SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
SCHEDULE
14A
Proxy
Statement Pursuant to Section 14(a) of the Securities Exchange Act of
1934
Filed
by
the Registrant T
Filed
by
a Party other than the Registrant £
Check
the
appropriate box:
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T
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Preliminary
Proxy Statement
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£
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Confidential,
for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
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£
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Definitive
Proxy Statement
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£
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Definitive
Additional Materials
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£
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Soliciting
Material Pursuant to Rule 14a-11(c) or Rule 14a-12
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PROFESSIONALS
DIRECT, INC.
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(Name
of Registrant as Specified in Its Charter)
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(Name
of Person(s) Filing Proxy Statement, if Other Than the
Registrant)
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Payment
of Filing Fee (Check the appropriate box):
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£
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No
fee required.
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T
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Fee
computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
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(1)
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Title
of each class of securities to which transaction
applies:
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Common
Stock, no par value
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(2)
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Aggregate
number of securities to which transaction applies:
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333,300
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(3)
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Per
unit price or other underlying value of transaction computed pursuant
to
Exchange Act Rule 0-11 (set forth the amount on which the file
fee is
calculated and state how it was determined): The maximum
aggregate value of $23,201,013 was determined by multiplying 333,300
shares of Common Stock by the merger consideration of $69.61 per
share. In accordance with Section 14(g) of the Securities
Exchange Act of 1934, as amended, the filing fee was determined
by
multiplying 0.00003070 by the maximum aggregate value.
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(4)
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Proposed
maximum aggregate value of transaction:
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$23,201,013
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(5)
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Total
fee paid:
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$712
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£
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Fee
paid previously with preliminary materials.
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£
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Check
box if any part of the fee is offset as provided by Exchange Act
Rule
0-11(a)(2) and identify the filing for which the offsetting fee
was paid
previously. Identify the previous filing by registration
statement number or the Form or Schedule and the date of its
filing.
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(1)
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Amount
previously paid:
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(2)
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Form,
Schedule or Registration Statement No.:
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(3)
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Filing
Party:
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(4)
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Date
Filed:
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The
information in this document is not complete and may be
changed.
PRELIMINARY
DRAFT, DATED JULY 20, 2007 – SUBJECT TO
COMPLETION
PROFESSIONALS
DIRECT, INC.
[________],
2007
Dear
Professionals Direct, Inc. Shareholder:
You
are
cordially invited to attend a Special Meeting of shareholders of Professionals
Direct, Inc., to be held at 10 a.m., local time, on [_________], 2007, at
the
Crowne Plaza Grand Rapids, 5700 – 28th Street, S.E., Grand Rapids, Michigan
49546. The attached notice of the special meeting and proxy statement provide
information regarding the matters to be acted on at the special meeting,
including at any adjournment or postponement of the meeting.
At
the
special meeting, you will be asked to consider and vote upon a proposal to
adopt
and approve the Agreement and Plan of Merger, dated as of June 25, 2007,
by and
among Professionals Direct, Inc., The Hanover Insurance Group, Inc., and
its
wholly-owned indirect subsidiary Hanover Acquisition Corp, which we refer
to as
the merger agreement, providing for the merger of Hanover Acquisition Corp.
with
and into Professionals Direct, Inc., which we refer to as the merger, and
to
transact any other business that may properly come before the special meeting
or
any adjournments or postponements of the meeting.
If
Professionals Direct, Inc. shareholders adopt and approve the merger agreement
and the merger is completed, Professionals Direct, Inc. will be the surviving
corporation in the merger and will be a wholly-owned indirect subsidiary
of The
Hanover Insurance Group, Inc., and shareholders of Professionals Direct,
Inc.
will have the right to receive $69.61 in cash, without interest, for each
share
of Professionals Direct, Inc. stock owned.
The
Professionals Direct, Inc. board of directors, acting upon the unanimous
recommendation of a special committee of the board comprised entirely of
independent directors, has unanimously adopted and approved the merger
agreement and merger and determined that they are fair to and in the best
interests of Professionals Direct, Inc. and its
shareholders. The Professionals Direct, Inc. board of
directors unanimously recommends that you vote “FOR” the adoption and approval
of the merger agreement and proposed merger.
The
accompanying proxy statement provides you with detailed information about
the
proposed merger and the special meeting. Please give this material your careful
attention. You also may obtain more information about Professionals Direct,
Inc.
from documents we have filed with the Securities and Exchange
Commission. The filings are available to the public at the SEC’s
website, http://www.sec.gov.
Regardless
of the number of shares you own, your vote is very important. We cannot complete
the merger unless the merger agreement is adopted and approved by the
affirmative vote of holders of a majority of the outstanding shares of
Professionals Direct, Inc. common stock entitled to vote on the proposal.
If you
fail to vote on the proposal to adopt and approve the merger agreement and
merger, the effect will be the same as a vote against the proposal. Whether
or
not you plan to attend the special meeting, please submit your proxy card
included with the proxy statement.
Returning
the proxy card will not deprive you of your right to attend the special meeting
and vote your shares in person. If you receive more than one proxy card because
you own shares that are registered differently, please vote all of your shares
shown on all of your proxy cards. If you complete, sign and submit your proxy
card without indicating how you wish to vote, your proxy will be counted
as a
vote in favor of adoption and approval of the merger agreement and proposed
merger.
Thank
you
for your cooperation and continued support.
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[______],
2007
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Sincerely,
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Stephen
M. Tuuk
President
and Chief Executive Officer
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Neither
the Securities and Exchange Commission nor any state securities commission
has
approved or disapproved the merger, passed upon the merits or fairness of
the
merger or passed upon the adequacy or accuracy of the disclosure in the enclosed
documents. Any representation to the contrary is a criminal
offense.
This
proxy statement is dated [_______], 2007, and is expected to be first mailed
to
shareholders on or about [________], 2007.
PROFESSIONALS
DIRECT, INC.
5211
Cascade Road, S.E.
Grand
Rapids, Michigan 49546
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Notice
of Special Meeting of
Shareholders
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Date:
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[________],
2007
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Time:
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10:00
a.m., local time
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Place:
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Crowne
Plaza Grand Rapids
5700
– 28th
Street, S.E.
Grand
Rapids, Michigan 49546
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To
Our
Shareholders:
You
are
cordially invited to attend a Special Meeting of Shareholders of Professional
Direct, Inc. on [________], 2007. At the meeting, the shareholders
will vote:
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(i)
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To
adopt and approve the Agreement and Plan of Merger dated as of
June 25,
2007, by and among Professionals Direct, Inc., The Hanover Insurance
Group, Inc., and its wholly-owned indirect subsidiary Hanover Acquisition
Corp, referred to as the merger agreement, and the merger of Hanover
Acquisition Corp. with and into Professionals Direct, Inc., referred
to as
the merger. Upon completion of the merger, Professionals
Direct, Inc. will be the surviving corporation in the merger and
will be a
wholly-owned indirect subsidiary of The Hanover Insurance Group,
Inc. Shareholders of Professionals Direct, Inc. will have the
right to receive $69.61 in cash, without interest, for each share
of
Professionals Direct, Inc. stock owned;
and
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(ii)
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To
transact any other business that may properly come before the
special
meeting or any adjournments or postponements of the
meeting.
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You
can
vote at the special meeting if you were a shareholder of record on [______],
2007.
The
Board
of Directors, acting upon the unanimous recommendation of a special committee
of
the board comprised entirely of independent directors, has unanimously adopted
and approved the merger agreement and the merger. Among other
conditions, the merger agreement and the merger must also be adopted and
approved by the affirmative vote of holders of a majority of the issued and
outstanding common shares of Professionals Direct, Inc. entitled to vote
on the
matter. The attached proxy statement gives you detailed information
about the merger and includes a copy of the merger agreement as Appendix
A. You should read these documents carefully.
Directors
and officers of Professionals Direct, Inc. will be present at the special
meeting to answer questions and to discuss the proposed merger. You
are welcomed and urged to attend the special meeting.
The
Board of Directors of Professionals Direct, Inc. unanimously recommends that
you
vote “FOR” the adoption and approval of the merger agreement and the
merger.
We
look
forward to seeing you at the meeting.
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[______],
2007
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By
Order of the Board of Directors,
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Stephen
M. Tuuk
President
and Chief Executive Officer
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Your
vote is important to us. Even if you plan to attend the meeting,
please vote now, by signing, dating and mailing your proxy in the enclosed
envelope.
TABLE
OF CONTENTS
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Page
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SUMMARY
TERM SHEET
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1
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QUESTIONS
AND ANSWERS ABOUT THE SPECIAL MEETING AND THE MERGER
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7
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CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
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11
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THE
SPECIAL MEETING
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12
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Date,
Time and Place
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12
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Matters
to Be Considered
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12
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Record
Date and Quorum
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12
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Required
Vote
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12
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Voting
by Proxy; Revocability of Proxy
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13
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Effect
of Abstentions and Broker Non-Votes
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14
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Shares
Owned by Company Directors and Executive Officers
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14
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Solicitation
of Proxies
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14
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THE
MERGER
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15
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Introduction
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15
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The
Parties to the Merger
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15
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Background
of the Merger
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15
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Recommendation
of the Special Committee and Board of Directors
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18
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Reasons
for the Merger
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18
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Opinion
of PhiloSmith
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19
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Material
U.S. Federal Income Tax Consequences
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24
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Certain
Effects of the Merger
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25
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Effects
on the Company and Our Shareholders If the Merger Is Not
Completed
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26
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Governmental
and Regulatory Approvals
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26
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Interests
of Our Directors and Executive Officers in the Merger
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27
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THE
MERGER AGREEMENT
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29
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Structure
of the Merger
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29
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Closing
of the Merger
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29
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Merger
Consideration and Conversion of the Company Common Shares
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30
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Exchange
of Share Certificates
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30
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Representations
and Warranties
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30
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Covenants
Relating to Conduct of Business
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32
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No
Solicitations and Change in Recommendation by the Company
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33
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Regulatory
Approvals
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35
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Indemnification
and Insurance
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35
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Other
Covenants and Agreements
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35
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Conditions
to the Closing of the Merger
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35
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Termination
of the Merger Agreement
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37
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Termination
Fee
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38
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Governing
Law
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39
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Amendments,
Extensions and Waivers of the Merger Agreement
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39
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OWNERSHIP
OF PROFESSIONALS DIRECT STOCK
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40
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RELATED
MATTERS
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41
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Market
for Common Equity
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41
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Shareholder
Proposals
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41
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Other
Matters
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41
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Where
You Can Obtain Additional Information
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41
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i
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Summary
Term Sheet
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This
summary term sheet highlights only selected information from this proxy
statement relating to the merger of Hanover Acquisition Corp. (the “Purchaser”)
into Professionals Direct, Inc. (the “Company” or “Professionals Direct”) and
may not contain all of the information about the merger and related transactions
that is important to you as a Company shareholder. Accordingly, we
encourage you to carefully read this entire document, including the appendices
(including the merger agreement attached as Appendix A) and the other documents
to which we have referred you. The information contained in this
summary is qualified in its entirety by the more detailed information contained
in this proxy statement. Page references are included in parentheses
to direct you to a more complete discussion of the topics presented in this
summary. Except as otherwise specifically noted in this proxy
statement, “we,” “our,” “us” and similar words in this proxy statement refer to
the Company. In addition, we refer to The Hanover Insurance Group,
Inc. as “Hanover.”
The
Proposed Merger (page __)
In
the
proposed transaction, upon completion of the merger, each outstanding common
share of the Company, other than common shares owned by the Company and its
subsidiaries, will be converted into the right to receive $69.61 in cash,
without interest. As a result of the merger, the Company will become
a wholly-owned indirect subsidiary of Hanover, and the Company common shares
will no longer be publicly traded.
The
Parties to the Merger (page __)
Professionals
Direct, Inc.
5211
Cascade Road, S.E.
Grand
Rapids, Michigan 49546
The
Company is a holding company organized as a Michigan corporation in
1996. Its subsidiaries include Professionals Direct Insurance
Company, whose primary products consist of errors and omissions insurance
for
lawyers. The Company operates through an independent agency system in
over 32 states.
The
Hanover Insurance Group, Inc.
440
Lincoln Street
Worcester,
Massachusetts 01653
Hanover
is a NYSE-listed holding company for a group of insurers, and was organized
as a
Delaware corporation in 1995. Its subsidiaries include The Hanover
Insurance Company, based in Worcester, Massachusetts, and Citizens Insurance
Company of America, based, in Howell, Michigan, which are its principal property
and casualty subsidiaries, First Allmerica Financial Life Insurance Company,
which is its life insurance and annuity subsidiary, and certain other insurance
and non-insurance subsidiaries. The Hanover Insurance Company began
operations as a property and casualty company in 1852. Taken as a
group, Hanover ranks among the top 35 property and casualty insurers in the
United States.
Hanover
Acquisition Corp.
440
Lincoln Street
Worcester,
Massachusetts 01653
The
Purchaser is a Michigan corporation that was formed solely for the purpose
of
entering into the merger agreement and consummating the transactions
contemplated by the merger agreement. It has not conducted any
activities to date other than activities incidental to its formation and
in
connection with the transactions contemplated by the merger
agreement.
1
The
Special Meeting (page __)
Date,
Time and Place (page __)
The
special meeting will be held on [____________], 2007, at the Crowne Plaza
Grand
Rapids, 5700 – 28th Street,
S.E.,
Grand Rapids, Michigan 49546, at 10:00 a.m. local time.
Matters
to be Considered (page __)
You
will
be asked to consider and vote upon (i) a proposal to adopt and approve the
merger agreement and merger, and (ii) the transaction of such other business
as
may properly come before the special meeting. If any other matters are properly
presented at the special meeting for action, the persons named in the enclosed
proxy will have discretion to vote on such matters in accordance with their
best
judgment.
Record
Date and Quorum (page __)
If
you
own Company common shares at the close of business on [_______], 2007, the
record date for the special meeting, you will be entitled to vote at the
special
meeting. You have one vote for each Company common share owned on the
record date. As of [_______], 2007, there were 333,300 common shares
outstanding.
Required
Vote (page __)
Adoption
and approval of the merger agreement and merger require the affirmative vote
of
holders of a majority of the issued and outstanding Company common shares
as of
the close of business on the record date. Consequently, the failure
to submit your proxy or vote in person will have the same effect as a vote
“AGAINST” adoption and approval of the merger agreement and
merger. Abstentions and broker non-votes also will have the same
effect as a vote “AGAINST” adoption and approval of the merger agreement and
merger.
Accordingly,
the Company’s board of directors urges you to complete, date, sign and return
the accompanying proxy card, or, if you hold your shares through a broker
or
other nominee, to follow the separate voting instructions received from your
broker or nominee. If you intend to submit your proxy by mail it must
be received by the Company prior to the commencement of voting at the special
meeting. Where a specification is indicated by the proxy, it
will be voted as specified. If no specification is made, the shares
will be voted “FOR” adoption and approval of the merger agreement and the
merger.
Voting
by Proxy (page __)
If
you
are a registered shareholder (that is, if you hold your Company common shares
in
certificate form), the enclosed proxy represents the number of shares held
of
record by you.
You
may
submit your proxies by mail. Instructions for submitting your proxies
are included on the proxy card.
If
you
hold your shares through a broker or other nominee, you should follow the
separate voting instructions, if any, provided by the broker or other nominee
with the proxy statement. Your broker or nominee may provide proxy
submission through the Internet or by telephone. Please contact your
broker or nominee to determine how to vote.
You
should NOT send share certificates with your proxy card. If the
merger is completed, you will receive a letter of transmittal with instructions
informing you how to send in any common share certificates to the paying
agent
in order to receive the merger consideration.
Revocability
of Proxy (page __)
You
may
revoke your proxy at any time before it is voted, except as otherwise described
below. If you do not hold your shares through a broker or other
nominee, you may revoke your proxy before it is voted by:
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Submitting
a later-dated proxy by mail.
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2
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Sending
a written notice to the Secretary of the Company. You must send
any written notice of a revocation of a proxy so as to be delivered
before
the taking of the vote at the special
meeting.
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·
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Attending
the special meeting and voting in person. If your shares are
held in the name of a broker or other nominee, you must obtain
a proxy,
executed in your favor, from the broker or other nominee that holds
your
shares to be able to vote at the special
meeting.
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If
you
hold your shares through a broker or other nominee, you should follow the
instructions of your broker or other nominee regarding the revocation of
proxies. If your broker or other nominee allows you to submit a proxy
by telephone or the Internet, you may be able to change your vote by submitting
a proxy again by telephone or through the Internet.
Shares
Owned by Company Directors and Executive Officers (page
__)
As
of
[______], 2007, our directors and executive officers owned approximately
20.2%
of the outstanding Company common shares.
The
Merger (page __)
Structure
of the Merger (page __)
Upon
the
terms and subject to the conditions of the merger agreement, the Purchaser,
a
wholly-owned indirect subsidiary of Hanover, will be merged with and into
the
Company. As a result of the merger, we will become a wholly-owned indirect
subsidiary of Hanover.
Merger
Consideration (page __)
In
the
merger, for each Company common share you hold immediately prior to the merger,
you will receive $69.61 in cash, without interest.
Background
of the Merger (page __)
A
description of the process we undertook that led to the proposed merger,
including our discussions with Hanover, is included in the section in this
proxy
statement entitled “The Merger – Background of the Merger.”
Recommendation
of the Special Committee and Board of Directors (page
__)
A
special
committee of our board of directors, comprised entirely of independent directors
and acting with the assistance of its own legal advisors and our legal and
financial advisors, evaluated and negotiated the merger, including the terms
and
conditions of the merger agreement with Hanover and the
Purchaser. The special committee unanimously (i) determined that the
merger agreement and merger are fair to and in the best interests of the
Company
and its shareholders and (ii) recommended to our board of directors that
it
adopt and approve the merger agreement and merger and recommend to our
shareholders that they adopt and approve the merger agreement and
merger.
After
careful consideration, our board of directors, acting upon the unanimous
recommendation of the special committee, unanimously (i) determined that
the
merger agreement and merger are fair to and in the best interests of the
Company
and its shareholders, (ii) adopted and approved the merger agreement and
merger,
and (iii) subject to its fiduciary duties under applicable law, determined
to
recommend that shareholders adopt and approve the merger agreement and
merger.
Reasons
for the Merger (page __)
A
description of the factors considered by our board of directors in unanimously
determining to adopt and approve the merger agreement and merger, and to
recommend that our shareholders adopt and approve the merger agreement and
merger, is included in the section in this proxy statement entitled “The Merger
– Reasons for the Merger.”
3
Opinion
of PhiloSmith Capital Corporation (page __ and Appendix
B)
PhiloSmith
Capital Corporation (“PhiloSmith”), has delivered its opinion, dated June 24,
2007 and confirmed on _______], 2007, to the Company’s board of directors that,
as of June 24, 2007 and [_______], 2007, the consideration to be received
by the
holders of Company common shares in the merger is fair, from a financial
point
of view, to the holders of such shares.
The
full
text of the PhiloSmith opinion is attached to this proxy statement as Appendix
B
and is incorporated into this proxy statement by
reference. Shareholders are urged to read the PhiloSmith opinion in
its entirety. PhiloSmith provided its opinion for the information and
assistance of the Company’s board of directors in connection with its
consideration of the proposed merger. The PhiloSmith opinion
addresses only the fairness, from a financial point of view, as of the date
of
the opinion, of the consideration to be received by the holders of the Company
common shares in the proposed merger, and does not address any other aspect
of
the merger or any other matter. The PhiloSmith opinion is not
intended to be and does not constitute a recommendation to any shareholder
as to
how such shareholder should vote with respect to the merger or any other
matter
and should not be relied upon by any shareholder as such.
Effects
on the Company and our Shareholders if the Merger is not Completed (page
__)
If
the
merger agreement and merger are not adopted and approved by our shareholders
or
if the merger is not completed for any other reason, our shareholders will
not
receive any payment for their shares in connection with the
merger. Instead, the Company will remain an independent public
company. In addition, if the merger agreement is terminated under
certain circumstances, the Company may be obligated to reimburse Hanover
and the
Purchaser their transaction expenses up to $300,000, to pay Hanover a
termination fee of up to $900,000, or both.
Conditions
to the Merger (page __)
Before
the merger can be completed, a number of conditions must be satisfied or
waived. These include:
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·
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adoption
and approval of the merger agreement and merger by the affirmative
vote of
holders of a majority of the Company’s issued and outstanding common
shares;
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·
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the
absence of any legal prohibitions against the
merger;
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·
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approval
of the merger by the Michigan insurance
regulators;
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·
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no
Company material adverse effect or downgrade of the Company’s A.M. Best
rating below “A-“; and
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·
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material
compliance by both the Company and Hanover of their representations,
warranties, covenants and agreements under the merger
agreement.
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No
Solicitation by the Company (page __)
The
merger agreement restricts our ability to solicit or engage in discussions
or
negotiations with third parties regarding specified transactions involving
the
Company or its subsidiaries. Notwithstanding these restrictions,
under certain circumstances and subject to certain conditions, our board
of
directors may, both before and after the adoption and approval of the merger
agreement and merger by our shareholders, respond to a takeover proposal,
change
its recommendation, or terminate the merger agreement and enter into an
agreement with respect to a superior proposal after paying Hanover and the
Purchaser up to $300,000 of their transaction expenses and the termination
fee
specified in the merger agreement.
Termination
of the Merger Agreement (page __)
The
Company and Hanover may agree in writing to terminate the merger agreement
at
any time without completing the merger, even after our shareholders have
adopted
and approved it. The merger agreement may also be terminated at any
time prior to the effective time of the merger under specified circumstances,
including:
4
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·
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by
Hanover or the Company if the merger is not consummated by December
31,
2007, and the terminating party’s material breach of the agreement did not
primarily contribute to the failure of the merger to close by such
date;
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·
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by
Hanover or the Company if the Michigan insurance regulators fail
to
approve the merger or any other governmental entity issues a final
non-appealable order or ruling preventing the
merger;
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·
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by
Hanover or the Company if Company shareholders fail to adopt and
approve
the merger agreement and merger at the special meeting or at an
adjournment or postponement of the special
meeting;
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·
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by
Hanover or the Company if the other party materially breaches or
fails to
perform its representations, warranties or covenants in the merger
agreement, subject to the ability of the breaching party to cure
the
breach within the time period set forth in the merger
agreement;
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·
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by
Hanover if our board of directors (i) withdraws its recommendation
or
approval in respect of the merger agreement or the merger, (ii)
modifies
its recommendation or approval in respect of the merger agreement
or the
merger in a manner adverse to Hanover, (iii) fails to recommend
to
shareholders of the Company that they approve the merger, (iv)
fails, at
the written request of Hanover, to publicly reaffirm within five
business
days after the request, its recommendation or approval in respect
of the
merger agreement or the merger, which public reaffirmation must
also
include, if requested by Hanover, the unconditional rejection of
any other
acquisition transaction, or (v) recommends any proposal other than
by
Hanover or the Purchaser with respect to certain acquisition
transactions;
|
|
|
·
|
by
Hanover if a court or other governmental entity issues a final
non-appealable order or ruling that in the reasonable judgment
of Hanover
(i) prohibits the merger, (ii) is reasonably likely to have a material
adverse effect on the business, operations, assets, financial condition
or
results of operations of the Company and its subsidiaries considered
as a
whole, (iii) prohibits or limits Hanover from exercising all material
rights and privileges pertaining to ownership of the Company or
any of
Parent’s subsidiaries or a material portion of their assets, (iv) compels
Hanover, the Company or their respective subsidiaries to dispose
or hold
separate a material portion of their businesses or assets, or (v)
imposes
any materially burdensome conditions or restrictions on Parent,
the
Company or their respective subsidiaries;
and
|
|
|
·
|
by
the Company if we intend to enter into a definitive acquisition
agreement
for a “superior proposal,” as described in the section in this proxy
statement entitled “The Merger Agreement – No Solicitations and Change in
Recommendation by the Company,” and the Company satisfies each of the
required steps for terminating the merger agreement in such event,
including paying Hanover and the Purchaser up to $300,000 of their
transaction expenses and the termination fee specified in the merger
agreement.
|
Termination
Fees if the Merger Is Not Completed (page __)
We
must
reimburse Hanover and the Purchaser their transaction expenses up to $300,000
and pay Hanover a termination fee of up to $900,000 if the merger agreement
is
terminated under certain circumstances. For more information on the
termination fee, please see the section in this proxy statement entitled
“The
Merger Agreement – Termination Fee.”
5
Interests
of Our Directors and Executive Officers in the Merger (page
__)
Our
directors and executive officers have interests in the merger that are in
addition to, and may be different from, their interests as Company
shareholders. These interests include that Company directors and
executive officers are entitled to continued indemnification and insurance
coverage under the merger agreement.
In
their
capacity as shareholders, two executive officers (one a director) and an
independent director of the Company collectively holding approximately 9.8%
of
the outstanding Company common shares have executed separate voting agreements
in favor of Hanover. Under the voting agreements, these individuals
agree to vote their common shares in favor of adopting and approving the
merger
agreement and merger and against certain actions that may impede or interfere
with the merger, and provide an irrevocable proxy to Hanover in furtherance
thereof.
As
a
condition to Hanover’s obligation to close the merger, our president and chief
executive officer, Stephen M. Tuuk, must execute and deliver to Hanover an
employment agreement acceptable to Hanover. Before the execution of
the merger agreement by Hanover, the Purchaser and the Company, Mr. Tuuk
and
Hanover separately negotiated the terms of the employment agreement that
Mr.
Tuuk would sign at closing.
Governmental
and Regulatory Approvals (page __)
State
insurance laws and regulations generally require that, prior to the acquisition
of an insurance company domiciled in that jurisdiction, the acquiring company
must obtain the approval of the insurance commissioner of that
jurisdiction. In connection with this state approval process, the
necessary application has been made with the insurance regulators of the
State
of Michigan, the domiciliary state of the Company’s insurance
subsidiary. In addition, the insurance laws and regulations of
certain U.S. states require that, prior to an acquisition of an insurance
company doing business in that state or licensed by that state, filings
disclosing certain market share data in the applicable jurisdiction and/or
other
data must be made and in some cases an applicable waiting period must expire
or
be terminated. These additional filings are in the process of being
made.
Although
the Company and Hanover do not expect the insurance regulators to raise
any
significant concerns in connection with their review of the merger, there
is no
assurance that the Company and Hanover will obtain all required regulatory
approvals, or that those approvals will not include terms, conditions or
restrictions that could cause either the Company or Hanover to abandon
the
merger.
Material
U.S. Federal Income Tax Consequences (page __)
The
merger will be a taxable transaction for U.S. federal income tax purposes
to
U.S. holders of Company common shares. For U.S. federal income tax
purposes, you generally will recognize gain or loss from the merger in an
amount
equal to the difference between the amount of cash you receive in the merger
and
the aggregate adjusted tax basis of your Company common shares.
Market
Price of Company Common Shares (page __)
There
is
no active public trading market for the Company common shares. Bid
and asked quotations for the Company common shares may be reported on the
over-the-counter bulletin board (the “OTC”) under the symbol
PFLD. Transactions in the Company common shares are occasionally
effected by individuals through the OTC or on an informal basis. The
prices at which such transactions are effected are only occasionally reported
to
the Company.
6
|
Questions
and Answers About the Special Meeting and the
Merger
|
The
following questions and answers address briefly some questions you may have
regarding the special meeting, the merger agreement and the proposed
merger. These questions and answers may not address all questions
that may be important to you as a shareholder of the Company. Please
refer to the more detailed information contained elsewhere in this proxy
statement, the appendices to this proxy statement and the documents referred
to
in this proxy statement.
|
Q.
|
Who
sent me this proxy
statement?
|
|
A.
|
The
Company’s board of directors sent you this proxy statement and proxy
card. We began mailing this proxy statement and proxy card on
or about [_______], 2007. We will pay for this solicitation,
including the cost of printing and mailing proxy materials to our
shareholders. Proxies will be solicited by mail and may be
solicited, for no additional compensation, by officers, directors
or
employees of the Company or its subsidiaries, by telephone, facsimile,
electronic mail or in person. Brokerage houses and other
custodians, nominees and fiduciaries may be requested to forward
soliciting material to the beneficial owners of common shares of
the
Company, and will be reimbursed for their related
expenses.
|
|
Q.
|
Why
did I receive this proxy statement and proxy
card?
|
|
A.
|
You
received this proxy statement and proxy card because you are being
asked
to attend a special meeting of the Company’s shareholders and because you
owned our common shares as of [_______], 2007, the record date
of the
special meeting. This proxy statement contains important
information about the special meeting and the business to be transacted
at
the special meeting.
You
should carefully read this proxy statement, including its appendices
and
the other documents we refer to in this proxy statement, because
they
contain important information about the merger, the merger agreement
and
the special meeting of the shareholders of the Company. The
enclosed voting materials allow you to vote your shares without
attending
the special meeting.
Your
vote is very important. We encourage you to vote as soon as
possible.
|
|
Q.
|
What
does it mean if I receive more than one proxy
card?
|
|
A.
|
It
means that you have multiple accounts at the transfer agent and/or
with
stockbrokers. Please sign and return all proxy cards to ensure
that all your shares are voted. Details are outlined in the
enclosed proxy card.
|
|
Q.
|
When
and where is the special
meeting?
|
|
A.
|
The
special meeting will be held on [________], 2007, at the Crowne
Plaza
Grand Rapids, 5700 – 28th Street, S.E., Grand Rapids, Michigan 49546, at
10:00 a.m. local time.
|
|
Q.
|
What
is the purpose of the special meeting and what am I being asked
to vote
on?
|
|
A.
|
At
the special meeting, you are being asked to vote on a proposal
to adopt
and approve the merger agreement and proposed merger. A copy of
the merger agreement is attached to this proxy statement as Appendix
A and
is incorporated into this proxy statement by
reference. Pursuant to the terms and conditions of the merger
agreement, the Purchaser will merge with and into the Company,
and each
outstanding common share of the Company, other than common shares
owned by
the Company and its subsidiaries, will be converted into the right
to
receive $69.61 in cash, without interest. As a result of the
merger, the Company will become a wholly-owned indirect subsidiary
of
Hanover, and the Company common shares will no longer be publicly
traded
and will be deregistered under the Securities Exchange Act of
1934.
|
|
Q.
|
What
vote is required to adopt the merger agreement and approve the
merger?
|
|
A.
|
In
order for the merger agreement and merger to be adopted and approved,
holders of a majority of the Company common shares outstanding
as of the
close of business on the record date must vote “FOR”
the
|
7
adoption
and approval of the merger agreement and merger. Each common share in
entitled to one vote. As of [_______], 2007, the record
date, there were 333,300 common shares outstanding. Therefore,
if you do not return your proxy card or attend the special meeting
and vote in person, or if you hold your shares in “street name” and fail to give
voting instructions to the record holder of your shares, it will have the
same
effect as if you voted “AGAINST” the merger agreement and merger.
|
Q.
|
What
do I need to do now?
|
|
A.
|
After
reading and considering the information contained in this proxy
statement,
please submit your proxy as soon as possible. You may submit
your proxy by returning the enclosed proxy card. If you intend
to submit your proxy by mail it must be received by the Company
prior to
commencement of voting at the special meeting. Details are
outlined in the enclosed proxy card. In addition, if you hold
your shares through a broker or other nominee, you may be able
to submit
your proxy through the Internet or by telephone in accordance with
instructions your broker or nominee
provides.
|
|
Q.
|
What
is the proposed
transaction?
|
|
A.
|
The
proposed transaction is the merger of a wholly-owned indirect subsidiary
of Hanover with and into the Company. As a result of the
merger, the Company will become a wholly-owned indirect subsidiary
of
Hanover, and Company common shares will no longer be publicly traded
and
will be deregistered under the Securities Exchange Act of
1934.
|
|
Q.
|
If
the merger is completed, what will I receive for my common
shares?
|
|
A.
|
You
will receive $69.61 in cash, without interest, for each Company
common
share you own.
|
|
Q.
|
Do
any of the Company’s executive officers or directors have any interests in
the merger that may differ from or be in addition to my interests
as a
shareholder?
|
|
A.
|
Yes. In
considering the recommendation of the board of directors with respect
to
the merger agreement, you should be aware that some of the Company’s
directors and executive officers have interests in the merger that
are in
addition to, and may be different from, the interests of our shareholders
generally. For descriptions of these interests, please see the
section in this proxy statement entitled “The Merger – Interests of Our
Directors and Executive Officers in the
Merger.”
|
|
Q.
|
How
does the Company’s board recommend I
vote?
|
|
A.
|
The
Company’s board of directors, acting upon the unanimous recommendation
of
a special committee of the board comprised entirely of independent
directors, unanimously recommends that you vote “FOR” the adoption and
approval of the merger agreement and merger because the board believes
that the merger agreement and merger are fair to and in the best
interests
of the Company and its shareholders. For a more complete
description of our board’s reasons for recommending the merger agreement
and merger, see the section in this proxy statement entitled “The Merger –
Reasons for the Merger.”
|
|
Q.
|
What
happens if I do not return my proxy card or attend the special
meeting and
vote in person?
|
|
A.
|
Because
the affirmative vote of holders of a majority of the issued and
outstanding common shares as of the close of business on the record
date
is needed to adopt and approve the merger agreement and merger,
the
failure to submit your proxy or vote in person will have the same
effect
as a vote “AGAINST” the adoption and approval of the merger agreement and
merger. Abstentions and broker non-votes also will have the
same effect as a vote “AGAINST” the adoption and approval of the merger
agreement and merger.
The
Company’s board of directors urges you to complete, date, sign and return
the accompanying proxy card, or, in the event you hold your shares
through
a broker or other nominee, to follow the separate voting instructions
received from your broker or other
nominee.
|
8
|
Q.
|
May
I change my vote after I have
voted?
|
|
A.
|
Yes. You
can revoke your proxy at any time before it is voted at the special
meeting by any of the following
methods:
|
|
|
·
|
Submitting
a later-dated proxy by mail. If you submit your later-dated
proxy by mail it must be received by the Company prior to the commencement
of voting at the special meeting.
|
|
|
·
|
Sending
a written notice to the Secretary of the Company that is delivered
before
the special meeting to:
|
Professionals
Direct, Inc.
Attn.
Corporate Secretary
P.O.
