any of Messrs. Ingrey, Evans or
Grandisson is terminated within two years after a change of control without
cause or due to permanent disability or such employee terminates his employment
for good reason, all of that employee's restricted shares will vest immediately
upon such termination.
John Pasquesi. Mr. Pasquesi has been appointed executive vice chairman of
our company. Mr. Pasquesi's employment agreement provides for an annual base
salary of $30,000. The term of the employment agreement ends on October 24,
2003, but we or Mr. Pasquesi may terminate his employment at any time. The
agreement provides that if Mr. Pasquesi's employment is terminated without cause
or for good reason before October 24, 2003, he will be entitled to receive an
amount equal to six months of his monthly base salary, reduced by amounts he
receives from other employment or self employment during such period. As an
executive officer of the company, he is not entitled to any additional
compensation for his service as a director of the company. Mr. Pasquesi agreed
that he will not, for a period of two years following termination of employment,
induce or attempt to induce any of our employees to leave his or her position
with the company.
On October 23, 2001, as an inducement essential to his entering into the
employment agreement, we granted Mr. Pasquesi options under our Incentive Plan
to purchase 375,473 common shares at an exercise price of $20.00 per share.
These options will vest on October 23, 2003 and expire on October 23, 2011. If
Mr. Pasquesi's employment is terminated without cause or for good reason or due
to his death or permanent disability, these options will vest and be exercisable
for the remainder of the option period. If he terminates his employment without
good reason or his employment is terminated by us without cause his unvested
options will be forfeited, and his vested options, to the extent then
exercisable, may be exercised for the remainder of the option period.
In addition, on October 23, 2001, in consideration for his providing
structuring and advisory services to us in connection with the investment, we
granted Mr. Pasquesi options to purchase 750,946 common shares at an exercise
price of $20.00 per share. These options vested upon grant and expire on October
23, 2011. This grant of options to purchase 750,946 common shares will be
rescinded if it is not approved by our shareholders prior to October 23, 2002.
We will seek shareholder approval of this grant at our next annual general
meeting, and the investors have committed to vote in favor of approval of these
grants. Your approval of this grant is not being sought at this special general
meeting.
Constantine Iordanou. Mr. Iordanou has been appointed to our board of
directors and as chief executive officer of Arch Capital Group (U.S.) Inc. As
chief executive officer of Arch Capital Group (U.S.) Inc., Mr. Iordanou will be
responsible for the general management and oversight of the U.S. insurance
operations of Arch Capital Group (U.S.) Inc. and its affiliates.
His employment agreement provides for an annual base salary of $1,000,000.
His base salary is subject to review annually for increase at the discretion of
the board of Arch Capital Group (U.S.) Inc. Mr. Iordanou is eligible to
participate in an annual bonus plan on terms established from time to time by
-25-
the board of Arch Capital Group (U.S.) Inc. and to participate in our employee
benefit programs. The target rate for the annual cash bonus is 100% of his
annual base salary.
The initial term of Mr. Iordanou's employment agreement ends on December
20, 2006, but we or Mr. Iordanou may terminate his employment at any time. The
agreement provides that it will be automatically extended for successive
one-year periods after the initial five-year term unless either we or Mr.
Iordanou gives at least 12 months notice of the intention not to renew.
The agreement provides that if Mr. Iordanou's employment is terminated by
his death, he will receive a prorated portion of his bonus that would have been
paid for the year of his death and an amount equal to two times the sum of his
base salary and target annual bonus payable in a lump sum. His agreement also
provides that if his employment is terminated by permanent disability, he will
receive a prorated portion of his bonus that would have been paid for the year
in which he becomes disabled, as determined by the board, and an amount equal to
40% of his base salary payable in monthly installments during the period of his
disability extending through the time period provided for the company's
disability plan. The agreement further provides that if we terminate Mr.
Iordanou's employment without cause or he resigns for good reason, he will
receive a prorated portion of his bonus that would have been paid for the year
of his termination and an amount equal to two times the sum of his base salary
and target annual bonus payable over an 18-month period in equal monthly
installments. Mr. Iordanou's major medical insurance coverage benefits pursuant
to his employment agreement shall continue for 18 months after the date of
termination in the event that (1) his employment ends due to death or permanent
disability, (2) he is terminated other than for cause or (3) he resigns for good
reason (or until such time as he has major medical insurance coverage under the
plan of another employer). The agreement also provides that if Mr. Iordanou's
employment is terminated by the company for cause or he resigns other than for
good reason, he will receive an amount equal to his base salary through the date
of termination.
Mr. Iordanou has agreed that, during the employment period and for the
period of 18 months after termination of employment, he will not compete with
the businesses of the company or any of its subsidiaries as such businesses
exist or are in process or being planned as of the date of termination. If we
terminate Mr. Iordanou's employment without cause or he terminates for good
reason, the term of his non-competition period will extend only as long as he is
receiving benefits under the company's major medical insurance coverage.
Further, Mr. Iordanou has agreed to extend the non-competition period for a
period of 18 months in the event of termination due to the expiration of the
five-year term of his agreement if he is paid an amount equal to two times his
base salary and annual target bonus (payable in equal monthly installments over
that period) and he remains covered by the company's major medical insurance
plan. Mr. Iordanou also agreed that he will not, for an 18-month period
following his date of termination, induce or attempt to induce any of our
employees to leave his or her position with the company or induce any customer
to cease doing business with us.
As inducements essential to his entering into his employment agreement, as
of January 1, 2002, we granted Mr. Iordanou, under the Incentive Plan, 106,383
restricted shares as a signing bonus, 325,000 additional restricted shares and
options to purchase 425,000 common shares at an exercise price equal to $23.50
per share.
Mr. Iordanou's options expire on January 1, 2011. One-third of his options
vested and became exercisable on the date of grant; one-third will become
exercisable on January 1, 2002; and the remain-
-26-
ing one-third will become exercisable on January 1, 2003. In the event that his
employment terminates due to his death or permanent disability, all of Mr.
Iordanou's options shall immediately vest and become exercisable. In the event
that Mr. Iordanou is terminated for cause, all of his options will cease to
exercisable and will be immediately forfeited. In the event that we terminate
his employment other than for cause or he resigns for good reason, Mr.
Iordanou's options will vest according to the schedule in the preceding
paragraph and have a remaining term of three years following termination. In the
event of termination for any other reason, all vested options held by Mr.
Iordanou will remain exercisable for a period of 90 days from termination. To
the extent that any of Mr. Iordanou's options have not vested at the time of his
termination, the options will be forfeited.
The restricted shares Mr. Iordanou received as a signing bonus will vest on
December 31, 2002, and the remainder of his restricted shares will vest on
December 31, 2006. In the event that his employment terminates due to his death
or permanent disability, by the company without cause or he resigns for good
reason, all of his restricted shares will immediately vest. In the case of such
termination, however, the newly vested shares may not be transferred (1) in the
case of restricted shares granted as a signing bonus, until December 31, 2002
and (2) in the case of all other restricted shares, until December 31, 2006. In
the event of termination for any other reason, all restricted shares held by Mr.
Iordanou will be forfeited.
Interests of Certain Persons
Management Subscription. We entered into a management subscription
agreement, pursuant to which certain members of management (or entities
affiliated with them) agreed to purchase preference shares and class A warrants
on the same economic terms as the principal investors. The management
subscription agreement was filed as an exhibit to our quarterly report on Form
10-Q filed with the SEC on November 14, 2001 and is incorporated herein by
reference.
On November 20, 2001, each of the persons or entities listed purchased
preference shares and class A warrants for the amount opposite his or its names
set forth in the table below:
Name Amount
------------------------------------------------------ -----------
Sound View Partners LP (an entity affiliated with
Robert Clements).................................... $2,000,000
Otter Capital LLC (an entity affiliated with
John M. Pasquesi)................................... 7,500,000
Peter A. Appel........................................ 1,000,000
Paul B. Ingrey........................................ 2,000,000
Dwight R. Evans....................................... 400,000
Marc Grandisson....................................... 250,000
------------
Total........................................ $13,150,000
===========
Incentive Compensation for Management and Directors. Also in connection
with the investments, certain directors and members of management were granted
stock-based awards under our existing incentive compensation plans or otherwise,
as described below. The restricted share and option agreements were filed as
exhibits either to our quarterly report on Form 10-Q filed with the SEC on
November 14, 2001 or our current report on Form 8-K filed with the SEC on
January 4, 2002.
-27-
Robert Clements. Mr. Clements, our chairman, was granted a total of
1,689,629 restricted shares. Of this total, 1,668,157 restricted shares were
granted on October 23, 2001 and 21,472 restricted shares were granted on
November 19, 2001. The restricted shares will vest in five equal annual
installments commencing on October 23, 2002. However, if Mr. Clements' service
as chairman is terminated by us or is not continued by us for any reason, or his
service terminates due to his death or permanent disability, the restricted
shares will vest in full upon such termination of service. Any unvested shares
will be forfeited if Mr. Clements otherwise terminates his service with us. In
addition, Mr. Clements has agreed that, in the event his service is terminated
by us prior to the fifth anniversary of the date of grant, he will not compete
with us during the period ending on the later of such fifth anniversary or one
year following such termination of service. These grants to Mr. Clements will be
rescinded if they are not approved by our shareholders prior to October 23,
2002. We will seek shareholder approval of these grants to Mr. Clements at our
next annual general meeting, and the investors have committed to vote in favor
of approval of these grants. Your approval of these grants is not being sought
at this special general meeting.