Box
2679
Grand
Rapids, Michigan 49501-2679
|
|
·
|
Attending
the special meeting and voting in person. If your shares are
held in the name of a broker or other nominee, you must obtain
a proxy,
executed in your favor, from the broker or other nominee that holds
your
shares to be able to vote at the special
meeting.
|
|
|
If
your shares are held in the name of a broker or other nominee,
you should
follow the instructions of your broker or other nominee regarding
the
revocation of proxies. If your broker or other nominee allows
you to submit a proxy by telephone or the Internet, you may be
able to
change your vote by submitting a proxy again by telephone or through
the
Internet.
|
|
Q.
|
If
my broker or bank holds my shares in “street name,” will my broker or bank
vote my shares for me?
|
|
A.
|
Your
broker or bank will not be able to vote your shares without instructions
from you. You should instruct your broker or bank to vote your
shares following the procedure provided by your broker or
bank. Without instructions, your shares will not be voted,
which will have the same effect as if you voted “AGAINST” the adoption and
approval of the merger agreement and
merger.
|
|
Q.
|
Will
I have the right to dissent from the merger and obtain a separate
appraisal for my shares?
|
|
A.
|
No. Shareholders
are not entitled to dissent from the merger, or obtain a separate
appraisal and payment for their common shares in connection with
the
merger.
|
|
Q.
|
When
is the merger expected to be
completed?
|
|
A.
|
We
are working towards completing the merger as quickly as
possible. We expect to complete the merger in the third quarter
of 2007, but we cannot be certain when or if the conditions to
the merger
will be satisfied or, to the extent permitted, waived. The
merger cannot be completed until a number of conditions are satisfied,
including the adoption and approval of the merger agreement and
merger by
the Company’s shareholders at the special meeting and the approval of the
merger by Michigan insurance
regulators.
|
|
Q.
|
Should
I send in my share certificates
now?
|
|
A.
|
No. Shortly
after the merger is completed, you will receive a letter of transmittal
with instructions informing you how to send in your share certificates
to
the paying agent in order to receive your cash payment. You
should use the letter of transmittal to exchange share certificates
for
the cash payment to which you are entitled as a result of the
merger. PLEASE DO NOT SEND IN SHARE CERTIFICATES WITH YOUR
PROXY.
|
|
Q:
|
What
happens if the merger is not
completed?
|
|
A:
|
If
the merger agreement and merger are not adopted and approved by
the
Company’s shareholders or if the merger is not completed for any other
reason, shareholders will not receive any payment for their shares
in
connection with the merger. Instead, the Company will remain an
independent public company and the Company common shares will continue
to
be quoted on the OTC, subject to continued satisfaction of the
conditions
for such quotation. Under specified circumstances, the Company
may be required to pay Hanover a termination fee and/or reimburse
Hanover
and the Purchaser for their transaction expenses as described in
the sections in this proxy statement entitled “The Merger Agreement –
Termination of the Merger Agreement” and “– Termination
Fee.”
|
9
|
Q.
|
Will
I owe taxes as a result of the
merger?
|
|
A.
|
Yes,
if you recognize taxable gain. The merger will be a taxable
transaction for U.S. federal income tax purposes to U.S. holders
of
Company common shares. As a result, to the extent you recognize
taxable gain, the cash you receive in the merger in exchange for
your
Company common shares will be subject to U.S. federal income tax
and also
may be taxed under applicable state, local and foreign income and
other
tax laws. In general, you will recognize gain or loss equal to
the difference between the amount of cash you receive in the merger
and
the aggregate adjusted tax basis of your Company common
shares. Please refer to the section in this proxy statement
entitled “The Merger – Material U.S. Federal Income Tax Consequences” for
a more detailed explanation of the tax consequences of the
merger. You are urged to consult your own tax advisor to
determine the particular tax consequences to you (including the
application and effect of any state, local or foreign income and
other tax
laws) of the receipt of cash in exchange for Company common shares
pursuant to the merger.
|
|
Q.
|
Who
can help answer my other
questions?
|
|
A.
|
If
you need assistance in submitting your proxy or voting your shares
or need
additional copies of the proxy statement or the enclosed proxy
card, you
should contact the Corporate Secretary of the Company at (616)
456-8899. If your broker holds your shares, you should also
call your broker for additional
information.
|
|
Q.
|
Where
can I find more information about the
Company?
|
|
A.
|
We
file reports, proxy statements and other information with the Securities
and Exchange Commission. The filings are available to the
public at the SEC’s website, http://www.sec.gov. You may
inspect our SEC filings at the SEC’s public reference
facilities. For a more detailed description of the information
available, please see the section in this proxy statement entitled
“Related Matters – Where You Can Obtain Additional
Information.”
|
10
|
Cautionary
Statement Regarding Forward-Looking
Statements
|
Information
included in and incorporated by reference in this proxy statement, and
information in documents to which we refer you in this proxy statement, contain
forward-looking statements. Words such as “believes,” “estimates,”
“expects,” “forecasts,” “intends,” “objective,” “predicts,” “projects,”
variations of such words and similar expressions are intended to identify
such
forward-looking statements. Forward-looking statements also include
any statements concerning future financial performance and future business
activities. These forward-looking statements are based on current
expectations, management beliefs and assumptions, and estimates and projections
about us and economic and market factors.
Forward-looking
statements are not guarantees of future performance and are subject to certain
risks, uncertainties and assumptions that are difficult to predict with respect
to timing, extent, likelihood and degree of occurrence. Therefore,
actual results and outcomes may differ materially from those expressed,
forecasted or contemplated by the forward-looking statements. In
addition to other factors and matters contained or incorporated in this
document, including in our Annual Report on Form 10-KSB for the year ended
December 31, 2006, under the heading “Forward-Looking Statements,” we
believe the following risks and matters could cause actual results to differ
materially from those discussed in the forward-looking statements:
|
|
·
|
the
occurrence of any event, change or other circumstance that could
give rise
to the termination of the merger agreement, including circumstances
that
may require us to pay Hanover and the Purchaser up to $1,200,000
of
expense reimbursements and termination
fees;
|
|
|
·
|
the
outcome of any legal proceedings that may be instituted against
the
Company, members of our board of directors and others relating
to the
merger agreement;
|
|
|
·
|
the
inability to complete the merger due to the failure to obtain the
necessary shareholder or regulatory approvals or the failure to
satisfy
other conditions to complete the
merger;
|
|
|
·
|
the
failure of the merger to close for any other
reason;
|
|
|
·
|
a
significant delay in the expected completion of the
merger;
|
|
|
·
|
risks
that the proposed merger disrupts our current plans and
operations;
|
|
|
·
|
risks
associated with the diversion of management attention from ongoing
business operations;
|
|
|
·
|
risks
associated with employee retention as a result of the
merger;
|
|
|
·
|
the
effect of the announcement of the merger on our business relationships,
operating results and business
generally;
|
|
|
·
|
the
amount of the costs, fees, expenses and charges related to the
merger;
|
|
|
·
|
future
business, economic and financial conditions and the legal and regulatory
environment in the markets served by the Company’s
subsidiaries;
|
|
|
·
|
changes
in financial ratings issued by independent organizations, including
A.M.
Best, Standard & Poors and Moody’s;
and
|
|
|
·
|
changes
in the laws, rules and regulations governing insurance holding
companies
and insurance companies, as well as applicable tax and accounting
matters.
|
The
foregoing list and the risks and matters reflected elsewhere in this proxy
statement, in the documents incorporated by reference in this proxy statement
and in the documents to which we refer you in this proxy statement should
not be
construed to be exhaustive.
In
view
of the various uncertainties surrounding forward-looking
statements, you should not place undue reliance on any of
them.
All
forward-looking statements included in this proxy statement speak only as
of the
date of this proxy statement. All forward-looking statements in
documents incorporated by reference into this proxy statement or to which
we
refer you in this proxy statement, speak only as of the date of the document
in
which they were included. We expressly disclaim any obligation to
release publicly any revision or updates to any forward-looking statements,
except to the extent required by law. All subsequent written and oral
forward-looking statements attributable to us or any person acting on our
behalf
are qualified by the cautionary statements in this section.
All
information contained in this proxy statement concerning Hanover, Purchaser
and
their affiliates has been supplied by Hanover and has not been independently
verified by us.
11
|
The
Special Meeting
|
Date,
Time and Place
This
proxy statement is being furnished to Company shareholders as part of the
solicitation of proxies by the Company’s board of directors for use at the
special meeting to be held on [_________], [________], 2007, at the Crowne
Plaza
Grand Rapids, 5700 – 28th Street,
S.E.,
Grand Rapids, Michigan 49546, at 10:00 a.m. local time.
Matters
to Be Considered
The
purpose of the special meeting will be to consider and vote upon a proposal
to
adopt and approve the merger agreement and merger. If any other
matters are properly presented at the special meeting for action, the persons
named in the enclosed proxy will have discretion to vote on such matters
in
accordance with their best judgment.
The
Board of Directors of Professionals Direct unanimously recommends that you
vote
“FOR” the adoption and approval of the merger agreement and the
merger.
Record
Date and Quorum
The
holders of record of Company common shares as of the close of business on
[_______], 2007, the record date, will be entitled to receive notice of,
and to
vote at, the special meeting or any adjournment or postponement
thereof. As of the record date, there were 333,300 Company common
shares outstanding.
A
quorum
of shareholders is necessary to take action at the special
meeting. Holders of a majority of the outstanding shares of the
Company, attending in person or represented by proxy, will constitute a
quorum. Votes cast by proxy or in person at the special meeting will
be tabulated by the inspectors of election appointed for the special
meeting. The inspectors of election will determine whether a quorum
is present at the special meeting.
Abstentions
and “broker non-votes” will be treated as present for purposes of determining
the presence of a quorum. Once a share is represented at the special
meeting, it will be counted for the purpose of determining a quorum at the
special meeting and any adjournment or postponement of the special meeting,
unless the holder is present solely to object at the beginning of the special
meeting to the transaction of any business because the meeting is not lawfully
called or convened. However, if a new record date is set for the
adjourned or postponed special meeting, then a new quorum will have to be
established.
The
record date of the special meeting is earlier than the date of the special
meeting and the date that the merger is expected to be completed. If
you transfer your common shares after the record date but before the special
meeting, you will retain the right to vote at the special meeting, but you
will
have transferred the right to receive the merger consideration. In
order to receive the merger consideration, you must beneficially own your
common
shares through completion of the merger.
Required
Vote
Each
outstanding common share on the record date entitles the holder to one vote
at
the special meeting. Completion of the merger requires, among other
conditions, the adoption and approval of the merger agreement and merger
by the
affirmative vote of holders of a majority of the issued and outstanding Company
common shares as of the close of business on the record date.
In
order
for your Company common shares to be included in the vote, you must submit
your
proxy by returning the enclosed proxy card or you must vote in person at
the
special meeting. If you hold your shares through a broker or other
nominee, you may receive separate voting instructions with this proxy
statement.
12
Voting
by Proxy; Revocability of Proxy
Each
copy
of this proxy statement mailed to Company shareholders is accompanied by
a form
of proxy. Instead of attending the special meeting and voting your
shares in person, you may choose to submit your proxies by mail. If
you choose to vote by mail, simply complete the enclosed proxy card, date
and
sign it, and return it to the Company in the envelope provided. If
you intend to submit your proxy by mail it must be received by the Company
prior
to the commencement of voting at the special meeting. If you sign
your proxy card and return it without marking any voting instructions, your
shares will be voted “FOR” the adoption and approval of the merger agreement and
merger.
If
you
hold your shares through a broker or other nominee, you should follow the
separate voting instructions, if any, provided by the broker or other nominee
with this proxy statement. Your broker or nominee may provide proxy
submission through the Internet or by telephone. Please contact your
broker or nominee to determine how to vote.
You
can
revoke your proxy at any time before the vote is taken at the special meeting,
except as otherwise described below. If you do not hold your shares
through a broker or other nominee, you may revoke your proxy before the proxy
is
voted by:
|
|
·
|
Submitting
a later-dated proxy by mail.
|
|
|
·
|
Sending
a written notice to the Secretary of the Company. You must send
any written notice of a revocation of a proxy so as to be delivered
before
the taking of the vote at the special meeting
to:
|
Professionals
Direct, Inc.
Attention:
Corporate Secretary
|
|
P.O.
Box 2679
|
Grand
Rapids, Michigan 49501-2679
|
|
·
|
Attending
the special meeting and voting in person. Your attendance at
the special meeting will not in and of itself revoke your
proxy. You must also vote your shares at the special
meeting. If your shares are held in the name of a broker or
other nominee, you must obtain a proxy, executed in your favor,
from the
broker or other nominee that holds your shares to be able to vote
at the
special meeting.
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If
your
Company common shares are held in the name of a broker or other nominee,
you
should follow the instructions of your broker or other nominee regarding
the
revocation of proxies. If your broker or other nominee allows you to
submit a proxy by telephone or the Internet, you may be able to change your
vote
by submitting a proxy again by telephone or through the Internet.
All
shares represented by valid, unrevoked proxies we receive through this
solicitation will be voted in accordance with your instructions on the proxy
card. If you do not specify voting instructions on the proxy card,
the shares will be voted “FOR” adoption and approval of the merger agreement and
merger.
If
other
matters do properly come before the special meeting, or at any adjournment
or
postponement thereof, we intend that shares represented by properly submitted
proxies will be voted, or not voted, by and at the discretion of the persons
named as proxies on the proxy card. In addition, the grant of a proxy
will confer discretionary authority on the persons named as proxies on the
proxy
card to vote in accordance with their best judgment on procedural matters
incidental to the conduct of the special meeting, such as a motion to adjourn
or
postpone in the absence of a quorum or a motion to adjourn or postpone for
other
reasons.
Shareholders
should NOT send share certificates with their proxy cards. If the
merger is completed, shareholders of record will receive a letter of transmittal
with instructions informing them how to send in any share certificates to
the
paying agent in order to receive the shareholders’ cash
payment. Shareholders should use the letter of transmittal to
exchange share certificates for the cash payment to which they are entitled
as a
result of the merger.
PLEASE
DO
NOT SEND IN SHARE CERTIFICATES WITH THE PROXY CARD.
13
Effect
of Abstentions and Broker Non-Votes
Absent
specific instructions from the beneficial owner of shares, brokers may not
vote
the shares with respect to the adoption and approval of the merger agreement
and
merger. For purposes of determining adoption and approval of the
merger agreement and merger, abstentions and broker non-votes will have the
same
effect as a vote “AGAINST” the merger agreement and merger.
Accordingly,
the Company’s board of directors urges shareholders to complete, date, sign and
return the accompanying proxy card, or, in the event you hold your shares
through a broker or other nominee, to follow the separate voting instructions
received from your broker or other nominee.
Shares
Owned by Company Directors and Executive Officers
As
of
[______], 2007, directors and executive officers of the Company owned, in
the
aggregate, 67,375 Company common shares, or approximately 20.2% of the voting
power of the issued and outstanding Company common shares. Please see
the section in this proxy statement entitled “Ownership of Professionals Direct
Stock.”
Solicitation
of Proxies
The
expense of soliciting proxies, including the cost of printing and mailing
proxy
materials to our shareholders, will be borne by the Company. Proxies
will be solicited by mail and may be solicited, for no additional compensation,
by officers, directors or employees of the Company or its subsidiaries, by
telephone, facsimile, electronic mail or in person. Brokerage houses
and other custodians, nominees and fiduciaries may be requested to forward
soliciting material to the beneficial owners of common shares of the Company,
and will be reimbursed for their related expenses.
14
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The
Merger
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Introduction
The
Company is seeking adoption and approval by its shareholders of the merger
agreement and merger among Hanover, the Purchaser and the
Company. Upon the terms and subject to the conditions of the merger
agreement, the Purchaser, a wholly-owned indirect subsidiary of Hanover,
will be
merged with and into the Company. As a result of the merger, the
Company will become a wholly-owned indirect subsidiary of Hanover, and Company
shareholders will receive $69.61 in cash, without interest, for each common
share of the Company.
The
Parties to the Merger
Professionals
Direct, Inc.
The
Company is the holding company of Professionals Direct Insurance Company,
whose
primary products consist of errors and omissions insurance for
lawyers. The Company is licensed to transact the business of
insurance in over 32 states. The Company’s executive offices are located at 5211
Cascade Road, S.E., Grand Rapids, Michigan 49546, telephone (616)
456-8899.
The
Hanover Insurance Group, Inc.
Hanover
is a NYSE-listed holding company for a group of insurers, and was organized
as a
Delaware corporation in 1995. Its subsidiaries include The Hanover
Insurance Company, based in Worcester, Massachusetts, and Citizens Insurance
Company of America, based, in Howell, Michigan, which are its principal property
and casualty subsidiaries, First Allmerica Financial Life Insurance Company,
which is its life insurance and annuity subsidiary, and certain other insurance
and non-insurance subsidiaries. The Hanover Insurance Company began
operations as a property and casualty company in 1852. Taken as a
group, Hanover ranks among the top 35 property and casualty insurers in the
United States. Hanover’s executive offices are located at 440 Lincoln
Street, Worcester, Massachusetts 01653.
Hanover
Acquisition Corp.
The
Purchaser is a Michigan corporation that was formed solely for the purpose
of
entering into the merger agreement and consummating the transactions
contemplated by the merger agreement. It has not conducted any
activities to date other than activities incidental to its formation and
in
connection with the transactions contemplated by the merger
agreement. The Purchaser’s mailing address is 440 Lincoln Street,
Worcester, Massachusetts 01653, Attention: Secretary.
Background
of the Merger
From
time
to time our board of directors has reviewed our strategic plans and various
strategic alternatives. In part these discussions stemmed from our
costs of being public, capital constraints and the lack of a liquid market
for
our shareholders wishing to sell stock. From time to time we have
received inquiries from third parties expressing an interest in a possible
investment in our stock or the acquisition of the entire Company.
At
a
regularly scheduled meeting of our board of directors held in June 2006,
our
board once again discussed our strategic plans and alternatives, in part
due to
the perceived strong market interest in specialty insurance
companies. Our board requested our president and chief executive
officer, Stephen M. Tuuk, to initiate discussions with two or three investment
banks in an effort to gain additional perspectives on industry trends and
the
prospects of smaller insurance organizations in our market niche.
In
the
ensuing weeks, Mr. Tuuk had discussions with several investment bankers
specializing in the insurance industry. Tracy T. Larsen, a director,
participated in some of those discussions.
15
At
our
board’s regularly scheduled meeting in September 2006, two investment banking
firms specializing in insurance presented their views on the market, future
trends and their qualifications to assist us in exploring strategic
options. One of those firms was PhiloSmith. Many questions
were asked by our directors and a meaningful discussion ensued. At
the conclusion of the September 2006 meeting, our board approved the formation
of a special committee to further investigate strategic
alternatives. The committee was comprised of three independent
directors: Tracy T. Larsen (Chair); David W. Crooks; and Blake W.
Krueger.
In
the
following weeks, members of the special committee had several discussions
with
investment banking professionals. As a result of those discussions,
the special committee invited representatives of PhiloSmith to make a more
detailed presentation on market conditions and their views of our Company
at the
board’s regularly scheduled November meeting.
Following
PhiloSmith’s board presentation at the November 2006 meeting, our board directed
the special committee to continue its exploration of the availability,
feasibility and desirability of strategic alternatives that may maximize
shareholder value. Because it was thought reasonably possible that
the party that may make the most valuable proposal to our shareholders may
desire investment by Mr. Tuuk, our governance committee recommended and our
board approved that Mr. Tuuk not participate in board deliberation on any
particular strategic alternative where a conflict of interest could
exist. At the time, no consensus existed as to whether the Company
should pursue any alternative to our strategic plan.
Following
the November board meeting, the special committee engaged the law firm of
Foley
& Lardner to act as its legal counsel. Committee members also
considered the engagement of several different investment
banks. Ultimately, the committee retained PhiloSmith to act as a
financial advisor.
Following
its engagement, PhiloSmith representatives had various discussions and meetings
with Mr. Tuuk and, independently, the special committee. A primary
purpose of the meetings with Mr. Tuuk was to obtain information to prepare
a
written information memorandum on our Company. Mr. Larsen
participated in some of those meetings on behalf of the special
committee.
Independently,
PhiloSmith had various discussions with members of the special committee
on a
wide range of possible strategic alternatives. The strategic
alternatives discussed included a significant acquisition by us, a
recapitalization or going private transaction, seeking a significant investor
and a sale of the Company. Also discussed was the process to be used
in exploring certain of those alternatives and appropriate parties to involve
in
that process. Numerous transaction candidates were discussed and
evaluated by PhiloSmith and members of the special committee on several factors,
including, among others, likely interest, strategic fit, financial capability
and transaction experience.
In
late
February and March 2007, PhiloSmith contacted a total of 40 potential strategic
and financial bidders to inquire of their interest in a possible transaction
with a lawyers’ liability insurance company. The strategic entities
contacted included a number of companies engaged in the specialty insurance
business who the special committee believed may offer premium value for the
Company as an entrée into the lawyers’ liability insurance business and a
platform for national expansion. The special committee concluded that
it was reasonably likely such an entity would present a proposal most favorable
to our shareholders.
Of
the 40
parties contacted, 18 executed confidentiality agreements and were provided
a
copy of the information memorandum. Those 18 parties were asked to
submit initial indications of interest describing their interest in a potential
transaction with us, and a value range. Throughout this process,
PhiloSmith remained in close contact with the special committee, and members
of
the special committee discussed developments frequently.
On
or
before April 19, 2007, eight written indications of interest were
received. Each was carefully reviewed by the special committee with
input from its advisors.
The
special committee reported to our board (other than Mr. Tuuk) at a meeting
held
on April 25, 2007. At that meeting, our board directed the special
committee, acting through PhiloSmith, to have further discussions with six
of
the parties who had submitted the most favorable indications of
interest. These parties were provided additional
16
information
concerning the Company and were invited to hear a presentation by our
management. The management presentations began the first week in May
and ended May 21, 2007.
On
April
26, 2007, we issued a press release stating that we had formed a special
committee and engaged PhiloSmith to assist us in exploring strategic
alternatives to maximize shareholder value. After this release, three
additional parties, each with professional lawyers’ liability insurance
businesses, contacted PhiloSmith. One of these parties entered into a
confidentiality agreement, received the information memorandum and met with
Company management during May, 2007.
Following
the management presentations, additional information and access to Mr. Tuuk
were
made available to the interested parties. PhiloSmith maintained
active contact with the parties to ensure that they were provided all
information necessary to enable them to present their most favorable
proposal. Each party was provided final bid instructions requiring
the submission of final proposals to PhiloSmith on or before May 31,
2007.
All
of
the parties who had participated in the management presentations made timely
proposals to acquire us, ranging in value from $38.50 to $69.61 per
share. The special committee reviewed each proposal in
detail. PhiloSmith told the special committee that it believed that
it had done everything possible to obtain the highest indicated values from
the
interested bidders. Each proposal was evaluated in terms of value
offered, conditions to the transaction, likelihood of consummation and other
matters deemed important by the special committee. The special
committee determined that the most favorable proposal was made by Hanover
because, at $69.61 per share, it offered the highest value to Company
shareholders and because of Hanover’s financial strength and perceived ability
to close a transaction on a timely basis. The special committee then
unanimously recommended to our board of directors that it be authorized to
provide a merger agreement to Hanover to determine if a definitive agreement
could be entered into on acceptable terms.
At
the
request of the special committee, a special meeting of our board of directors
was held on June 5, 2007. At that meeting, the special committee
presented, together with PhiloSmith, the proposals that had been
received. Based on the committee’s recommendation, the full board
unanimously authorized the committee to provide a proposed merger agreement
to
Hanover to determine if a definitive agreement could be entered into on
acceptable terms.
From
June
5 through June 25, 2007, Barnes & Thornburg LLP, as Company counsel, and
PhiloSmith had extensive negotiations with Hanover and its counsel, Dykema
Gossett, as to the terms of the merger agreement. The matters negotiated
included, among others, closing conditions, termination fees, the circumstances
under which the termination fees would be payable, and the circumstances
under
which our board of directors could enter into discussions with another party
regarding an acquisition proposal and, if necessary, terminate the merger
agreement. Tracy T. Larsen, chair of the special committee, was
directly involved in certain of those negotiations and kept the committee
apprised of all material developments. Mr. Larsen is a partner at
Barnes & Thornburg LLP.
On
June
22, 2007, our board met to discuss the terms of a draft merger agreement
reflecting negotiations to date. PhiloSmith and Company counsel
answered questions on the draft agreement, and meaningful discussions
ensued. PhiloSmith also discussed with the board its views of the
financial fairness of the proposed merger consideration, and provided its
verbal
opinion that the proposed merger consideration was fair to our shareholders
from
a financial point of view.
The
June
22, 2007 board meeting was temporarily adjourned pending further negotiation
of
the merger agreement and to allow for further review and consideration by
our
directors of the matters discussed at the meeting. On June 24, 2007,
our board reconvened its meeting. At that meeting, PhiloSmith
provided its written opinion that the merger consideration was fair to our
shareholders from a financial point of view. Following further
discussion, our board of directors, acting upon the unanimous recommendation
of
the special committee of the board, determined that the merger agreement
and
merger were fair to and in the best interests of the Company and its
shareholders, adopted and approved the merger agreement and merger and, subject
to its fiduciary duties under applicable law, recommended that shareholders
of
the Company adopt and approve the merger agreement and merger. The merger
agreement was finalized and executed on June 25, 2007, and a press release
announcing the transaction was issued that same day.
17
Recommendation
of the Special Committee and Board of Directors
The
special committee of our board of directors, comprised entirely of independent
directors and acting with the assistance of its own legal advisors and our
legal
and financial advisors, evaluated and negotiated the merger, including the
terms
and conditions of the merger agreement with Hanover and the
Purchaser. The special committee unanimously (i) determined that the
merger agreement and merger are fair to and in the best interests of the
Company
and its shareholders and (ii) recommended to our board of directors that
it
adopt and approve the merger agreement and merger and recommend to our
shareholders that they adopt and approve the merger agreement and
merger.
After
careful consideration of the factors described in the section in this proxy
statement entitled “The Merger – Reasons for the Merger,” our board of directors
unanimously (i) determined that the merger agreement and merger are fair
to and
in the best interests of the Company and its shareholders, (ii) adopted and
approved the merger agreement and merger, and (iii) subject to its fiduciary
duties under applicable law, determined to recommend that shareholders adopt
and
approve the merger agreement and merger.
Reasons
for the Merger
In
reaching its determination and the recommendation described above with respect
to the merger agreement and merger, our board of directors consulted with
its
legal and financial advisors and considered a number of factors, including
the
following, among others:
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the
familiarity of the board of directors with the business, results
of
operations, properties and financial condition of the Company and
the
nature of the industry in which the Company operates, based, in
part, upon
presentations by management of the
Company;
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the
Company’s competitive position and current trends in the industry in which
it operates;
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the
risks faced by the Company if it remains an independent public
company;
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the
fact that the merger price is payable entirely in cash, providing
liquidity and certainty of value to the Company’s
shareholders;
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the
structure and results of the process undertaken by PhiloSmith,
as
independent financial advisor engaged by a special committee of
the board
comprised entirely of independent directors, to identify and solicit
proposals from third parties to enter into a transaction with the
Company;
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the
offers received from other parties;
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the
presentation of Philo Smith at the June 22 and June 24, 2007 special
meeting of the board of directors and the opinion of PhiloSmith
that,
based upon and subject to the assumptions, limited procedures and
other
limitations set forth therein, the price to be received by the
shareholders of the Company pursuant to the merger is fair to such
shareholders from a financial point of view (the opinion, dated
June 24,
2007, is attached as Appendix B hereto and is incorporated into
this proxy
statement by reference; Company shareholders are encouraged to
read the
opinion in its entirety);
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the
unanimous determination of the special committee of the board comprised
entirely of independent directors that the merger agreement and
merger are
fair to and in the best interests of the Company and its shareholders,
and
the committee’s unanimous recommendation to the board that it adopt and
approve the merger agreement and merger and recommend to our shareholders
that they adopt and approve the merger agreement and
merger;
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the
terms of the merger agreement and the course of negotiations with
Hanover,
including:
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the
closing conditions to the merger, including the fact that the obligations
of Hanover and the Purchaser under the merger agreement are not
subject to
a financing condition;
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the
representation and warranty of Hanover that it has sufficient funds
available for it and the Purchaser to consummate the
merger;
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the
Company’s right, both before and after shareholder approval of the merger
agreement, to engage in negotiations with, and provide information
to, a
third party that makes an unsolicited acquisition proposal if the
board of
directors determines the proposal is reasonably likely to lead
to a
transaction that is more favorable to the Company’s shareholders than the
merger with Hanover;
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o
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the
amount of the termination fee payable by the Company to Hanover
upon
termination of the merger agreement in certain circumstances, which
at
$900,000 is approximately 3.88% of
the
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18
equity
value of the merger and, when added to reimbursement of up to $300,00 of
Hanover’s and the Purchaser’s transaction expenses, is approximately 5.17% of
the equity value of the transaction;
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the
circumstances under which the transaction fee would be payable
to Hanover
upon termination of the merger agreement, including the fact that
the
Company would be required to pay only $300,000 of the $900,000
fee upon
termination of the merger agreement by Hanover because the Company
proposed to enter into a definitive acquisition agreement for a
superior
proposal with a third party, with the remaining $600,000 payable
only if
the Company consummated the superior proposal;
and
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the
structure of the transaction as a merger requiring shareholder
approval,
resulting in detailed public disclosure and a protracted period
of time
prior to consummation of the merger during which an unsolicited
superior
proposal could materialize;
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the
fact that certain directors and officers of the Company collectively
holding approximately 9.8% of the outstanding Company common shares
committed under separate voting agreements with Hanover to vote
their
shares in favor of the merger, and the terms of the voting agreements,
including a provision under which the agreements terminate upon
termination of the merger
agreement;
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the
reputation and financial condition of Hanover;
and
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the
merger price of $69.61 per share represented (i) a premium of
approximately 98.9% over the highest trading price of the Company
common
shares over the three-months prior to April 26, 2007, the date
of the
Company’s public announcement that it had formed a special committee of
the board of directors and engaged PhiloSmith to explore strategic
alternatives to maximize shareholder value, (ii) a multiple of
approximately 15.4 times the Company’s earnings for the 12-month period
ended March 31, 2007, and (ii) a multiple of approximately 1.8
times the
Company’s book value as of March 31, 2007, as reported on the Company’s
Quarterly Report on Form 10-QSB.
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The
board
of directors also considered a variety of risks and other potentially negative
factors concerning the merger. These factors include the following, among
others:
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the
fact that the Company will cease to be a public company following
the
merger and that current shareholders will no longer be able to
participate
in any future increase in value;
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the
fact that gains from an all-cash transaction are generally taxable
to the
Company’s shareholders for U.S. federal income tax
purposes;
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the
possibility that the announcement of the merger may distract the
Company’s
management and otherwise disrupt its business, and the resulting
effect on
the Company if the merger does not close;
and
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the
closing conditions to the merger, including shareholder approval
and
regulatory approvals.
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This
discussion summarizes the material factors considered by the board of directors
in its consideration of the merger agreement and merger. After considering
these
factors, the board of directors concluded that the positive factors relating
to
the merger agreement and merger outweighed the potential negative factors.
In
view of the wide variety of factors considered by the board of directors,
and
the complexity of these matters, the board did not find it practicable to
quantify or otherwise assign relative weights to the foregoing factors. In
addition, individual members of the board may have assigned different weights
to
various factors. The board approved and recommended the merger agreement
and
merger based upon the totality of the information presented to and considered
by
its individual members.
Opinion
of PhiloSmith
Our
board
of directors, through its special committee comprised entirely of independent
directors, engaged PhiloSmith to act as its financial advisor in connection
with
the proposed merger and to render an opinion as to whether the consideration
to
be received by the holders of our common shares pursuant to the merger is
fair,
from a financial point of view, to the holders of such shares.
On
June
22, 2007, PhiloSmith delivered its oral opinion to our board of directors,
subsequently confirmed in writing on June 24, 2007 and again on [________],
2007, that, as of June 24, 2007 and [______], 2007, and based upon and subject
to the assumptions made, matters considered and qualifications and limitations
set forth in its written opinion
19
(which
are described below), the consideration of $69.61 per share in cash to be
received by the holders of our common shares pursuant to the merger is fair,
from a financial point of view, to the holders of such shares.
The
full
text of the written opinion of PhiloSmith, which sets forth assumptions made,
matters considered and qualifications and limitations on the review undertaken
by PhiloSmith, is attached to this proxy statement as Appendix B and is
incorporated into this proxy statement by reference. The following
summary of PhiloSmith’s opinion is qualified by reference to the full text of
the opinion. Shareholders are urged to read the entire opinion
carefully.
The
opinion is addressed to our board of directors and addresses only the fairness,
from a financial point of view, of the consideration to be received by the
holders of our common shares pursuant to the merger. The opinion does
not address the merits of the underlying decision by us to engage in the
merger
and does not constitute, nor should it be construed as, a recommendation
to any
shareholder as to how the shareholder should vote with respect to the proposed
merger or any other matter. In addition, PhiloSmith was not asked to
address, and its opinion does not address, the fairness to, or any other
consideration of, the holders of any class of securities, creditors or other
constituencies of the Company, other than the holders of our common
shares. Although PhiloSmith participated in negotiations among the
parties, the consideration to be received by such holders pursuant to the
merger
was determined by our board of directors, and was approved by our board of
directors.
In
arriving at its opinion, PhiloSmith, among other things:
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reviewed
the merger agreement;
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reviewed
certain publicly available business and financial information concerning
the Company and the industries in which we
operate;
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compared
the proposed financial terms of the merger with the publicly available
financial terms of certain transactions involving companies that
PhiloSmith deemed relevant and the consideration received for such
companies;
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compared
the financial and operating performance of the Company with publicly
available information concerning certain other companies that PhiloSmith
deemed relevant and reviewed the current and historical market
prices of
the Company common shares and certain publicly traded securities
of such
other companies;
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reviewed
certain internal financial analyses and forecasts prepared by the
management of the Company related to its business;
and
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performed
such other financial studies and analyses and considered such other
information as PhiloSmith deemed
appropriate.
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In
preparing its opinion, PhiloSmith assumed and relied on the accuracy and
completeness of all information supplied or otherwise made available to it,
discussed with or reviewed by or for it, or that was publicly
available. PhiloSmith did not assume any responsibility for
independently verifying such information and did not undertake and was not
furnished with any independent evaluation or appraisal of any of our assets
or
liabilities, nor did it evaluate our solvency or fair value under any state
or
federal laws relating to bankruptcy, insolvency or similar
matters. In addition, PhiloSmith did not assume any obligation to
conduct any physical inspection of our properties or facilities. With
respect to the financial forecast information furnished to or discussed with
PhiloSmith by us, PhiloSmith assumed that such information had been reasonably
prepared and reflected the best currently available estimates and judgment
of
our management as to our expected future financial performance.