In connection with these transactions, we entered into a retention
agreement with Mr. Clements, which replaced our existing retention and change in
control agreement with Mr. Clements. Under the retention agreement, he will
continue to receive compensation at an annual rate equal to one-half of the
salary of ACGL's chief executive officer, payable in restricted shares that vest
on January 1 of the following year. Mr. Clements will continue to be eligible to
receive a cash bonus at the discretion of the compensation committee. If Mr.
Clements's service as chairman of our board is terminated for any reason, he
will be entitled to receive an amount equal to a prorated portion of his
compensation for that year. In addition, a subsidiary of ACGL has agreed to make
a loan of $13,530,000 to Mr. Clements, which will be used to pay income and self
employment taxes, payable in April 2002, on the restricted shares granted to him
on October 23, 2001. The loan will bear interest at the applicable federal rate
and mature on the fifth anniversary of borrowing. If we terminate Mr. Clements'
service as chairman of the board for cause, the loan will become immediately
payable. Mr. Clements will receive additional compensation in cash in an amount
sufficient to defray the interest cost. In addition, we have agreed to make
gross-up payments to him in the event of certain tax liabilities. Mr. Clements
agreed that, for a period of one year after termination of service, he will not
induce or attempt to induce any of our employees to leave his or her position
with the company. In connection with these arrangements, Mr. Clements waived his
right to receive any non-employee director compensation. Mr. Clements' previous
retention and change in control agreement provided that upon involuntary
termination (other than for cause) or constructive termination within 24 months
following a change in control, Mr. Clements would be entitled to a payment equal
to 2.99 times the sum of his annual compensation plus his bonus for the previous
year. This provision is no longer in effect.
Peter Appel. Mr. Appel, our chief executive officer, was granted options to
purchase a total of 422,407 common shares at an exercise price of $20.00 per
share. Of these options, 50,000 vested and became exercisable upon grant;
172,407 will become vested and exercisable on the Vesting Date, and 200,000 will
become vested on the Vesting Date and become exercisable on the later of (x) the
Vesting Date and (y) the earliest of (i) our common shares trading at or above
$30.00 per share for 20 out of 30 consecutive trading days, (ii) the occurrence
of a change of control and (iii) the date on which no class B warrants are
outstanding. "Vesting Date" means the earlier of (1) the date we have
consummated the sale or other disposition or settlement of at least 50% of
certain of our non-core assets and (2) October
-28-
23, 2002. If we terminate Mr. Appel's service as chief executive officer for any
reason, his service terminates due to his death or permanent disability, or he
terminates his service for good reason, any unvested options granted to Mr.
Appel will vest in full upon such termination of service and continue to be
exercisable for the remainder of the option period. In the event that Mr. Appel
terminates his service without good reason, any vested options will continue to
be, or become, exercisable for the remainder of the option period, but any
unvested options will be forfeited. In addition, Mr. Appel has agreed that
during the term of his employment and, in the event his service with us is
terminated for any reason, for a period ending two years after his termination,
(1) he will not compete with any of our or our subsidiaries' insurance or
reinsurance businesses as they exist on the date of his termination and (2) he
will not induce or attempt to induce any of our employees to leave his or her
position with the company.
Debra O'Connor and Louis Petrillo. Mr. Petrillo was granted options to
purchase 40,000 common shares and Ms. O'Connor was granted options to purchase
10,000 common shares. These options are exercisable at an exercise price of
$20.00 per share. One-third of these options became exercisable at the closing,
one-third will become exercisable on October 23, 2002 and the remaining
one-third will become exercisable on October 23, 2003. If we terminate Mr.
Petrillo or Ms. O'Connor without cause, the terminated employee's options will
remain exercisable (to the extent then exercisable) for 90 days following
termination of employment (but not beyond the option period). In the event that
any such employee ceases to be an employee due to death or permanent disability,
all such employee's options will vest in full and remain exercisable for the
remainder of the option period.
Directors. In addition, each current director of the company (other than
Messrs. Clements and Appel), and Mr. Ian Heap, who recently resigned from the
board, were granted options to purchase 15,000 common shares at an exercise
price of $20.00 per share. These options vested upon grant and expire on October
23, 2011.
Other. The restricted share awards and option grants for Messrs. Ingrey,
Evans, Pasquesi and Iordanou are described under "--Employment Arrangements."
-29-
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information available to us as of January 4,
2002 with respect to the ownership of our voting shares by (1) each person known
to us to be the beneficial owner of more than 5% of any class of our outstanding
voting shares, (2) each director of ACGL, (3) each executive officer of ACGL and
(4) all of the directors and executive officers of ACGL as a group. Except as
otherwise indicated, each person named below has sole investment and voting
power with respect to the securities shown.
Please note that this table addresses ownership of voting shares; it does
not address the voting power of those shares, which, in some cases, is different
than the percentages set forth below. See "The Special General Meeting --
Limitation on Voting" for a description of current limitations on voting rights
in our bye-laws and in the certificate of designations for the preference shares
and "Proposal 2 --Amendment to Bye-Law 45" for a description of how the
limitations in our bye-laws are proposed to be amended.
Common Shares
---------------------------------------------------------------------------------------------------------------------------
Before Receipt of Requisite After Receipt of Requisite
Nasdaq and Regulatory Nasdaq and Regulatory
Approvals (1) Approvals
------------------------------- ----------------------------------------------
(I) (II) (III) (IV) (V)
Number of Number of
Common Shares Rule 13d-3 Common Shares Rule 13d-3 Fully-Diluted
Beneficially Percentage Beneficially Percentage Percentage
Name and Address of Beneficial Owner Owned (2) Ownership (2) Owned (2) Ownership (2) (3)
---------------------------------------- --------------- ------------- -------------- -------------- -------------
Warburg Pincus (4)...................... 1,514,327 8.8% 20,943,229 57.2% 34.1%
c/o 466 Lexington Avenue
New York, New York 10017
H&F Corporate Investors IV (Bermuda), 842,655 5.1 11,636,491 42.7 18.9
Ltd. (5)............................
c/o A.S.&K. Services Ltd.
41 Cedar Avenue
Hamilton HM 12, Bermuda
Insurance Private Equity Investors, L.L.C. 186,951 1.2 2,585,583 14.2 4.2
(6).................................
3003 Summer Street
Stamford, CT 06905
EQSF Advisers, Inc. and
M.J. Whitman Advisers, Inc. (7)..... 2,235,680 14.3 2,235,680 14.3 3.6
767 Third Avenue
New York, New York 10017
Marsh & McLennan Risk Capital Holdings,
Ltd. (8)............................ 1,542,963 9.8 1,632,231 10.4 2.7
1166 Avenue of the Americas
New York, New York 10036
-30-
Common Shares
---------------------------------------------------------------------------------------------------------------------------
Before Receipt of Requisite After Receipt of Requisite
Nasdaq and Regulatory Nasdaq and Regulatory
Approvals (1) Approvals
------------------------------- ----------------------------------------------
(I) (II) (III) (IV) (V)
Number of Number of
Common Shares Rule 13d-3 Common Shares Rule 13d-3 Fully-Diluted
Beneficially Percentage Beneficially Percentage Percentage
Name and Address of Beneficial Owner Owned (2) Ownership (2) Owned (2) Ownership (2) (3)
---------------------------------------- --------------- ------------- -------------- -------------- -------------
Trident II, L.P. (9).................... 123,910 0.8 1,713,681 9.9 2.8
Craig Appin House
8 Wesley Street
Hamilton HM 11
Bermuda
The Trident Partnership, L.P. (10)...... 1,636,079 9.6 1,636,079 9.6 2.7
Craig Appin House
8 Wesley Street
Hamilton, HM11, Bermuda
Farallon Partners, L.L.C. (11).......... 93,476 0.6 1,292,791 7.6 2.1
One Maritime Plaza
Suite 1325
San Francisco, CA 94111
Artisan Partners Limited Partnership (12) 1,168,000 7.5 1,168,000 7.5 1.9
1000 North Water Street, #1770
Milwaukee, Wisconsin 53202
Beck, Mack & Oliver LLC (13)............ 1,121,100 7.2 1,121,100 7.2 1.8
330 Madison Avenue
New York, New York 10017
Steinberg Asset Management Co., Inc. (14) 1,082,554 6.9 1,082,554 6.9 1.8
12 East 49th Street
New York, New York 10017
Franklin Resources, Inc. (15)........... 842,700 5.4 842,700 5.4 1.4
777 Mariners Island Boulevard
San Mateo, California 94404
Crabbe Huson Group, Inc. (16)........... 809,887 5.2 809,887 5.2 1.3
121 SW Morrison, Suite 1400
Portland, Oregon 97204
Robert Clements (17).................... 2,219,806 13.9 2,315,751 14.4 4.0
Peter A. Appel (18)..................... 454,434 2.8 502,406 3.1 1.4
John L. Bunce, Jr. (19)................. 842,655 5.1 11,636,491 42.7 19.0
-31-
Common Shares
---------------------------------------------------------------------------------------------------------------------------
Before Receipt of Requisite After Receipt of Requisite
Nasdaq and Regulatory Nasdaq and Regulatory
Approvals (1) Approvals
------------------------------- ----------------------------------------------
(I) (II) (III) (IV) (V)
Number of Number of
Common Shares Rule 13d-3 Common Shares Rule 13d-3 Fully-Diluted
Beneficially Percentage Beneficially Percentage Percentage
Name and Address of Beneficial Owner Owned (2) Ownership (2) Owned (2) Ownership (2) (3)
---------------------------------------- --------------- ------------- -------------- -------------- -------------
Michael P. Esposito, Jr. (20)........... 29,472 * 29,472 * *
Paul B. Ingrey (21)..................... 570,687 3.6 666,632 4.2 1.5
Constantine Iordanou (22)............... 573,049 3.6 573,049 3.6 1.4
Kewsong Lee (23)........................ 1,515,690 8.8 20,944,592 57.2 34.1
James J. Meenaghan (24)................. 17,113 * 17,113 * *
John M. Pasquesi (25)................... 778,989 4.7 1,138,784 6.8 2.5
Robert F. Works (26).................... 23,972 * 23,972 * *
Dwight R. Evans (27).................... 84,829 * 104,017 * *
Debra M. O'Connor (28).................. 72,319 * 72,319 * *
Louis T. Petrillo (29).................. 70,131 * 70,131 * *
All directors and executive officers
(13 persons)........................ 7,253,146 36.4% 38,094,730 75.0% 64.5%
Series A Convertible Preference Shares
------------------------------------------------------------------------------------------------------------
(VI) (VII)
Number of Preference Shares Rule 13d-3
Name and Address of Beneficial Owner Beneficially Owned (30) Percentage Ownership (30)
------------------------------------------- ---------------------------- --------------------------
Warburg Pincus (4)......................... 18,939,311 53.1%
H&F Corporate Investors IV (Bermuda),
Ltd. (5)............................... 10,521,839 29.5
Insurance Private Equity Investors, L.L.C. (6) 2,338,186 6.6
Robert Clements (17)....................... 93,527 *
Peter A. Appel (18)........................ 46,763 *
John L. Bunce, Jr. (19).................... 10,521,839 29.5
-32-
Series A Convertible Preference Shares
------------------------------------------------------------------------------------------------------------
(VI) (VII)
Number of Preference Shares Rule 13d-3
Name and Address of Beneficial Owner Beneficially Owned (30) Percentage Ownership (30)
------------------------------------------- ---------------------------- --------------------------
Michael P. Esposito, Jr.................... 0 0
Paul B. Ingrey (21)........................ 93,527 *
Constantine Iordanou....................... 0 0
Kewsong Lee (23)........................... 18,939,311 53.1
James J. Meenaghan......................... 0 0
John M. Pasquesi (25)...................... 350,728 1.0
Robert F. Works............................ 0 0
Dwight R. Evans (27)....................... 18,705 *
Debra O'Connor............................. 0 0
Louis T. Petrillo.......................... 0 0
All directors and executive officers
(13 persons)........................... 30,064,400 84.2%
---------------
* Denotes beneficial ownership of less than 1.0%.
(1) Gives effect to the limitation on conversion of preference shares and
exercise of class A warrants issued under the subscription agreements. See
"The Investment -- Shareholders Agreement -- Restrictions on
Conversion/Exercise."
(2) Pursuant to Rule 13d-3 promulgated under the Exchange Act, amounts shown
include common shares that may be acquired by a person within 60 days of
the date hereof. Therefore, columns (II) and (IV) have been computed based
on (a) 15,641,958 common shares actually outstanding as of January 4, 2002
and (b) common shares that may be acquired within 60 days of the date
hereof upon the exercise of options and warrants and conversion of
preference shares held by the person whose Rule 13d-3 Percentage Ownership
of Common Shares is being computed. Each preference share is convertible
into one common share, subject to adjustments and the aforementioned
limitation on conversion. The preference shares are mandatorily convertible
under certain circumstances. See "The Investment -- Certificate of
Designations for Preference Shares -- Conversion." Under the subscription
agreements, the purchase price for the preference shares is subject to
certain adjustments, which may result in the issuance of additional
preference shares and class A warrants to the purchasers. For a description
of the adjustments, see "The Investment -- Subscription Agreement --
Purchase Price Adjustments."
(3) Amounts shown under column (V) in the above table have been computed based
on (a) 15,641,958 common shares actually outstanding as of January 4, 2002
and, (b) common shares that may be acquired upon the exercise of all
outstanding options and warrants and conversion of all preference shares,
whether or not such options and warrants are exercisable within 60 days and
without giving effect to any limitation on conversion of preference shares
or exercise of class A warrants issued under the subscription agreements.
As of January 4, 2002, there were outstanding (i) class A warrants to
purchase an aggregate of 5,401,707 common shares, (ii) class B warrants to
purchase an aggregate of 150,000 common shares, (iii) options to purchase
an aggregate of 4,525,811 common shares and (iv) 35,687,735 pref-
-33-
erence shares. The class A warrants are currently exercisable at $20 per
share and expire on September 19, 2002. The class B warrants are
exercisable at $20 per share at any time after our common shares have
traded at or above $30 per share for 20 out of 30 consecutive trading days
or a change of control has occurred and expire on September 19, 2005. See
note (2) for a description of the preference shares.
(4) The security holders are Warburg Pincus (Bermuda) Private Equity VIII, L.P.
("WP VIII Bermuda"), Warburg Pincus (Bermuda) International Partners, L.P.
("WPIP Bermuda"), Warburg Pincus Netherlands International Partners I, C.V.
("WPIP Netherlands I") and Warburg Pincus Netherlands International
Partners II, C.V. ("WPIP Netherlands II"). Warburg Pincus (Bermuda) Private
Equity Ltd. ("WP VIII Bermuda Ltd.") is the sole general partner of WP VIII
Bermuda. Warburg Pincus (Bermuda) International Ltd. ("WPIP Bermuda Ltd.")
is the sole general partner of WPIP Bermuda. Warburg, Pincus & Co. ("WP")
is the sole general partner of WPIP Netherlands I and WPIP Netherlands II.
WP VIII Bermuda, WPIP Bermuda, WPIP Netherlands I and WPIP Netherlands II
are managed by Warburg Pincus LLC ("WP LLC"). The foregoing is based on a
Schedule 13D and a Form 3 dated November 30, 2001 filed with the SEC by
these entities. Amounts in columns (I), (II), (III), (IV) and (V) reflect
common shares issuable upon conversion of preference shares or exercise of
class A warrants issued under the subscription agreements.
(5) The security holders are HFCP IV (Bermuda), L.P. ("HFCP IV Bermuda"), H&F
International Partners IV-A (Bermuda), L.P. ("HFIP IV-A Bermuda"), H&F
International Partners IV-B (Bermuda), L.P. ("HFIP IV-B Bermuda") and H&F
Executive Fund IV (Bermuda), L.P. ("HFEF Bermuda," and together with HFCP
IV Bermuda, HFIP IV-A Bermuda and HFIP IV-B Bermuda, the "H&F Funds"). H&F
Investors IV (Bermuda), L.P. ("HFI IV Bermuda") is the sole general partner
of the H&F Funds. H&F Corporate Investors IV (Bermuda) Ltd. ("HFCI
Bermuda") is the sole general partner of HFI IV Bermuda. HFI IV Bermuda may
be deemed to control the H&F Funds. The foregoing is based on a Schedule
13D and a Form 3 dated November 30, 2001 filed with the SEC by these
entities. Amounts in columns (I), (II), (III), (IV) and (V) reflect (a)
common shares issuable upon conversion of preference shares or exercise of
class A warrants issued under the subscription agreements, (b) 1,263 common
shares owned by Mr. Bunce for the benefit of these entities and (c) 100
common shares issuable upon exercise of currently exercisable options held
by Mr. Bunce for the benefit of these entities.
(6) Insurance Private Equity Investors, L.L.C. ("Insurance") is a wholly owned
subsidiary of General Electric Pension Trust ("GEPT"), which is an employee
benefit plan for the benefit of employees of General Electric Company
("GE"). GE Asset Management Incorporated ("GEAM"), a wholly owned
subsidiary of GE, acts as manager of Insurance and as investment manager of
GEPT. Insurance, GEPT and GEAM may be deemed to share beneficial ownership.
Excludes securities held by Orbital Holdings, Ltd., which is an indirect
wholly owned subsidiary of GE, as to which Insurance, GEPT and GEAM
disclaim beneficial ownership. Based on a Schedule 13D filed on November
30, 2001 by these entities. Amounts in columns (I), (II), (III), (IV) and
(V) reflect common shares issuable upon conversion of preference shares or
exercise of class A warrants issued under the subscription agreements.
(7) Based upon a Schedule 13G/A dated July 10, 2001, filed with the SEC jointly
by EQSF Advisers, Inc. and M.J. Whitman Advisers, Inc. ("MJWA"), each an
investment advisor, and Martin J. Whitman. In the Schedule 13G/A, EQSF
reported that it has sole voting power and sole dispositive power with
respect to 1,113,300 common shares and MJWA reported that it has sole
dispositive power with respect to 1,122,380 common shares and sole voting
power with respect to 1,190,305 common shares.
(8) Amounts reflect common shares issuable upon conversion of preference shares
or exercise of class A warrants issued under the subscription agreements
and 1,536,005 common shares owned directly by MMRCH. The preference shares
and class A warrants are held by Marsh & McLennan Capital Professionals
Fund, L.P. and Marsh & McLennan Employees' Securities Company, L.P., which
are beneficially owned by employees of Marsh & McLennan, Inc. A subsidiary
of MMRCH is the sole general partner of these funds.
(9) Amounts reflect common shares issuable upon conversion of preference shares
or exercise of class A warrants issued under the subscription agreements.