In
performing its analyses, PhiloSmith made numerous assumptions with respect
to
industry performance, general business, economic, market and financial
conditions and other matters, many of which are beyond the control of PhiloSmith
and us. Any estimates contained in the analyses performed by
PhiloSmith are not necessarily indicative of actual values or future results,
which may be significantly more or less favorable than suggested by PhiloSmith’s
analyses. Additionally, estimates of the value of businesses or
securities do not purport to be appraisals or to reflect the prices at which
those businesses or securities might actually be sold. Accordingly,
the analyses and estimates are inherently subject to substantial
uncertainty. PhiloSmith’s opinion was among a number of factors taken
into consideration by our board of directors in making its determination
to
approve the merger agreement. In addition, our board of directors did
not rely on any single analysis in making its
determination. Consequently, the analyses
20
described
below should not be viewed as determinative of the decision of our board
of
directors with respect to the fairness of the consideration to be paid pursuant
to the merger.
At
the
June 22 and June 24, 2007 special meeting of our board of directors, PhiloSmith
made a presentation of certain financial analyses of the
merger. PhiloSmith performed each of the financial analyses
summarized below. The summary below does not purport to be a complete
description of the analyses performed by PhiloSmith and underlying its
opinion. The preparation of a fairness opinion is a complex analytic
process involving various determinations as to the most appropriate and relevant
methods of financial analysis and the application of those methods to the
particular circumstances. Therefore, a fairness opinion is not
readily susceptible to partial analysis or summary description.
In
arriving at its opinion, PhiloSmith considered the results of all of its
analyses and did not attribute any particular weight to any analysis or factor
that it considered. The financial analyses summarized below include
information presented in tabular format. PhiloSmith believes that its
analyses and the summary of its analyses must be considered as a whole and
that
selecting portions of its analyses and factors or focusing on the information
presented below in tabular format, without considering all analyses and factors
or the full narrative description of the financial analyses, including the
methodologies and assumptions underlying the analyses, could create a misleading
or incomplete view of the process underlying its analyses and
opinion. The tables alone do not constitute a complete description of
the financial analyses.
Comparable
Public Company Analysis
PhiloSmith
analyzed the public market statistics of certain comparable publicly traded
companies and examined various trading statistics and
information. PhiloSmith selected a variety of comparative groupings
of publicly traded property and casualty (P&C) insurance companies, based on
size and/or market focus within the sector. These comparative
groupings included:
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all
P&C insurers with securities traded on NYSE, NASDAQ, AMEX or the
OTC
Bulletin Board;
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P&C
insurers with market capitalizations under $500
million;
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|
P&C
insurers with market capitalizations under $250
million;
|
|
|
·
|
commercial
P&C insurers with market capitalizations under $1 billion;
and
|
|
|
·
|
monoline
commercial P&C insurers with market capitalizations under $1
billion.
|
PhiloSmith
excluded from the groupings companies that were targets in announced merger
and
acquisition transactions and companies in run-off or distress.
As
part
of its analysis, Philo Smith compared the price payable by Hanover in the
proposed merger to median market multiples of GAAP book value as of March
31,
2007, and last twelve months (LTM) earnings for the period ended March 31,
2007,
of publicly traded companies included in the foregoing groupings. The
results of the comparison are as follows:
|
Stock
Price as Multiple of:
|
||||||||||||
|
Company
Groupings
|
Number
of Companies
|
GAAP
Book Value
|
LTM
Earnings
|
|||||||||
|
All
P&C insurers
|
101
|
1.4x
|
10.2x
|
|||||||||
|
P&C
insurers with market cap < $500 million
|
38
|
1.3x
|
10.8x
|
|||||||||
|
P&C
insurers with market cap < $250 million
|
23
|
1.1x
|
10.5x
|
|||||||||
|
Commercial
P&C insurers with market cap < $1 billion
|
30
|
1.4x
|
10.9x
|
|||||||||
|
Monoline
commercial P&C insurers with market cap < $1
billion
|
9
|
1.4x
|
10.1x
|
|||||||||
|
Professionals
Direct (based on merger price of $69.61 per
share)
|
1.8x
|
15.4x
|
||||||||||
21
PhiloSmith
selected the foregoing groupings because their businesses and operating profiles
are reasonably similar to us. None of the comparable companies in the groupings
is of course identical to us. A complete analysis involves complex
considerations and judgments concerning differences in financial and operating
characteristics of the comparable companies and other factors that could
affect
public trading values of such comparable companies. Mathematical
analysis (such as determining the mean and median) is not by itself a meaningful
method of using the selected comparable companies data.
Comparable
Transaction Analysis
PhiloSmith
analyzed merger and acquisition activity in the P&C insurance sector over a
period that it deemed relevant. Although no merger or
acquisition target is exactly comparable to the Company, particularly given
its
size, PhiloSmith focused on those public company transactions that occurred
in
the P&C insurance sector based on the following criteria:
|
|
·
|
transactions
occurring between June 13, 2002 and June 13, 2007 (last 5
years);
|
|
|
·
|
transaction
size less than $3 billion in value;
|
|
|
·
|
transactions
involving a target that resulted in a change of control (buyer
acquiring
more than 51%); and
|
|
|
·
|
transactions
involving targets that were not shell companies or were not in
distress or
liquidation.
|
PhiloSmith’s
analysis of public transactions of certain comparable publicly traded companies
included the following:
|
Buyer
|
Target
|
Date
Announced
|
|||
|
D.E.
Shaw & Company, LP
|
James
River Group, Inc.
|
6/11/2007
|
|||
|
North
Pointe Holdings Corporation
|
Capital
City Holding Co., Inc.
|
5/11/2007
|
|||
|
Liberty
Mutual Holding Company, Inc.
|
Ohio
Casualty Corporation
|
5/6/2007
|
|||
|
Alleghany
Corporation
|
Employers
Direct Corp.
|
4/27/2007
|
|||
|
Zurich
Financial Services AG
|
Bristol
West Holdings, Inc.
|
3/1/2007
|
|||
|
QBE
Insurance Group Limited
|
Praetorian
Financial Group, Inc.
|
12/12/2006
|
|||
|
Elara
Holdings, Inc.
|
Direct
General Corporation
|
12/4/2006
|
|||
|
American
European Group
|
Merchants
Group, Inc.
|
10/31/2006
|
|||
|
Affordable
Residential Communities, Inc.
|
NLASCO,
Inc.
|
10/6/2006
|
|||
|
Delek
Group Ltd.
|
Republic
Companies Group, Inc.
|
8/4/2006
|
|||
|
Investor
Group
|
Sirius
America Insurance Co.
|
4/12/2006
|
|||
|
New
Affirmative LLC
|
Affirmative
Insurance Holdings, Inc.
|
6/14/2005
|
|||
|
Mercer
Insurance Group, Inc.
|
Financial
Pacific Ins. Group, Inc.
|
4/29/2005
|
|||
|
Educators
Mutual Life Insurance Co.
|
Eastern
Holding Company
|
3/17/2005
|
|||
|
ProAssurance
Corporation
|
NCRIC
Group, Inc.
|
2/28/2005
|
|||
|
United
National Group, Ltd.
|
Penn-America
Group, Inc.
|
10/14/2004
|
|||
|
White
Mountains Insurance Group, Ltd.
|
Sirius
International Group
|
12/9/2003
|
|||
|
Donegal
Mutual Insurance Co.
|
Peninsula
Insurance Group
|
10/30/2003
|
|||
|
Nationwide
Mutual Insurance Co.
|
THI
Holdings, Inc.
|
3/26/2003
|
|||
PhiloSmith
analyzed the metrics of these transactions, focusing on price per share in
each
transaction as a multiple of GAAP book value for the most recent quarter
and of
last twelve months (LTM) reported earnings. PhiloSmith then compared
these multiples to comparable multiples for the Company’s proposed merger with
Hanover. The results follow:
|
Deal
Value
|
Stock
Price as Multiple of:
|
|||||||||||
|
(millions)
|
GAAP
Book Value
|
LTM
Earnings
|
||||||||||
|
Selected
comparable transactions (median):
|
$ |
138.8
|
1.5x
|
11.9x
|
||||||||
|
Hanover
merger with Professionals Direct
|
$ |
23.2
|
1.8x
|
15.4x
|
||||||||
22
In
its
opinion, PhiloSmith noted the following limitations on its analysis of
comparable public company transactions: (i) the time lag between many
of the identified transactions and the present; (ii) the lack of access to
detailed financial data regarding some of the target companies; and (iii)
the
lack of access to the detailed terms of some of the identified
transactions.
Discounted
Dividend Analysis
PhiloSmith
performed a discounted dividend analysis to estimate a range of present values
for our common shares. The analysis used our management’s financial
projections for the three-year period ending December 31,
2009. Key assumptions made by management in preparing the
projections include the following:
|
|
·
|
consistent
top-line and bottom line growth through the
period;
|
|
|
·
|
compounded
annual growth rate of direct written premium of approximately 16%
through
the period;
|
|
|
·
|
return
of average equity increasing from 15.8% in 2007 to 17.0% in 2009;
and
|
|
|
·
|
continued
corporate governance costs of $375,000-$425,000 per year associated
with
being a publicly traded company.
|
Based
on
discussions with our management, PhiloSmith believed that the Company would
not
be able to issue dividends during the period because of capital demands imposed
by the projected growth and the Company’s statutory surplus
requirements. As a result, PhiloSmith’s analysis focused on terminal
values of the Company common shares. To calculate the
terminal values, PhiloSmith used multiples of our projected year-end 2007
book
value (approximately $20.3 million) and multiples of our projected 2009 earnings
(approximately $3.2 million). The multiples, which for book value
ranged from 1.1x to 1.5x and for earnings ranged from 10x to 12x, were derived
from the comparable public company analysis and comparable transaction analysis
described above. The discount rates used in the analysis ranged from
13% to 15%, which PhiloSmith felt appropriately reflected the volatility
and
systemic risk associated with our business.
The
results of the analysis are as follows:
|
Multiple
of Projected 2009
Year
End Book Value
|
Multiple
of Projected 2009 Earnings
|
|||||||||
|
(millions)
|
(millions)
|
|||||||||
|
Discount
Rate
|
1.1x
|
1.3x
|
1.5x
|
10.0x
|
11.0x
|
12.0x
|
||||
|
|
13%
|
$15.9
|
$18.8
|
$21.7
|
$22.7
|
$25.0
|
$27.3
|
|
||
|
14%
|
$15.6
|
$18.4
|
$21.2
|
$22.2
|
$24.4
|
$26.6
|
||||
|
15%
|
$15.2
|
$17.9
|
$20.7
|
$21.6
|
$23.8
|
$26.0
|
||||
Valuation
Conclusions
Based
on
the comparable public company analysis, the comparable transaction analysis
and
discounted dividend analysis, and on other analyses and factors it deemed
relevant, PhiloSmith determined an estimated valuation range of the Company
between $16,613,000 and $21,266,000. Based on 333,300 common shares
outstanding, that equates to a per share valuation range of $49.84 to $63.80
per
share.
General
The
summary set forth above does not purport to be a complete description of
the
analyses performed by PhiloSmith. The preparation of a fairness
opinion is a complex process and is not necessarily susceptible to partial
analysis or summary description. PhiloSmith believes that selecting
any portion of its analyses or of the summary set forth above, without
considering the analyses as a whole, would create an incomplete view of the
process underlying PhiloSmith’s opinion. In arriving at its opinion,
PhiloSmith considered the results of all its analyses. The analyses
performed by PhiloSmith include analyses based upon forecasts of future results,
which results may be significantly more or less favorable than those suggested
by PhiloSmith’s analyses. The analyses do not purport
to
23
be
appraisals or to reflect the prices at which our common shares may trade
at any
time after announcement of the proposed merger. The analyses were
prepared solely for purposes of PhiloSmith providing its opinion to our board
of
directors. Because the analyses are inherently subject to
uncertainty, being based upon numerous factors and events, including among
others factors relating to general economic and competitive conditions beyond
the control of the parties or their respective advisors, neither PhiloSmith
nor
any other person assumes responsibility if future results or actual values
are
materially different from those forecasted.
Our
board
of directors selected PhiloSmith as its financial adviser because of
PhiloSmith’s reputation as a nationally recognized investment banking and
advisory firm with experience in transactions similar to the proposed merger
and
PhiloSmith’s familiarity with us and our business. Under the terms of
a letter agreement dated January 10, 2007, pursuant to which our board of
directors, through a special committee comprised entirely of independent
directors, engaged PhiloSmith as its financial advisor, we agreed to pay
PhiloSmith for its services a fee of (i) $50,000 at the time it rendered
its
fairness opinion to the board, and (ii) a success fee of 3.0% of the merger
consideration up to $15,000,000, and 6% of the merger consideration in excess
of
$15,000,000, subject to an aggregate cap of $550,000 on the amounts described
in
(i) and (ii) above. In addition to any fees payable to PhiloSmith under the
letter agreement, we have agreed to reimburse PhiloSmith for its reasonable
out-of-pocket expenses incurred in connection with providing its engagement,
including the reasonable fees of its legal counsel. We have also
agreed to indemnify PhiloSmith and related parties against various liabilities,
including liabilities arising under U.S. federal securities laws or relating
to
or arising out of the merger or the engagement of PhiloSmith.
Material
U.S. Federal Income Tax Consequences
The
following is a general discussion of certain material U.S. federal income
tax
consequences to “U.S. holders” (as defined below) of Company common shares of
the receipt of cash in exchange for such shares pursuant to the
merger. This summary is based upon the provisions of the Internal
Revenue Code of 1986, as amended (the “Code”), applicable current and proposed
U.S. Treasury Regulations promulgated thereunder (the “Treasury Regulations”),
judicial authorities and administrative rulings and practice, all as in effect
as of the date of this proxy statement and all of which are subject to change,
possibly on a retroactive basis.
For
purposes of this discussion, the term “U.S. holder” means a beneficial owner of
Company common shares that, for U.S. federal income tax purposes, is: (i)
an
individual citizen or resident of the United States; (ii) a corporation,
or
other entity treated as a corporation for U.S. federal income tax purposes,
created or organized in or under the laws of the United States or any state
thereof or the District of Columbia; (iii) a trust (a) the administration
of
which is subject to the primary supervision of a court within the United
States
and for which one or more U.S. persons have the authority to control all
substantial decisions of the trust or (b) for which a valid election is in
effect under applicable Treasury Regulations to be treated as a U.S. person;
or
(iv) an estate the income of which is subject to U.S. federal income tax
regardless of its source.
Holders
of Company common shares who are not U.S. holders may have different tax
consequences from those described below and are urged to consult their own
tax
advisors regarding the tax treatment to them under U.S. and non-U.S. tax
laws.
If
a
partnership (including any entity treated as a partnership for U.S. federal
income tax purposes) holds Company common shares, the U.S. federal income
tax
treatment of a partner in such partnership generally will depend upon the
status
of the partner and the activities of the partnership. A holder of
Company common shares that is a partnership, and partners in such partnership,
should consult their own tax advisors regarding the tax consequences of the
receipt of cash in exchange for Company common shares pursuant to the
merger.
This
discussion assumes that a U.S. holder holds Company common shares as a capital
asset within the meaning of Section 1221 of the Code (generally, property
held
for investment). This discussion does not address all aspects of U.S.
federal income taxation that may be relevant to a U.S. holder in light of
the
U.S. holder’s particular circumstances, or those U.S. holders subject to special
treatment under the Code (including insurance companies, dealers or brokers
in
securities or currencies, traders in securities who elect to apply a
mark-to-market method of accounting, tax-exempt organizations, financial
institutions, mutual funds, U.S. expatriates and shareholders subject to
the
alternative minimum tax), U.S. holders who hold Company common shares as
part of
a “hedging,” “straddle,” “conversion” or other integrated transaction for U.S.
federal income tax purposes, or U.S. holders who acquired their
24
Company
common shares through the exercise of employee stock options or other
compensation arrangements. In addition, this discussion does not
address any aspect of foreign, state, local, estate or gift taxation that
may be
applicable to a U.S. holder. U.S. holders are urged to consult their
own tax advisors to determine the particular tax consequences to them (including
the application and effect of any state, local or foreign income and other
tax
laws) of the receipt of cash in exchange for Company common shares pursuant
to
the merger.
The
receipt of cash in exchange for Company common shares pursuant to the merger
will be a taxable transaction for U.S. federal income tax purposes (and also
may
be a taxable transaction under applicable state, local and foreign income
and
other tax laws). In general, for U.S. federal income tax purposes, a
U.S. holder will recognize capital gain or loss equal to the difference between
the amount of cash received and the U.S. holder’s aggregate adjusted tax basis
in Company common shares converted to cash in the merger. Gain or
loss will be calculated separately for each block of Company common shares
(i.e., shares acquired at the same cost in a single transaction) converted
to
cash in the merger. If, at the effective time of the merger, the U.S.
holder’s Company common shares were held for more than one year, the gain or
loss will be long-term capital gain or loss, and any such long-term capital
gain
generally will be subject (in the case of U.S. holders who are individuals)
to
tax at a maximum U.S. federal income tax rate of 15%. If, however, at
the effective time of the merger, the U.S. holder’s Company common shares were
held for one year or less, the gain or loss will be short-term capital gain
or
loss. The deductibility of capital losses by U.S. holders is subject
to limitations under the Code.
Under
the
U.S. federal income tax backup withholding rules, unless an exemption applies,
the paying agent or Hanover generally is required to and will withhold and
remit
to the U.S. Treasury 28% of all payments to which a Company shareholder or
other
payee is entitled pursuant to the merger, unless the Company shareholder
or
other payee (i) is a corporation or comes within other exempt categories
and,
when required, demonstrates this fact and otherwise complies with the applicable
requirements of the backup withholding rules or (ii) provides such shareholder’s
correct taxpayer identification number (i.e., the shareholder’s social security
number, in the case of an individual shareholder, or the shareholder’s employer
identification number, in the case of other shareholders) and certifies,
under
penalties of perjury, that the number is correct (or properly certifies that
the
shareholder is awaiting a taxpayer identification number) and certifies that
such shareholder is exempt from backup withholding and otherwise complies
with
the applicable requirements of the backup withholding rules. Each
Company shareholder and, if applicable, each other payee should complete
and
sign the substitute Form W-9 that will be part of the letter of transmittal
to
be returned to the paying agent in order to provide the information and
certification necessary to avoid backup withholding, unless an applicable
exemption exists and is proved in a manner satisfactory to the paying
agent. Company shareholders who are neither U.S. citizens nor U.S.
resident aliens should complete, sign and submit a Form W-8BEN, “Certificate of
Foreign Status of Beneficial Owner for United States Tax
Withholding.” Backup withholding is not an additional
tax. Generally, any amounts withheld under the backup withholding
rules described above will be refunded or credited against a Company
shareholder’s U.S. federal income tax liability, if any, provided that the
required information is furnished to the U.S. Internal Revenue Service in
a
timely manner.
The
discussion above of certain material U.S. federal income tax consequences
is
included for general information purposes only. Company shareholders
are urged to consult their own tax advisors to determine the particular tax
consequences to them (including the application and effect of any state,
local
or foreign income and other tax laws) of the receipt of cash in exchange
for
Company common shares pursuant to the merger.
Certain
Effects of the Merger
If
the
merger agreement and merger are adopted and approved by Company shareholders
and
certain other conditions to the closing of the merger are either satisfied
or
waived, the Purchaser will be merged with and into the Company, with the
Company
being the surviving entity. As a result of the merger, the separate
corporate existence of the Purchaser will cease, and the Company will continue
as the surviving entity.
Following
the merger, all outstanding common shares of the Company will be owned by
Hanover. At the effective time of the merger, each common share of
the Company (other than common shares owned by the Company and its subsidiaries)
issued and outstanding immediately prior to the effective time will be converted
into the right to receive $69.61 in cash, without interest, and Company
shareholders will cease to have ownership interests in the Company or rights
as
shareholders of the Company. Therefore, the current shareholders of
the Company will not
25
participate
in any future earnings or growth of the Company and will not benefit from
any
appreciation in value of the Company.
There
is
no active public trading market for the Company common shares. Bid
and asked quotations for the Company common shares may be reported on the
OTC
under the symbol PFLD. Transactions in the Company common shares are
occasionally effected by individuals through the OTC or on an informal
basis. As a result of the merger, the Company common shares will
cease to be quoted on the OTC and there will be no public market for the
Company
common shares. In addition, the registration of the Company common
shares under the Securities Exchange Act of 1934 will be terminated, and
the
Company will no longer be required to file periodic and other reports with
the
SEC.
The
benefit of the merger to our shareholders is the right to receive $69.61
in
cash, without interest, for each common share of the Company. The
principal detriments are that our shareholders will cease to participate
in our
future earnings and growth, if any, and that their receipt of payment for
their
shares generally will be a taxable transaction for U.S. federal income tax
purposes. See “The Merger – Material U.S. Federal Income Tax
Consequences.”
Effects
on the Company and Our Shareholders If the Merger Is Not
Completed
In
the
event that the merger agreement and merger are not adopted and approved by
the
Company’s shareholders or if the merger is not completed for any other reason,
the Company’s shareholders will not receive any payment for their shares in
connection with the merger. Instead, the Company will remain an
independent public company, and the Company common shares will continue to
be
quoted on the OTC and registered under the Securities Exchange Act of 1934,
subject to continued satisfaction of the conditions for such quotation and
registration. In that event, we expect that management will operate
the business generally in a manner similar to that in which it is being operated
today and that the Company’s shareholders will continue to be subject to the
same general risks and opportunities as they currently are, including, among
other things, those arising from economic and market conditions.
Finally,
if the merger agreement is terminated under certain circumstances, the Company
may be obligated to reimburse Hanover and the Purchaser their transaction
expenses up to $300,000, to pay Hanover a termination fee of up to $900,000,
or
both. For a description of the circumstances obligating payment of
the termination fee and expenses, please see the section in this proxy statement
entitled “The Merger Agreement – Termination Fee.”
Governmental
and Regulatory Approvals
State
insurance laws and regulations generally require that, prior to the acquisition
of an insurance company domiciled in that jurisdiction, the acquiring company
must obtain the approval of the insurance commissioner of that
jurisdiction. In connection with this state approval process, the
necessary application has been made with the insurance regulators of the
State
of Michigan, the domiciliary state of the Company’s insurance
subsidiary.
In
addition, the insurance laws and regulations of certain U.S. states in which
the
Company operates require that, prior to an acquisition of an insurance company
doing business in that state or licensed by that state (or the acquisition
of
its holding company), filings disclosing certain market share data in the
applicable jurisdiction and/or other data must be made and in some cases
an
applicable waiting period must expire or be terminated. These
additional filings are in the process of being made.
Although
the Company and Hanover do not expect the insurance regulators to raise any
significant concerns in connection with their review of the merger, there
is no
assurance that the Company and Hanover will obtain all required regulatory
approvals, or that those approvals will not include terms, conditions or
restrictions that may have an adverse effect on the Company or
Hanover.
Other
than the filings described above, neither the Company nor Hanover is aware
of
any regulatory approvals or waiting periods necessary to complete the
merger. If the parties discover that other approvals or waiting
periods are necessary, they will seek to obtain or comply with
them. If any additional approval or action is needed, however, the
Company or Hanover may not be able to obtain it, as is the case with respect
to
the other necessary approvals. Even if the Company or Hanover obtain all
necessary approvals, and the merger agreement and merger are adopted
26
and
approved by the Company’s shareholders, conditions may be placed on any such
approval that could cause either the Company or Hanover to abandon the
merger.
Interests
of Our Directors and Executive Officers in the Merger
Our
directors and executive officers have financial interests in the merger that
are
in addition to, and may be different from, their interests as shareholders
of
the Company. Our board of directors was aware of these interests and
considered them, among other matters, in adopting and approving the merger
agreement and merger.
Insurance
and Indemnification
The
merger agreement provides that, following the merger, Hanover and the Company,
as the surviving corporation in the merger, will indemnify and hold harmless,
to
the fullest extent permitted by law, all past and present directors and officers
of the Company and its subsidiaries against any costs or expenses (including
attorney’s fees), judgments, fines, losses, claims, damages or liabilities
incurred in connection with any claim, action, suit, proceeding or investigation
arising out of or pertaining to matters existing or occurring at or prior
to the
effective time of the merger.
The
merger agreement further provides that for a period of six years after the
effective time of the merger, Hanover will maintain in effect, and will cause
the Company, as the surviving corporation in the merger, to maintain in effect,
without any lapses of coverage, the current policies of directors’ and officers’
liability insurance maintained by the Company with respect to claims arising
in
whole or in part from facts or events which occurred before the effective
time. Alternatively, Hanover may obtain and fully pay for a “tail”
insurance policy with a claims period of at least six years after the effective
time with the same coverage and amounts, and containing terms and conditions
which are no less advantageous then the Company’s current policies with respect
to claims arising in whole or in part from facts or events which occurred
before
the effective time.
Hanover
will not be obligated to make annual premium payments to the extent such
premiums exceed 200% of the annual premiums paid as of the date of the merger
agreement by the Company for its current policies of directors’ and officers’
liability insurance or, if Hanover elects to obtain tail coverage, it will
not
be obligated to pay an aggregate premium payment for such tail coverage in
excess of 300% of the annual premiums paid as of the date of the merger
agreement by the Company for its current policies of directors’ and officers’
liability insurance. If the amount of the premiums necessary to
maintain or procure such insurance coverage exceeds such amounts, Hanover
and
the Company will be required to maintain the most advantageous policies of
directors’ and officers’ insurance obtainable for an annual premium equal to
such maximum amount.
Voting
Agreements
In
their
capacity as shareholders, two executive officers, Stephen M. Tuuk (who is
also a
director) and Stephen M. Westfield, and one independent director of the Company,
Tracy T. Larsen, collectively holding or controlling approximately 9.8% of
the
outstanding Company common shares, have entered into separate voting
agreements with Hanover. Under their respective voting agreements,
these individuals agree to vote their shares in favor of adopting and approving
the merger agreement and merger and against certain actions that may impede
or
interfere with the merger, and provide an irrevocable proxy to Hanover in
furtherance thereof. These individuals also agree not to transfer any
of their shares prior to the effective time of the merger. The voting
agreements will terminate at the effective time of the merger or upon
termination of the merger agreement, or if any amendment to or waiver of
any
term of the merger agreement is adverse to the shareholder. In
addition, the independent director may terminate his voting agreement if
based
on advice of counsel he determines that failure to do so would be inconsistent
with his duties as a director. Each voting agreement provides that it
in no way restricts the shareholder from exercising his fiduciary duties
as an
officer and/or director of the Company. A copy of the voting
agreement substantially in the form executed by such individuals is attached
hereto as Appendix C and is incorporated into this proxy statement by
reference. The foregoing description of the voting agreements does
not purport to be complete and is qualified in its entirety by reference
to the
full text of the voting agreement.
27
Employment
Agreements
As
a
condition to Hanover’s obligation to close the merger, our president and chief
executive officer, Stephen M. Tuuk, must execute and deliver to Hanover an
employment agreement acceptable to Hanover. Mr. Tuuk also serves as
the chairman of our board of directors. Before the execution of the
merger agreement by Hanover, the Purchaser and the Company, Mr. Tuuk and
Hanover
separately negotiated the terms of the employment agreement that Mr. Tuuk
would
sign at closing. The negotiated agreement would replace Mr. Tuuk’s
existing employment agreement with the Company. The material terms of
the negotiated agreement include an annual salary at Mr. Tuuk’s current salary
rate of $254,000, continued participation in the Company’s existing annual bonus
plan through 2007, a 24-month severance arrangement consistent with the
severance provisions in his current employment agreement with the Company,
and a
three-year term. In addition, the agreement provides that, upon his
employment with Hanover, Mr. Tuuk would receive an equity grant of restricted
stock units valued at $150,000, based on the price per share of Hanover’s common
stock on the grant date. Commencing in 2008, Mr. Tuuk would be
eligible to participate in Hanover’s short-term bonus plan and long-term equity
incentive plan in a manner consistent with persons at his level of management
within Hanover’s organization. The negotiated agreement also contains
restrictions on Mr. Tuuk’s ability to compete with the Company or solicit
employees of the Company following his employment with Hanover, and contains
other customary provisions relating to nondisclosure of confidential and
proprietary information.
The
existing employment agreement with our vice president of finance, secretary
and
treasurer, Stephen M. Westfield, is expected to remain in effect after the
merger. Hanover has indicated that it intends to continue Mr.
Westfield’s employment at his current annual salary of $139,000, that he would
continue to participate in the Company’s annual bonus plan for 2007, and that
commencing in 2008, he would be eligible to participate in Hanover’s short-term
bonus plan in a manner consistent with persons at his level of management
within
Hanover’s organization. Hanover also indicated that it anticipates in
connection with his ongoing employment with Hanover, following the merger
Mr.
Westfield would receive an equity grant of restricted stock units valued
at
$25,000, based on the price per share of Hanover’s common stock on the grant
date.
28
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The
Merger Agreement
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The
following summary describes the material provisions of the merger agreement,
and
is qualified in its entirety by reference to the complete text of the merger
agreement, a copy of which is attached to this proxy statement as Appendix
A and
is incorporated into this proxy statement by reference. The
provisions of the merger agreement are extensive and not easily
summarized. Accordingly, this summary may not contain all of the
information about the merger agreement that is important to you. We
encourage you to read the merger agreement carefully and in its entirety
for a
more complete understanding of the terms of the merger.
Additional
information about Hanover, the Purchaser or the Company may be found elsewhere
in this proxy statement and in the other public filings that the Company
makes
with the SEC. Please see the section in this proxy statement
entitled “Related Matters -- Where You
Can Obtain Additional Information.”
The
merger agreement contains representations and warranties that the parties
to the
merger agreement made to and solely for the benefit of each
other. The assertions embodied in those representations and
warranties are subject, in some cases, to specified exceptions, qualifications,
limitations and supplemental information, including knowledge qualifiers
and
contractual standards of materiality, such as materiality qualifiers and
the
occurrence of a material adverse effect, that are different from those generally
applicable under federal securities law, as well as detailed information
set
forth in a disclosure letter provided by us in connection with signing the
merger agreement. While the Company does not believe that the
disclosure letter contains non-public information that the securities laws
require to be publicly disclosed, the disclosure letter does contain detailed
information that modifies, qualifies and creates exceptions to our
representations and warranties set forth in the merger agreement. In
addition, some representations and warranties may have been included in the
merger agreement for the purpose of allocating risk between the Company and
Hanover rather than to establish matters as facts. The merger
agreement is described in this proxy statement, and included as Appendix
A
hereto, only to provide you with information regarding its terms and conditions,
and not to provide any other factual information regarding the Company or
the
business. Accordingly, you should not rely on the representations and
warranties as characterizations of the actual state of facts, since (i) they
have been made as of the date of the merger agreement or other specific dates,
(ii) in some cases they are subject to knowledge, materiality and material
adverse effect qualifiers, and (iii) they are modified in important part
by
detailed information included in the disclosure letter. Finally,
information concerning the subject matter of the representations and warranties
may have changed since the date of the merger agreement, which subsequent
information may or may not be fully reflected in the Company’s public
disclosures.
Structure
of the Merger
Under
the
merger agreement, the Purchaser will merge with and into the Company, with
the
Company continuing as the surviving entity. The officers of the
Company immediately prior to the merger will remain as officers after the
effective time of the merger. The directors of the Purchaser
immediately prior to the merger will be the directors of the Company after
the
effective time. The effective time of the merger is sometimes
referred to in this proxy statement as the effective time.
The
articles of incorporation of the Purchaser in effect immediately prior to
the
effective time will be the articles of incorporation of the surviving
corporation until later amended as provided in the articles or by applicable
law.
Closing
of the Merger
The
closing of the merger will take place as promptly as practicable after the
satisfaction or waiver of the conditions to closing set forth in the merger
agreement (other than those conditions that by their terms are to be satisfied
at closing, but subject to the satisfaction or waiver of those conditions
at
such time). The parties will file a certificate of merger with the
Michigan Department of Labor and Economic Growth on the closing date of the
merger. The merger will become effective when the certificate of
merger is filed or at such later time as we and Hanover may agree upon and
specify in the certificate of merger. Subject to the receipt of
Company shareholder approval and all necessary regulatory approvals, we
currently anticipate the closing will occur in the third quarter of
2007.
29
Merger
Consideration and Conversion of the Company Common Shares
At
the
effective time of the merger, each common share of the Company issued and
outstanding immediately prior to the effective time (other than common shares
held by the Company or its subsidiearies, which shares as a result of the
merger
will be canceled with no payment being made with respect to them) will be
converted into the right to receive $69.61 in cash, without
interest.
Exchange
of Share Certificates
Prior
to
the closing of the merger, Hanover will engage a paying agent to handle the
exchange of Company common share certificates for cash. Promptly
following the effective time, the paying agent will send a letter of transmittal
and instructions to each former Company shareholder explaining the procedure
for
surrendering common share certificates (including shares owned in “book entry”
form) for the applicable cash payment.
Shareholders
should not return their stock certificates with the enclosed proxy card,
and
they should not forward their common share certificates to the paying agent
without a letter of transmittal.
After
the
effective time, each certificate that previously represented Company common
shares (including “book entry” shares) will only represent the right to receive
payment in the amount that the holder is entitled to receive pursuant to
the
merger agreement, less any required withholdings under tax or other applicable
laws. After the effective time, there will be no further registration
or transfers of Company common shares.
No
consideration will be paid to a holder of Company common shares until the
holder’s shares are surrendered to the paying agent, together with a duly
completed and validly executed letter of transmittal and any other documents
as
the paying agent may reasonably require. No interest will be paid or
will accrue on the cash payable upon surrender of any
certificate. The consideration may be paid to a person other than the
person in whose name the corresponding certificate is registered if the
certificate is properly endorsed or is otherwise in the proper form for transfer
and is accompanied by reasonable evidence that any applicable stock transfer
taxes have been paid, are not applicable or will be paid by such
transferee. Shareholders no longer in possession of their common
share certificates because they have been lost, stolen or destroyed may,
in
exchange for the merger consideration, deliver an affidavit of loss and,
if
required, provide customary indemnity against loss.
None
of
Hanover, the Company, the Purchaser, the surviving entity or the paying agent
will be liable to any shareholder for any amounts delivered to a public official
pursuant to any applicable abandoned property, escheat or similar
laws. All funds held by the paying agent for payment to the holders
of shares that are not disbursed 18 months after the effective time of the
merger will be delivered to Hanover. Thereafter, each holder of a
certificate formerly representing Company common shares entitled to the merger
consideration who has not received the merger consideration must look only
to
Hanover, subject to applicable abandoned property, escheat and similar laws,
as
general creditors of Hanover for payment of the merger consideration that
may be
payable upon due surrender of the certificates held by them, without
interest.
Representations
and Warranties
The
merger agreement contains representations and warranties made by the Company
relating to, among other things, the following:
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due
incorporation, good standing, qualification and corporate power,
organizational documents and authorizations, licenses and permits
to
conduct its business;
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·
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capitalization
of the Company and its
subsidiaries;
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·
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corporate
authority to enter into and perform the merger agreement, enforceability
of the merger agreement, approval and recommendation to the shareholders
of the merger agreement by the Company’s board of directors and the vote
required for shareholder approval;
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·
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required
governmental filings or consents, absence of conflicts of the merger
agreement and the transactions contemplated thereby with organizational
documents, material contracts, permits or applicable
law;
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filings
with the SEC, disclosure controls and procedures and financial
statements;
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30
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absence
of certain changes or events and conduct of business since March
31, 2007,
absence of undisclosed material liabilities, and subordinated
debentures;
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absence
of material litigation;
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compliance
with applicable laws, including insurance
laws;
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tax
matters, including payment of taxes and filing of
returns;
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employees
and labor matters;
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employee
benefit plan matters;
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title
to property and assets owned by the
Company;
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title
to real property and leases for real
property;
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environmental
laws and regulations;
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intellectual
property rights;
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accuracy
of information contained in this proxy statement and compliance
with SEC
regulations;
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statutory
statements of subsidiaries filed with insurance regulators, and
examinations by insurance
regulators;
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conduct
of and matters related to the Company’s insurance subsidiaries, including
conduct of insurance operations through, and insurance licenses
and
authorizations of, subsidiaries;
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general
insurance coverages;
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material
contracts;
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receipt
of the fairness opinion from
PhiloSmith;
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absence
of change in control payments;
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absence
of questionable payments;
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applicability
of the Michigan Business Corporation Act;
and
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finders’
fees due in connection with the
merger.
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The
representations and warranties of Hanover and the Purchaser are more limited
and
relate to, among other things, the following:
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·
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due
incorporation, good standing, qualification and corporate power
and
authorizations;
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corporate
authority to enter into and perform the merger agreement, enforceability
of the merger agreement and approval of the merger agreement by
Hanover’s
board of directors;
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absence
of conflicts of the merger agreement and the transactions contemplated
thereby with organizational documents, material contracts, permits
or
applicable law, and required governmental filings or
consents;
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availability
of funds to make all required payments in connection with the merger;
and
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finders’
fees due in connection with the
merger.
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Certain
of the representations and warranties of the Company and of Hanover and the
Purchaser are qualified as to “materiality” or “Company material adverse effect”
or “Hanover material adverse effect.” For purposes of the merger
agreement, “Company material adverse effect” means, with respect to the Company,
a material adverse effect on the business, operations, assets, financial
condition or results of operations of the Company and its subsidiaries taken
as
a whole or a material adverse effect on the Company’s ability to perform its
obligations under the merger agreement or to consummate the merger, except
for
any such effect attributable to (i) acts of sabotage or terrorism, or the
engagement by the United States in hostilities, whether or not pursuant to
the
declaration of a national emergency or war, (ii) changes in general economic
conditions, or financial or securities markets (including any disruption
thereof
and any decline in the price of any security or any market index) to the
extent
not disproportionately affecting the Company and the Company’s subsidiaries
taken as a whole, as compared to other similarly situated companies in the
legal
malpractice insurance industry, (iii) changes affecting the legal malpractice
insurance industry in general to the extent not disproportionately affecting
the
Company and the Company’s subsidiaries taken as a whole, as compared to other
similarly situated companies in the legal malpractice insurance industry,
(iv)
the execution and announcement of the merger agreement and the transactions
contemplated thereby, (v) Hanover’s announcement or other communication by
Hanover of its plans or intentions with respect to the Company or any of
its
subsidiaries or any other acts or omissions of Hanover or the Purchaser,
(vi)
acts or omissions of the Company prior to the effective time taken at the
written request of Hanover or the Purchaser or with the prior written consent
of
Hanover or the Purchaser, (vii) changes in generally accepted accounting
principles or actuarial methodologies or practices historically employed
by the
Company to establish loss reserves unless the principles,
31
methodologies
or practices historically employed by the Company were not in accordance
with or
more conservative than those called for in relevant policy and reinsurance
contract provisions during the period employed, (viii) changes in tax laws,
or
(ix) other than a Loss Reserve MAE (described below), certain changes in
loss
reserves. For purposes of the merger agreement, “loss reserves” means
the Company’s estimates of its future obligations with respect to any incidents,
demands and suits made and reported to its insurance subsidiary, Professionals
Direct Insurance Company, including estimates of future losses, indemnity
obligations, loss adjustment expenses, unallocated loss adjustment expenses,
extended reporting endorsement estimates and any other type of losses, whether
or not such may be net of deductibles and reinsurance, gross or
ceded.
Pursuant
to the merger agreement, a Company material adverse effect will be deemed
to
have occurred if one or both of the following occurs (referred to in this
proxy
statement as a “Loss Reserve MAE”): (i) the Company’s independent
actuary determines that its reserves for report years 1990 through 2006 as
of
June 30, 2007 exceed $16,176,000; or (ii) the Company’s estimated loss and
allocated loss adjustment expense ratio for either the first six months or
first
nine months of 2007 exceeds 67%.
For
purposes of the merger agreement, “Hanover material adverse effect” means, with
respect to Hanover, certain violations, breaches, defaults or rights, except
those which would not reasonably be expected to have a material adverse effect
on Hanover’s or the Purchaser’s ability to perform their respective obligations
under the merger agreement or consummate the merger.
The
representations and warranties in the merger agreement do not survive the
closing of the merger.
Covenants
Relating to Conduct of Business
The
Company has made certain covenants in the merger agreement that affect the
conduct of its business between the date the merger agreement was signed
and the
effective time of the merger. Prior to the effective time, subject to
specified exceptions, the Company and each of its subsidiaries are required
to
conduct business in the ordinary course and consistent with past practices,
use
commercially reasonable efforts to preserve their business organizations
and
relationships with customers, suppliers, agents, brokers, insurers and other
persons with which the Company or any of its subsidiaries has significant
business relations, and to keep available the services of their officers,
employees and consultants. In addition, absent the written consent of
Hanover and subject to specified exceptions, the Company will not, and will
not
permit any of its subsidiaries to (or agree to):
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amend
or propose to amend its organizational
documents;
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authorize
for issuance, issue, sell, deliver or agree or commit to authorize,
issue,
sell or deliver (whether through the issuance or granting of options,
warrants, commitments, subscriptions, rights to purchase or otherwise)
any
stock of any class or any other securities or equity equivalents,
or amend
any of the terms of any such securities or agreements outstanding
as of
the date of the merger agreement;
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split,
combine or reclassify any shares of its capital stock, declare,
set aside
or pay any dividend or other distribution (whether in cash, stock
or
property or any combination thereof) in respect of its capital
stock or
redeem or otherwise acquire any of its securities, other than any
dividend
or other distribution to the Company by any of its
subsidiaries;
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except
in the ordinary course of business consistent with past practice
(including selling professional liability insurance), (i) incur,
assume or
prepay any long-term or short-term debt or issue any debt securities,
except for borrowings under existing lines of credit or prepayments
in the
ordinary course of business; (ii) assume, guarantee, endorse or
otherwise
become liable or responsible (whether directly, contingently or
otherwise)
for any material obligations of any other person, except for obligations
of any subsidiary of the Company; (iii) make any material loan,
advance or
capital contribution to, or investment in, any other person (other
than to
any subsidiary of the Company or any customary loan or advance
to
employees related to advancement of expenses or 401(k) loans, and
not to
exceed $10,000 in the aggregate); (iv) pledge or otherwise encumber
shares
of capital stock of the Company or any of its subsidiaries; or
(v)
mortgage or pledge any of its assets, tangible or intangible, or
create or
suffer to exist any material lien upon such
assets;
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except
as may be required by law, enter into, adopt, amend or terminate
any
bonus, profit sharing, compensation, severance, termination, stock
option,
stock appreciation right, restricted stock, performance unit, stock
equivalent, stock purchase agreement, pension, retirement, deferred
compensation, employment,
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32
severance
or other employee benefit agreement, trust, plan, fund or other arrangement
for
the benefit or welfare of any director, officer or employee in any manner,
or
(except for normal increases in the ordinary course of business that, in
the
aggregate, do not result in a material increase in benefits or compensation
expense to the Company, or except as required under any existing agreement,
plan
or arrangement) increase in any manner the compensation or fringe benefits
of
any director, officer or employee or pay any benefit not required by any
agreement, plan and arrangement as in effect as of the date of the merger
agreement;
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acquire,
sell, lease, encumber or dispose of any assets of the Company or
any of
its subsidiaries (except for (i) dispositions of obsolete or worthless
assets, (ii) sales of immaterial assets not in excess of $50,000
in the
aggregate, and (iii) encumbrances created under existing secured
lending
arrangements on assets acquired after the date of the merger agreement),
enter into any contract, agreement or transaction outside the ordinary
course of business consistent with past practice, or modify, amend,
terminate or waive any material rights under any material contract
or
agreement;
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except
as may be required as a result of a change in law or in generally
accepted
accounting principles (after consultation with Hanover as to the
effect of
any such change), change any of the accounting principles or practices,
any actuarial methodologies (other than any changes to such methodologies
used by the Company’s actuaries twice a year in setting annual loss
reserve picks and consistent with generally accepted actuarial
practice),
or any pricing policy or reserving policy used by it or any of
its
subsidiaries;
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acquire
(i) by merger, consolidation, acquisition of stock or assets or
otherwise
any corporation, partnership or other business organization or
division
thereof or (ii) any equity interest therein other than any investment
made
in the ordinary course of business;
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revalue
in any material respect any of its assets, including writing off
notes or
accounts receivable;
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except
as required as a result of a change in law, make or change any
tax
election, change a tax accounting period, adopt or change any tax
accounting method, file any amended tax return, enter into any
tax closing
agreement, settle any tax claim or assessment relating to the Company
or
any of its subsidiaries, surrender any right to claim a refund
of taxes,
consent to extension or waiver of the statute of limitations applicable
to
any tax, or take any similar
action;
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pay,
discharge or satisfy any claim, liability or obligation (whether
absolute,
accrued, asserted or unasserted, contingent or otherwise), other
than the
payment, discharge or satisfaction in the ordinary course of business
consistent with past practice of liabilities reflected or reserved
against
in the consolidated financial statements (including the notes thereto)
of
the Company and its subsidiaries contained in SEC reports filed
prior to
the date of the merger agreement or incurred in the ordinary course
of
business consistent with past
practice;
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settle
or compromise any pending or threatened suit, action or claim relating
to
the transactions contemplated by the merger agreement or material
to the
Company and its subsidiaries taken as a
whole;
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authorize
any new capital expenditure which when aggregated with all other
new
capital expenditures causes all such new capital expenditures to
exceed
$75,000; or
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offer
insurance of a type or in a jurisdiction materially different from
the
types and jurisdictions for which they offer insurance on the date
of the
merger agreement.
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No
Solicitations and Change in Recommendation by the Company
In
the
merger agreement, the Company agrees, subject to certain exceptions described
below, that the Company and its subsidiaries will not, and that it will not
authorize or permit it or its subsidiaries’ directors, officers, employees,
representatives and agents to, directly or indirectly:
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solicit,
initiate, facilitate or encourage (including by way of furnishing
or
disclosing non-public information, or waiving of any standstill
provisions
or agreements) any inquiries or the making of any proposal with
respect to
an “acquisition transaction” (as described
below);
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negotiate,
explore or otherwise engage in substantive communications in any
way with
any person with respect to an acquisition transaction;
or
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enter
into any agreement, contract or arrangement requiring it to abandon,
terminate or fail to consummate the merger or any other transactions
contemplated by the merger
agreement.
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For
purposes of the merger agreement, an “acquisition transaction” means any offer
or proposal for, or any inquiry or indication of interest in, (i) any sale,
lease, exchange, mortgage, transfer or other disposition of 10% or more
of
33
the
consolidated assets of the Company and its subsidiaries, (ii) any acquisition
or
purchase of an equity interest in the Company representing in excess of 10%
of
the power to vote for the election of the directors of the Company, or any
tender offer or exchange offer for equity securities of the Company, (iii)
any
merger, consolidation, business combination, recapitalization, liquidation,
dissolution or similar transaction involving the Company, or any of its
subsidiaries whose assets, individually or in the aggregate, constitute more
than 10% of the consolidated assets of the Company, (iv) a plan of liquidation
or extraordinary dividend relating to more than 10% of the Company’s total
assets, (v) the repurchase by the Company or any of its subsidiaries of more
than 10% of the outstanding Company shares or (vi) any other transaction
similar
to any of the foregoing, in each case other than the transactions with Hanover
or the Purchaser contemplated by the merger agreement.
The
Company may negotiate or otherwise engage in discussions with, and furnish
non-public information to, any person in response to an unsolicited, bona
fide
third party written proposal by such person, if (i) the board determines
in good
faith after consultation with and advice from PhiloSmith or another financial
advisor of nationally or regionally recognized reputation, that such proposal
is
reasonably likely to result in a superior proposal (as described below),
(ii)
such person executes a confidentiality agreement no less favorable to the
Company than the Confidentiality Agreement with Hanover, and including certain
additional standstill provisions to which Hanover has agreed to be bound,
and
(iii) the board determines in good faith after receiving the advice of outside
legal counsel that the failure to engage in such negotiation or discussions
or
provide such information would be inconsistent with the board’s fiduciary duties
under applicable law.
Within
24
hours of receipt of an acquisition transaction or any proposal that could
reasonably be expected to lead to an acquisition transaction, the Company
must
provide notice to Hanover of such proposal setting forth the material terms
and
conditions of such proposal, including the identity of the party making the
proposal and any documents evidencing the proposal. Additionally, the
Company is required to keep Hanover informed of the current status of any
such
takeover proposal.
Under
the
merger agreement, except as provided below, neither our board of directors
nor
any committee of the board may (i) withdraw or modify, or publicly propose
to
withdraw or modify, in a manner adverse to Hanover, its recommendation of
the
merger agreement and the merger and that Company shareholders vote in favor
of
the merger agreement and the merger, or take any action not explicitly permitted
by the merger agreement that would be inconsistent with its approval of the
merger agreement and the merger, (ii) approve or recommend, or publicly propose
to approve or recommend, any acquisition transaction or (iii) cause the Company
to enter into any letter of intent, agreement in principle, acquisition
agreement or similar agreement or document related to any acquisition
transaction. Notwithstanding the foregoing, the board is permitted
under the merger agreement (i) not to recommend, and publicly propose not
to
recommend, to its shareholders adoption and approval of the merger agreement
and
the merger, (ii) to withdraw or modify, and publicly propose to withdraw
or
modify, in a manner adverse to Hanover, its recommendation to its shareholders,
(iii) to approve or recommend, and publicly propose to approve and recommend,
any superior proposal or (iv) to terminate the merger agreement and in
connection with such termination enter into an agreement with respect to
a
superior proposal, but only if (y) the Company has received an acquisition
transaction which the board reasonably determines in good faith after
consultation with and advice from PhiloSmith or another financial advisor
of
nationally or regionally recognized reputation constitutes a superior proposal
and (z) the board determines in good faith, after receiving the advice of
outside legal counsel, that the failure to take such action would be
inconsistent with the board’s fiduciary duties under applicable law; provided,
however, that the Company must, among other things, negotiate in good faith
with
Hanover for four business days before termination of the merger agreement
to
make such adjustments in the terms and conditions of the merger agreement
so
that such other proposal would no longer constitute a superior
proposal.
For
purposes of the merger agreement, a “superior proposal” means any bona fide,
third party written proposal not solicited by the Company or any of its
subsidiaries, relating to any acquisition of more than 50% of the Company
and
its subsidiaries taken as a whole, by means of a merger, consolidation, share
exchange or other business combination involving the Company and its
subsidiaries, or acquisition of more than 50% of the assets or capital stock
of
the Company and its subsidiaries taken as a whole, which contains no financing
contingency or for which the financing is determined by the board to be
reasonably available to the offeror, and which the board determines in good
faith, after consultation with and advice from PhiloSmith or another financial
advisor of nationally or regionally recognized reputation, and taking into
account all the terms and conditions of the proposal, is more
34
favorable
to Company shareholders (in their capacities as shareholders) from a financial
point of view than the merger agreement and merger, and is reasonably likely
to
be consummated on the terms set forth in the proposal.
Regulatory
Approvals
The
merger agreement provides that Hanover and the Company will use their reasonable
best efforts to take all actions and do all things advisable, proper or
necessary under the merger agreement and applicable laws to consummate the
merger and the other transactions contemplated by the merger agreement as
promptly as practicable. This includes, among other things, taking
the appropriate actions to obtain approvals from and give notices to applicable
state insurance departments and other governmental entities. In
addition, Hanover and the Company are each required to cooperate with the
other
in obtaining, and to use their reasonable best efforts to take all lawful
steps
as are necessary or appropriate to secure, regulatory approvals. More
information on the required regulatory approvals and notices is available
in the
section in this proxy statement entitled “The Merger – Governmental and
Regulatory Approvals.”
Indemnification
and Insurance
The
merger agreement provides that, following the merger, Hanover and the Company,
as the surviving corporation in the merger, will indemnify and hold harmless,
to
the fullest extent permitted by law, all past and present directors and officers
of the Company and its subsidiaries against any costs or expenses (including
attorney’s fees), judgments, fines, losses, claims, damages or liabilities
incurred in connection with any claim, action, suit, proceeding or investigation
arising out of or pertaining to matters existing or occurring at or prior
to the
effective time of the merger.
The
merger agreement further provides that for a period of six years after the
effective time of the merger, Hanover will maintain in effect, and will cause
the Company, as the surviving corporation in the merger, to maintain in effect,
without any lapses of coverage, the current policies of directors’ and officers’
liability insurance maintained by the Company with respect to claims arising
in
whole or in part from facts or events which occurred before the effective
time. Alternatively, Hanover may obtain and fully pay for a “tail”
insurance policy with a claims period of at least six years after the effective
time with the same coverage and amounts, and containing terms and conditions
which are no less advantageous then the Company’s current policies with respect
to claims arising in whole or in part from facts or events which occurred
before
the effective time.
Hanover
will not be obligated to make annual premium payments to the extent such
premiums exceed 200% of the annual premiums paid as of the date of the merger
agreement by the Company for its current policies of directors’ and officers’
liability insurance or, if Hanover elects to obtain tail coverage, it will
not
be obligated to pay an aggregate premium payment for such tail coverage in
excess of 300% of the annual premiums paid as of the date of the merger
agreement by the Company for its current policies of directors’ and officers’
liability insurance. If the amount of the premiums necessary to
maintain or procure such insurance coverage exceeds such amounts, Hanover
and
the Company will be required to maintain the most advantageous policies of
directors’ and officers’ insurance obtainable for an annual premium equal to
such maximum amount.
Other
Covenants and Agreements
The
merger agreement contains other covenants and agreements, including covenants
and agreements relating to cooperation between Hanover and the Company in
the
preparation of this proxy statement, holding the special meeting of Company
shareholders to adopt and approve the merger agreement and merger, access
to
Company information, public announcements regarding the merger, notifications
of
certain matters, expenses of the parties, and the Company’s 401(k)
plan.
Conditions
to the Closing of the Merger
The
obligations of Hanover, the Purchaser and the Company to complete the merger
are
subject to the satisfaction or waiver of the following
conditions:
35
|
|
·
|
the
adoption and approval of the merger agreement and merger by the
requisite
vote of the shareholders of the
Company;
|
|
|
·
|
the
completion of all filings with, and receipt of all approvals by,
Michigan
insurance regulators that are legally required to consummate the
merger,
the merger agreement and all transactions contemplated
thereby;
|
|
|
·
|
no
temporary restraining order, preliminary or permanent injunction
or other
order, or other legal restraint or prohibition issued by any court
of
competent jurisdiction in the United States preventing the consummation
of
the merger may be in effect, and no proceeding brought by any
administrative agency or commission or other governmental authority
in the
United States seeking any of the foregoing may be pending; and
there must
not have been any action taken, or any statute, rule, regulation
or order
enacted, entered, enforced or deemed applicable to the merger,
which makes
the consummation of the merger illegal;
and
|
|
|
·
|
there
must not have been instituted, pending or threatened any action
or
proceeding (or any investigation or other inquiry that would likely
result
in such an action or proceeding) by any governmental authority
before any
governmental authority or court of competent jurisdiction in the
United
States, and there must not be in effect any judgment, decree or
order of
any governmental authority or court of competent jurisdiction in
the
United States, in either case, seeking to prohibit or limit Hanover
from
exercising all material rights and privileges pertaining to its
ownership
of the surviving corporation or the ownership or operation by Hanover
or
any of its subsidiaries of all or a material portion of the business
or
assets of Hanover or any of its subsidiaries, or seeking to compel
Hanover
or any of its subsidiaries to dispose of or hold separate all or
any
material portion of the business or assets of Hanover or any of
its
subsidiaries (including the surviving corporation and its subsidiaries),
or imposing any materially burdensome conditions or restrictions on
Hanover, the Company or their subsidiaries, as a result of the
merger or
the transactions contemplated by the merger
agreement.
|
Hanover’s
and the Purchaser’s obligation to close is also conditioned on the satisfaction
or waiver of the following conditions:
|
|
·
|
the
representations and warranties of the Company must be true and
correct as
of the closing date, except where the failure of such representations
and
warranties to be true and correct does not, individually or in
the
aggregate, have a Company material adverse
effect;
|
|
|
·
|
the
Company’s performance in all material respects of all agreements and
covenants required to be performed by the Company under the merger
agreement;
|
|
|
·
|
Stephen
M. Tuuk must have executed and delivered to Hanover an employment
agreement acceptable to Hanover;
and
|
|
|
·
|
there
must not have occurred after the date of the merger agreement (i)
any
development or developments with relation to the Company or its
subsidiaries that has have, or would reasonably be expected to
have, a
Company material adverse effect, or (ii) any downgrade in the Company’s
A.M. Best rating below “A-.”
|
The
Company’s obligation to close is also conditioned on the satisfaction or waiver
of the following conditions:
|
|
·
|
the
representations and warranties of Hanover and the Purchaser must
be true
and correct as of the closing date, except where the failure to
be true
and correct does not, individually or in the aggregate, have a
Hanover
material adverse effect; and
|
|
|
·
|
Hanover’s
and the Purchaser’s performance in all material respects of all agreements
and covenants required to be performed by Hanover and the Purchaser
under
the merger agreement.
|
Before
the closing of the merger, the Company or Hanover may waive any of its
conditions to closing and complete the merger even though one of these
conditions has not been met. However, under Michigan law, the
approval of Company shareholders and Michigan insurance regulators is necessary
to close the merger.
36
Termination
of the Merger Agreement
The
merger agreement may be terminated and the transactions contemplated thereby
abandoned at any time prior to the closing of the merger under the following
circumstances:
|
|
·
|
by
mutual written consent of Hanover and the
Company;
|
|
|
·
|
by
either Hanover or the Company, if:
|
|
|
o
|
the
merger is not closed by December 31, 2007 (which date may be extended
by
mutual consent of Hanover and the Company) and the terminating
party’s
material breach of the merger agreement did not primarily contribute
to
the failure of the merger to close by such
date;
|
|
|
o
|
the
shareholders of the Company fail to adopt and approve the merger
agreement
and merger;
|
|
|
o
|
the
Michigan insurance regulators fail to provide the approval that
is legally
required to consummate the merger and the denial of such approval
is final
and nonappealable; or
|
|
|
o
|
any
court of competent jurisdiction in the United States or other governmental
authority in the United States issues an order (other than a temporary
restraining order), decree or ruling or takes any other action
restraining, enjoining or otherwise prohibiting the merger, and
such
order, decree, ruling or other action is final and
nonappealable;
|
|
|
·
|
by
Hanover, if:
|
|
|
o
|
the
Company breaches any of its representations and warranties contained
in
the merger agreement so that the closing conditions cannot be satisfied,
except for any breach that is capable of being and is cured (other
than by
mere disclosure of the breach) within 20 days after written notice
from
the Purchaser to the Company of such
breach;
|
|
|
o
|
the
Company breaches in any material respect any of its covenants made
in this
Agreement, except for any breach that is capable of being and is
cured
within 20 days after written notice from the Purchaser to the Company
of
such breach;
|
|
|
o
|
the
board of directors of the Company (i) withdraws its recommendation
or
approval in respect of the merger agreement or the merger, (ii)
modifies
its recommendation or approval in respect of the merger agreement
or the
merger in a manner adverse to Hanover, (iii) fails to recommend
to
shareholders of the Company that they approve the merger, or (iv)
fails,
at the written request of Hanover, to publicly reaffirm within
five
business days after the request, its recommendation or approval
in respect
of the merger agreement or the merger, which public reaffirmation
must
also include, if requested by Hanover, the unconditional rejection
of any
other acquisition transaction;
|
|
|
o
|
the
board of directors of the Company recommends any proposal other
than by
Hanover or the Purchaser in respect of an acquisition transaction;
or
|
|
|
o
|
any
court of competent jurisdiction in the United States or other governmental
authority in the United States issues a judgment, decree or order
that is
final and nonappealable and in the reasonable judgment of Hanover
(i) has
the effect of prohibiting the merger, (ii) individually or in the
aggregate has had, or is reasonably likely to have, a Company material
adverse effect, or (iii) prohibits or limits Hanover from exercising
all
material rights and privileges pertaining to its ownership of the
surviving corporation or the ownership or operation by Hanover
or any of
its subsidiaries of all or a material portion of the business or
assets of
Hanover or any of its subsidiaries, or compels Hanover or any of
its
subsidiaries to dispose of or hold separate all or any material
portion of
the business or assets of Hanover or any of its subsidiaries (including
the surviving corporation and its subsidiaries), or imposes any
materially
burdensome conditions or restrictions on Hanover, the Company or
their
subsidiaries, as a result of the merger or the transactions contemplated
by the merger agreement;
|
|
|
·
|
by
the Company, if:
|
|
|
o
|
the
Company intends to enter into a definitive acquisition agreement
with a
third party with respect to a superior proposal, to the extent
otherwise
permitted by the merger agreement,
and
|
|
|
§
|
the
Company provides written notice to Hanover and the Purchaser of
the
material terms and conditions of the superior proposal that the
board or
the Company intends to accept; and
|
|
|
§
|
on
or after the fifth business day following delivery of such written
notice,
the board reasonably determines, upon the advice of its financial
advisor,
that such proposal
|
37
remains
a
superior proposal and, after receiving the advice of outside legal counsel
to
the Company, that the failure to terminate the merger agreement to enter
into an
agreement with respect to the superior proposal would be inconsistent with
its
fiduciary duties under applicable law;
|
|
o
|
Hanover
or the Purchaser breaches any of its representations and warranties
contained in the merger agreement so that the closing conditions
cannot be
satisfied, except for any breach that is capable of being and is
cured
(other than by mere disclosure of the breach) within 20 days after
written
notice from the Company to Hanover of such breach;
or
|
|
|
o
|
either
Hanover or the Purchaser breaches in any material respect any of
its
covenants made in the merger agreement, except for any breach that
is
capable of being and is cured within 20 days after written notice
from the
Company to Hanover of such breach.
|
Termination
Fee
As
described below, if the merger agreement is terminated, the Company may be
required (i) to reimburse Hanover and the Purchaser their actual, incurred
expenses directly relating to the transactions contemplated by the merger
agreement up to $300,000 in the aggregate (the “Expense Payment”), and (ii) to
pay Hanover a termination fee of up to $900,000.
If
the
merger agreement is terminated by Hanover under the following circumstances,
the
Company will be required to pay Hanover and the Purchaser the Expense Payment
and, if the Company consummates a “termination transaction” (described below)
within 18 months of the termination, the Company also will be required to
pay
Hanover a termination fee of $900,000:
|
|
·
|
the
board of directors of the Company (i) withdraws its recommendation
or
approval in respect of the merger agreement or the merger, (ii)
modifies
its recommendation or approval in respect of the merger agreement
or the
merger in a manner adverse to Hanover, (iii) fails to recommend
to
shareholders of the Company that they approve the merger, or (iv)
fails,
at the written request of Hanover, to publicly reaffirm within
five
business days after the request, its recommendation or approval
in respect
of the merger agreement or the merger, which public reaffirmation
must
also include, if requested by Hanover, the unconditional rejection
of any
other acquisition transaction; or
|
|
|
·
|
the
board of directors of the Company recommends any proposal other
than by
Hanover or the Purchaser in respect of an acquisition
transaction.
|
For
purposes of the merger agreement, a “termination transaction” means any
acquisition of more than 50% of the Company and its subsidiaries taken as
a
whole, by means of a merger, consolidation, share exchange or other business
combination involving the Company and its subsidiaries, or acquisition of
more
than 50% of the assets or capital stock of the Company and its subsidiaries
taken as a whole, in each case other than the transactions with Hanover or
the
Purchaser contemplated by the merger agreement.
If
the
merger agreement is terminated by the Company or Hanover because Company
shareholders fail to approve the merger, before the termination an acquisition
transaction by a third party is publicly announced or otherwise becomes publicly
known, and the Company consummates a termination transaction within 18 months
of
the termination, the Company will be required to pay Hanover and the Purchaser
the Expense Payment and to pay Hanover a termination fee of
$900,000.
If
the
merger agreement is terminated by the Company or Hanover because the merger
is
not closed by December 31, 2007 or a later date agreed upon by the Company
and
Hanover, before the termination an acquisition transaction by a third party
is
publicly announced or otherwise becomes publicly known, and the Company
consummates a termination transaction within 18 months of the termination,
the
Company will be required to pay Hanover and the Purchaser the Expense
Payment.
If
the
merger agreement is terminated by the Company in connection with the Company’s
intention to enter into a definitive acquisition agreement with respect to
a
superior proposal, then (i) the Company will be required to pay to Hanover
and
the Purchaser the Expense Payment, (ii) the Company will be required to pay
to
Hanover a termination fee of $300,000 after entering into a
definitive acquisition agreement with respect to a superior proposal, and
(iii)
if
38
within
18
months after such termination the Company consummates a termination transaction,
the Company will be required to pay Hanover an additional termination fee
of
$600,000.
If
the
merger agreement is terminated by Hanover under the following circumstances,
the
Company will be required to pay to Hanover and Purchaser the Expense
Payment:
|
|
·
|
the
Company breaches any of its representations and warranties contained
in
the merger agreement so that the closing conditions could not be
satisfied, except for any breach that is capable of being and is
cured
(other than by mere disclosure of the breach) within 20 days after
written
notice from the Purchaser to the Company of such breach and except
for a
termination due solely to a Loss Reserve MAE;
or
|
|
|
·
|
the
Company breaches in any material respect any of its covenants made
in this
Agreement, except for any breach that is capable of being and is
cured
within 20 days after written notice from the Purchaser to the Company
of
such breach.
|
Governing
Law
The
merger agreement is governed by the laws of the State of Michigan and provides
that any litigation relating to the merger agreement or the transactions
contemplated by the merger agreement will be maintained in Michigan state
courts
and federal courts located in Michigan.
Amendments,
Extensions and Waivers of the Merger Agreement
The
merger agreement provides that, subject to applicable law, the parties may
amend, modify or supplement the merger agreement, except that after approval
of
the merger agreement by our shareholders, no such amendment, modification
or
supplement may reduce the merger price of $69.61 per Company common share
or the
form of consideration (cash) or may materially adversely affect the rights
of
our shareholders, without the further approval of our shareholders.
The
merger agreement further provides that at any time before the effective time
of
the merger, Hanover and the Purchaser, on the one hand, and the Company,
on the
other hand, may extend the time for performance of any obligations of the
other,
waive any breaches of representations or warranties of the other, and waive
any
agreements and conditions that may be legally waived.
39
|
Ownership
of Professionals Direct
Stock
|
The
following table shows the number of Company common shares beneficially owned
on
[_________], 2007, the record date, by each of the Company’s directors, each of
its executive officers, and all of its directors and executive officers as
a
group. Except as described below, no shareholder known to management
of the Company beneficially owned more than 5% of Company common shares
outstanding on [________], 2007. As a group, the Company’s directors
and executive officers owned approximately 20.2% of Company common shares
on
[_______], 2007.
|
Name
of Beneficial Owner(1)
|
Amount
and Nature of
Beneficial
Ownership(2)
|
Percentage
of
Class(3)
|
|||||
|
Stephen
M. Tuuk(4)
(5)
|
16,675
|
5.0%
|
|||||
|
Stephen
M. Westfield(5)
|
10,200
|
3.1%
|
|||||
|
David
W. Crooks
|
11,000
|
3.3%
|
|||||
|
Thomas
F. Dickinson
|
0
|
0.0%
|
|||||
|
Joseph
A. Fink
|
6,800
|
2.0%
|
|||||
|
Blake
W. Krueger
|
0
|
0.0%
|
|||||
|
Tracy
T. Larsen(5)
|
6,000
|
1.8%
|
|||||
|
Julius
A. Otten
|
0
|
0.0%
|
|||||
|
Thomas
J. Ryan
|
2,200
|
0.7%
|
|||||
|
Mary
L. Ursul
|
14,500
|
4.4%
|
|||||
|
All
directors and executive officers as a group (10 persons)
|
67,375
|
20.2%
|
|||||
|
(1)
|
The
address of each beneficial owner is 5211 Cascade Road, S.E.,
Grand Rapids,
Michigan, 49546.
|
|
|
(2)
|
The
numbers of shares stated are based on information furnished by
each person
listed and include shares personally owned of record by that
person and
shares which, under applicable regulations, are considered to
be otherwise
beneficially owned by that person. Under these regulations, a
beneficial owner of a security includes any person who, directly
or
indirectly, through any contract, arrangement, understanding,
relationship
or otherwise, has or shares voting power or dispositive power
with respect
to the security. Voting power includes the power to vote or
direct the voting of the security. Dispositive power includes
the power to dispose or direct the disposition of the
security. A person would also be considered the beneficial
owner of a security if the person has a right to acquire beneficial
ownership of the security within 60 days, but no shares listed
are deemed
to be beneficially owned for this reason. These numbers include
shares as to which the listed person is legally entitled to share
voting
or dispositive power by reason of joint ownership, trust or other
contract
or property right, and shares held by spouses and minor children
over whom
the listed person may have substantial influence by reason of
relationship.
|
|
|
(3)
|
Percentage
of beneficial ownership is based on 333,300 shares of common
stock
outstanding on [______], 2007.
|
|
|
(4)
|
In
July 2006, Stephen M. Tuuk’s beneficial ownership of Company common shares
increased to 5.003% as a result of the Company’s purchase of 200 common
shares from a shareholder in a single private transaction and
not pursuant
to a publicly announced plan or program.
|
|
|
(5)
|
This
individual, in his capacity as a shareholder, has executed a
voting
agreement with Hanover. Under the voting agreement, this
individual agrees to vote his common shares in favor of adopting
and
approving the merger agreement and merger and against certain
actions that
may impede or interfere with the merger, and provides an irrevocable
proxy
to Hanover in furtherance thereof. A copy of the voting
agreement substantially in the form executed by this individual
is
attached hereto as Appendix C and is incorporated into this proxy
statement by reference. For additional information regarding
the voting agreement, please see the section in this proxy statement
entitled “The Merger – Interests of Our Directors and Executive Officers
in the Merger.”
|
40
|
Related
Matters
|
Market
for Common Equity
There
is
no active public trading market for the Company common shares. Bid
and asked quotations for the Company common shares may be reported on the
OTC
under the symbol PFLD. Transactions in the Company common shares are
occasionally effected by individuals through the OTC or on an informal
basis. The prices at which such transactions are effected are only
occasionally reported to the Company.