(10) Amounts in columns reflect (a) 250,000 common shares owned directly by The
Trident Partnership, L.P. and (b) 1,386,079 common shares issuable upon the
exercise of class A warrants held by The Trident Partnership, L.P. Based
upon a Schedule 13D dated March 27, 1998, filed with the SEC by The Trident
Partnership, L.P.
-34-
(11) The security holders are Farallon Capital Partners, L.P., Farallon Capital
Institutional Partners II, L.P., Farallon Capital Institutional Partners
III, L.P and RR Capital Partners, L.P. Farallon Partners, L.L.C. is the
sole general partner of each of these holders. Amounts in columns (I),
(II), (III), (IV) and (V) reflect common shares issuable upon conversion of
preference shares or exercise of class A warrants issued under the
subscription agreements.
(12) Based upon a Schedule 13G dated February 9, 2001, filed with the SEC by
Artisan Partners Limited Partnership and certain of its affiliates
(collectively, "Artisan"). In the Schedule 13G, Artisan reported that it
has sole voting power and sole dispositive power with respect to 1,168,000
common shares beneficially owned by one or more discretionary clients of
Artisan.
(13) Based upon a Schedule 13G dated January 18, 2001, filed with the SEC by
Beck, Mack & Oliver LLC, an investment advisor. In the Schedule 13G, Beck
reported that it has shared dispositive power with respect to 1,121,100
common shares beneficially owned by its clients.
(14) Based upon a Schedule 13G dated February 14, 2001, filed with the SEC
jointly by Steinberg Asset Management Co., Inc. ("SAMC"), an investment
advisor, and Michael A. Steinberg & Co., Inc., a broker-dealer. In the
Schedule 13G, SAMC reported that it has sole voting power with respect to
572,800 common shares and sole dispositive power with respect to 1,082,554
common shares, and Steinberg & Co. reported that it has sole dispositive
power with respect to 2,500 common shares.
(15) Based upon a Schedule 13G dated January 26, 2001, filed with the SEC by
Franklin Resources, Inc. and certain of its affiliates (collectively,
"FRI"). In the Schedule 13G, FRI reported that it has sole voting power and
sole dispositive power with respect to 842,700 common shares beneficially
owned by one or more managed accounts which are advised by investment
advisory subsidiaries of FRI.
(16) Based upon a Schedule 13G dated February 3, 2000, filed with the SEC by the
Crabbe Huson Group, Inc., an investment advisor. In the Schedule 13G,
Crabbe Huson reported that it has shared voting power with respect to
774,287 common shares and shared dispositive power with respect to 809,887
common shares beneficially owned by its clients.
(17) Amounts in columns (I), (II), (III) and (IV) reflect (a) 1,810,600 common
shares owned directly by Mr. Clements (including 1,696,911 restricted
shares, which are subject to vesting), (b) 200,000 common shares issuable
upon exercise of class A warrants owned directly by Mr. Clements, (c)
107,125 common shares issuable upon exercise of currently exercisable
options owned directly by Mr. Clements, (d) 55,000 common shares owned by
Taracay Investors, (e) 39,603 common shares issuable upon exercise of class
A warrants owned by Taracay Investors and (f) common shares issuable upon
conversion of preference shares or exercise of class A warrants owned by
Sound View Partners, L.P. Amount in column (V) includes 107,198 common
shares issuable upon exercise of class B warrants, which are not currently
exercisable within 60 days of the date hereof. Taracay Investors is a
general partnership, the general partners of which consist of Mr. Clements
and members of his family and the managing partner of which is Mr.
Clements. Mr. Clements is the general partner of Sound View.
(18) Amounts in columns (I), (II), (III) and (IV) reflect (a) 134,895 common
shares owned directly by Mr. Appel, (b) 315,800 common shares issuable upon
exercise of currently exercisable options and (c) common shares issuable
upon conversion of preference shares or exercise of class A warrants.
Amount in column (V) includes 372,407 common shares issuable upon exercise
of stock options that are not likely to become exercisable within 60 days
of the date hereof.
(19) Amounts reflect securities held by or the benefit of the entities listed in
note (5). Mr. Bunce is a member of an investment committee of HFCI Bermuda
which has investment discretion over the securities held by the H&F Funds.
Mr. Bunce is a 9.9% shareholder of HFCI Bermuda. All shares indicated as
owned by Mr. Bunce are included because he is a member of our board and is
affiliated with HFCI Bermuda. Mr. Bunce may be deemed to have an indirect
pecuniary interest (within the meaning of Rule 16a-1 under the Exchange
Act) in an indeterminate portion of the shares beneficially owned by the
H&F Funds. Mr. Bunce disclaims beneficial ownership of all shares owned by
the H&F Funds, except to the extent of his indirect pecuniary interest in
the issuer held through the H&F Funds. Based on a Form 3 dated November 30,
2001 filed with the SEC by Mr. Bunce.
-35-
(20) Amounts reflect 9,672 common shares owned directly by Mr. Esposito and
19,800 common shares issuable upon exercise of currently exercisable
options.
(21) Amounts in columns (I), (II), (III) and (IV) reflect (a) 422,407 restricted
shares (all of which are subject to vesting), (b) 140,802 common shares
issuable upon exercise of currently exercisable options and (c) common
shares issuable upon conversion of preference shares or exercise of class A
warrants. Amount in column (V) includes 281,605 common shares issuable upon
exercise of stock options that are not currently exercisable within 60 days
of the date hereof.
(22) Amounts in columns (I), (II), (III) and (IV) reflect (a) 431,383 restricted
shares (all of which are subject to vesting) and (b) 141,666 common shares
issuable upon exercise of currently exercisable options. Amount in column
(V) includes 283,334 common shares issuable upon exercise of stock options
that are not currently exercisable within 60 days of the date hereof.
(23) Amounts reflect (a) securities held by the entities listed in note (4), (b)
1,263 common shares owned directly by Mr. Lee and (c) 100 common shares
issuable upon exercise of currently exercisable options. Mr. Lee is a
general partner of WP, a managing director and member of WP LLC and a
beneficial owner of certain shares of capital stock of WP VIII Bermuda Ltd.
and WPIP Bermuda Ltd. All shares indicated as owned by Mr. Lee are included
because he is a member of our board and is affiliated with these Warburg
Pincus entities. Mr. Lee may be deemed to have an indirect pecuniary
interest (within the meaning of Rule 16a-1 under the Exchange Act) in an
indeterminate portion of the shares owned by WP VIII Bermuda, WPIP Bermuda,
WPIP Netherlands I and WPIP Netherlands II. Mr. Lee disclaims beneficial
ownership of all shares owned by these Warburg Pincus entities. Based on a
Form 3 dated November 30, 2001 filed with the SEC by Mr. Lee.
(24) Amounts reflect 1,813 common shares owned directly by Mr. Meenaghan and
15,000 common shares issuable upon exercise of currently exercisable
options.
(25) Amounts in columns (I), (II), (III) and (IV) reflect (a) 750,946 common
shares issuable upon exercise of currently exercisable options and (b)
common shares issuable upon conversion of preference shares or exercise of
class A warrants. Amount in column (V) includes 375,473 common shares
issuable upon exercise of stock options that are not currently exercisable
within 60 days of the date hereof.
(26) Amounts reflect 5,672 common shares owned directly by Mr. Works and 18,300
common shares issuable upon exercise of currently exercisable options.
(27) Amounts in columns (I), (II), (III) and (IV) reflect (a) 50,000 restricted
shares (all of which are subject to vesting), (b) 33,333 common shares
issuable upon exercise of currently exercisable options and (c) common
shares issuable upon conversion of preference shares or exercise of class A
warrants. Amount in column (V) includes 66,667 common shares issuable upon
exercise of stock options that are not currently exercisable within 60 days
of the date hereof.
(28) Amounts in columns (I) and (II) reflect (a) 14,986 common shares owned
directly by Ms. O'Connor and (b) 57,333 common shares issuable upon
exercise of currently exercisable options. Amounts exclude 6,667 common
shares issuable upon exercise of options that are not currently exercisable
within 60 days hereof.
(29) Amounts in columns (I) and (II) reflect (a) 8,998 common shares owned
directly by Mr. Petrillo and (b) 61,133 common shares issuable upon
exercise of currently exercisable options. Amounts exclude 26,667 common
shares issuable upon exercise of options that are not currently exercisable
within 60 days hereof.
(30) Under the subscription agreements, the purchase price for the preference
shares is subject to certain adjustments, which may result in the issuance
of additional preference shares to the purchasers. For a description of the
adjustments, please see "The Investment -- Subscription Agreement --
Purchase Price Adjustments."
-36-
CERTAIN TAX CONSIDERATIONS
This discussion summarizes certain U.S. federal income tax considerations
that arise in connection with the investment in our company by the principal
investors and the proposed amendments to bye-law 45. The discussion deals only
with persons that are "U.S. Holders" (as defined below) and that hold our common
shares as capital assets. This summary does not address the tax treatment of the
investment or the proposed amendments under applicable state or local tax laws
or the laws of any jurisdiction other than the United States. In addition, this
summary does not address federal alternative minimum tax consequences and does
not address all aspects of U.S. federal income taxation that may be applicable
to holders of common shares in light of their particular circumstances, or to
holders subject to special treatment under U.S. federal income tax law,
including the following:
o banks, securities dealers, financial institutions, mutual funds,
insurance companies, expatriates or tax-exempt organizations;
o holders who are holding shares as part of a hedging or larger
integrated financial or conversion transaction;
o a holder who owns 50% or more of our shares by vote or value;
o holders whose functional currency is a currency other than the U.S.
dollar; and
o holders who are holding shares pursuant to selected retirement plans,
pursuant to the exercise of employee stock options or otherwise as
compensation.