Shareholder
Proposals
If
the
merger is completed, we will have no public shareholders and no public
participation in our future shareholder meetings.
We
have
not yet held our 2007 annual meeting of shareholders. If the merger
is not completed and you would like a proposal to be presented at the 2007
annual meeting of shareholders and included in the Company’s proxy statement and
form of proxy for that meeting, you must submit the proposal to us in accordance
with Rule 14a-8 under the Securities Exchange Act of 1934. We must
receive your proposal a reasonable time before we begin to print and send
our
proxy materials to shareholders for the 2007 meeting for your proposal to
be
eligible for inclusion in the Company’s proxy statement and form of proxy for
that meeting. To be considered timely, any other proposal intended to
be presented at the 2007 annual meeting of shareholders must be received
by us
by that same date.
Similarly,
if the merger is not completed and you would like a proposal to be presented
at
our 2008 annual meeting of shareholders and included in the Company’s proxy
statement and form of proxy for that meeting, you must submit the proposal
to us
in accordance with Rule 14a-8 under the Securities Exchange Act of
1934. For your proposal to be eligible for inclusion in the Company’s
proxy statement and form of proxy relating to that meeting, we must receive
your
proposal no later than 120 calendar days before the date of the Company’s proxy
statement sent to shareholders for our 2007 annual meeting of
shareholders. To be considered timely, any other proposal that you
intend to present at the 2008 annual meeting of shareholders must be received
by
us by that same date. If we do not hold a 2007 annual meeting of
shareholders, or if the date of the 2008 annual meeting is changed by more
than
30 days from the date of the 2007 annual meeting, then the deadline for
submitting proposals to us is a reasonable time before we begin to print
and
send our proxy materials to shareholders for the 2008 meeting.
Other
Matters
The
Company’s board of directors knows of no other matters that are likely to be
brought before the meeting, but if other matters do properly come before
the
meeting which we did not have notice of prior to [______], 2007, or that
applicable laws otherwise permit proxies to vote on a discretionary basis,
it is
intended that the person authorized under solicited proxies will vote or
act
thereon in accordance with that person’s own judgment.
Where
You Can Obtain Additional Information
The
Company is subject to the informational requirements of the Securities Exchange
Act of 1934. The Company files reports, proxy statements and other
information with the SEC. The filings are available to the public at
the SEC’s website, http://www.sec.gov. The Company’s website,
http://www.professionalsdirect.com/pdcom/invest/index.htm, has copies of
some of
these filings as well. You may read and copy our SEC filings, proxy
statements and other information at the SEC’s Public Reference Section at 450
Fifth Street, N.W., Washington, D.C. 20549. You may obtain
information on the operation of the Public Reference Room by calling the
SEC at
1-800-SEC-0330.
If
you
have questions about the special meeting or the merger after reading this
proxy
statement, or if you would like additional copies of this proxy statement
or the
proxy card, you should contact the Company.
41
We
have
authorized no one to give you any information or to make any representation
about the proposed merger or our Company that differs from or adds to the
information contained in this document or in the documents we have publicly
filed with the SEC. Therefore, if anyone should give you any
different or additional information, you should not rely on it.
The
information contained in this document speaks only as of the date indicated
on
the cover of this document unless the information specifically indicates
that
another date applies.
42
(This
page intentionally left blank)
Appendix
A
EXECUTION
COPY
AGREEMENT
AND PLAN OF MERGER
by
and
among
PROFESSIONALS
DIRECT, INC.
(“Company”)
HANOVER
ACQUISITION CORP.
(“Purchaser”)
and
THE
HANOVER INSURANCE GROUP, INC.
(“Parent”)
June
25,
2007
TABLE
OF CONTENTS
Page
|
ARTICLE
I THE MERGER
|
1
|
|
|
Section
1.1
|
The
Merger.
|
1
|
|
Section
1.2
|
Effective
Time
|
2
|
|
Section
1.3
|
Effects
of Merger.
|
2
|
|
Section
1.4
|
Articles
of Incorporation and Bylaws of Surviving Corporation
|
2
|
|
Section
1.5
|
Directors
and Officers of Surviving Corporation.
|
2
|
|
ARTICLE
II CONVERSION OF SHARES
|
3
|
|
|
Section
2.1
|
Effect
on the Shares and the Purchaser’s Capital Stock.
|
3
|
|
ARTICLE
III PAYMENT FOR SHARES
|
3
|
|
|
Section
3.1
|
Payment
For Shares.
|
3
|
|
ARTICLE
IV REPRESENTATIONS AND WARRANTIES OF THE
COMPANY
|
5
|
|
|
Section
4.1
|
Organization
|
5
|
|
Section
4.2
|
Capitalization
|
8
|
|
Section
4.3
|
Authority
|
8
|
|
Section
4.4
|
No
Violations; Consents and Approvals.
|
8
|
|
Section
4.5
|
SEC
Documents; Financial Statements.
|
10
|
|
Section
4.6
|
Absence
of Certain Changes; No Undisclosed Liabilities; Subordinated
Debentures.
|
11
|
|
Section
4.7
|
Litigation
|
12
|
|
Section
4.8
|
Compliance
with Applicable Law
|
12
|
|
Section
4.9
|
Taxes.
|
14
|
|
Section
4.10
|
Labor
and Employment Matters.
|
15
|
|
Section
4.11
|
Employee
Benefit Plans, ERISA.
|
16
|
|
Section
4.12
|
Title
to Property; Assets.
|
18
|
|
Section
4.13
|
Real
Properties
|
18
|
|
Section
4.14
|
Environmental
Matters.
|
19
|
|
Section
4.15
|
Intellectual
Property.
|
20
|
|
Section
4.16
|
Information
|
21
|
|
Section
4.17
|
Insurance
Reports
|
22
|
|
Section
4.18
|
Insurance
Matters.
|
23
|
|
Section
4.19
|
General
Insurance.
|
24
|
|
Section
4.20
|
Certain
Contracts.
|
25
|
|
Section
4.21
|
Opinion
of Financial Advisor.
|
27
|
|
Section
4.22
|
Change
in Control Payments.
|
27
|
|
Section
4.23
|
Questionable
Payments.
|
27
|
|
Section
4.24
|
Michigan
Acts
|
27
|
|
Section
4.25
|
Broker’s
Fees
|
27
|
|
Section
4.26
|
No
Other Representations or Warranties
|
27
|
i
|
ARTICLE
V REPRESENTATIONS AND WARRANTIES OF PARENT AND THE
PURCHASER
|
28
|
|
|
Section
5.1
|
Organization
|
28
|
|
Section
5.2
|
Authority
|
28
|
|
Section
5.3
|
No
Violations; Consents and Approvals.
|
28
|
|
Section
5.4
|
Financing
|
29
|
|
Section
5.5
|
Broker’s
Fees
|
29
|
|
ARTICLE
VI COVENANTS
|
29
|
|
|
Section
6.1
|
Conduct
of Business of the Company
|
29
|
|
Section
6.2
|
No
Solicitation.
|
32
|
|
Section
6.3
|
Insurance
Regulatory Filings.
|
35
|
|
Section
6.4
|
Proxy
Statement; Shareholder Meeting.
|
35
|
|
Section
6.5
|
Access
to Information
|
36
|
|
Section
6.6
|
Reasonable
Best Efforts, Other Actions
|
37
|
|
Section
6.7
|
Public
Announcements
|
37
|
|
Section
6.8
|
Notification
of Certain Matters
|
37
|
|
Section
6.9
|
Indemnification
and Insurance.
|
38
|
|
Section
6.10
|
Expenses
|
39
|
|
Section
6.11
|
Obligations
of the Purchaser
|
39
|
|
Section
6.12
|
401(k)
Plan
|
39
|
|
ARTICLE
VII CONDITIONS TO THE OBLIGATIONS OF PARENT, THE PURCHASER AND
THE COMPANY
|
39
|
|
|
Section
7.1
|
Conditions
to Obligation of Each Party to Effect the Merger.
|
39
|
|
Section
7.2
|
Additional
Conditions to Obligations of Parent and Purchaser.
|
40
|
|
Section
7.3
|
Additional
Conditions to Obligations of the Company
|
41
|
|
ARTICLE
VIII TERMINATION AND ABANDONMENT
|
41
|
|
|
Section
8.1
|
Termination
|
41
|
|
Section
8.2
|
Termination
by Parent
|
42
|
|
Section
8.3
|
Termination
by the Company
|
43
|
|
Section
8.4
|
Procedure
for Termination
|
43
|
|
Section
8.5
|
Effect
of Termination
|
43
|
|
Section
8.6
|
Termination
Fee
|
43
|
|
ARTICLE
IX DEFINITIONS
|
45
|
|
|
Section
9.1
|
Terms
Defined in Agreement
|
45
|
|
ARTICLE
X MISCELLANEOUS
|
47
|
|
|
Section
10.1
|
Amendment
and Modification.
|
47
|
|
Section
10.2
|
Waiver.
|
47
|
|
Section
10.3
|
Survivability;
Investigations
|
47
|
|
Section
10.4
|
Notices
|
47
|
|
Section
10.5
|
Assignment;
No Third Party Beneficiaries.
|
48
|
|
Section
10.6
|
Governing
Law.
|
49
|
|
Section
10.7
|
Counterparts.
|
49
|
ii
|
Section
10.8
|
Certain
Disclosure Matters.
|
49
|
|
Section
10.9
|
Interpretation.
|
49
|
|
Section
10.10
|
Entire
Agreement.
|
50
|
|
Section
10.11
|
Waiver
of Jury Trial.
|
50
|
iii
AGREEMENT
AND PLAN OF MERGER
THIS
AGREEMENT AND PLAN OF MERGER is dated as of June 25, 2007 (the “Agreement”), by
and among Professionals Direct, Inc., a Michigan corporation (the
“Company”), Hanover Acquisition Corp., a Michigan
corporation (the “Purchaser”), and The Hanover Insurance Group, Inc., a Delaware
corporation (“Parent”). The Company and the Purchaser are hereinafter
sometimes collectively referred to as the “Constituent
Corporations.” An index of defined terms used in this Agreement is
set forth in Article IX.
RECITALS
WHEREAS,
the respective Boards of Directors of each of Parent, the Purchaser
and the
Company have approved the acquisition of the Company by the Parent
upon the
terms and subject to the conditions set forth herein;
WHEREAS,
in furtherance of such acquisition, the respective Boards of Directors
of each of Parent, the Purchaser and the Company have approved the
merger of the Purchaser with and into the Company in accordance with
the terms
of this Agreement and the Michigan Business Corporation Act (the “MBCA”) and
with any other applicable law; and
WHEREAS,
the Board of Directors of the Company (the “Board”) has, in light of and subject
to the terms and conditions set forth herein, (a) determined that (i)
the
consideration to be paid for each Share in the Merger (as such terms
are
hereinafter defined) is fair to the shareholders of the Company, and
(ii) the
Merger is otherwise in the best interests of the Company and its shareholders,
and (b) resolved to approve and adopt this Agreement and the transactions
contemplated hereby and to recommend approval by the shareholders of
the Company
of this Agreement.
NOW,
THEREFORE, in consideration of the premises and the mutual representations,
warranties, covenants, agreements and conditions contained herein,
the parties
hereto agree as follows:
ARTICLE
I
THE
MERGER
Section
1.1 The
Merger.
(a) In
accordance with the provisions of this Agreement and the MBCA, at the
Effective
Time, the Purchaser shall be merged with and into the Company (the
“Merger”),
and the Company shall be the surviving corporation (hereinafter sometimes
called
the “Surviving Corporation”) and shall continue its corporate existence under
the Laws of the State of Michigan. At the Effective Time the separate
existence of the Purchaser shall cease.
(b) The
name of the Surviving Corporation shall be “Professionals Direct,
Inc.”
1
(c) Unless
this Agreement is terminated in accordance with Article VIII of this
Agreement
and subject to the satisfaction or waiver of the conditions set forth
in Article
VII, the consummation of the Merger will take place as promptly as
practicable
after satisfaction or waiver of the conditions set forth in Article
VII, at the
offices of Dykema Gossett, PLLC, 300 Ottawa Avenue, NW, Suite 700,
Grand Rapids,
Michigan, unless another date, time or place is agreed to in writing
by the
parties hereto (“Closing”). The Merger shall have the effects on the Company and
the Purchaser as provided under the MBCA and this Agreement. As of
the Effective Time, the Company shall be a wholly-owned direct or indirect
subsidiary of Parent.
(d) Subject
to the terms and conditions of this Agreement, each of Parent, the
Purchaser and
the Company shall take all such reasonable and lawful action as may
be necessary
or appropriate in order to effectuate the Merger in accordance with
this
Agreement as promptly as practicable. If, at any time after the
Effective Time, any such further action is necessary or desirable to
carry out
the purposes of this Agreement and to vest the Surviving Corporation
with full
right, title, possession, privileges, powers, franchises, licenses,
and
interests of the Company and the Purchaser in and to every type of
property
(whether real, personal, or mixed), the officers and directors of the
Company
and Purchaser immediately prior to the Effective Time are fully authorized
in
the name of their respective corporations or otherwise to take all
such lawful
and necessary action.
Section
1.2 Effective
Time
. At
Closing, the parties shall file a certificate of merger in the form
required by
and executed in accordance with the MBCA (the “Certificate of Merger”) with the
Michigan Department of Labor and Economic Growth in accordance with
the
provisions of the MBCA and the Merger shall become effective at the
time of
filing of, or at such later time specified in, the Certificate of
Merger. The date and time when the Merger shall become effective is
herein referred to as the “Effective Time.”
Section
1.3 Effects
of Merger.
At
the Effective Time, the effect of the Merger shall be as provided in
this
Agreement, the Certificate of Merger, and the applicable provisions
of the
MBCA. Without limiting the generality of the foregoing, and subject
thereto, at the Effective Time (a) all the rights, privileges, powers,
franchises, licenses, and interests of the Company and the Purchaser
in and to
every type of property (whether real, personal, or mixed), shall vest
in the
Surviving Corporation, (b) all choses in action of the Company and
the Purchaser
shall continue unaffected and uninterrupted by the Merger and shall
accrue to
the Surviving Corporation, and (c) all debts, liabilities and duties
of the
Company and the Purchaser shall become the debts, liabilities and duties
of the
Surviving Corporation.
Section
1.4 Articles
of Incorporation and Bylaws of Surviving Corporation. Subject to
Section 1.1(b), the Articles of Incorporation of the Purchaser shall
be
submitted with the Certificate of Merger as the Articles of Incorporation
of the
Surviving Corporation and the Bylaws of the Purchaser shall be the
Bylaws of the
Surviving Corporation, in each case until thereafter amended as provided
by
applicable Law.
Section
1.5 Directors
and Officers of Surviving Corporation.
(a) Subject
to applicable Law, the directors of the Purchaser immediately prior
to the
Effective Time shall be the initial directors of the Surviving Corporation
and
shall hold office
2
until
their respective successors are duly elected and qualified, or their
earlier
death, resignation or removal.
(b) The
officers of the Company immediately prior to the Effective Time shall
be the
initial officers of the Surviving Corporation and shall hold office
until their
respective successors are duly elected and qualified, or their earlier
death,
resignation or removal.
ARTICLE
II
CONVERSION
OF SHARES
Section
2.1 Effect
on the Shares and the Purchaser’s Capital Stock.
(a) As
of the Effective Time, by virtue of the Merger and without any action
on the
part of the holders thereof, each share of common stock of the Company
(each a
“Share” and collectively the “Shares”) issued and outstanding immediately prior
to the Effective Time (other than any Shares held by a wholly-owned
subsidiary
of the Company, which Shares, by virtue of the Merger and without any
action on
the part of the holder thereof, shall be canceled and retired and shall
cease to
exist with no payment being made with respect thereto) shall be converted
into
the right to receive $69.61 net to the holder in cash (the “Merger Price”),
payable to the holder thereof, without interest thereon, as set forth
in Article
III.
(b) As
of the Effective Time, by virtue of the Merger and without any action
on the
part of the holders thereof, each share of capital stock of the Purchaser
issued
and outstanding immediately prior to the Effective Time shall be converted
into
and become one fully paid and nonassessable share of common stock of
the
Surviving Corporation.
ARTICLE
III
PAYMENT
FOR SHARES
Section
3.1 Payment
For Shares.
(a) From
and after the Effective Time, Computershare, Ltd. shall act as paying
agent (the
“Paying Agent”) for the purpose of effecting the payment of the Merger Price in
exchange for certificates (the “Certificates”) formerly representing Shares and
entitled to payment of the Merger Price pursuant to Section 2.1. At
the Effective Time and from time to time thereafter, Parent shall,
or shall
cause the Purchaser or the Surviving Corporation (including, if necessary,
providing the Purchaser or the Surviving Corporation with sufficient
funds) to,
deposit, or cause to be deposited, in trust with the Paying Agent sufficient
funds to permit the Paying Agent to make the payments contemplated
by this
Section 3.1. Such funds shall be invested by the Paying Agent in a
bank money-market account, short-term certificates of deposit issued
by a bank,
or short-term securities issued or guaranteed by the United States
Government,
as directed by Parent or the Purchaser, in trust for the benefit of
the holders
of the Shares, for payment in accordance with Section 2.1 in exchange
for
outstanding Shares. Parent or the Surviving Corporation may cause the
Paying Agent to pay over to the Parent or Surviving Corporation any
net earnings
with respect to the investment of the funds. In no event will any
holder of Shares be entitled to any earnings on the funds to which
such holder
shall become entitled pursuant to
3
Section
2.1. To the extent that there are losses with respect to any
investment of the funds or the funds diminish for any reason below
the level
required to make prompt cash payment as contemplated by this Section
3.1, Parent
shall, or shall cause the Surviving Corporation (including, if necessary,
providing the Surviving Corporation with sufficient funds) to, promptly
replace
or restore such funds in cash so as to ensure that funds at all times
are
maintained at a level sufficient to make such cash payments.
(b) Promptly
after the Effective Time, Parent shall cause the Paying Agent to mail
to each
record holder of a Certificate that immediately prior to the Effective
Time
represented Shares (other than any Certificate representing Shares
held by a
wholly-owned subsidiary of the Company) a form of letter of transmittal
that
shall specify that delivery shall be effected, and risk of loss and
title to the
Certificates shall pass, only upon proper delivery of the Certificate
to the
Paying Agent, instructions for use in surrendering Certificates and
receiving
the Merger Price therefore, and such other provisions as Parent and
the Company
may reasonably specify. Upon the surrender of each Certificate for
cancellation to the Paying Agent, or in lieu of any such Certificate
which has
been lost, stolen or destroyed, an affidavit of lost, stolen or destroyed
share
certificates (including customary indemnity against loss but excluding
any
requirement to post a bond or similar security), together with such
letter of
transmittal, duly executed, and such other customary documents as may
be
required pursuant to such instructions, the Paying Agent shall pay
the holder of
such Certificate in exchange therefore cash in an amount equal to the
Merger
Price multiplied by the number of Shares formerly represented by such
Certificate, and such Certificate shall forthwith be canceled. Until
so surrendered, each Certificate (other than Certificates representing
Shares
held by a wholly-owned subsidiary of the Company) shall represent solely
the
right to receive the aggregate Merger Price relating thereto. No
interest shall be paid or accrued on the Merger Price.
(c) Promptly
following the date which is 18 months after the Effective Time, Parent
may
require the Paying Agent to deliver to Parent all cash (including any
interest
received with respect thereto), Certificates and other documents in
its
possession relating to the transactions described in this Agreement,
and the
Paying Agent’s duties shall terminate. Thereafter, each holder of a
Certificate formerly representing a Share (other than Certificates
representing
Shares held by a wholly-owned subsidiary of the Company) shall be entitled
to
look to Parent (subject to applicable abandoned property, escheat and
similar
Laws) only as general creditors thereof with respect to the Merger
Price payable
upon the surrender of their Certificates, without any interest
thereon. None of Parent, the Purchaser or the Surviving Corporation
shall be liable to any holder of Shares for any amount paid to a public
official
in accordance with applicable abandoned property, escheat or similar
Laws.
(d) The
Merger Price shall be net to each holder of Certificates in cash, subject
to
reduction only for any applicable federal back up withholding and any
other
taxes payable by such holder. Parent, the Surviving Corporation or
the Paying Agent shall be entitled to deduct and withhold from the
Merger Price
otherwise payable pursuant to this Agreement to any holder of Shares
such
amounts as Parent, the Surviving Corporation or the Paying Agent is
required to
deduct and withhold with respect to the making of such payment under
the
Internal Revenue Code of 1986, as amended (the “Code”), or any provision of
state, local or foreign tax Law. To the extent that amounts are so
withheld by Parent, the Surviving Corporation or the Paying Agent,
such withheld
amounts shall be treated for all purposes of this Agreement as having
been
4
paid
to
the holder of the Shares in respect of which such deduction and withholding
was
made by Parent, the Surviving Corporation or the Paying Agent.
(e) If
payment of cash in respect of any Certificate is to be made to a person
other
than the person in whose name such Certificate is registered, it shall
be a
condition to such payment that the Certificate so surrendered shall
be properly
endorsed or shall be otherwise in proper form for transfer and that
the person
requesting such payment shall have paid any taxes required by reason
of such
payment in a name other than that of the registered holder of the Certificate
surrendered or shall have established to the satisfaction of Parent
or the
Paying Agent that such tax either has been paid or is not payable.
(f) The
Merger Price delivered upon the surrender for exchange of Shares in
accordance
with the terms hereof shall be deemed to have been issued in full satisfaction
of all rights pertaining to such Shares, and, after the Effective Time,
there
shall be no transfers on the stock transfer books of the Surviving
Corporation
of any Shares which were outstanding immediately prior to the Effective
Time. If, after the Effective Time, Certificates formerly
representing Shares (other than Certificates representing Shares held
by a
wholly-owned subsidiary of the Company) are presented to Parent, the
Surviving
Corporation or the Paying Agent, they shall be surrendered and canceled
in
return for the payment by Parent or the Paying Agent, as applicable,
of the
aggregate Merger Price relating thereto, without interest, as provided
in this
Section 3.1.
ARTICLE
IV
REPRESENTATIONS
AND WARRANTIES OF THE COMPANY
The
Company represents and warrants to Parent and the Purchaser that the
statements
contained in this Article IV are correct and complete as of the date
of this
Agreement and shall be correct and complete as of the Effective Time
(as though
made as of the Effective Time), except as disclosed by the Company
to Parent and
the Purchaser in the Disclosure Letter dated the same date hereof,
subject to
Section 10.8 (the “Disclosure Letter”), or, with respect to the statements in
this Article IV being correct and complete as of the Effective Time,
by the
Company to Parent and Purchaser in the Updated Disclosure Letter, subject
to
Section 10.8:
Section
4.1 Organization.
(a) The
Company is a corporation duly organized, validly existing and in good
standing
under the Laws of the state of Michigan and the Company and each of
its direct
and indirect subsidiaries have all requisite corporate power and authority
necessary to own, lease and operate their respective properties they
purport to
own or lease and to carry on their respective businesses as now being
conducted.
Each subsidiary of the Company is a corporation or trust, as applicable,
duly
organized, validly existing and in good standing under the Laws of
its
jurisdiction of organization and each subsidiary of the Company has
all
requisite corporate or trust, as applicable, power and
authority necessary to own, lease and operate their respective properties
they
purport to own, lease or operate and to carry on their respective businesses
as
now being conducted. The Company and each of its subsidiaries is duly
qualified
or licensed and
5
in
good
standing to do business in each jurisdiction in which the property
owned, leased
or operated by it or the nature of the business conducted by it makes
such
qualification or licensing necessary, except in such jurisdictions
where the
failure to be so duly qualified or licensed and in good standing, individually
or in the aggregate, would not reasonably be expected to have a Company
Material
Adverse Effect. Schedule 4.1(a) of the Disclosure Letter sets forth
the name and state or incorporation or organization of each of the
Company’s
subsidiaries. Except for the Company subsidiaries set forth in
Schedule 4.1(a) of the Disclosure Letter, the Company does not directly
or
indirectly own any equity or similar interest in, or any interest convertible
into or exchangeable or exercisable for, any equity or similar interest
in, any
corporation, partnership, joint venture or other business association
or entity,
excluding securities in any publicly traded company held for investment
by the
Company and compromising less that five percent of the outstanding
stock of such
company. For the purposes of this Agreement, “Company Material
Adverse Effect” means a material adverse effect on the business, operations,
assets, financial condition or results of operations of the Company
and its
subsidiaries taken as a whole or a material adverse effect on the Company’s
ability to perform its obligations under this Agreement or to consummate
the
Merger, except for any such effect attributable to (i) acts of sabotage
or
terrorism, or the engagement by the United States in hostilities, whether
or not
pursuant to the declaration of a national emergency or war, (ii) changes
in
general economic conditions, or financial or securities markets (including
any
disruption thereof and any decline in the price of any security or
any market
index) to the extent not disproportionately affecting the Company and
the
Company’s subsidiaries, taken as a whole, as compared to other similarly
situated companies in the legal malpractice insurance industry, (iii)
changes
affecting the legal malpractice insurance industry in general to the
extent not
disproportionately affecting the Company and the Company’s subsidiaries, taken
as a whole, as compared to other similarly situated companies in the
legal
malpractice insurance industry, (iv) the execution and announcement
of this
Agreement and the transactions contemplated hereby, (v) Parent’s announcement or
other communication by Parent of its plans or intentions with respect
to the
Company or any of its subsidiaries or any other acts or omissions of
Parent or
the Purchaser, (vi) acts or omissions of the Company prior to the Effective
Time
taken at the written request of Parent or the Purchaser or with the
prior
written consent of Parent or the Purchaser (provided, however,
that nothing set forth in this Agreement shall constitute such consent),
(vii)
changes in generally accepted accounting principles or actuarial methodologies
or practices historically employed by the Company to establish Loss
Reserves
unless the principles, methodologies or practices historically employed
by the
Company were not in accordance with or more conservative than those
called for
in relevant policy and reinsurance contract provisions during the period
employed, (viii) changes in Tax Laws, or (ix) except for a Loss Reserve
MAE,
changes in Loss Reserves. For purposes of this Agreement, “Loss Reserves” means
the Company’s estimates of its future obligations on any incidents, demands and
suits made and reported to the Insurance Company Subsidiary, including
estimates
of future losses, indemnity obligations, loss adjustment expenses,
unallocated
loss adjustment expenses, extended reporting endorsement estimates
and any other
type of losses, whether or not such may be net of deductibles and reinsurance,
gross or ceded.
Notwithstanding
the foregoing, a
Company Material Adverse Effect shall have occurred if one or both
of the
following occurs (a “Loss Reserve MAE”):
(X)
The Milliman Selected Retained
Reserves for report years 1990 through 2006 (as detailed, the “Selected Retained
Reserves”) as of June 30, 2007, as set forth in the
6
Professionals
Direct Insurance Company Analysis of Statutory Loss and LAE Reserves
(the “PDIC
Report”) as of June 30, 2007, prepared by Milliman, Inc. exceeds
$16,176,000. For purpose of illustration, the Milliman Selected
Retained Reserves as of December 31, 2006 are set forth in Exhibit
A5, page 1,
column 7 and Exhibit A6, page 1, column 7 in the PDIC Report as
of December 31, 2006. If the Merger has not been
consummated by September 30, 2007, Parent shall have the option of
causing the
Company, at Parent’s sole cost, to promptly engage Milliman, Inc. or, if
Milliman, Inc. is unable or unwilling to prepare such report, actuaries
selected
by Parent, to prepare aPDIC Report as of September 30, 2007 and, in
such event,
a Company Material Adverse Effect shall have occurred if the actuary’s Selected
Retained Reserves determined as of September 30, 2007, as set forth
in the PDIC
Report as of September 30, 2007, exceeds $16,561,000; or
(Y) The
Company’s estimated loss and ALAE ratio (the “Loss and ALAE Ratio”) for either
the first six months or first nine months of 2007 (the 2007 report
year) exceeds
67%. The Loss and ALAE Ratio shall be calculated by dividing (i)
estimates by Milliman, Inc. (or, potentially, other actuaries selected
by Parent
for preparation of the PDIC Report as of September 30, 2007) for indemnity
(also
known as loss) and defense and cost containment (also known as DCC
and/or ALAE),
but excluding any expenses or estimates or changes in estimates from
prior
periods for ULAE, coverage or extended reporting endorsements (all
as defined
and set forth in (A) the PDIC Report as of June 30, 2007 for determination
of
the Loss and ALAE Ratio for the first six months of 2007 or (B) the
PDIC Report
as of September 30, 2007 for determination of the Loss and ALAE Ratio
for the
first nine months of 2007) by (ii) the Company’s net earned premium (X) for the
first six months of 2007, as set forth in the Insurance Company SAP
Statements
for the quarterly period ended June 30, 2007 (for determination of
the Loss and
ALAE Ratio for the first six months of 2007) or (Y) for the first nine
months of
2007, as set forth in the Insurance Company SAP Statements for the
quarterly
period ended September 30, 2007 (for determination of the Loss and
ALAE Ratio
for the first nine months of 2007).
(b) Copies
of the articles of incorporation and bylaws of the Company, and the
organizational documents of each of its subsidiaries and all amendments
thereto,
have been made available to Parent and the Purchaser and such copies
are true
and complete. The Company owns directly or indirectly all of the
outstanding capital stock of each of its subsidiaries, free and clear
of any
security interest, claim, lien, pledge, limitation on the Company’s voting
rights, charges or other encumbrances of any nature whatsoever, other
than (i)
statutory liens and other encumbrances for Taxes not yet due and payable,
(ii)
liens and other encumbrances for real estate Taxes being contested
in good
faith, (iii) liens and other encumbrances arising by operation of law
in the
ordinary course of business, (iv) liens and other encumbrances listed
on
Schedule 4.1(b), and (v) minor imperfections in title that do not
materially detract from the value of the property subject thereto (collectively,
“Liens”).
(c) The
Company conducts its insurance operations exclusively through Professionals
Direct Insurance Company (the “Insurance Company Subsidiary”) and Professionals
Direct Insurance Services, Inc. (the “Insurance Services
Subsidiary”). The Insurance Company Subsidiary is duly authorized and
licensed to write each line of business reported as being
7
written
by the Company in the Insurance Company SAP Statements, in each jurisdiction
where it is required to be so licensed and eligible. The Insurance
Services
Subsidiary is duly authorized and licensed as an insurance agency in
each
jurisdiction where it is required to be so authorized or licensed.
Section
4.2 Capitalization. The
authorized capital stock of the Company consists of 5,000,0000 Shares
and
500,000 shares of preferred stock, (“Company Preferred Stock”). The
Company has 333,300 Shares and no shares of Company Preferred Stock
issued and
outstanding. The Company and Company subsidiaries have no, and at all
times
through the Effective Time there will not be any, existing options,
warrants,
calls, subscriptions or other rights or other agreements or commitments
obligating the Company or any of its subsidiaries to issue, transfer,
sell or
vote any shares of capital stock of the Company or any of its subsidiaries
or
any other securities convertible into or evidencing the right to subscribe
for
any such shares under any equity compensation plan or otherwise. All
issued and outstanding Shares, and all outstanding shares of capital
stock of
each subsidiary, are duly authorized and validly issued, fully paid,
nonassessable and free of preemptive rights with respect thereto.
Section
4.3 Authority. The
Company has all requisite corporate power and authority to execute
and deliver
this Agreement and, subject to the affirmative vote of the holders
of at least a
majority of the Shares entitled to vote in accordance with the MBCA
(the
“Company Shareholder Approval”) and receipt of approvals by applicable
Governmental Authorities regulating the Insurance Company Subsidiary
and the
Insurance Services Subsidiary, to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly
and validly
authorized and unanimously approved by the Board, and, assuming that
none of the
Parent, the Purchaser or any of their affiliates is an “interested shareholder”
under Chapter 7A of the MBCA, other than the Company Shareholder Approval,
no
other corporate proceedings are necessary to authorize or adopt this
Agreement
or the consummation of the transactions contemplated hereby. At a meeting
held
June 22 and June 24, 2007, the Board determined that it is advisable
and in the
best interest of the holders of the Shares for the Company to enter
into a
business combination with Parent upon the terms and subject to the
conditions of
this Agreement and unanimously recommended that the holders of the
Shares
approve and adopt this Agreement and the Merger. The Company
Shareholder Approval is the only vote of holders of any class or series
of the
Company’s capital stock necessary to approve the Merger. This
Agreement has been duly and validly executed and delivered by the Company
and,
assuming this Agreement constitutes a legal, valid and binding agreement
of the
other parties hereto, it constitutes a legal, valid and binding agreement
of the
Company, enforceable against it in accordance with its terms, except
that (a)
such enforcement may be subject to applicable bankruptcy, insolvency,
reorganization, moratorium or other similar Laws, now or hereafter
in effect,
relating to creditors’ rights generally and (b) equitable remedies of specific
performance and injunctive and other forms of equitable relief may
be subject to
equitable defenses and to the discretion of the court before which
any
proceeding therefore may be brought.
Section
4.4 No
Violations; Consents and Approvals.
(a) None
of the execution and delivery of this Agreement, the consummation of
the
transactions contemplated hereby or the compliance by the Company with
any of
the provisions
8
hereof
shall, subject to the Company Shareholder Approval and receipt of approvals
by
applicable Governmental Authorities regulating the Insurance Company
Subsidiary
and the Insurance Services Subsidiary, (i) violate any provision of
its or any
of its subsidiaries’ organizational documents, (ii) result in a violation or
breach of, or constitute (with or without due notice or lapse of time
or both) a
default, or give rise to any right of termination, cancellation or
acceleration
or any right which becomes effective upon the occurrence of a merger,
consolidation or change in control or ownership, under, any of the
terms,
conditions or provisions of any note, bond, mortgage, indenture or
other
instrument of indebtedness for money borrowed to which the Company
or any of its
subsidiaries is a party, or by which the Company or any of its subsidiaries
or
any of their respective properties is bound, or (iii) result in a violation
or
breach of, or constitute (with or without due notice or lapse of time
or both) a
default, or give rise to any right of termination, cancellation or
acceleration
or any right which becomes effective upon the occurrence of a merger,
consolidation or change in control or ownership, under, any of the
terms,
conditions or provisions of any license, franchise, permit or agreement
to which
the Company or any of its subsidiaries is a party, or by which the
Company or
any of its subsidiaries or any of their respective properties is bound,
or (iv)
conflict with or violate any federal, foreign, state, local or provincial
statute, rule, regulation, order, judgment or decree (collectively,
“Laws”) of
any public body or authority by which the Company or any of its subsidiaries
or
any of their respective properties is bound, excluding from the foregoing
clauses (ii), (iii) and (iv) violations, breaches, defaults or rights
which,
individually or in the aggregate, would not reasonably be expected
to have a
Company Material Adverse Effect or for which the Company has received,
or prior
to the Effective Time shall have received, appropriate consents or
waivers. The material consents and approvals required to be obtained
by the Company or its subsidiaries for the consummation of the Merger
are set
forth in Schedule 4.4(a) of the Disclosure Letter.
(b) No
filing or registration with, notification to, or authorization, consent
or
approval of, any Governmental Authority is required in connection with
the
execution and delivery of this Agreement by the Company, or the consummation
by
the Company of the transactions contemplated hereby, except (i) in
connection,
or in compliance, with the provisions of the Securities Exchange Act
of 1934, as
amended (including the rules and regulations promulgated thereunder),
(the
“Exchange Act”), (ii) the filing of the Certificate of Merger with the Michigan
Department of Labor and Economic Growth, (iii) the filing of applications,
notices and forms with, and the obtaining of approvals from, any applicable
Governmental Authorities regulating the Insurance Company Subsidiary
or the
Insurance Services Subsidiary, including the Commissioner of Insurance
of the
State of Michigan under the Michigan Insurance Code of 1956, as amended,
with
respect to the transactions contemplated by this Agreement, (iv) filing
with,
and approval of, the Securities and Exchange Commission (the “SEC”) and all
other applicable governing bodies with respect to the deregistration
of the
Shares, (v) those consents, approvals, orders, authorizations, notifications,
registrations, declarations and filings listed on Schedule 4.4(a) of
the
Disclosure Letter, and (vi) such other consents, approvals, orders,
authorizations, notifications, registrations, declarations and filings
not
obtained or made prior to the Effective Time the failure of which to
be obtained
or made, individually or in the aggregate, would not reasonably be
expected to
prevent consummation of the Merger, or otherwise prevent the Company
from
performing its obligations under this Agreement, or would otherwise
reasonably
be expected to have a Company Material Adverse Effect.
9
(c) No
shareholder of the Company has any right to dissent and obtain payment
for his
or her Shares under applicable Law with respect to, or as a result
of, the
transactions contemplated by this Agreement (including the Merger).
Section
4.5 SEC
Documents; Financial Statements.
(a) The
Company has filed and made available to Parent and the Purchaser true
and
complete copies of each registration statement, report,
proxy statement, information statement or schedule, together with all
amendments
thereto, that were required to be filed with the SEC by the Company
since April
30, 2002 (the “SEC Documents”). As of their respective dates, the SEC
Documents complied in all material respects with the applicable requirements
of
the Securities Act of 1933, as amended, and the Exchange Act, as the
case may
be, and none of such SEC Documents contained at the time they were
filed (or if
amended or superseded by a filing prior to the date of this Agreement,
then on
the date of such filing) any untrue statement of a material fact or
omitted to
state a material fact required to be stated therein or necessary to
make the
statements therein, in light of the circumstances under which they
were made,
not misleading.
(b) As
of their respective dates, the consolidated financial statements (including
the
notes thereto) of the Company included in the SEC Documents were prepared
in
accordance with generally accepted accounting principles applied on
a consistent
basis throughout the periods involved (except as may be indicated therein
or in
the notes thereto) and fairly presented in all material respects, the
Company’s
consolidated financial position and that of its consolidated subsidiaries
as at
the dates thereof and the consolidated results of their operations
and
statements of cash flows for the periods then ended (subject, in the
case of
unaudited statements, to the lack of footnotes thereto, and to normal
year end
audit adjustments which, individually or in the aggregate, were not
or are not
expected to be material in amount).
(c) Each
of the Insurance Company Subsidiary and the Insurance Services Subsidiary
(i)
has timely filed all annual and quarterly reports (including the financial
statements contained therein), registrations and statements, together
with all
amendments required to be made with respect thereto, that were required
to be
filed since April 30, 2002 with any applicable Governmental Authority
regulating
the Insurance Company Subsidiary or the Insurance Services Subsidiary,
as
applicable, and (ii) has paid all fees and assessments due and payable
in
connection therewith. All such reports, registrations and statements,
together with all such amendments, were in compliance, in all material
respects,
with applicable Law when filed and, as of their respective dates, did
not
contain any untrue statement of material fact or omit to state any
material fact
required to be stated therein or necessary to make the statements therein,
in
light of the circumstances under which they were or are made, not
misleading. No material deficiencies have been asserted by any
applicable Governmental Authority with respect to such reports, registrations
and statements or any such amendments thereto.
(d) Each
of the principal executive officer
of the Company and the principal financial officer of the Company (or
each
former principal executive officer of the Company and each former principal
financial officer of the Company, as applicable) has made all applicable
certifications required by Rule 13a-14 or 15d-14 under the Exchange
Act and
Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 (including the
rules and
regulations promulgated
10
thereunder,
“SOX”) with respect to the SEC Documents and the statements contained in
such
certifications are in compliance with the requirements of the Exchange
Act and
SOX. For purposes of this Agreement, “principal executive officer”
and “principal financial officer” have the meanings ascribed to such terms in
SOX. Neither the Company nor any of the Company’s subsidiaries has
outstanding, or has since the effective date of Section 402 of SOX,
arranged any
outstanding “extensions of credit” to or for directors or executive officers of
the Company in violation of Section 402 of SOX.
(e) The
Company maintains a system of “internal control over
financial
reporting,” as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act, and
such system is maintained in compliance with such rules.
(f) The
Company has not received any written
notification from its outside auditors of any (A) “significant deficiency” or
(B) “material weakness” in the Company’s internal controls over financial
reporting since January 1,
2006. To the
knowledge of the Company, there is no outstanding “significant deficiency” or
“material weakness” that has not been appropriately and adequately remedied by
the Company. For purposes of this Agreement, the terms “significant
deficiency” and “material weakness” shall have the meanings assigned to them in
Auditing Standard No. 2 of the Public Company Accounting Oversight
Board, as in
effect on the date hereof.
(g) None
of the Company’s subsidiaries is,
or has ever been, subject to the reporting requirements of Sections
13(a) and
15(d) of the Exchange Act.
Section
4.6 Absence
of Certain Changes; No Undisclosed Liabilities; Subordinated
Debentures.
(a) Except
as set forth in the SEC Reports, since March 31, 2007, each of the
Company and
its subsidiaries has conducted its business in the ordinary course
consistent
with past practice and there has not occurred: (a) any action, event
or
occurrence that, individually or in the aggregate, would reasonably
be expected
to have a Company Material Adverse Effect; (b) any amendments or changes
in the
articles of incorporation or bylaws of the Company or any of its subsidiaries;
(c) any changes by the Company in its accounting methods, principles
or
practices or underwriting, reserving or actuarial practices or methods,
except
as may be required to conform to changes in statutory or regulatory
accounting
rules, or generally accepted accounting principles, or applicable regulatory
requirements; (d) any declaration, setting aside or payment of any
dividend or
other distribution in respect of capital stock of the Company or any
direct or
indirect redemption, purchase or other acquisition by the Company or
any of its
subsidiaries of any capital stock or of any interest in or right to
acquire any
capital stock of the Company or any of its subsidiaries; (e) any Lien
created or
assumed on any of the assets or properties of the Company or any of
its
subsidiaries, except under the existing credit arrangements with Fifth
Third
Bank; (f) any borrowing of money by the Company other than in the ordinary
course of business; (g) an incurrence by the Company or any of its
subsidiaries
of any deferred purchase price obligation that, individually or in
the
aggregate, exceeds $100,000; (h) any material write-off or write-down
of, or any
determination to write-off or write-down, the assets or properties
(other than
any statutory write-down of investment assets) of the Company or any
of its
subsidiaries or any portion thereof, other than in the ordinary course
of
business; (i)
11
any
material addition to the Company’s consolidated reserves for future benefits or
other policy claims and benefits before the date of this Agreement,
except in
the ordinary course of business consistent with past practice; (j)
acquisition
(by merger, consolidation, acquisition of stock or assets, or otherwise)
of any
corporation, partnership or other business organization or division
thereof; (k)
any increase in the compensation payable or to become payable to the
Company’s
directors, officers or other executive employees, or grant of any severance
or
termination pay to, or enter into any employment or severance agreement
with any
director, officer or other executive employee of the Company; (l) any
material
tax election inconsistent with past practice or settlement or compromise
of any
material federal, state, local or foreign tax liability or agreement
to an
extension of a statute of limitations; (m) payment, discharge or satisfaction
of
any claims, liabilities or obligations (absolute, accrued, asserted
or
unasserted, contingent or otherwise), other than the payment, discharge
or
satisfaction in the ordinary course of business and consistent with
past
practice of liabilities reflected or reserved against in the financial
statements contained in the SEC Reports; (n) any sale of a material
amount of
property or assets of the Company or any of its subsidiaries, except
in the
ordinary course of business; or (o) any contract or agreement to take
any of the
actions set forth in subsections (a) through (n) of this Section
4.6(a).
(b) Neither
the Company nor any of its subsidiaries has any liabilities or obligations
of
any nature, whether or not accrued, contingent or otherwise, required
by
generally accepted accounting principles to be reflected on a consolidated
balance sheet of the Company and its subsidiaries, except for liabilities
or
obligations (i) under this Agreement, (ii) disclosed in the Company’s March 31,
2007 consolidated balance sheet (including the notes thereto), as set
forth in
the SEC Reports, or (iii) that are incurred in the ordinary course
of business
since the date of the Company’s March 31, 2007 consolidated balance sheet, as
set forth in the SEC Reports, and which would not reasonably be expected
to have
a Company Material Adverse Effect.
(c) The
floating rate junior subordinated debenture, having a principal amount
of
$2,062,000, issued by the Company to Professionals Direct Statutory
Trust I on
December 4, 2002 may be redeemed in whole or in part beginning on December
4,
2007. The junior subordinated debenture, having a principal amount of
$3,093,000, issued by the Company to Professionals Direct Statutory
Trust II on
June 30, 2005 may be redeemed in whole or in part beginning on September
15,
2010.
Section
4.7 Litigation. Except
for any coverage or other claim made with respect to insurance policies
issued
by the Insurance Company Subsidiary, there is no suit, claim, action,
proceeding
or investigation pending, or to the knowledge of the Company threatened,
against
the Company or any of its subsidiaries or any of their respective properties
or
assets before any court or Governmental Authority seeking damages of
$100,000 or
more. Neither the Company nor any of its subsidiaries is subject to
any outstanding order, writ, injunction or decree (excluding coverage
and other
claims made with respect to insurance policies issued by the Insurance
Company
Subsidiary).
Section
4.8 Compliance
with Applicable Law.
(a) The
business and operations of the Company, the Insurance Company Subsidiary
and the
Insurance Services Subsidiary have been conducted in compliance, in
all
material
12
respects,
with all applicable statutes and regulations regulating the business
of
insurance and all applicable orders and directives of Insurance Regulators
(collectively, “Insurance Laws”), except any noncompliance which individually,
or in the aggregate, would not reasonably likely to have a Company
Material
Adverse Effect. For purposes of this Agreement, “Insurance
Regulators” means all Governmental Authorities regulating the business of
insurance under Insurance Laws. The Insurance Company Subsidiary and
Insurance Services Subsidiary have marketed, sold, and issued insurance
products
in compliance, in all material respects, with Insurance Laws applicable
to the
business of the Insurance Company Subsidiary or the Insurance Services
Subsidiary and in the respective jurisdictions in which the products
have been
sold. There is no material pending or, to the knowledge of the
Company, threatened charge by any Insurance Regulators with respect
to
violations of any applicable Insurance Laws. The Company Insurance
Subsidiary is not subject to any order or decree of any Insurance Regulators
relating to the Insurance Company Subsidiary or the Insurance Services
Subsidiary (as opposed to insurance companies generally) which would,
individually or in the aggregate, be reasonably likely to have a Company
Material Adverse Effect. Since December 31, 2002, to the knowledge of
the Company, the Company and each of the Insurance Company Subsidiary
and the
Insurance Services Subsidiary have filed all reports and other filings
required
to be filed with any Insurance Regulators on or before the date of
this
Agreement. As of its date, each of such reports and filings contained
all
information required by the Insurance Regulators with which it was
filed and did
not contain any untrue statement of a material fact or omit to state
any
material fact necessary in order to make the statements made therein,
in light
of the circumstances under which they were made, not
misleading. Schedule 4.8(a) of the Disclosure Letter sets forth (i) a
list of the states in which any of the Company, the Insurance Company
Subsidiary
or the Insurance Services Subsidiary file reports or other filings
with
Insurance Regulators, (ii) the dates on which such reporting obligations
commenced and (iii) a brief description of the frequency with which
reports are
required to be filed in each such state.
(b) Except
for violations or possible violations that are not, individually or
in the
aggregate, reasonably likely to have a Company Material Adverse Effect,
neither
the Company nor any of its subsidiaries is in conflict with, or in
default or
violation of, (i) any Law applicable to the Company or any of its subsidiaries
or by which its or any of their respective properties is bound or affected
or
(ii) any note, bond, mortgage, indenture, contract, agreement, lease,
license,
franchise or other instrument or obligation to which the Company or
any of its
subsidiaries is a party or by which the Company or any of its subsidiaries
or
its or any of their respective properties is bound or affected.
(c) The
Company and its subsidiaries hold all permits, licenses, easements,
variances,
exemptions, consents, certificates, orders and approvals from Governmental
Authorities which are necessary for the operation of the businesses
of the
Company and each of its subsidiaries as now being conducted (collectively,
the
“Company Permits”). The Company and its subsidiaries are in
compliance with the terms of the Company Permits in all material respects.
Copies of all insurance licenses of the Company, the Insurance Company
Subsidiary and the Insurance Services Subsidiary have previously been
made
available to Parent. For purposes of this Agreement, “Governmental
Authority” or “Governmental Authorities” means any governmental body, agency,
official, instrumentality, subdivision or authority, whether federal,
foreign,
state, local or provincial.
13
Section
4.9 Taxes.
(a) For
purposes of this Agreement, “Tax” or “Taxes” shall mean taxes, fees, levies,
duties, tariffs, imposts, and governmental impositions or charges of
any kind in
the nature of (or similar to) taxes, payable to any federal, state,
local or
foreign taxing authority, including (i) income, franchise, profits,
gross
receipts, ad valorem, net worth, value added, sales, use, service,
real or
personal property, special assessments, capital stock, license, payroll,
withholding, employment, social security, workers’ compensation, unemployment
compensation, utility, severance, environmental, customs duties, production,
excise, stamp, occupation, premiums, windfall profits, transfer and
gains taxes,
or other tax of any kind whatsoever and (ii) interest, penalties, additional
taxes and additions to tax imposed with respect thereto. “Tax
Returns” shall mean returns, declarations, claims for refund, reports, and
information statements, including any attachment or schedule thereto
and
including any amendment thereof, with respect to Taxes required to
be filed with
the Internal Revenue Service (“IRS”) or any other federal, foreign, state, local
or provincial taxing authority, domestic or foreign, including consolidated,
combined and unitary tax returns.
(b) Each
of the Company and its subsidiaries has filed, or caused to be filed,
all Tax
Returns required to be filed by it, has paid or withheld, or caused
to be paid,
withheld or remitted, all Taxes of any nature whatsoever, that are
shown on such
Tax Returns as due and payable, or otherwise required to be paid, other
than
such Taxes as are being contested in good faith (as described in Schedule
4.9 of
the Disclosure Letter) and for which adequate reserves have been
established. All Tax Returns filed by or on behalf of the Company and
its subsidiaries with respect to Taxes are true and correct in all
material
respects. The Company and each of its subsidiaries have paid or will
timely pay all Taxes due with respect to any period ending on or prior
to the
Effective Time, other than Taxes contested in good faith and for which
adequate
reserves are established, or where the payment of Taxes is not yet
due, have
established, or with respect to Taxes incurred after the date hereof
will timely
establish in accordance with past practices, an adequate accrual in
accordance
with generally accepted accounting principles. There are no claims,
assessments or audits pending, or to the Company’s knowledge threatened, against
the Company or its subsidiaries for any alleged deficiency in any
Tax. None of the Company or its subsidiaries have ever been a member
of a consolidated return group under Section 1504 of the Code except
one for
which the Company is the parent company. There is no deferred
inter-company gain within the meaning of the Treasury Regulations promulgated
under Code Section 1502. Neither the Company nor any of its
subsidiaries are liable for the payment of Taxes of another person
(other than
the Company or any of its subsidiaries) under the principles of Treasury
Regulation Section 1.1502-6 (or any similar provision of state, local
foreign
Law) as a transferee or successor, by contract, or otherwise. There
are no outstanding waivers or extensions of any applicable statute
of
limitations to assess any Taxes of the Company or any of its
subsidiaries. There are no outstanding requests by the Company or any
of its subsidiaries for any extension of time within which to file
any Tax
Return or within which to pay any Taxes shown to be due on any Tax
Return. There are no Liens for any Taxes upon the assets of the
Company or any of its subsidiaries. Except as described in Schedule
4.9 of the Disclosure Letter, neither the Company nor any of its subsidiaries
is
a party to, is bound by or has any obligation under, a tax sharing
or tax
allocation agreement or arrangement for the allocation, apportionment,
sharing,
indemnification or payment of Taxes. The Company has provided Parent
with true and complete copies of all Tax Returns filed by Company and
its
14
subsidiaries
for all Tax periods beginning on or after January 1, 2004. Neither
the Company nor any of its subsidiaries has any “tax exempt use property” within
the meaning of Code Section 168(h). Neither the Company nor any of
its subsidiaries is a United States Real Property Holding Company as
defined in
Code Section 897(c)(2). The Company and its subsidiaries have
properly disclosed on their Tax Returns all positions that could result
in a
substantial understatement as defined in Code Section 6662. There is
no requirement of the Company or any of its subsidiaries to include
any item of
income in, or exclude any item of deduction from, taxable income post-closing
as
a result of: (a) a change in accounting method, (b) a closing
agreement under Code Section 7121 (or any similar provision of state,
local
foreign Law), (c) intercompany transactions or an excess loss account
pursuant
to Code Section 1502 and regulations thereunder (or any similar provision
of
state, local or foreign Law), (d) installment sales or open transactions,
or (e)
prepaid amounts. None of the Company or any of its subsidiaries was a
party to a transaction under Code Sections 355 or 361. No power of
attorney for tax matters has been granted to any person. None of the
Company or any of its subsidiaries has engaged in a “listed transaction” as
described in Treasury Regulation Section 1.6011-4(b)(2).
Section
4.10 Labor
and Employment Matters.
(a) The
Company has made available to Parent and the Purchaser an accurate
and complete
list of each (i) employment agreement with each executive officer and
other
employee of the Company or its subsidiaries (each employee of the Company
or its
subsidiaries, an “Employee” and all such employees, collectively, the
“Employees”) not terminable without material liability or obligation on 60 days’
or less notice; (ii) agreement with any director, executive officer
or other
Employee of the Company or its subsidiaries (A) the benefits of which
are
contingent, or the terms of which are materially altered, on the occurrence
of a
transaction involving the Company or its subsidiaries of the nature
of any of
the transactions contemplated by this Agreement or relating to an actual
or
potential change in control of the Company or (B) providing any compensation
guarantee or extending severance benefits or other benefits after termination
not comparable to benefits available to Employees generally; (iii)
agreement,
plan or arrangement under which any person may receive payments that
may be
subject to Tax imposed by Section 4999 of the Code or included in the
determination of such person’s “parachute payment” under Section 280G of the
Code; and (iv) agreement or plan, including any stock option plan,
stock
appreciation right plan, restricted stock plan or stock purchase plan,
any of
the benefits of which will be increased, or the vesting of the benefits
of which
will be accelerated, by the occurrence of any of the transactions contemplated
by this Agreement or the value of any of the benefits of which will
be
calculated on the basis of any of the transactions contemplated by
this
Agreement. Since March 31, 2007, neither the Company nor any of its
subsidiaries has entered into or amended any employment or severance
agreement
with any director, executive officer or other employee of the Company
or granted
any severance or termination pay to any director, executive officer
or employee
of the Company.
(b) The
Company and each of its subsidiaries are in material compliance with
all
applicable Laws respecting employment, employment practices, terms
and
conditions of employment, employee safety and wages and hours, and
in each case,
with respect to Employees: (i) has withheld and reported all amounts
required by
Law or by agreement to be withheld and reported with respect to wages,
salaries
and other payments to Employees, (ii) is not liable for any arrears
of wages,
severance pay or any taxes or any penalty for failure to
15
comply
with any of the foregoing, and (iii) is not liable for any payment
to any trust
or other fund governed by or maintained by or on behalf of any Governmental
Authority, with respect to unemployment compensation benefits, social
security
or other benefits or obligations for Employees (other than routine
payments to
be made in the normal course of business and consistent with past
practice). There are no material actions, suits, claims or
administrative matters pending, or to the knowledge of the Company,
threatened
or reasonably anticipated against the Company or any of its subsidiaries,
or any
of their Employees relating to any Employee, Employee agreement or
Company or
subsidiary employee plan. There are no pending or, to the knowledge
of the Company, threatened material claims or actions against Company
or any of
its subsidiaries, any Company or subsidiary trustee under any worker’s
compensation policy or long-term disability policy. None of the
Company or any of its subsidiaries has any direct or indirect liability
with
respect to any misclassification of any person as an independent contractor
rather than as an employee, or with respect to any employee leased
from another
employer.
(c) No
work stoppage or labor strike against the Company or any of its subsidiaries
is
pending, or, to the knowledge of the Company, threatened or reasonably
anticipated. The Company has no knowledge of any activities or
proceedings of any labor union to organize any Employees. There are
no actions, suits, claims, labor disputes or grievances pending or
to the
knowledge of the Company threatened or reasonably anticipated relating
to any
labor matters involving any Employee, including charges of unfair labor
practices or discrimination complaints. None of the Company or any of
its subsidiaries has engaged in any material unfair labor practices
within the
meaning of the National Labor Relations Act. Neither the Company nor
any of its subsidiaries presently, nor have any of them been in the
past, a
party to, or bound by, any collective bargaining agreement or union
contract
with respect to Employees and no collective bargaining agreement is
being
negotiated by the Company or any of its subsidiaries. The Company and
its subsidiaries have not incurred any liability or obligation under
the Worker
Adjustment and Retraining Notification Act or any similar state or
local Law
that remains unsatisfied.
Section
4.11 Employee
Benefit Plans, ERISA.
(a) Each
“employee benefit plan” (as defined in Section 3(3) of the Employee Retirement
Income Security Act of 1974, as amended (“ERISA”)), and all other employee
benefit, bonus, incentive, stock option (or other equity based), severance,
change in control, welfare (including post retirement medical and life
insurance) and fringe benefit plans (whether or not subject to ERISA)
maintained
or sponsored by the Company or any of its subsidiaries or any trade
or business,
whether or not incorporated, that would be deemed a “single employer” within the
meaning of Section 4001 of ERISA or Section 414 of the Code (an “ERISA
Affiliate”), for the benefit of any employee or former employee of the Company
or any of its ERISA Affiliates (collectively, the “Plans”) has been operated and
administered, in all material respects, in accordance with its terms
and with
applicable Law. To the knowledge of the Company, all filings,
disclosures and notices related to the Plans as required by applicable
Law have
been timely made. There is no pending, or to the knowledge of the
Company threatened, litigation, administrative action, suit or claim
relating to
any of the Plans (other than routine claims for benefits). To the
knowledge of the Company, the Company has not engaged in a transaction,
or
omitted to take any action, with respect to any Plan that would reasonably
be
16
expected
to subject the Company to a penalty or Tax imposed by either Section
4975 of the
Code or Section 502 of ERISA.
(b) The
Company has made available to Parent true and complete copies of the
following: the current Plan document (including a written description
of all oral Plans), any amendments thereto, and the related summary
plan
description and summaries of material modifications, if any, for the
last three
Plan years; the financial information or reports (including any FASB
required
reports, if applicable), relating to each such Plan; and all Annual
Report Form
5500 series) filed with any governmental agency at any time during
the three
year period ending on the Effective Time.
(c) Neither
the Company nor any ERISA Affiliate maintains or has maintained during
the last
six years a Plan which is subject to Title IV of ERISA or which is
subject to
the minimum funding requirements of Section 412 of the Code. None of
the Company, any ERISA Affiliate, any Plan, any trust created under
any Plan, or
to the Company’s knowledge any trustee or administrator of any such trust, has
engaged in a transaction in connection with which the Company, any
ERISA
Affiliate, any Plan, any such trust or any such trustee or administrator
would
reasonably be expected to be subject to either a civil liability or
penalty
pursuant to Section 409, 502(i) or 502(l) of ERISA or a tax imposed
pursuant to
Chapter 43 of the Code.
(d) All
contributions required to be made under the terms of any Plan or any
employee
benefit arrangements to which the Company is a party or of which the
Company is
a sponsor have been timely made for the four prior Plan years. All
additional contributions, premium payments and other payments due on
or before
the Effective Time shall have been paid by that date. The Company has
no material obligation to provide retiree health, life insurance, disability
insurance or other retiree benefits under any Plan, other than benefits
mandated
by Section 4980B of the Code.
(e) At
no time has the Company or an ERISA Affiliate contributed to or been
obligated
to contribute to any multiemployer plan, as defined in Section 3(37)
of
ERISA.
(f) Neither
the Company nor an ERISA Affiliate has ever established, sponsored,
maintained,
participated in or contributed to any self-insured plan that provides
benefits
to employees (including any such plan pursuant to which a stop-loss
policy or
contract applies).
(g) Neither
the Company nor any of its subsidiaries maintains any compensation
plans,
programs or arrangements under which any payment is non-deductible,
in whole or
in part, for tax reporting purposes as a result of the limitations
under Section
162(m) of the Code and the regulations issued thereunder. The
consummation of the transactions contemplated by this Agreement will
not,
directly or indirectly (including as a result of any termination of
employment
or service at any time prior to or following the Effective Time), entitle
any
current or former director, officer, employee or independent contractor
of the
Company to any actual or deemed payment (or benefit) which would constitute
a
“parachute payment” (as such term is defined in Section 280G of the
Code).
(h) Each
Plan that is subject to Code Section 409A has been operated and administered
in
compliance, in all material respects, with Code Section 409A.
17
(i) Each
Plan can be amended, terminated or otherwise discontinued after the
Effective
Time in accordance with its terms, without liability to the Company,
Purchaser
or Parent (other than ordinary administration expenses).
(j) Except
as set forth on Schedule 4.11 of the Disclosure Letter, with respect
to each
Plan that is an “employee pension benefit plan” (as defined in ERISA Section
3(2)): (1) each such Plan that is intended to qualify as a
tax-qualified retirement plan under Code Section 401(a) and each trust
intended
to qualify under Code Section 501(a) has received a current favorable
determination letter (or notification, advisory or opinion letter,
as
applicable) from the IRS as to qualification of such Plan covering
the period
from its adoption through the Effective Time; all amendments required
to
maintain such qualification have been timely adopted; nothing has occurred,
whether by action or failure to act, which has resulted in or, to the
knowledge
of the Company, would reasonably be expected to cause the loss of such
qualification (whether or not eligible for review under the IRS’s Closing
Agreement Program, Voluntary Compliance Resolution program or any similar
governmental agency program); and each trust thereunder is exempt from
Tax
pursuant to Code Section 501(a); and (2) no such Plan is a “multiemployer plan”
(as defined in ERISA Section 3(37)).
Section
4.12 Title
to Property; Assets.
(a) The
Company and each of its subsidiaries have good and marketable title
to all of
their owned properties and assets, free and clear of all Liens. All
leases pursuant to which the Company or any of its subsidiaries lease
from
others material amounts of personal property are, in all material respects,
in
good standing, valid and effective in accordance with their respective
terms,
and, to the knowledge of the Company, there is not, under any of such
leases any
existing default or event of default (or event which with notice or
lapse of
time, or both, would reasonably be expected to constitute a
default).
(b) The
Insurance Company SAP Statements contain accurate lists, in accordance
with SAP,
as of their respective dates of investment, of assets held and purchases
and
sales of the investment assets by the Insurance Company
Subsidiary. Such debentures, notes, stock, limited partnership
interests, other securities, mortgages and other investment assets
are owned by
either the Company or the Insurance Company Subsidiary, free and clear
of all
Liens.
Section
4.13 Real
Properties
(a) Neither
the Company nor any of its subsidiaries is a party to any agreement
or option to
purchase any real property or interest therein. Neither the Company
nor any of
its subsidiaries (i) own, or have ever owned, any real property, or
(ii) lease
or operate any real property other than the Leased Real Property (as
defined
below).
(b) Set
forth in Schedule 4.13(b) of the Disclosure Letter is a list of all
leases and
subleases of real property, including all amendments, modifications
and
supplements thereto (the “Real Estate Leases”), to which the Company or any of
its subsidiaries is a party and a list of all other agreements between
the
Company, or any subsidiary of the Company, and any lessor or sublessor
under any
of the Real Estate Leases, any mortgagee of any of the premises covered
by the
Real Estate Leases (the “Leased Real Property”) or any assignor of any of the
Real Estate
18
Leases.
The Company has made available true and complete copies of each of
the Real
Estate Leases to Parent.
(c) Neither
the Company nor any of its subsidiaries has received any written notice
of any
pending or threatened condemnation, expropriation, eminent domain or
similar
proceeding affecting all or any portion of any of the Leased Real
Property.
(d) All
accounts for work and services performed or materials placed or furnished
upon
or in respect of the construction and completion of any of the Leased
Real
Property have been fully paid.
(e) Neither
the Company nor any of its subsidiaries has any knowledge of any fact
or
condition that would reasonably be expected to result in termination
or
limitation of full and free vehicular access to and from a public right-of-way
to the Leased Real Property.
(f) To
the extent required under any Real Property Leases, the Company now
has in force
normal and customary casualty, liability and business interruption
insurance
relating to such Leased Real Property. The Company has received no
written notice from any insurance carrier alleging any defects or inadequacies
in the Leased Real Property that, if not corrected, would reasonably
be expected
to result in termination of such insurance coverage or increase in
the normal
and customary cost of any or all of such insurance coverage.
Section
4.14 Environmental
Matters.
(a) The
Company and each of its subsidiaries have at all times been in material
compliance with all orders of any federal, state, local or foreign
court or
Governmental Authority or tribunal and all Laws, in each case related
to human
health or the environment (“Environmental Laws”).
(b) There
are not any past or present conditions or circumstances at, or arising
out of,
any current or former business, assets or properties of the Company
or any of
its subsidiaries, including to on-site or off-site disposal presence
or release
of or exposure to any chemical substance, product or waste or any other
condition or circumstance which has resulted in or would reasonably
be expected
to have resulted in or would reasonably be expected to give rise to:
(i)
material liabilities, fines, penalties, costs, capital expenditures
or
obligations for any violation, noncompliance, cleanup, remediation,
disposal or
corrective action under any Environmental Law, or (ii) material claims
arising
for personal injury, property damage, or damage to
natural resources.
(c) Neither
the Company nor any of its subsidiaries has (i) received any notice
of
noncompliance with, violation of, or liability or potential liability
relating
to any Environmental Law or (ii) entered into any consent decree, agreement
or
order or is subject to any order of any federal, state, local or foreign
court
or Governmental Authority or tribunal or any indemnity with any third
party
relating to any Environmental Law or relating to the cleanup of any
hazardous
materials contamination.
19
Section
4.15 Intellectual
Property.
(a) “Intellectual
Property” means:
(i) Any
know-how, invention (whether patentable or un-patentable and whether
or not
reduced to practice), any improvements to any invention, and any patent,
patent
application, statutory invention registration or patent disclosure,
together
with any reissuance, division, continuation, continuation-in-part,
revision,
extension, or reexamination of any patent;
(ii) any
trademark, service mark, trade dress, logo, trade name, domain name
or corporate
name, whether or not registered, together with any translation, adaptation,
derivation, or combination and including any associated goodwill, and
any
application, registration, or renewal;
(iii) any
copyrightable work (including policy forms), any copyright, and any
application,
registration, or renewal;
(iv) any
trade secret or confidential or proprietary business information (including
any
idea, research and development, know-how, formula, composition, manufacturing
and production process or technique, technical data, design, drawing,
specification, customer or supplier list, pricing and cost information,
and
business and marketing plan or proposal);
(v) any
other proprietary right, including waivers of such rights by others
and the
right to sue and recover damages, attorneys’ fees and costs for past
infringement of any patent, trademark, copyright; and
(vi) any
copies or tangible embodiment of any of the foregoing.
(b) To
the knowledge of the Company, the Company, directly or indirectly,
owns, or is
licensed or otherwise possesses legally enforceable rights to use,
all
Intellectual Property that is material to the business of the Company
and its
subsidiaries as currently conducted (the “Company Intellectual Property
Rights”). To the knowledge of the Company, there are no settlements,
forbearances to sue, consents, judgments, or orders or similar obligations
which
restrict the Company or its subsidiaries’ rights to use any Company Intellectual
Property Rights, or restrict the Company or its subsidiaries’ business in order
to accommodate a third party’s Intellectual Property, or permit third parties to
use any Company Intellectual Property Rights owned by the Company or
its
subsidiaries.