This discussion is based on current provisions of the U.S. Internal Revenue
Code (the "Code"), current and proposed U.S. Treasury regulations, and
administrative and judicial interpretations of the Code and the regulations as
of the date of this proxy statement, all of which are subject to change or
reinterpretation by the Treasury or courts, possibly on a retroactive basis.
Holders of our common shares should note that no rulings have been or are
expected to be sought from the IRS with respect to any of the U.S. federal
income tax consequences discussed in this proxy statement. Holders of our common
shares are urged to consult with their own tax advisors as to the tax
consequences to them of owning common shares.
For purposes of this discussion, the term "U.S. Holder" means a beneficial
owner of common shares that, for U.S. federal income tax purposes, is (1) a
citizen or resident of the United States, (2) a corporation or partnership
created or organized in or under the laws of the United States, or any political
subdivision thereof, (3) an estate the income of which is subject to United
States federal income taxation regardless of its source or (4) a trust if either
(a) a court within the United States is able to exercise primary supervision
over the administration of such trust and one or more United States persons have
the authority to control all substantial decisions of such trust or (b) the
trust has a valid election in effect to be treated as a United States person for
United States federal income tax purposes.
In the case of a U.S. Holder that is a partnership, the tax treatment of a
partner will generally depend upon the status of the partner and the activities
of the partnership. If you are a partner of a partnership holding common shares,
you should consult your tax advisor.
-37-
Taxation of the Company
Personal Holding Company Rules. Whether or not the proposed changes to
bye-law 45 are approved, we and one or more of our subsidiaries could be or
become a personal holding company (a "PHC") for U.S. federal income tax
purposes. A corporation will not be classified as a PHC in a given taxable year
unless at some time during the last half of such taxable year, five or fewer
individuals (without regard to their citizenship or residency) own or are deemed
to own (pursuant to certain constructive ownership rules) more than 50% of the
corporation's shares by value and at least 60% of the adjusted ordinary gross
income of the corporation for such taxable year consists of PHC income (as
defined in Section 543 of the Code). For purposes of the 50% share ownership
test, all of our common shares owned by an investment partnership will be
attributed to each of its partners, if any, who are individuals.
We will use reasonable best efforts to cause us and each of our
subsidiaries not to satisfy the gross income requirement set forth in Section
542(a) of the Code. If, however, we or any of our subsidiaries are or were to
become a PHC in a given taxable year, such company would be subject to PHC tax
(at the highest marginal rate on ordinary income applicable to individuals) on
its "undistributed PHC income" (which, in our case and the case of our foreign
subsidiaries, would include only PHC income that is from U.S. sources and
foreign source income to the extent that such income is effectively connected
with the conduct of a trade or business in the U.S.). PHC income generally would
not include underwriting income or, in our case and the case of our foreign
subsidiaries, investment income derived from non-U.S. sources or dividends
received from non-U.S. subsidiaries. If we or any of our subsidiaries are or
become a PHC, there can be no assurance that the amount of PHC income would be
immaterial.
There can be no assurance that we and each of our subsidiaries are not or
will not become a PHC because of factors including legal and factual
uncertainties regarding the application of the PHC rules, the makeup of our
shareholder base and other circumstances that affect the application of the PHC
rules to us and our subsidiaries.
Taxation of Our Shareholders
Controlled Foreign Corporation Rules. Under the proposed amendments to
bye-law 45, the 9.9% voting restriction applicable to the Controlled Shares of a
U.S. Person (as defined in the proposed amendment) generally would not apply to
the principal investors. As a result of certain attribution rules, we believe,
therefore, that we and our foreign subsidiaries would each become a controlled
foreign corporation (a "CFC"). That status as a CFC would not cause us or any of
our subsidiaries to be subject to U.S. federal income tax. Such status also
would have no adverse U.S. federal income tax consequences for any U.S. Holder
that is considered to own less than 10% of the total combined voting power of
our common shares or those of our foreign subsidiaries. Only U.S. Holders that
are considered to own 10% or more of the total combined voting power of our
common shares or those of our foreign subsidiaries (taking into account common
shares actually owned by such U.S. Holder as well as common shares attributed to
such U.S. Holder under the Code or the regulations thereunder) (a "10% U.S.
Voting Shareholder") would be affected by our status as a CFC. Our bye-laws are
intended to prevent any U.S. Holder from being considered a 10% U.S. Voting
Shareholder by limiting the votes conferred by the Controlled Shares (as defined
in our bye-laws) of any U.S. Person to 9.9% of the total voting power of all our
shares entitled to vote. However, because the principal investors under the
proposed bye-laws
-38-
generally would be entitled to vote their directly owned common shares in full,
a U.S. Holder that is attributed (under the Code or the regulations thereunder)
common shares owned by the principal investors may be considered a 10% U.S.
Voting Shareholder. As long as we are a CFC, a U.S. Holder that is considered a
10% U.S. Voting Shareholder will be subject to current U.S. federal income
taxation (at ordinary income tax rates) to the extent of all or a portion of the
undistributed earnings and profits of us and our subsidiaries attributable to
"subpart F income" (including certain insurance premium income and investment
income) and may be taxable at ordinary income tax rates on any gain realized on
a sale or other disposition (including by way of repurchase or liquidation) of
our common shares to the extent of the current and accumulated earnings and
profits attributable to such shares.
While our bye-laws are intended to prevent any member from being considered
a 10% U.S. Voting Shareholder (except as described above), there can be no
assurance that a U.S. Holder will not be treated as a 10% U.S. Voting
Shareholder, by attribution or otherwise, under the Code or any applicable
regulations thereunder.
Foreign Personal Holding Company Rules. Whether or not the proposed changes
to bye-law 45 are approved, we and one or more of our subsidiaries could be or
become a foreign personal holding company (an "FPHC") for U.S. federal income
tax purposes. A foreign company will not be classified as an FPHC unless, at
some time during the taxable year at issue, five or fewer individuals who are
U.S. citizens or residents own or are deemed to own (pursuant to certain
constructive ownership rules) more than 50% of all classes of its shares
measured by voting power or value and at least 60% (or in general 50% for any
year after the first year that a corporation is an FPHC) of its gross income is
FPHC income (as defined in Section 553 of the Code) (generally including passive
income such as dividends, interest and gains from the sale of stocks and
securities). For purposes of the share ownership test, all of our common shares
owned by an investment partnership will be attributed to each of its partners,
if any, who are individuals.
We will use reasonable best efforts to cause us and each of our
subsidiaries not to satisfy the gross income requirement set forth in Section
552 of the Code. If, however, we or any of our subsidiaries are or were to
become an FPHC, a portion of such company's "undistributed foreign personal
holding company income" (as defined in the Code) would be imputed to all of our
U.S. Holders. Such income would be taxable as a dividend, even if no cash
dividend were actually paid. In such event, subsequent cash distributions would
first be treated as a tax-free return of any previously taxed and undistributed
amounts. In addition, if we or any of our subsidiaries are or become an FPHC in
any year, the heirs or estate of any individual U.S. Holder who dies in the
immediately following year (whether or not we or any of our subsidiaries are an
FPHC in such year) would not be entitled to a "step-up" in the basis of the
common shares which might otherwise be available under U.S. income tax laws.
There can be no assurance that we and each of our subsidiaries are not or
will not become an FPHC because of factors including legal and factual
uncertainties regarding the application of the FPHC rules, the makeup of our
shareholder base and other circumstances that could affect the application of
the FPHC rules to us and our subsidiaries. If we or any of our subsidiaries are
or were to become an FPHC, such company would not be subject to the PHC rules
described above.
Passive Foreign Investment Companies. Sections 1291 through 1298 of the
Code contain special rules applicable with respect to foreign corporations that
are "passive foreign investment companies"
-39-
("PFICs"). In general, a foreign corporation will be a PFIC if 75% or more of
its income constitutes "passive income" or 50% or more of its assets produce
passive income. If we were to be characterized as a PFIC, U.S. Holders would be
subject to a penalty tax at the time of their sale of (or receipt of an "excess
distribution" with respect to) their common shares. In general, a shareholder
receives an "excess distribution" if the amount of the distribution is more than
125% of the average distribution with respect to the shares during the three
preceding taxable years (or shorter period during which the taxpayer held the
stock). In general, the penalty tax is equivalent to an interest charge on taxes
that are deemed due during the period the shareholder owned the shares, computed
by assuming that the excess distribution or gain (in the case of a sale) with
respect to the shares was taxable in equal portions throughout the holder's
period of ownership. The interest charge is equal to the applicable rate imposed
on underpayments of U.S. federal income tax for such period.
The PFIC statutory provisions contain an express exception for income
"derived in the active conduct of an insurance business by a corporation which
is predominantly engaged in an insurance business. . . ." This exception is
intended to ensure that income derived by a bona fide insurance company is not
treated as passive income, except to the extent such income is attributable to
financial reserves in excess of the reasonable needs of the insurance business.