(c) Schedule
4.15(c) of the Disclosure Letter sets forth a complete list of all
patents and
patent applications, trademark and service mark registrations and applications
therefore, unregistered trademarks and service marks, trade names,
domain names,
copyright registrations and applications therefore, and unregistered
copyrights
included in the Company Intellectual Property Rights, and specifies,
where
applicable, the jurisdictions in which each such Company Intellectual
Property
Right has been issued or registered or in which an application for
such issuance
and registration has been filed, including the respective patent, registration
or application numbers and the names of all registered owners. The
Company or
one of its subsidiaries is listed in the records of the appropriate
United
States, state or foreign agency as the sole owner of record for each
patent, any
registration, or application listed in Schedule 4.15(c) of
20
the
Disclosure Letter. In each case where a registration or patent, or
application for registration or patent, listed in Schedule 4.15(c)
of the
Disclosure Letter is held by assignment, the assignment has been duly
recorded
with the governmental office from which the original registration or
patent
issued or before which the application for registration or patent is
pending.
(d) All
the material licenses, sublicenses and other agreements as to which
the Company
or any of its subsidiaries is a party and pursuant to which the Company,
any of
its subsidiaries or any other person is authorized to use any Company
Intellectual Property Right have been made available to Parent. To
the knowledge of the Company, all such licenses, sublicenses, and other
agreements are, in all material respects, legal, binding, enforceable
and in
full force and effect and represent the entire agreement with respect
to the
subject matter of the agreement. To the knowledge of the Company,
neither the Company nor any of its subsidiaries, nor any other party,
is in
violation of any such license, sublicense or agreement except such
violations as
do not materially impair the Company’s or such subsidiary’s rights under such
license, sublicense or agreement. The execution and delivery of this
Agreement by the Company, and the consummation of the transactions
contemplated
hereby, will neither cause the Company or any of its subsidiaries to
be in
violation or default under any such license, sublicense or agreement,
nor
entitle any other party to any such license, sublicense or agreement
to
terminate or modify such license, sublicense or agreement. Neither
the Company nor any of its subsidiaries has received any notice of
termination
or cancellation under any license, sublicense or other agreement, nor
any notice
of a breach or default which has not been cured.
(e) The
Company Intellectual Property Rights owned by the Company or one of
its
subsidiaries are free from and clear of any Liens, excluding any Liens
relating
to infringement, and to the knowledge of the Company are free and clear
of any
Liens relating to infringement. Neither the Company nor any of its
subsidiaries has received any notice of a claim and, to the knowledge
of the
Company, no claims are threatened by any person and there are no valid
grounds
for a claim (i) that the Company or any of its subsidiaries is infringing
on any
copyright, patent trademark, or service mark, or misappropriating any
trade
secret or other violating the rights in any Intellectual Property of
any third
party or (ii) challenging the ownership or right to use by the Company
or any of
its subsidiaries, or the validity or effectiveness of, any of the Company
Intellectual Property Rights. To the knowledge of the Company, there
is no unauthorized use, infringement, dilution or misappropriation
of any of the
Company Intellectual Property Rights by any third party.
(f) The
Company and each of its subsidiaries have taken reasonable precautions
to
protect the secrecy, confidentiality and value of their trade
secrets.
Section
4.16 Information. None
of the Proxy Statement or any other document to be filed by or on
behalf of the Company with the SEC or any other Governmental Authority
entity in
connection with the transactions contemplated by this Agreement will,
at the
respective times filed with the SEC or other Governmental Authority
and, in
addition, in the case of the Proxy Statement at the date it or any
amendment or
supplement is mailed to shareholders of the Company and at the time
of the
Shareholder Meeting, contain any untrue statement of a material fact
or omit to
state any material fact required to be stated therein or necessary
in order to
make the statements made therein, in light of the circumstances under
which they
were made, not
21
misleading;
provided that the foregoing shall not apply to information supplied
by Parent or
the Purchaser specifically for inclusion or incorporation by reference
in any
such document.
Section
4.17 Insurance
Reports
(a) “Insurance
Company SAP Statements” means (i) the annual statutory statements of the
Insurance Company Subsidiary filed with any Insurance Regulator for
each of the
years ended December 31, 2006, 2005 and 2004 and for each calendar
year ending
after the date of this Agreement, (ii) the quarterly statutory statements
of the Insurance Company Subsidiary filed with any Insurance Regulator
for the
quarterly period ended March 31, 2007, and for each quarterly period
ending
after the date of this Agreement, and (iii) all exhibits, interrogatories,
notes, schedules and any actuarial opinions, affirmations or certifications
or
other supporting documents filed in connection with such annual statutory
statements and quarterly statutory statements.
(b) All
such Insurance Company SAP Statements were prepared (i) in conformity
with
statutory accounting practices prescribed or permitted by the Insurance
Regulators consistently applied (“SAP”) and (ii) from the books and records of
the Insurance Company Subsidiary. The Insurance Company SAP
Statements, when read in conjunction with the notes thereto and any
statutory
audit reports relating thereto, present fairly in all material respects
the
statutory financial condition and results of operations of the Insurance
Company
Subsidiary as of the dates and for the periods indicated (subject,
in the case
of unaudited statements, to notes and normal year-end adjustments that
are not
material in amount or effect). The annual statutory balance sheets
and income
statements included in the Insurance Company SAP Statements have been,
where
required by Insurance Laws, audited by an independent accounting firm
of
recognized national reputation.
(c) Since
December 31, 2002, the Company and the Insurance Company Subsidiary
(i) have
filed or submitted with the applicable Insurance Regulator all registration
statements, notices and reports, together with all supplements and
amendments
thereto, required under the Insurance Laws applicable to insurance
holding
companies (the “Holding Company Act Reports”); (ii) have filed all
Insurance Company SAP Statements, (iii) have filed all other reports and
statements together with all amendments and supplements thereto, required
to be
filed with any Insurance Regulator under the Insurance Laws (the “Other Reports
and Statements”), and (iv) have paid all fees and assessments due and
payable by them under the Insurance Laws, except where the failure
to so file or
so pay would not reasonably be expected to have a Company Material
Adverse
Effect. The Company has made available to Parent true and complete
copies of all Insurance Company SAP Statements and all Holding Company
Act
Reports filed by Company or the Insurance Company Subsidiary with any
Insurance
Regulator for periods ending and events occurring, after January 1,
2003 and
prior to the Effective Time. All such Insurance Company SAP
Statements, Holding Company Act Reports, and Other Reports and Statements
complied in all material respects with the Insurance Laws when
filed. No material deficiencies have been asserted by any
Governmental Authority with respect to such Insurance Company SAP Statements,
Holding Company Act Reports, and Other Reports and Statements that
the Company
has not appropriately addressed with such Governmental Authority.
22
(d) Except
for examinations conducted by a Governmental Authority in the ordinary
course of
the business of the Company and its subsidiaries, to the knowledge
of the
Company, no Governmental Authority has initiated any proceeding or
investigation
into the business or operations of the Company or its subsidiaries,
or any
director or officer of the Company or its subsidiaries in his or her
capacity as
such, since January 1, 2003. There is no unresolved violation or
exception asserted in writing to the Company or any of its subsidiaries
by any
Governmental Authority with respect to any examinations of the Company
or any of
its subsidiaries.
(e) The
Company has made available to Parent correct and complete reports issued
by the
applicable Insurance Regulator with respect to such financial
examinations. Except with respect to the transactions contemplated by
this Agreement, there are no regulatory examinations of the Company
or any of
its subsidiaries currently in process.
(f) Neither
the Company nor any of its subsidiaries has received from any Person
any
currently pending Notice on Form A or such other form as may be prescribed
under
applicable Law indicating that such Person intends to make or has made
a tender
offer for or a request or invitation for tenders of, or intends to
enter into or
has entered into any agreement to exchange securities for, or intends
to acquire
or has acquired (in the open market or otherwise), any voting security
of
Company, if after the consummation thereof such Person would directly
or
indirectly be in control of Company.
Section
4.18 Insurance
Matters.
(a) All
policies, binders, slips, certificates and other agreements of insurance
in
effect as of the date of this Agreement (including all applications,
endorsements, supplements, endorsements, riders and ancillary agreements
in
connection therewith) issued by the Insurance Company Subsidiary, and
any and
all marketing materials, agents agreements, brokers agreements, service
contracts, and managing general agents agreements to which Company
or any of its
subsidiaries is a party, are, to the extent required under applicable
Law, on
forms approved by the Insurance Regulators or have been filed with
and not
objected to in writing by such Insurance Regulators within the period
provided
for objection, and all of such forms comply in all material respects
with the
Insurance Laws.
(b) All
premium rates and other charges of the Insurance Company Subsidiary
required to
be filed with or approved by any Governmental Authority have been so
filed and
have received interim or final approval from each such Governmental
Authority,
and all premiums and other fees charged by the Insurance Company Subsidiary
conform with such approvals.
(c) No
party to any of the reinsurance treaties issued to the Insurance Company
Subsidiary has given notice that such party intends to terminate or
cancel any
of the reinsurance treaties as a result of or following consummation
of the
Merger. Each of the reinsurance treaties is in full force and effect
and is valid and binding on each party thereto. None of the Company
or its subsidiaries, and to the knowledge of Company, any other party
thereto,
is in default in any material respect with respect to any of the reinsurance
treaties. None of the reinsurance treaties contain any provision
providing that the other party thereto may terminate the same by reason
of
23
the
transactions contemplated by this Agreement, or contains any other
provision
which would be altered or otherwise become applicable by reason of
such
transactions. To the knowledge of the Company all amounts to which
the Insurance Company Subsidiary is entitled as of the date hereof
under any
reinsurance agreements (including amounts based on paid and unpaid
losses), are
collectible, except as otherwise reflected in the applicable Insurance
Company
SAP Statements. The Insurance Company Subsidiary is entitled to take
full credit in its Insurance Company SAP Statements pursuant to applicable
Law
for all reinsurance ceded by it pursuant to any reinsurance
agreements.
(d) The
Insurance Company Subsidiary has assets that qualify as admitted assets
under
the Insurance Laws in an amount at least equal to the sum of all its
reserves
and other liability amounts as shown on the balance sheet contained
in the most
recently filed Insurance Company SAP Statements and its minimum statutory
capital and surplus as required by such Insurance Laws. Each of the
Insurance Company SAP Statements, as of the date thereof, sets forth
the Loss
Reserves. The Loss Reserves as of December 31, 2006 have been
reviewed and certified by a nationally recognized actuarial firm. The
Loss Reserves in the December 31, 2006 Company SAP Statements (and
any Company
SAP Statements thereafter) accurately reflect management’s estimate of the total
amount of all reasonably anticipated matured and unmatured claims and
other
liabilities of the Company and the Insurance Company Subsidiary under
all
insurance contracts under which any of the Company or the Insurance
Company
Subsidiary has any liability (including any liability arising under
or as a
result of any reinsurance, coinsurance or other similar contract) on
the
respective dates of such Insurance Company SAP Statement. The Company
owns assets that qualify as legal reserve assets under applicable insurance
Laws
in an amount at least equal to all such Loss Reserves. Except for
regular periodic assessments based on developments that are publicly
known
within the insurance industry, to the knowledge of the Company, no
claim or
assessment is pending or threatened against the Company or any of its
subsidiaries which is peculiar or unique to the Company or such subsidiary
by
any state insurance guaranty association in connection with such association’s
fund relating to insolvent insurers.
(e) The
Company has made available to Parent a true and complete copy of any
actuarial
reports prepared by actuaries, independent or otherwise, with respect
to the
Insurance Company Subsidiary since June 30, 2004, and all attachments,
addenda,
supplements and modifications thereto.
Section
4.19 General
Insurance.
(a) The
Company and its subsidiaries maintain policies of general liability,
fire and
casualty, directors and officers, errors and omissions, and other forms
of
insurance in such amounts, with such deductibles and against such risks
and
losses as are reasonable, in the judgment of the Company, for the business
and
assets of the Company and its subsidiaries (the “Insurance
Policies”). All such Insurance Policies are in full force and effect,
all premiums due and payable thereon have been paid, and no notice
of
cancellation or termination has been received with respect to any such
Insurance
Policy which has not been replaced on substantially similar terms prior
to the
date of such cancellation. To the knowledge of the Company, the
activities and operations of the Company and its subsidiaries have
been
conducted in a manner so as to conform in all material respects to
all
applicable provisions of such Insurance Policies.
24
The
coverages and policy limits of the Insurance Policies maintained by
the Company
and each of its subsidiaries during the last three (3) years are consistent,
in
all material respects, with the Insurance Policies currently in
effect.
(b) Schedule
4.19(b) of the Disclosure Letter sets forth a complete and correct
list of the
Insurance Policies, indicating for each policy the insurance company,
type of
coverage, annual premium and whether the terms of such policy provide
for
retrospective premium adjustments, and, by year, for each of the current
policy
year and each of the three preceding policy years, the following:
(i) A
summary of the loss experience under each Insurance Policy;
(ii) A
statement describing each claim under an Insurance Policy for an amount
in
excess of $10,000, which identifies the Insurance Policy under which
the claim
was made and sets forth (A) the name of the claimant, and (B) the amount
and
brief description of the claim; and
(iii) A
statement describing the loss experience for all claims that were self-insured,
including the number and aggregate cost of such claims.
(c) The
premiums for the Insurance Policies have been paid in full, and no
declaratory
judgment has been sought by any Person or entered by any court of competent
jurisdiction that denies or limits coverage (in whole or in part) under
any of
the Insurance Policies. There are no pending or, to the knowledge of
the Company, threatened claims against such Insurance Policies by or
on behalf
of the Company or any of its subsidiaries as to which the insurers
have denied
liability, and there exist no claims under such Insurance Policies
or binders
that have not been properly and timely submitted by or on behalf of
the Company
or its subsidiaries to its insurers.
Section
4.20 Certain
Contracts.
(a) The
documents listed in Item 13 of the Company’s Annual Report on Form 10-KSB for
the fiscal year ended December 31, 2006, as filed with the SEC and the
documents listed on Schedule 4.20(a) of the Disclosure Letter set forth
all
written contracts, agreements, arrangements, commitments or understandings
and,
to the knowledge of Company, all oral contracts, agreements, arrangements,
commitments or understandings, to which the Company or any of its subsidiaries
is currently a party to or bound: (i) with respect to the employment
or other services of any directors or officers; or (ii) which, upon
the
consummation of the transactions contemplated by this Agreement will
(either
alone or upon the occurrence of any additional acts or events) result
in any
material payment (whether of severance pay or otherwise) becoming due
from the
Company, Parent, Purchaser, or any of their respective subsidiaries
to any
director, officer or employee thereof; or (iii) which is a “material contract”
(as such term is defined in Item 601(b)(10) of Regulation S-K of the
SEC) to be
performed after the date of this Agreement that has not been filed
or
incorporated by reference in the SEC Documents, (iv) that concerns
a partnership
or joint venture that is not consolidated with the Company for financial
reporting purposes; or (v) the purpose of which is to limit the ability
of the
Company or any of its subsidiaries to compete with respect to any product,
service or territory; or (vi) that is in the
25
nature
of
a collective bargaining agreement, employment agreement, consulting
agreement or
severance agreement that is not cancelable by the Company or any of
its
subsidiaries without penalty or compensation on thirty (30) days notice
or less;
(vii) that is with any Insurance Regulator and restricts (A) distributions
or other payments to the shareholders of the Company or any of its
subsidiaries,
(B) the continued operation of the Company or any of its subsidiaries,
or
(C) any other material matter relating to the Company or any of its
subsidiaries and its affairs; or (viii) (including any stock option
plan, stock
appreciation rights plan, restricted stock plan or stock purchase plan)
any of
the benefits of which will be increased, or the vesting of the benefits
of which
will be accelerated, by the occurrence of any of the transactions contemplated
by this Agreement, or the value of any of the benefits of which will
be
calculated on the basis of any of the transactions contemplated by
this
Agreement. The Company has made available to Parent correct and
complete copies of all of the contracts, agreements, commitments and
arrangements listed on Schedule 4.20(a) of the Disclosure
Letter. Each material contract, agreement, arrangement, commitment,
or understanding of the type described in Sections 4.20(a) and (b)
of this
Agreement, whether or not set forth in the Disclosure Letter, is referred
to in
this Agreement as a “Company Contract.”
(b) Schedule
4.20(b) of the Disclosure Letter sets forth a list of, and the Company
has made
available to Parent correct and complete copies of, all written arrangements
(or
group of related written arrangements) from or to third persons, for
the
furnishing of services to, or receipt of services by, the Company or
any of its
subsidiaries (including non-claim legal services, accounting services,
risk
management services, agency agreements, managing general agent agreements,
reinsurance intermediary agreements and other distribution agreements,
and
agreements relating to the sale or servicing of professional liability
insurance
products offered by the Company or any of its subsidiaries) under which
payments
were made during any calendar year since December 31, 2002 in excess
of
$200,000. Schedule 4.20(b) of the Disclosure Letter sets forth a
list of all agency agreements, general agent and managing general agent
agreements, reinsurance intermediary agreements and other distribution
agreements, and agreements relating to the sale or servicing of professional
liability insurance products offered by the Company or any of its subsidiaries
that will not expire and cannot be canceled or terminated within one
year, to
which the Company or any of its subsidiaries is a party and under which
payments
were made during any calendar year since December 31, 2002 in excess
of
$200,000. To the knowledge of the Company, neither the Company nor
any of its subsidiaries is a party to any verbal contract, agreement
or other
arrangement which if reduced to written form would be required to be
listed in
Schedule 4.20(b) of the Disclosure Letter under the terms of this Section
4.20(b).
(c) With
respect to each Company Contract: (i) such Company Contract is in
full force and effect, and is legally valid, binding and enforceable
in
accordance with its terms, in all material respects except as enforceability
may
be limited by bankruptcy Laws and creditors’ rights generally; (ii) there
are no monetary defaults in excess of $5,000 and no material non-monetary
defaults by the Company or any of its subsidiaries, or, to the knowledge
of the
Company, any other party, under such Company Contract; (iii) neither the
Company nor any of its subsidiaries has received written notice of
any default,
offset, counterclaim or defense under such Company Contract; (iv) to
the
knowledge of the Company, no condition or event has occurred which
with the
passage of time or the giving of notice or both would reasonably be
expected to
constitute a default or breach (that would be required to be disclosed
under
clause (ii)) by the Company or any of its subsidiaries, or any other
party under
the terms of such
26
Company
Contract; (v) all security deposits, reserve funds, and other sums
and charges
that have become due and payable under such Company Contract have been
paid in
full; and (vi) to the knowledge of the Company no party has repudiated
any
provision of such Company Contract.
Section
4.21 Opinion
of Financial Advisor. The Company has been advised by, and
received a written opinion from, its financial advisor, Philo Smith
& Co.
(the “Company Financial Advisor”), that in its opinion, as of the date hereof,
the Merger Price set forth herein is fair to the holders of Shares
from a
financial point of view and such opinion has not been changed, withdrawn
or
otherwise modified in any way.
Section
4.22 Change
in Control Payments. Neither the Company nor any of its
subsidiaries have any plans, programs or agreements to which they are
parties,
or to which they are subject, pursuant to which payments may be required
or
acceleration of benefits may be required upon a change of control of
the
Company.
Section
4.23 Questionable
Payments. Neither the Company nor any of its subsidiaries, nor
any of their respective current directors or officers, and to the knowledge
of
the Company, former officers or directors or current or former employees,
agents
or representatives have (i) used any corporate funds for any illegal
contributions, gifts, entertainment or other unlawful expenses relating
to
political activity, (ii) used any corporate funds for any direct or
indirect
unlawful payments to any foreign or domestic government officials or
employees,
(iii) violated any provision of the Foreign Corrupt Practices Act of
1977, (iv)
established or maintained any unlawful or unrecorded fund of corporate
monies or
other assets, (v) made any false or fictitious entries on the books
and records
of the Company or any of its subsidiaries, (vi) made any bribe, rebate,
payoff,
influence payment, kickback or other unlawful payment of any nature,
or (vii)
made any material favor or gift which is not deductible for federal
income tax
purposes.
Section
4.24 Michigan
Acts. Assuming that none of the Parent, the Purchaser or any of
their affiliates is an “interested shareholder” under Chapter 7A of the MBCA,
neither Chapter 7A or Chapter 7B of the MBCA will apply to this Agreement
or any
of the transactions contemplated by this Agreement.
Section
4.25 Broker’s
Fees. Except for fees payable to the Company Financial Advisor,
neither the Company nor any of its subsidiaries has incurred any liability
for
any broker’s fees, commissions or financial advisory or finder’s fees in
connection with any of the transactions contemplated by this Agreement,
and
neither the Company nor any of its subsidiaries has employed any broker,
finder
or financial advisor other than the Company Financial Advisor in connection
with
any of the transactions contemplated by this Agreement.
Section
4.26 No
Other Representations or Warranties. Except for the express
representations and warranties contained in this Article IV, none of
the
Company, its subsidiaries or any other person makes, or shall be deemed
to have
made, any other representation or warranty, express or implied, on
behalf of the
Company or any of its subsidiaries or other affiliates. Without
limiting the generality of the foregoing, and notwithstanding any representation
and warranty made by the Company in this Article IV, none of the Company,
any of
its subsidiaries or any other person makes any representation or warranty
with
respect to (a) any projections, estimates or budgets delivered or made
available
to Parent, the Purchaser or any
27
of
their
respective representatives at any time with respect to future revenues,
expenses
or expenditures or future results of operations, or (b) except as expressly
covered by any representation and warranty contained in this Article
IV, any
other information or documents (financial or otherwise) made available
to
Parent, the Purchaser or any of their respective representatives, including
the
information memorandum, whether on, before or after the date of this
Agreement.
ARTICLE
V
REPRESENTATIONS
AND WARRANTIES OF PARENT AND THE PURCHASER
Parent
and the Purchaser represent and warrant to the Company as follows:
Section
5.1 Organization. Each
of Parent and the Purchaser is a corporation duly organized, validly
existing
and in good standing under the Laws of its state of incorporation and
each of
Parent and the Purchaser has all requisite corporate power and authority
necessary to own, lease and operate its properties and to carry on
its business
as now being conducted. Purchaser is a wholly-owned subsidiary of
Parent. None of the Parent, the Purchaser or any of their affiliates
is an “interested shareholder” under Chapter 7A of the MBCA.
Section
5.2 Authority. Each
of Parent and the Purchaser has all requisite corporate power and authority
to
execute and deliver this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and
the consummation of the transactions contemplated hereby have been
duly and
validly authorized and approved by the Board of Directors of each of
Parent and
the Purchaser and by Parent as the ultimate holding company of the
Purchaser,
and no other corporate proceedings are necessary to authorize or adopt
this
Agreement or the consummation of the transactions contemplated
hereby. This Agreement has been duly and validly executed and
delivered by each of Parent and the Purchaser and, assuming this Agreement
constitutes a legal, valid and binding agreement of the Company, it
constitutes
a legal, valid and binding agreement of each of Parent and the Purchaser,
enforceable against each of them in accordance with its terms, except
that (a)
such enforcement may be subject to applicable bankruptcy, insolvency,
reorganization, moratorium or other similar Laws, now or hereafter
in effect,
relating to creditors’ rights generally and (b) equitable remedies of specific
performance and injunctive and other forms of equitable relief may
be subject to
equitable defenses and to the discretion of the court before which
any
proceeding therefore may be brought.
Section
5.3 No
Violations; Consents and Approvals.
(a) None
of the execution and delivery of this Agreement, the consummation of
the
transactions contemplated hereby or the compliance by Parent or the
Purchaser
with any of the provisions hereof will (i) violate any provision of
their
respective organizational documents, (ii) result in a violation or
breach of, or
constitute (with or without due notice or lapse of time or both) a
default, or
give rise to any right of termination, cancellation or acceleration
or any right
which becomes effective upon the occurrence of a merger, under, any
of the
terms, conditions or provisions of any note, bond, mortgage, indenture
or other
instrument of indebtedness for money borrowed to which Parent or the
Purchaser
is a party, or by which Parent or the Purchaser or any
28
of
their
respective properties is bound, (iii) result in a violation or breach
of, or
constitute (with or without due notice or lapse of time or both) a
default, or
give rise to any right of termination, cancellation or acceleration
or any right
which becomes effective upon the occurrence of a merger, under any
of the terms,
conditions or provisions of any license, franchise, permit or agreement
to which
Parent or the Purchaser is a party, or by which Parent or the Purchaser
or any
of their respective properties is bound, or (iv) conflict with or violate
any
Laws by which Parent or the Purchaser or any of its respective properties
is
bound, excluding from the foregoing clauses (ii), (iii) and (iv) violations,
breaches, defaults or rights which would not reasonably be expected
to have a
material adverse effect on Parent’s or the Purchaser’s ability to perform their
respective obligations under this Agreement or consummate the Merger
(a “Parent
Material Adverse Effect”) or the approval of Insurance Regulators described in
Section 7.1(b).
(b) No
filing or registration with, notification to, or authorization, consent
or
approval of, any Governmental Authority is required by Parent or the
Purchaser
in connection with the execution and delivery of this Agreement, or
the
consummation by Parent or the Purchaser of the transactions contemplated
hereby,
except (i) in connection, or in compliance, with the provisions of
the Exchange
Act, (ii) the filing of the Certificate of Merger with the Michigan
Department
of Labor and Economic Growth, (iii) the filing of applications, notices
and
forms with, and the obtaining of approvals from, any applicable Governmental
Authorities regulating transactions involving insurance companies,
agencies or
underwriters with respect to the transactions contemplated by this
Agreement,
and (iv) such other consents, orders, authorizations, registrations,
declarations and filings not obtained prior to the Effective Time the
failure of
which to be obtained or made would not prevent consummation of the
Merger, or
otherwise prevent the Parent or the Purchaser from performing its obligations
under this Agreement, and would not otherwise reasonably be expected
to have a
Parent Material Adverse Effect.
Section
5.4 Financing. Parent
has adequate financial resources to pay the Merger Price in full as
required by
Sections 2.1 and 3.1 of this Agreement and to pay all other costs to
be paid by
Parent and the Purchaser, as applicable, under this Agreement.
Section
5.5 Broker’s
Fees. Neither Parent nor the Purchaser has incurred any liability
for any broker’s fees, commissions or financial advisory or finder’s fees in
connection with any of the transactions contemplated by this Agreement,
and
neither Parent nor the Purchaser has employed any broker, finder or
financial
advisor in connection with any of the transactions contemplated by
this
Agreement.
ARTICLE
VI
COVENANTS
Section
6.1 Conduct
of Business of the Company. The Company covenants and agrees
that, during the period from the date of this Agreement and continuing
until the
earlier of the termination of this Agreement or the Effective Time,
unless
Parent shall otherwise agree in writing, the Company shall conduct
its business
and shall cause the businesses of its subsidiaries to be conducted
only in, and
the Company and its subsidiaries shall not take any action except in,
the
ordinary course of business and in a manner consistent with past practice
other
than actions taken by the Company or its subsidiaries in contemplation
of the
Merger; and the Company shall
29
use
its
reasonable commercial efforts to preserve substantially intact the
business
organization of the Company and its subsidiaries, to keep available
the services
of the present officers, employees and consultants of the Company and
its
subsidiaries, to file all required reports and statements with the
SEC, state
securities regulators and Insurance Regulators, and to preserve the
present
relationships of the Company and its subsidiaries with customers, suppliers,
agents, brokers, insurers and other persons with which the Company
or any of its
subsidiaries has significant business relations. Without limiting the
generality of the foregoing, and except as otherwise expressly provided
in this
Agreement, prior to the Effective Time, the Company shall not, and
shall cause
its subsidiaries not to, without the prior written consent of Parent
or the
Purchaser:
(a) amend
or propose to amend its organizational documents;
(b) authorize
for issuance, issue, sell, deliver or agree or commit to authorize,
issue, sell
or deliver (whether through the issuance or granting of options, warrants,
commitments, subscriptions, rights to purchase or otherwise) any stock
of any
class or any other securities or equity equivalents, or amend any of
the terms
of any such securities or agreements outstanding as of the date
hereof;
(c) split,
combine or reclassify any shares of its capital stock, declare, set
aside or pay
any dividend or other distribution (whether in cash, stock or property
or any
combination thereof) in respect of its capital stock or redeem or otherwise
acquire any of its securities, other than any dividend or other distribution
to
the Company by any of its subsidiaries;
(d) except
in the ordinary course of business consistent with past practice (including
selling professional liability insurance), (i) incur, assume or prepay
any
long-term or short-term debt or issue any debt securities, except for
borrowings
under existing lines of credit or prepayments in the ordinary course
of
business; (ii) assume, guarantee, endorse or otherwise become liable
or
responsible (whether directly, contingently or otherwise) for any material
obligations of any other person, except for obligations of any subsidiary
of the
Company; (iii) make any material loan, advance or capital contribution
to, or
investment in, any other person (other than to any subsidiary of the
Company or
any customary loan or advance to employees related to advancement of
expenses or
401(k) loans, and not to exceed $10,000 in the aggregate); (iv) pledge
or
otherwise encumber shares of capital stock of the Company or any of
its
subsidiaries; or (v) mortgage or pledge any of its assets, tangible
or
intangible, or create or suffer to exist any material Lien
thereupon;
(e) except
as may be required by Law, enter into, adopt, amend or terminate any
bonus,
profit sharing, compensation, severance, termination, stock option,
stock
appreciation right, restricted stock, performance unit, stock equivalent,
stock
purchase agreement, pension, retirement, deferred compensation, employment,
severance or other employee benefit agreement, trust, plan, fund or
other
arrangement for the benefit or welfare of any director, officer or
employee in
any manner, or (except for normal increases in the ordinary course
of business
that, in the aggregate, do not result in a material increase in benefits
or
compensation expense to the Company, or except as required under any
existing
agreement, plan or arrangement) increase in any manner the compensation
or
fringe benefits of any director, officer or employee or pay any benefit
not
required by any agreement, plan and arrangement as in effect as of
the date
hereof;
30
(f) acquire,
sell, lease, encumber or dispose of any assets of the Company or any
of its
subsidiaries (except for (i) dispositions of obsolete or worthless
assets, (ii)
sales of immaterial assets not in excess of $50,000 in the aggregate,
and (iii)
encumbrances created under existing secured lending arrangements on
assets
acquired after the date of this Agreement), enter into any contract,
agreement
or transaction outside the ordinary course of business consistent with
past
practice, or modify, amend, terminate or waive any material rights
under any
material contract or agreement;
(g) except
as may be required as a result of a change in Law or in generally accepted
accounting principles (after consultation with Parent as to the effect
of any
such change), change any of the accounting principles or practices,
any
actuarial methodologies (other than any changes to such methodologies
used by
the Company’s actuaries twice a year in setting annual Loss Reserve picks and
consistent with generally accepted actuarial practice), or any pricing
policy or
reserving policy used by it or any of its subsidiaries;
(h) acquire
(i) by merger, consolidation, acquisition of stock or assets or otherwise
any
corporation, partnership or other business organization or division
thereof or
(ii) any equity interest therein other than any investment made in
ordinary
course of business;
(i) revalue
in any material respect any of its assets, including writing off notes
or
accounts receivable;
(j) except
as required as a result of a change in Law, make or change any Tax
election,
change a Tax accounting period, adopt or change any Tax accounting
method, file
any amended Tax Return, enter into any Tax closing agreement, settle
any Tax
claim or assessment relating to the Company or any of its subsidiaries,
surrender any right to claim a refund of Taxes, consent to extension
or waiver
of the statute of limitations applicable to any Tax, or take any similar
action;
(k) pay,
discharge or satisfy any claim, liability or obligation (whether absolute,
accrued, asserted or unasserted, contingent or otherwise), other than
the
payment, discharge or satisfaction in the ordinary course of business
consistent
with past practice of liabilities reflected or reserved against in
the
consolidated financial statements (including the notes thereto) of
the Company
and its subsidiaries contained in SEC Reports filed prior to the date
of this
Agreement or incurred in the ordinary course of business consistent
with past
practice;
(l) settle
or compromise any pending or threatened suit, action or claim relating
to the
transactions contemplated hereby or material to the Company and its
subsidiaries
taken as a whole;
(m) authorize
any new capital expenditure which when aggregated with all other new
capital
expenditures causes all such new capital expenditures to exceed
$75,000;
(n) offer
insurance of a type or in a jurisdiction materially different from
the types and
jurisdictions for which they offer insurance on the date of this Agreement;
or
(o) take,
or agree in writing or otherwise to take, any of the actions described
in
Section 6.1(a) through (n) above, or any action which would reasonably
be
expected to make any
31
of
the
representations or warranties of the Company contained in this Agreement
untrue
or incorrect or prevent the Company, subject to the terms and conditions
of this
Agreement, from performing or cause the Company not to perform its
covenants
hereunder.
Section
6.2 No
Solicitation.
(a) The
Company and its subsidiaries shall, and shall direct their officers,
directors,
employees, representatives and agents (“Representatives”) to, immediately cease
any existing discussions and negotiations with any parties conducted
before the
date of this Agreement with respect to any Acquisition Transaction,
and request
that all non-public information concerning the Company and its subsidiaries
provided by the Company or its subsidiaries with respect to the evaluation
of an
Acquisition Transaction and in the possession of such persons and their
affiliates, representatives and advisors be returned to the Company
or
destroyed. Prior to the Effective Time, the Company and its
subsidiaries shall not, and shall not authorize or permit any of its
subsidiaries or any of their Representatives, directly or indirectly,
to,
solicit, initiate, facilitate or encourage (including by way of furnishing
or
disclosing non-public information, or waiving of any standstill provisions
or
agreements) any inquiries or the making of any proposal with respect
to an
Acquisition Transaction or negotiate, explore or otherwise engage in
substantive
communications in any way with any person (other than with respect
to the Merger
and the other transactions contemplated by this Agreement) with respect
to any
Acquisition Transaction, or enter into any agreement, contract or arrangement
requiring it to abandon, terminate or fail to consummate the Merger
or any other
transactions contemplated by this Agreement. “Acquisition
Transaction” means any offer or proposal for, or any inquiry or indication of
interest in, (i) any sale, lease, exchange, mortgage, transfer or other
disposition of 10% or more of the consolidated assets of the Company
and its
subsidiaries, (ii) any acquisition or purchase of an equity interest
in the
Company representing in excess of 10% of the power to vote for the
election of
the directors of the Company, or any tender offer or exchange offer
for equity
securities of the Company, (iii) any merger, consolidation, business
combination, recapitalization, liquidation, dissolution or similar
transaction
involving the Company, or any of its subsidiaries whose assets, individually
or
in the aggregate, constitute more than 10% of the consolidated assets
of the
Company, (iv) a plan of liquidation or extraordinary dividend relating
to more
than 10% of the Company’s total assets, (v) the repurchase by the Company or any
of its subsidiaries of more than 10% of the outstanding Shares or (vi)
any other
transaction similar to any of the foregoing, in each case other than
the
transactions with Parent or the Purchaser contemplated by this
Agreement.