The PFIC statutory provisions contain a look-through rule that states that, for
purposes of determining whether a foreign corporation is a PFIC, such foreign
corporation shall be treated as if it "received directly its proportionate share
of the income" and as if it "held its proportionate share of the assets" of any
other corporation in which it owns at least 25% of the stock. While no explicit
guidance is provided by the statutory language, we believe that under the
look-through rule we would be deemed to own the assets and to have received the
income of our subsidiaries directly for purposes of determining whether we
qualify for the aforementioned insurance exception. We believe that our
interpretation of the look-through rule is consistent with the legislative
intention generally to exclude bona fide insurance companies from the
application of PFIC provisions; there can, of course, be no assurance as to what
positions the IRS or a court might take in the future. We will use reasonable
best efforts to cause us and each of our subsidiaries not to constitute a PFIC
within the meaning of Section 1297 of the Code.
No regulations interpreting the substantive PFIC provisions have yet been
issued. Each U.S. Holder should consult his tax advisor as to the effects of
these rules.
-40-
PROPOSAL 1 -- APPROVAL OF ISSUANCE OF COMMON SHARES UPON
CONVERSION OF PREFERENCE SHARES AND EXERCISE OF
CLASS A WARRANTS AND FULL VOTING POWER OF PREFERENCE SHARES
Purpose and Effect of Shareholder Approval
Our common shares are traded on the Nasdaq Stock Market. Rule 4350(i) of
the National Association of Securities Dealers Inc. requires that companies
whose securities are traded on the Nasdaq Stock Market obtain shareholder
approval before issuing securities under certain circumstances. Under this rule,
we generally may not, except in a public offering, issue or sell common shares,
or securities convertible into or exercisable for common shares, equal to 20% or
more of our common shares outstanding before the issuance or 20% or more of the
voting power outstanding before the issuance for a price less than the greater
of the book or market value of our common shares.
On November 20, 2001, we issued:
o 35,687,735 series A convertible preference shares and 3,776,025 class
A warrants under the subscription agreements; and
o 140,380 common shares to Marsh & McLennan Risk Capital Holdings Ltd.
in exchange for cancellation of its existing class A warrants.
Immediately prior to these issuances, there were 15,044,507 common shares issued
and outstanding (including restricted shares granted under the Long-Term
Incentive Plan for New Employees).
On October 23, 2001, the last trading day prior to our entering into the
subscription agreements and announcing the transactions, the closing price of
our common shares on the Nasdaq Stock Market was $17.44 per share. As of
September 30, 2001, our book value per share, on a primary basis, was
approximately $21.476.
Under the subscription agreements, the investors paid an aggregate purchase
price of $763.15 million. This equates to approximately $21.384 paid for each
preference share plus 0.1058 class A warrant. The per share purchase price at
closing was equal to the book value per share as of June 30, 2001, the latest
date for which a balance sheet was available at the time that we entered into
the subscription agreements, adjusted so that the marketable securities in our
investment portfolio were valued at their estimated fair value as of the third
business day prior to closing. However, since the investors also received class
A warrants as part of this purchase price and may receive additional preference
shares as purchase price adjustments, the preference shares could be deemed to
have been issued at less than the book value of our common shares. In addition,
the class A warrants are exercisable at $20.00 per share, which is also less
than the book value of the common shares at the time of issuance of the class A
warrants.
In order to comply with Rule 4350(i), the investors have agreed that the
aggregate number of common shares issuable upon conversion of the preference
shares or exercise of the class A warrants (including by operation of the
anti-dilution provisions therein) issued under the subscription agreements will
be limited to an amount that, together with the common shares issued to Marsh &
McLennan Risk
-41-
Capital Holdings Ltd. at closing in cancellation of its existing class A
warrants, is equal to 19.9% of the number or voting power of our common shares
issued and outstanding prior to closing, unless and until our shareholders
approve the issuance of common shares in excess of this amount. In addition,
until this approval is obtained, the voting power of the preference shares will
be reduced so that the aggregate voting power of (1) all preference shares
issued under the subscription agreements, (2) the common shares issued to Marsh
& McLennan Risk Capital Holdings Ltd. at closing in cancellation of its existing
class A warrants and (3) common shares issued upon conversion of any preference
shares or upon exercise of the class A warrants issued under the subscription
agreements does not exceed 19.9% of the voting power of all shares of the
company issued and outstanding prior to closing. These limitations are discussed
in more detail under "The Investment -- Certificate of Designations for
Preference Shares -- Voting Rights" and "-- Shareholders Agreement --
Restrictions on Conversion/Exercise."
In order to ensure compliance with Rule 4350(i) described above, we are
seeking shareholder approval of (1) the issuance of common shares upon
conversion of the preference shares and upon exercise of the class A warrants
(including after giving effect to the anti-dilution adjustments therein) issued
under the subscription agreements and (2) removal of the voting limitation
described above so that the terms of the preference shares would entitle the
holder to voting power equal to the common shares on an as-converted basis.
Shareholder approval of the investment is not required as a matter of Bermuda
law or other applicable law or rules or by our bye-laws.
If this proposal and Proposal 2 are approved by shareholders and certain
regulatory approvals are obtained, the Warburg Pincus investors and the Hellman
& Friedman investors will own shares representing 36.9% and 20.5%, respectively,
of the total voting power of all of our issued and outstanding voting shares.
Consequences of Not Approving This Proposal
If the requisite shareholder and regulatory approvals for this proposal and
Proposals 2 and 3 are not obtained within specified periods, the investors will
be entitled to exchange their preference shares and class A warrants for
preference shares and warrants of a newly formed subsidiary of ACGL that will
hold all of our core insurance and reinsurance operations. Such securities of
this newly formed holding company would be convertible into common shares of
that company and otherwise have identical provisions (including registration
rights) as the securities issued at closing, except that the limitations on
conversion and voting would not apply to the extent that such limitations are
not required. The right is intended to permit the holders to create a result
comparable to that which would have occurred if the investors had initially made
their investment in an existing subsidiary of ACGL, rather than in ACGL itself.
The investors would be entitled to exercise this exchange right in whole or in
part, provided that preference shares representing at least $150.0 million in
liquidation preference would be required for the initial exchange. This exchange
right is discussed in more detail under "The Investment -- Subscription
Agreement -- Right to Exchange into Subsidiary Shares."
If the investors become entitled to exercise this exchange right and do so,
the investors would be able to participate directly in the growth of our core
businesses through their equity interest in the new holding company. Other
shareholders of the company would be able to participate only indirectly through
a continuing equity interest in ACGL, which would itself only be a minority
shareholder in the new holding company.
-42-
Required Vote
The affirmative vote of a majority of the voting power of all of our shares
represented at the special general meeting, voting together as a single class,
will be required for approval of this proposal.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" THIS PROPOSAL.
-43-
PROPOSAL 2 -- AMENDMENTS TO BYE-LAW 45
Current Bye-Law 45
Our current bye-law 45 contains a provision limiting the voting rights of
any person who owns (directly, indirectly or constructively the Code) shares
with more than 9.9% of the total voting power of all shares entitled to vote
generally at an election of directors to 9.9% of such voting power. This
provision was intended to prevent us from being characterized as a controlled
foreign corporation under the Code. Our current bye-law 45 also contains a
provision limiting the rights of any group (within the meaning of the Exchange
Act) that owns shares with more than 9.9% of the total voting power of all
shares entitled to vote generally at an election of directors to 9.9% of such
voting power.
Purpose and Effect of the Proposed Amendments
The proposed amendment to bye-law 45 would change these voting limitations
so that the limitation would apply only to votes conferred (directly or
indirectly or by attribution) by shares of ACGL directly, indirectly or
constructively owned (within the meaning of section 958 of the Code) by any U.S.
person, as defined in section 7701(a)(30) of the Code. If the votes so conferred
on such U.S. person would represent more than 9.9% of the voting power of all
shares entitled to vote generally at an election of directors, the votes so
conferred would, in general, be reduced by whatever amount is necessary so that
after the reduction the votes so conferred on such U.S. person constitutes 9.9%
of the total voting power of all shares of the company entitled to vote
generally at any election of directors.
The proposed amendments would allow non-U.S. persons, including the Warburg
Pincus investors and the Hellman & Friedman investors, to have more than 9.9% of
the total voting power of our shares. This change would result in ACGL being
characterized as a controlled foreign corporation, given the current ownership
of our shares.
There may be circumstances in which the votes conferred on a U.S. person
are reduced to less than 9.9% as a result of the operation of bye-law 45 as
proposed to be amended, because of shares, including shares of the Warburg
Pincus investors and the Hellman & Friedman investors, that may be attributed to
that person under the Code.
If this proposal and Proposal 1 are approved by shareholders and the
Requisite Regulatory Approval is obtained, the Warburg Pincus investors and the
Hellman & Friedman investors will own shares representing 36.9% and 20.5%,
respectively, of the total voting power of all of our issued and outstanding
voting shares.
See "Proposal 1 -- Approval of Issuance of Common Shares Upon Conversion of
Preference Shares and Exercise of Class A Warrants and Full Voting Power of
Preference Shares -- Consequences of Not Approving This Proposal" for a
description of certain consequences of not approving this proposal.
-44-
Required Vote
The affirmative vote of the shareholders having at least 65% of the voting
power of all of our outstanding shares entitled to vote at the special general
meeting, voting together as a single class, will be required to approve the
proposed amendments to bye-law 45.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE
"FOR" THE AMENDMENTS TO BYE-LAW 45.
The full text of the amended and restated bye-law 45 is attached hereto as
Appendix A.
-45-
PROPOSAL 3 -- AMENDMENTS TO BYE-LAW 75
Current Bye-Law 75
Under bye-law 75 of our current bye-laws, the boards of directors of any of
our subsidiaries that are incorporated in Bermuda, and any other subsidiary
designated by our board of directors, must consist of persons who have been
elected by our shareholders either as (1) alternate directors of our board of
directors or (2) designated company directors.
Purpose and Effect of the Amendments
Since the date of adoption of our current bye-laws, we have formed or
acquired subsidiaries in Bermuda, the Cayman Islands and Barbados, and we may,
in the future, form other subsidiaries in these jurisdictions. The proposed
amendments to bye-law 75 would make the provisions of bye-law 75 expressly
applicable to subsidiaries incorporated under the laws of the Cayman Islands and
Barbados, as well as Bermuda. In addition, the references to alternate directors
would be deleted, since our shareholders have elected specified individuals to
serve as directors of our existing and future Bermuda, Barbados and other
non-U.S. subsidiaries, making the concept of alternate directors unnecessary.
See "Proposal 1 -- Approval of Issuance of Common Shares Upon Conversion of
Preference Shares and Exercise of Class A Warrants and Full Voting Power of
Preference Shares -- Consequences of Not Approving This Proposal" for a
description of certain consequences of not approving this proposal.
Required Vote
The affirmative vote of a majority of the voting power of all of our shares
represented at the special general meeting, voting together as a single class,
will be required to approve the proposed amendments to bye-law 75.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE
"FOR" THE AMENDMENTS TO BYE-LAW 75.
The full text of the amended and restated bye-law 75 is attached hereto as
Appendix B.
-46-
PROPOSAL 4 -- ELECTION OF SUBSIDIARY DIRECTOR
Under our bye-laws, the boards of directors of any of our subsidiaries that
is incorporated in Bermuda, and any other subsidiary designated by our board of
directors, must consist of persons who have been elected by our shareholders
either as (1) alternate directors of our board of directors or (2) designated
company directors.
The persons named below have been nominated to serve as designated company
directors of our non-U.S. subsidiaries indicated below. Unless authority to vote
for this nominee is withheld, the enclosed proxy will be voted for this nominee,
except that the persons designated as proxies reserve discretion to cast their
votes for other persons in the unanticipated event that this nominee is unable
or declines to serve.
Arch Reinsurance Ltd. Dwight R. Evans
Marc Grandisson
Paul B. Ingrey
Constantine Iordanou
Alternative Re Holdings Limited Graham Collis
Joseph King
Debra O'Connor
Alternative Underwriting Services, Ltd. Graham Collis
Joseph King
Debra O'Connor
Mr. Collis, 41, has practiced law at Conyers Dill & Pearman in Bermuda
since 1992, where he has been a partner since 1995. He is a director of Coastal
Caribbean Oils & Minerals Limited and Zambia Copper Investments Limited.
Mr. Evans, 49, has served as president of Arch Reinsurance Ltd. since
October 2001. From 1998 until October 2001, Mr. Evans was executive vice
president of St. Paul Re. From 1983 until 1998, Mr. Evans was employed as
executive vice president for F&G Re Inc., a reinsurance subsidiary of USF&G
Corporation. Prior to that, Mr. Evans served as assistant vice president at
Skandia Reinsurance Company and as a reinsurance underwriter as Prudential
Reinsurance Company (now Everest Re Company).
Mr. Grandisson, 34, has served as senior vice president and chief actuary
of Arch Reinsurance Ltd. since October 2001. From March 1999 until October 2001,
Mr. Grandisson was employed as vice president and actuary of the reinsurance
division of Berkshire Hathaway. From July 1996 until February 1999, Mr.
Grandisson was employed as vice president-director of F&G Re Inc. From July 1994
until July 1996, Mr. Grandisson was employed as an actuary for F&G Re. Prior to
that, Mr. Grandisson was employed as an actuarial assistant from Tillinghast, a
Towers Perrin Co.
Mr. Ingrey, 62, has served as a director of Arch Capital Group Ltd. and as
chief executive officer of Arch Reinsurance Ltd. since October 2001. He was the
founder of F&G Re, Inc. and served as its chairman and chief executive officer
from 1983 to 1996. Prior to that, he was senior vice president of
-47-
Prudential Reinsurance, an underwriter of property/casualty reinsurance. He has
also served as a director of USF&G Corporation (until its sale to The St. Paul
Companies, Inc. in 1978) and E.W. Blanch Holdings, Inc., the holding company for
E.W. Blanch Co., which provides risk management and distribution services
through several subsidiaries (until its sale to Benefield Greig, the
London-based international reinsurance broker, in April 2001) and is currently
on the board of Fairfax Financial Holdings Limited, an insurance and reinsurance
company with a focus on property/casualty insurance.
Mr. Iordanou, 51, has served as a director of the company and as chief
executive officer of Arch Capital Group (U.S.) Inc. since January 1, 2002. From
March 1992 through December 2001, Mr. Iordanou served in various capacities for
Zurich Financial Services and its affiliates, including the senior vice
president of group operations and business development worldwide of Zurich
Financial Services and CEO of Zurich North America. Prior to joining Zurich, he
had senior executive responsibilities with Berkshire Hathaway Group and American
International Group.
Mr. King, 32, has been vice president, mergers & acquisitions of Arch
Capital Group (U.S.) Inc. since May 5, 2000. From 1995 to May 5, 2000, Mr. King
was vice president, treaty property of the company's reinsurance subsidiary.
From 1991 until 1995, Mr. King served as treaty property manager at Everest Re
(formerly known as Prudential Reinsurance Company).
Ms. O'Connor, 41, has been senior vice president, controller and treasurer
of the company since June 9, 2000. From 1995 to June 9, 2000, Ms. O'Connor was
senior vice president and controller of the company's reinsurance subsidiary.
From 1986 until 1995, Ms. O'Connor served at NAC Re Corp. in various capacities,
including vice president and controller. Prior to that, Ms. O'Connor was
employed by General Re and the accounting firm of Coopers & Lybrand.
Required Vote
The affirmative vote of a majority of the voting power of all of our shares
represented at the special general meeting, voting together as a single class,
will be required for the election of designated company directors.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" THE ELECTION OF THE
DESIGNATED COMPANY DIRECTORS INDICATED ABOVE.
-48-
WHERE YOU CAN FIND MORE INFORMATION
As required by law, we file reports, proxy statements and other information
with the SEC (SEC file number: 0-26456). These reports, proxy statements and
other information contain additional information about us. You can inspect and
copy these materials at the SEC's Public Reference Room at 450 Fifth Street,
N.W., Judiciary Plaza, Washington, D.C. 20549. You can obtain information about
the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC
maintains an Internet website that contains reports, proxy and information
statements and other information regarding companies that file electronically
with the SEC. The SEC's Internet address is http://www.sec.gov. You can also
inspect these materials at the offices of the Nasdaq Stock Market, 1735 K
Street, N.W. Washington, D.C. 20006.
The SEC allows us to "incorporate by reference" information into this proxy
statement, which means that we can disclose important information by referring
you to another document filed separately with the SEC. Information incorporated
by reference is considered part of this proxy statement, except to the extent
that the information is superseded by information in this proxy statement. This
proxy statement incorporates by reference the following:
o Our annual report on Form 10-K/A for the year ended December 31, 2000.
o Our quarterly report on Form 10-Q/A for the quarter ended March 31,
2001, our quarterly report on Form 10-Q for the quarter ended June 30,
2001 and our quarterly report on Form 10-Q for the quarter ended
September 30, 2001.
o Our current reports on Form 8-K filed on March 15, 2001, July 6, 2001,
November 8, 2001 and January 4, 2002.
o Our proxy statement on Schedule 14A for our annual meeting of
shareholders held on June 7, 2001 (other than the sections entitled
"Execution Compensation -- Report of the Compensation and Stock Awards
Committees of the Board of Directors," "Performance Graph," "Report of
the Audit Committee of the Board of Directors" and "Audit Fees").
o The description of the common shares contained in our registration
statement on Form 8-A filed on November 7, 2000 pursuant to Section 12
of the Exchange Act, including any amendment or report filed for the
purpose of updating such description.
We also incorporate by reference the information contained in all other
documents that we file with the SEC after the date of this proxy statement and
before the meeting. The information contained in any of these documents will be
considered part of this proxy statement from the date these documents are filed.
Any statement contained in this proxy statement or in a document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this proxy statement to the extent
that a statement contained herein or in any other subsequently filed document
which also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this proxy
statement.
-49-
If you are one of our shareholders and would like to receive a copy of any
document incorporated by reference into this proxy statement (which will not
include any of the exhibits to the document other than those exhibits that are
themselves specifically incorporated by reference into this proxy statement),
you should call or write to Arch Capital Group Ltd., [ ], Hamilton, Bermuda,
Attention: Secretary (telephone [ ]). We will provide these documents to our
shareholders, without charge, by first class mail within one business day of the
day we receive a request. In order to ensure timely delivery of the documents
prior to the special general meeting, you should make any such request not later
than [ ], 2002.
-50-
Appendix A
Proposed Amended and Restated Bye-law 45
45. Limitation on voting rights of Controlled Shares
(1) Except as provided in the other paragraphs of this Bye-law 45, every
Member of record owning shares conferring the right to vote present in person or
by proxy shall have one vote, or such other number of votes as may be specified
in the terms of the issue and rights and privileges attaching to such shares or
in these Bye-laws, for each such share registered in such Member's name.
(2) If, as a result of giving effect to the foregoing provisions of this
Bye-law 45 or otherwise, the votes conferred by the Controlled Shares, directly
or indirectly or by attribution, to any U.S. Person would otherwise represent
more than 9.9% of the voting power of all shares entitled to vote generally at
an election of Directors, the votes conferred by the Controlled Shares on such
U.S. Person shall be reduced by whatever amount is necessary so that after any
such reduction the votes conferred by the Controlled Shares to such U.S. Person
shall constitute 9.9% of the total voting power of all shares of the Company
entitled to vote generally at any election of Directors (provided, however, that
(a) votes shall be reduced only (i) in shares of the Company, if any, held by
such U.S. Person within the meaning of Section 958(a) of the Internal Revenue
Code of 1986, as amended (the "Code") and (ii) in shares of the Company if any
(other than shares held directly by the H&F Funds or the WP Funds) held by such
U.S. Person within the meaning of Section 958(b) of the Code, (b) votes shall be
reduced in shares of the Company held directly by the H&F Funds and the WP Funds
only if and to the extent that reductions in the vote of other shares do not
result in satisfaction of the 9.9% threshold set forth in this paragraph (2),
(c) such reduction (or portion thereof) in votes conferred by shares held
directly by an H&F Fund shall not be effective on or after such date, if any, as
such H&F Fund reasonably objects in writing to such reduction (or portion
thereof) after reasonable notice given to such H&F Fund in advance (to the
extent feasible) of any meeting of shareholders (which notice the Company shall
provide in writing) and (d) such reduction (or portion thereof) in votes
conferred by shares held directly by a WP Fund shall not be effective on or
after such date, if any, as such WP Fund reasonably objects in writing to such
reduction (or portion thereof) after reasonable notice given to such WP Fund in
advance (to the extent feasible) of any meeting of shareholders (which notice
the Company shall provide in writing)).
(3) (a) "Controlled Shares" in reference to any person means all shares of
the Company directly, indirectly or constructively owned by such
person within the meaning of Section 958 of the Code;
(b) "U.S. Person" means a United States person as defined in Section
7701(a)(30) of the Code;
(c) "H&F Fund" means the Hellman & Friedman parties to the
Shareholders Agreement by and among the Company and certain
investors dated as of November 20, 2001 (the "Shareholders
Agreement"); and
(d) "WP Fund" means the Warburg Pincus parties to the Shareholders
Agreement.
A-1
(4) Upon written notification by a Member to the Board, the number of votes
conferred by the total number of shares held directly by such Member shall be
reduced to that percentage of the total voting power of the Company, as so
designated by such Member (subject to acceptance of such reduction by the Board
in its sole discretion), so that (and to the extent that) such Member may meet
any applicable insurance or other regulatory requirement or voting threshold or
limitation that may be applicable to such Member or to evidence that such
person's voting power is no greater than such threshold.
(5) Notwithstanding the foregoing provisions of this Bye-law 45, after
having applied such provisions as best as they consider reasonably practicable,
the Board may make such final adjustments to the aggregate number of votes
conferred, directly or indirectly or by attribution, by the Controlled Shares on
any U.S. Person that they consider fair and reasonable in all the circumstances
to ensure that such votes represent 9.9% (or the percentage designated by a
Member pursuant to paragraph (4) of this Bye-law 45) of the aggregate voting
power of the votes conferred by all the shares of the Company entitled to vote
generally at any election of Directors. Such adjustments intended to implement
the 9.9% limitation set forth in paragraph (2) of this Bye-law 45 shall be
subject to the proviso contained in such paragraph (2), but adjustments intended
to implement the limitation set forth in a notification pursuant to paragraph
(4) of this Bye-law 45 shall not be subject to the proviso contained in
paragraph (2).
(6) Each Member shall provide the Company with such information as the
Company may reasonably request so that the Company and the Board may make
determinations as to the ownership (direct or indirect or by attribution) of
Controlled Shares to such Member or to any person to which Shares may be
attributed as a result of the ownership of Shares by such Member.
A-2
Appendix B
Proposed Amended and Restated Bye-law 75
75. Certain Subsidiaries
With respect to any company incorporated under the laws of Bermuda,
Barbados or the Cayman Islands all of the voting shares of which are owned
(directly or indirectly through subsidiaries) by the Company, and any other
subsidiary of the Company designated by the Board of the Company (together, the
"Designated Companies"), the board of directors of each such Designated Company
shall consist of the persons who have been elected by the Members as Designated
Company Directors. Notwithstanding the general authority set out in Bye-law
2(1), the Board shall vote all shares owned by the Company in each Designated
Company to ensure the constitutional documents of such Designated Company
require such Designated Company Directors to be elected as the directors of such
Designated Company, and to elect such Designated Company Directors as the
directors of such Designated Company. The Company shall enter into agreements
with each such Designated Company to effectuate or implement this Bye-law.
B-1
Appendix C
ARCH CAPITAL GROUP LTD.
PROXY CARD FOR SPECIAL GENERAL MEETING OF
STOCKHOLDERS ON , 2002
This proxy is solicited by the board of directors of Arch Capital Group Ltd.
(the "Company"). The undersigned hereby appoints Robert Clements, Peter A. Appel
and Louis T. Petrillo as proxies, each with full power of substitution, to
represent the undersigned and to vote all common shares of the Company held of
record by the undersigned on [ ], 2002, or which the undersigned would otherwise
be entitled to vote at the special general meeting to be held on , 2002 and any
adjournment thereof, upon all matters that may properly come before the special
general meeting. All shares votable by the undersigned will be voted by the
proxies named above in the manner specified on the reverse side of this card,
and such proxies are authorized to vote in their discretion on such other
matters as may properly come before the special general meeting.
PLEASE VOTE, DATE AND SIGN ON REVERSE AND RETURN PROMPTLY IN THE ENCLOSED
ENVELOPE. Please sign this proxy exactly as your name(s) appear(s) on the books
of the Company. Joint owners should each sign personally. Trustees and other
fiduciaries should indicate the capacity in which they sign, and where more than
one name appears, a majority must sign. If a corporation, this signature should
be that of an authorized officer who should state his or her title.
HAS YOUR ADDRESS CHANGED?
__________________________________________
__________________________________________
__________________________________________
PLEASE MARK VOTES AS IN THIS EXAMPLE |X|
ARCH CAPITAL GROUP LTD.
This proxy, when properly executed, will be voted in the manner directed herein
by the undersigned shareholder(s). If no direction is made, this proxy will be
voted FOR the proposals set forth on the reverse of this card.
The undersigned hereby acknowledges receipt of the proxy statement and hereby
revokes all previously granted proxies.
C-1
RECORD DATE SHARES:
Proposals by the Company: FOR AGAINST ABSTAIN
1. To approve the issuance of common shares issuable upon conversion of the |_| |_| |_|
series A convertible preference shares or exercise of the class A warrants
(including by operation of anti-dilution adjustments in the class A
warrants) issued under the subscription agreements dated October 24, 2001,
as amended November 20, 2001 and January 3, 2002, entered into between ACGL
and various investors, to the extent that such common shares and the
140,380 common shares issued on November 20, 2001 represent more than 19%
of the number or voting power of our common shares issued and outstanding
on November 19, 2001, and to approve the provision of full voting power of
the preference shares issued under the subscription agreements to the
extent that such preference shares and the 140,380 common shares issued on
November 20, 2001 represent more than 19% of the voting power of all of our
shares outstanding on November 19, 2001. This approval is being sought in
compliance with the rules applicable to companies whose securities trade on
the Nasdaq Stock Market and is referred to as the Requisite Nasdaq
Approval.
2. To adopt an amendment to our Bye-Law 45 as set forth in Appendix A of, and as more |_| |_| |_|
fully described in, the enclosed proxy statement, which would change the limitation
on voting rights of shareholders so that the limitation would apply only to votes
conferred (directly or indirectly or by attribution) by shares of ACGL directly,
indirectly or constructively owned by any U.S. person.
3 To adopt an amendment to our Bye-Law 75 as set forth in Appendix B of this proxy |_| |_| |_|
statement, which would expressly provide that the directors of our Cayman Islands
and Barbados subsidiaries, as well as our Bermuda subsidiaries, must be elected by
our shareholders as persons designated to be elected as directors of such
subsidiaries..
4 To elect Graham B. R. Collis, Dwight Evans, Marc Grandisson, Paul B. Ingrey, |_| |_| |_|
Constantine Iordanou, Joseph N. King and Debra M. O'Connor as designated company
directors so that they may be elected directors of certain of our non-U.S.
subsidiaries.
Please be sure to sign and date this proxy: Date , 2002
----------------------------
Shareholder sign here Co-owner sign here
------------------------------------- ----------------------------
Mark box at right if an address change or comment has been noted on the
reverse side of this card. |_|
..........................DETACH CARD......................... ..........................DETACH CARD..............
C-2
ARCH CAPITAL GROUP LTD.
Dear shareholder,
Please take note of the important information enclosed with this proxy. The
proposals set forth on this proxy card to approve the issuance of common shares
upon conversion, approve the amendments to bye-laws 45 and 75 and elect
directors of our reinsurance subsidiary require your immediate attention and
approval. These proposals are discussed in detail in the enclosed proxy
materials.
Your vote counts, and you are strongly encouraged to exercise your right to
vote your shares.
Please mark the boxes on this proxy card to indicate how your shares will
be voted. Then sign the card, detach it and return your proxy vote in the
enclosed postage paid envelope.
Your vote must be received prior to the special general meeting on , 2002.
Thank you in advance for your prompt consideration of these matters.
Sincerely,
[SIGNATURE LOGO]
LOUIS T. PETRILLO
Senior Vice President,
General Counsel and Secretary
C-3