(b) Notwithstanding
Section 6.2(a), the Company may negotiate or otherwise engage in discussions
with, and furnish non-public information to, any Person in response
to an
unsolicited, bona fide third party written proposal by such Person,
not
resulting from a breach of this Section 6.2, if (i) the Board determines
in good
faith after consultation with and advice from the Company Financial
Advisor or
financial advisor of nationally or regionally recognized reputation,
that such
proposal is reasonably likely to result in a Superior Proposal, (ii)
such Person
executes a confidentiality agreement no less favorable to the Company
than the
Confidentiality Agreement (including the standstill provisions thereof)
and
including therein a restriction on such Person from, without the prior
written
consent of the Board, proposing or entering into any Acquisition Transaction,
making, or in any way participating, directly or indirectly, in any
solicitation
of, or request for, proxies, consents or authorizations to vote, or
32
seeking
to advise or influence any person with respect to the voting of any
voting
securities of the Company, taking any action that might require the
Company to
make a public announcement regarding the possibility of any of the
foregoing or
requesting the Company to amend or waive any of the foregoing (the
“Third Party
Confidentiality Agreement”) and the Company does not agree to waive the terms of
the Third Party Confidentiality Agreement (except that any approval
or consent
of the Company or the Board of any action that, under the standstill
provisions
of the Third Party Confidentiality Agreement, requires the Company’s or Board’s
approval or consent shall not be, and shall not be deemed to be, a
waiver of any
terms of the Third Party Confidentiality Agreement), and (iii) the
Board
determines in good faith after receiving the advice of outside legal
counsel
that the failure to engage in such negotiation or discussions or provide
such
information would be inconsistent with the Board’s fiduciary duties under
applicable Law.
(c) The
Company (i) shall notify Parent of any Acquisition Transaction (including,
without limitation, the material terms and conditions thereof and the
identity
of the Person making it) as promptly as practicable (but in no case
later than
24 hours after its receipt, and in any event before providing any information
to
or entering into discussions or negotiations with any Person in connection
with
the Acquisition Transaction); (ii) unless restricted by contract, shall
promptly
provide Parent with a copy of any written Acquisition Transaction or
amendments
or supplements thereto; (iii) shall promptly inform Parent of the status
of any
discussions or negotiations with such Person and any material changes
to the
terms and conditions of such Acquisition Transaction; and (iv) shall
promptly
deliver to Parent a copy of any information delivered by the Company
to such
Person which has not previously been delivered by the Company to
Parent.
(d) Except
as permitted by the second sentence of this Section 6.2(d), neither
the Board
nor any committee thereof shall (1) withdraw or modify, or publicly
propose to
withdraw or modify, in a manner adverse to Parent, its recommendation
of this
Agreement and the Merger and that its shareholders vote in favor of
this
Agreement and the Merger, or take any action not explicitly permitted
by this
Agreement that would be inconsistent with its approval of this Agreement
and the
Merger, (2) approve or recommend, or publicly propose to approve or
recommend,
any Acquisition Transaction or (3) cause the Company to enter into
any letter of
intent, agreement in principle, acquisition agreement or similar agreement
or
document (other than a Third Party Confidentiality Agreement as permitted
under
Section 6.2(b)) related to any Acquisition
Transaction. Notwithstanding the foregoing, the Board shall be
permitted (1) not to recommend, and publicly propose not to recommend,
to its
shareholders approval and adoption of this Agreement and the Merger,
(2) to
withdraw or modify, and publicly propose to withdraw or modify, in
a manner
adverse to Parent, its recommendation to its shareholders, (3) to approve
or
recommend, and publicly propose to approve and recommend, any Superior
Proposal
or (4) to terminate this Agreement in accordance with Section 8.3(a)
below and
in connection therewith enter into an agreement with respect to such
Superior
Proposal, but only if (y) the Company has received an Acquisition Transaction
which the Board reasonably determines in good faith after consultation
with and
advice from the Company Financial Advisor or other financial advisor
of
nationally or regionally recognized reputation constitutes a Superior
Proposal
and (z) the Board determines in good faith, after receiving the advice
of
outside legal counsel, that the failure to take such action would be
inconsistent with the Board’s fiduciary duties under applicable Law;
provided, however, that any termination of this Agreement by the
Company pursuant to Section
33
8.3(a)
below shall be void and of no force or effect unless, within the applicable
time
periods set forth in Section 8.6(b), the Company pays to Parent the
Expense
Payment, the Initial Fee and the Final Fee in accordance with Section
8.6(b);
and provided, further, that the Company shall not exercise its
right to terminate this Agreement and the Board shall not take any
of the
actions set forth above unless the Company shall have delivered to
Parent a
prior written notice advising Parent that the Company or its Board
intends to
take such action with respect to a Superior Proposal, specifying in
reasonable
detail the material terms and conditions of the Superior Proposal,
this notice
to be delivered not less than four Business Days prior to the time
the action is
taken, and, during this four Business Day period, the Company and its
advisors
shall negotiate in good faith with Parent to make such adjustments
in the terms
and conditions of this Agreement (“Modified Merger Agreement”) such that such
other proposal would no longer constitute a Superior Proposal and shall
accept
the Modified Merger Agreement if the other proposal is no longer a
Superior
Proposal.
(e) For
purposes of this Agreement, “Superior Proposal” means any bona fide, third party
written proposal not solicited by the Company or any of its subsidiaries
or any
of their Representatives, nor otherwise resulting from a breach of
this Section
6.2, nor made in breach of the Third Party Confidentiality Agreement,
relating
to any acquisition of more than fifty percent (50%) of the Company
and its
subsidiaries taken as a whole, by means of a merger, consolidation,
share
exchange or other business combination involving the Company and its
subsidiaries, or acquisition of more than fifty percent (50%) of the
assets or
capital stock of the Company and its subsidiaries, taken as a whole,
which
contains no financing contingency or for which the financing is determined
by
the Board to be reasonably available to the offeror, and which the
Board
determines in good faith, after consultation with and advice from the
Company
Financial Advisor or other financial advisor of nationally or regionally
recognized reputation, and taking into account all the terms and conditions
of
the proposal, is more favorable to the Company’s shareholders (in their
capacities as shareholders) from a financial point of view than this
Agreement
and Merger, as supplemented by the Modified Merger Agreement, and is
reasonably
likely to be consummated on the terms set forth in the proposal, taking
into
account all legal, financial, regulatory and other aspects of the proposal
determined relevant by the Board.
(f) Except
in connection with a termination of this Agreement in accordance with
the terms
of this Agreement, the Company shall not take any action to exempt
any Person
from the restrictions on “business combinations,” “control share acquisitions,”
“takeover offers” or similar provisions contained in Chapter 7A or Chapter 7B of
the MBCA or the Company’s articles of incorporation, or otherwise cause such
restrictions not to apply unless such actions are taken simultaneously
with a
termination of this Agreement in accordance with the terms of this
Agreement.
(g) The
Company agrees that any violations of the restrictions set forth in
this Section
6.2 by any Representative of the Company or any of its subsidiaries
shall be
deemed to be a breach of this Section 6.2 by the Company.
34
Section
6.3 Insurance
Regulatory Filings.
(a) The
parties hereto understand and agree that Parent will be required to
file certain
documents and obtain certain approvals in order to complete the transactions
contemplated hereby, which filings and approvals include notice on
Form A and
Form E, if applicable, to be filed with Insurance Regulators in support
of
Parent’s request for approval of a change in control of the Company and its
subsidiaries (the “Insurance Filings”). Each party covenants and
agrees that all information furnished by it for inclusion in the Insurance
Filings will not contain any untrue statement of material fact or omit
to state
any material fact required to be stated therein.
(b) Parent
shall use its reasonable best efforts to file all Insurance Filings
and obtain
the approval of the necessary Insurance Regulators to the transactions
contemplated herein as soon as reasonably practicable, including giving
notice
of any public hearing regarding the Merger to any persons required
by such
Insurance Regulators in the manner prescribed by such authorities,
having its
representatives attend the public hearings of such authorities and
testify at
such hearings, if required, and submitting such information as may
be reasonably
available pursuant to the requests by such Insurance Regulators authorities
in
connection with such hearings. In furtherance of the foregoing,
Parent shall use its reasonable best efforts to file the Form A and
Form E, if
applicable, with the Insurance Regulators of the State of Michigan
no later than
10 Business Days after the date of this Agreement. The Company shall
reasonably cooperate and coordinate with Parent, at Parent’s expense, in
providing all information necessary to complete the Insurance Filings
and in
obtaining the approval of the necessary Insurance Regulators to the
transactions
contemplated herein.
Section
6.4 Proxy
Statement; Shareholder Meeting.
(a) As
soon as practicable following the date of this Agreement, the Company shall
prepare, with the assistance and input of Parent, and file with the
SEC, and
Parent shall reasonably cooperate with the Company in the preparation
and filing
of, a proxy statement relating to the adoption of this Agreement and
the
approval of the transactions contemplated hereby by the shareholders
of the
Company (the “Proxy Statement”) and shall use its commercially reasonable
efforts to have the Proxy Statement cleared by the SEC as promptly
as
practicable after such filing. The Company hereby represents and
warrants that the Proxy Statement will comply with the requirements
of the
Exchange Act and the rules and regulations related thereto in all material
respects, and will not contain any untrue statement of a material fact
or omit
to state a material fact necessary in order to make the statements
made therein,
in light of the circumstances under which they were made, not misleading;
provided, however, that the Company makes no representation or warranty
with respect to any information that Parent or the Purchaser will supply
specifically for use in the Proxy Statement. The Company shall notify
Parent promptly of the receipt of any comments from the SEC and of
any request
by the SEC for amendments or supplements to the Proxy Statement and
will use its
reasonable best efforts to respond promptly to and resolve such comments
or
requests. The Company will promptly provide to Parent copies of all
correspondence between it, or any of its Representatives, and the SEC
with
respect to the Proxy Statement. Parent and the Purchaser shall cooperate
with
the Company in the preparation of, and furnish all information concerning
it
required to be included in, the Proxy Statement. The Company shall
cause the
Proxy Statement to be mailed to the Company’s shareholders as promptly as
practicable after it is cleared by the SEC.
35
(b) The
Company shall call a meeting of its shareholders in accordance with
applicable
Laws for the purpose of voting upon the adoption of this Agreement
and approval
of the transactions contemplated hereby (the “Shareholder Meeting”) as soon as
practicable after the date hereof, and shall use its reasonable best
efforts to
hold the Shareholder Meeting not later than September 15,
2007. Subject to Section 6.2, the Board shall recommend and declare
advisable such adoption and approval (which recommendation the Company
shall
include in the Proxy Statement) and shall use its reasonable best efforts
(which
shall not be deemed to require the Company to engage any proxy solicitation
or
public relations firms) to obtain, such adoption and approval. Parent
shall vote or cause to be voted at the Shareholder Meeting (and any
adjournment
thereof) all shares of common stock beneficially owned by Parent or
any of its
subsidiaries in favor of the adoption of this Agreement and approval
of the
transactions contemplated hereby.
(c) Without
limiting the generality of the foregoing provisions of this Section,
subject to
Section 6.2(d), the Company agrees that its obligations pursuant to
this Section
shall not be affected by (i) the commencement, public proposal, public
disclosure or communication to the Company of an Acquisition Transaction
or (ii)
the withdrawal or modification by the Board of its approval or recommendation
of
this Agreement or the Merger.
Section
6.5 Access
to Information. From the date of this Agreement until the
Effective Time, (i) the Company shall give Parent and its authorized
representatives (including counsel, financial advisors, accountants,
banks,
financial institutions, actuaries and auditors) full access, during
normal
business hours to all facilities and operations and to all books and
records of
the Company and its subsidiaries, shall permit Parent to make such
inspections
as it may reasonably request and shall cause its officers and those
of its
subsidiaries to promptly furnish Parent with such financial and operating
data
and other information with respect to its business and properties as
Parent may
from time to time reasonably request and (ii) the Company shall, and
shall cause
each of its subsidiaries to, furnish promptly to Parent (a) a copy
of each
report, schedule, registration statement and other document filed by
it during
such period pursuant to the requirements of federal or state securities
Laws,
(b) a copy of each report or other document filed with or otherwise
provided to
or received from a Governmental Authority or its staff, (c) a copy
of each
report or other document filed with or otherwise provided to or received
from a
rating agency or its staff and (d) all other information concerning
its
business, properties and personnel as Parent may reasonably
request. All such information shall be held in confidence in
accordance with the terms of the Confidentiality Agreement (the “Confidentiality
Agreement”) between Parent and the Company dated March 15, 2007, the terms of
which are hereby incorporated herein and shall survive the termination
of this
Agreement. Parent and the Purchaser shall not, and Parent shall cause
its other subsidiaries and affiliates to not, without the prior written
consent
of the Board, propose to enter or enter into any Acquisition Transaction
(except
the Merger pursuant to this Agreement), make or in any way participate,
directly
or indirectly, in any solicitation of, or request for, proxies, consents
or
authorizations to vote, or seek to advise or influence any person with
respect
to the voting of any voting securities of the Company, take any action
that
might require the Company to make a public announcement regarding the
possibility of any of the foregoing or request the Company to amend
or waive any
of the foregoing.
36
Section
6.6 Reasonable
Best Efforts, Other Actions. Subject to the terms and conditions
herein provided and applicable Law, each of the Company, Parent and
the
Purchaser shall use its reasonable best efforts promptly to take, or
cause to be
taken, all other actions and do, or cause to be done, all other things
necessary, proper or appropriate under applicable Laws to consummate
and make
effective the transactions contemplated by this Agreement, including
all
applications, notices and forms to be filed with, and the approvals
to be
obtained from, any applicable Governmental Authorities regulating the
Company
and its subsidiaries, including under applicable insurance Laws, with
respect to
the transactions contemplated by this Agreement. If any court or
Governmental Authority issues an order, decree or ruling or takes any
other
action restraining, enjoining or otherwise prohibiting the Merger or
any of the
other transactions contemplated by this Agreement, each of the parties
hereto
shall use its reasonable best efforts to remove or lift such order,
decree or
ruling. In furtherance of the foregoing, each of the Company, Parent
and the Purchaser agree to use their reasonable best efforts to consummate
the
Merger within five days after receipt of the latter of Company Shareholder
Approval or the approval of Insurance Regulators described in Section
7.1(b).
Section
6.7 Public
Announcements. Before issuing any press release or otherwise
making any public statements with respect to this Agreement or the
Merger,
Parent, the Purchaser and the Company shall consult with each other
as to its
form and substance (including providing the opportunity to review and
comment on
such release or statement) and shall not issue any such press release
or make
any such public statement prior to such consultation, except in either
case as
may be required by Law or any obligations pursuant to the rules and
regulations
issued by the SEC, the National Association of Securities Dealers,
Inc., the New
York Stock Exchange or the NASDAQ Stock Market, Inc., if it has used
its
reasonable best efforts to consult with the other party prior
thereto. Parent, the Purchaser and the Company shall mutually agree
as to the form and content of any initial press release or public statement
with
respect to this Agreement or the Merger prior to issuance.
Section
6.8 Notification
of Certain Matters. Each of the Company and Parent shall give
prompt notice to the other party of (a) the occurrence or non-occurrence
of any
event the occurrence or non-occurrence of which would be reasonably
likely to
cause either (i) any representation or warranty of any party contained
in this
Agreement to be untrue or inaccurate in any material respect at any
time from
the date hereof to the Effective Time, or (ii) any condition set forth
in
Article VII to be unsatisfied at any time from the date hereof to the
Effective
Time, and (b) any material failure of the Company, Parent or the Purchaser,
as
the case may be, to comply with or satisfy any covenant, condition
or agreement
to be complied with or satisfied by it hereunder; provided, however, that
the delivery of any notice pursuant to this Section 6.8 shall not limit
or
otherwise affect the remedies available hereunder to the Company, Parent
or the
Purchaser. The Company shall update the Disclosure Letter (the
“Updated Disclosure Letter”) to a date that is no earlier than
10 Business Days prior to the Effective Time and no
later
than one Business Day prior to the Effective Time and shall deliver
the Updated
Disclosure Letter to the Parent and the Purchaser not less than one
Business Day
prior to the Effective Time; provided, however, that the Updated
Disclosure Letter shall have no effect on the representations or warranties
of
the Company made as of the date of this Agreement or the conditions
to the
obligations of Parent and the Purchaser under this Agreement relating
to the
accuracy of such representations and warranties made as of such
date.
37
Section
6.9 Indemnification
and Insurance.
(a) From
and after the Effective Time, Parent and the Surviving Corporation
shall
indemnify, defend and hold harmless, and Parent shall cause the Surviving
Corporation (including, if necessary, providing the Surviving Corporation with
sufficient funds) to indemnify, defend and hold harmless, each person
who is
now, or has been at any time prior to the date hereof or who becomes
prior to
the Effective Time, an officer, director, employee or agent of the
Company or
any of its subsidiaries (the “Indemnified Parties”) against all losses, claims,
damages, expenses (including reasonable legal fees and expenses), liabilities
or
judgments or amounts that are paid in settlement with the approval
of the
indemnifying party (which approval shall not be unreasonably withheld
or
delayed) incurred based in whole or in part on or arising in whole
or in part
out of actions or omissions or alleged actions or omissions occurring
at or
prior to the Effective Time to the same extent and on the same terms
and
conditions (including with respect to advancement of expenses) provided
for in
the Company’s articles of incorporation and bylaws and agreements in effect at
the date hereof (to the extent consistent with applicable Law).
(b) For
a period of six years after the Effective Time, Parent shall maintain
in effect,
and shall cause the Surviving Corporation to maintain in effect, without
any
lapses of coverage, the current policies of directors’ and officers’ liability
insurance maintained by the Company (provided that Parent may substitute
therefore policies of at least the same coverage and amounts containing
terms
and conditions which are no less advantageous) with respect to claims
arising in
whole or in part from facts or events which occurred before the Effective
Time
(the “Continuation Coverage”). Alternatively, Parent may obtain and
fully pay for a “tail” insurance policy (providing only for coverage for
indemnified directors and officers where the existing policies also
include
coverage for the Company) with a claims period of at least six years
after the
Effective Time with the same coverage and amounts, and containing terms
and
conditions which are no less advantageous then the Company’s current policies
with respect to claims arising in whole or in part from facts or events
which
occurred before the Effective Time (the “Tail Coverage”). Parent
shall not be obligated to make annual premium payments for any Continuation
Coverage to the extent such premiums exceed 200% of the annual premiums
paid as
of the date hereof by the Company for its current policies of directors’ and
officers’ liability insurance or, if Parent elects to obtain Tail Coverage, it
shall not be obligated to pay an aggregate premium payment for such
Tail
Coverage in excess of 300% of the annual premiums paid as of the date
hereof by
the Company for its current policies of directors’ and officers’ liability
insurance (the “Maximum Amount”). If the amount of the premiums
necessary to maintain or procure such insurance coverage exceeds the
Maximum
Amount, Parent and the Surviving Corporation shall, and Parent shall
cause the
Surviving Corporation to, maintain the most advantageous policies of
directors’
and officers’ insurance obtainable for an annual premium equal to the Maximum
Amount. Notwithstanding the foregoing, Parent may not elect to obtain
Tail Coverage in lieu of Continuation Coverage if Parent applies the
limitation
in the immediately preceding sentence and the Tail Coverage would be
less
advantageous to the Company’s directors and officers than the Continuation
Coverage.
(c) The
provisions of this Section 6.9 shall survive the consummation of the
Merger and
are intended to be for the benefit of, and shall be enforceable by,
each
Indemnified Party, and their respective heirs, legal representatives,
successors
and assigns. The rights of each Indemnified Party under this Section
6.9 shall be in addition to any rights such Indemnified Party
38
may
have
under the articles or incorporation and bylaws of the Company or any
of its
subsidiaries or applicable Law.
(d) The
obligations of Parent and the Surviving Corporation under this Section
6.9 shall
be joint and several. If Parent, the Surviving Corporation or any of
their
respective successors or assigns (i) consolidates with or merges into
any other
Person and is not the surviving entity of such consolidation or merger,
or (ii)
transfers all or substantially all of its assets to any Person, then
in each
such case, proper provision shall be made so that the surviving entity
or such
Person assumes in full the obligations set forth in this Section
6.9.
Section
6.10 Expenses. Except
as set forth in Sections 6.3 and 8.6, Parent, the Purchaser and the
Company
shall each bear their respective expenses incurred in connection with
this
Agreement and the Merger, including the preparation, execution and
performance
of this Agreement, the Proxy Statement and regulatory filings, proxy
solicitation costs and regulatory fees, and the transactions contemplated
hereby, and all fees and expenses of investment bankers, finders, brokers,
agents, representatives, counsel and accountants.
Section
6.11 Obligations
of the Purchaser. Parent shall take all action necessary to cause
the Purchaser to perform its obligations under this Agreement and to
consummate
the Merger on the terms and conditions set forth in this
Agreement. To the extent required by applicable Law or any
Governmental Authority, Parent will cause the Company or the Insurance
Company
Subsidiary, as applicable, to redeem the outstanding 5.25% surplus
certificates
previously issued by the Insurance Company Subsidiary, including any
interest
thereon.
Section
6.12 401(k)
Plan. If requested by the Parent no later than five Business Days
before the Effective Time, the Company shall terminate the Professionals
Direct,
Inc. 401(k) Plan (the “Company Plan”) immediately prior to the Effective Time.
Subject to Parent’s reasonable satisfaction that the Company Plan is tax
qualified upon termination, if the Company Plan is terminated, as soon
as
reasonably practicable after the Effective Time, the Parent shall ensure
that a
qualified retirement plan of Parent or any of its affiliates will accept
rollover contributions from the Company Plan on behalf of employees
of the
Company and its subsidiaries. As soon as reasonably practicable after
receipt of
a favorable determination letter from the IRS with respect to the termination
of
the Company Plan, if necessary (as determined by Parent in its reasonable
discretion), the assets of the Company Plan shall be distributed to
the
participants or beneficiaries thereof or transferred pursuant to an
eligible
rollover distribution as a participant or beneficiary may direct (including
a
rollover into a qualified retirement plan of Parent or any of its
affiliates).
ARTICLE
VII
CONDITIONS
TO THE OBLIGATIONS OF PARENT, THE PURCHASER AND THE COMPANY
Section
7.1 Conditions
to Obligation of Each Party to Effect the Merger. The respective
obligations of each party to effect the Merger shall be subject to
the
satisfaction at or prior to the Effective Time of all of the following
conditions:
39
(a) Shareholder
Approval. This Agreement and the Merger shall have been approved
and adopted by the requisite vote of the shareholders of the
Company.
(b) Insurance
Regulatory Authority Approvals. The completion of all filings
with, and receipt of all approvals by, the Commissioner of Insurance
of the
State of Michigan and the Office of Financial and Insurance Services
of the
Michigan Department of Labor and Economic Growth (the “Michigan Insurance
Regulators”) that are legally required to consummate the Merger, this Agreement
and all transactions contemplated hereby.
(c) No
Injunctions or Restraints; Illegality. No temporary restraining
order, preliminary or permanent injunction or other order, or other
legal
restraint or prohibition issued by any court of competent jurisdiction
in the
United States preventing the consummation of the Merger shall be in
effect, nor
shall any proceeding brought by any administrative agency or commission
or other
Governmental Authority in the United States seeking any of the foregoing
be
pending; and there shall not be any action taken, or any statute, rule,
regulation or order enacted, entered, enforced or deemed applicable
to the
Merger, which makes the consummation of the Merger illegal.
(d) Governmental
Actions. There shall not have been instituted, pending or
threatened any action or proceeding (or any investigation or other
inquiry that
would likely result in such an action or proceeding) by any Governmental
Authority before any Governmental Authority or court of competent jurisdiction
in the United States, nor shall there be in effect any judgment, decree
or order
of any Governmental Authority or court of competent jurisdiction in
the United
States (including the insurance regulatory approvals described in Section
7.1(b)), in either case, seeking to prohibit or limit Parent from exercising
all
material rights and privileges pertaining to its ownership of the Surviving
Corporation or the ownership or operation by Parent or any of its subsidiaries
of all or a material portion of the business or assets of Parent or
any of its
subsidiaries, or seeking to compel Parent or any of its subsidiaries
to dispose
of or hold separate all or any material portion of the business or
assets of
Parent or any of its subsidiaries (including the Surviving Corporation
and its
subsidiaries), or imposing any materially burdensome conditions or
restrictions
on Parent, the Company or their subsidiaries, as a result of the Merger
or the
transactions contemplated by this Agreement.
Section
7.2 Additional
Conditions to Obligations of Parent and Purchaser. The obligations of Parent
and the Purchaser to effect the Merger are also subject to each of
the following
conditions:
(a) Representations
and Warranties. The representations and warranties of the
Company contained in this Agreement shall be true and correct at and
as of the
Effective Time as if made at and as of such time (except for those
representations and warranties which address matters only as of a particular
date, which shall have been true and correct as of such date), with
the same
force and effect as if made at and as of the Effective Time, except
where the
cumulative effect of the failure to be true and correct, or any additional
matters set forth in the Updated Disclosure Letter not set forth in
the
Disclosure Letter, has not had, and would not reasonably be expect
to have, a
Company Material Adverse Effect, and Parent and Purchaser shall have
received a
certificate to such effect signed on behalf of the Company by the President
and
the Vice President of Finance of the Company.
40
(b) Agreements
and Covenants. The Company shall have performed or complied in
all material respects with all agreements and covenants required by
this
Agreement to be performed or complied with by it at or prior to the
Effective
Time, and Parent and Purchaser shall have received a certificate to
such effect
signed on behalf of the Company by the President and the Vice President
of
Finance of the Company.
(c) Employment
Agreement. Stephen M. Tuuk shall have executed and delivered to
Parent an Employment Agreement substantially in the form previously
reviewed and
confirmed by Mr. Tuuk and Parent.
(d) Material
Developments. There shall not have occurred after the date of
this Agreement (i) any development or developments with relation to
the Company
or its subsidiaries that has had, or would reasonably be expected to
have, a
Company Material Adverse Effect, or (ii) any downgrade in the Company’s A.M.
Best rating below “A-.”
Section
7.3 Additional
Conditions to Obligations of the Company. The obligation of the
Company to effect the Merger is also subject to each of the following
conditions:
(a) Representations
and Warranties. The representations and warranties of Parent and
the Purchaser contained in this Agreement shall be true and correct
at and as of
the Effective Time as if made at and as of such time (except for those
representations and warranties which address matters only as of a particular
date, which shall have been true and correct as of such date), with
the same
force and effect as if made at and as of the Effective Time, except
where the
cumulative effect of the failure to be true and correct has not had,
and would
not reasonably be expect to have, a Parent Material Adverse Effect,
and the
Company shall have received a certificate to such effect signed on
behalf of
Parent by the Chief Financial Officer and the Secretary of Parent.
(b) Agreements
and Covenants. Parent and Purchaser shall have performed or
complied in all material respects with all agreements and covenants
required by
this Agreement to be performed or complied with by them on or prior
to the
Effective Time, and the Company shall have received a certificate to
such effect
signed on behalf of Parent by the Chief Financial Officer and the Secretary
of
Parent.
ARTICLE
VIII
TERMINATION
AND ABANDONMENT
Section
8.1 Termination. This
Agreement may be terminated, and the Merger contemplated hereby may
be
abandoned, notwithstanding approval thereof by the shareholders of
the Company,
at any time prior to the Effective Time:
(a) by
mutual written consent of Parent and the Company;
(b) by
either Parent or the Company if, the Effective Time has not occurred
on or
before December 31, 2007, (which date may be extended by mutual written
consent
of Parent
41
and
the
Company) unless due to any material breach by the terminating party
of its
representations, warranties or covenants made in this Agreement;
(c) by
either Parent or the Company if the shareholders of the Company fail
to approve
the Merger and this Agreement at a duly held meeting (including any
adjournment
or postponement permitted by this Agreement), except that the Company
shall not
be entitled to elect to terminate this Agreement unless it has complied
with its
obligations under Section 6.4; or
(d) by
either Parent or the Company if (i) the Michigan Insurance Regulators
have not
provided the approval that is legally required to consummate the Merger
and the
denial of such approval has become final and nonappealable; or (ii)
any court of
competent jurisdiction in the United States or other Governmental Authority
in
the United States shall have issued an order (other than a temporary
restraining
order), decree or ruling or taken any other action restraining, enjoining
or
otherwise prohibiting the Merger, and such order, decree, ruling or
other action
shall have become final and nonappealable; provided that the party
seeking to terminate this Agreement shall have used its reasonable
best efforts
in accordance with Section 6.6 to obtain such approval or reverse,
remove or
lift such denial, order, decree, ruling or other action.
Section
8.2 Termination
by Parent. This Agreement may be terminated by Parent at any time
prior to the Effective Time, if (a) the Company has breached any of
its
representations and warranties contained in this Agreement so that
the closing
conditions set forth in Section 7.2(a) cannot be satisfied, except
for any
breach that is capable of being and is cured (other than by mere disclosure
of
the breach) within 20 days after written notice from the Purchaser
to the
Company of such breach; (b) the Company has breached in any material
respect any
of its covenants made in this Agreement, except for any breach that
is capable
of being and is cured within 20 days after written notice from the
Purchaser to
the Company of such breach; (c) the Board shall have (i) withdrawn
its
recommendation or approval in respect of this Agreement or the Merger,
(ii)
modified its recommendation or approval in respect of this Agreement
or the
Merger in a manner adverse to Parent, (iii) failed to recommend to
shareholders
of the Company that they approve the Merger, or (iv) failed, at the
written
request of Parent, to publicly reaffirm within five Business Days after
the
request, its recommendation or approval in respect of this Agreement
or the
Merger, which public reaffirmation must also include, if requested
by Parent,
the unconditional rejection of any other Acquisition Transaction; (d)
the Board
shall have recommended any proposal other than by Parent or the Purchaser
in
respect of an Acquisition Transaction; or (e) any court of competent
jurisdiction in the United States or other Governmental Authority in
the United
States shall have issued a judgment, decree or order that is final
and
nonappealable and in the reasonable judgment of Parent (A) has the
effect of
prohibiting the Merger, (B) individually or in the aggregate has had,
or is
reasonably likely to have, a Company Material Adverse Effect, or (C)
prohibits
or limits Parent from exercising all material rights and privileges
pertaining
to its ownership of the Surviving Corporation or the ownership or operation
by
Parent or any of its subsidiaries of all or a material portion of the
business
or assets of Parent or any of its subsidiaries, or compels Parent or
any of its
subsidiaries to dispose of or hold separate all or any material portion
of the
business or assets of Parent or any of its subsidiaries (including
the Surviving
Corporation and its subsidiaries), or imposes any materially burdensome
conditions or restrictions on Parent, the Company or their subsidiaries,
as a
result of the Merger or the transactions contemplated by this
Agreement.
42
Section
8.3 Termination
by the Company. This Agreement may be terminated by the Company
at any time prior to the Effective Time, if (a), in connection with
its
intention to enter into a definitive acquisition agreement with respect
to a
Superior Proposal, to the extent otherwise permitted by this Agreement,
if (x)
the Company provides written notice, as required by Section 6.2(d),
to Parent
and the Purchaser of the material terms and conditions of the Superior
Proposal
that the Board or the Company intends to accept and (y) on or after
the fifth
Business Day following delivery of such written notice, the Board reasonably
determines, upon the advice of its financial advisor, that such proposal
remains
a Superior Proposal and, after receiving the advice of outside legal
counsel to
the Company, that the failure to terminate this Agreement to enter
into an
agreement with respect to the Superior Proposal would be inconsistent
with its
fiduciary duties under applicable Law; (b) Parent or the Purchaser
has breached
any of its representations and warranties contained in this Agreement
so that
the closing conditions set forth in Section 7.2(a) cannot be satisfied,
except
for any breach that is capable of being and is cured (other than by
mere
disclosure of the breach) within 20 days after written notice from
the Company
to Parent of such breach; or (c) either Parent or the Purchaser has
breached in
any material respect any of its covenants made in this Agreement, except
for any
breach that is capable of being and is cured within 20 days after written
notice
from the Company to Parent of such breach.
Section
8.4 Procedure
for Termination. Termination of this Agreement by Parent or the
Company pursuant to this Article VIII shall be effective upon written
notice
thereof to the other as provided in this Agreement.
Section
8.5 Effect
of Termination. In the event of termination of this Agreement
pursuant to and in accordance with this Article VIII, the Merger shall
be deemed
abandoned and this Agreement shall forthwith become void, except as
provided in
the last two sentences of Section 6.5 and in Sections 6.7 and 6.10
(which
sentences and Sections shall survive any termination of this Agreement),
without
liability on the part of any party hereto or its affiliates, directors,
officers, employees, agents or shareholders, except as provided in
Section 8.6
and except with respect to any willful or bad faith breach of any provision
of
this Agreement, and each of the parties hereto hereby irrevocably waives
and
releases any other claim which may otherwise exist upon such
termination.
Section
8.6 Termination
Fee.
(a) If
this Agreement is terminated by Parent pursuant to Section 8.2(c) or
(d), then
the Company shall reimburse Parent and the Purchaser their actual,
incurred
expenses directly relating to the transactions contemplated by this
Agreement up
to the sum of $300,000 in the aggregate (the “Expense Payment”) promptly (but no
later than one Business Day) after Parent and the Purchaser provide
the Company
reasonable evidence of such expenses. If the Expense Payment is
payable pursuant to the preceding sentence and within 18 months after
such
termination of this Agreement the Company consummates a Termination
Transaction
with a third party, the Company shall pay to Parent a termination fee
equal to
$900,000 (the “Termination Fee”) promptly (but in no event later than one
Business Day) after consummation of the Termination Transaction. If
this Agreement is terminated by either party pursuant to Section 8.1(c)
and,
prior to such termination, an Acquisition Transaction by a third party
has been
publicly announced or otherwise become publicly known or a third party
has
publicly
43
announced
an intention to make a proposal with respect to an Acquisition Transaction
and
the Company consummates a Termination Transaction with such third party
within
18 months after such termination, then the Company shall pay to Parent
and the
Purchaser (i) the Expense Payment promptly (but no later than one Business
Day)
after Parent and the Purchaser provide the Company reasonable evidence
of such
expenses and (ii) the Termination Fee promptly (but in no event later
than one
Business Day) after consummation of the Termination Transaction. If
this Agreement is terminated by either party pursuant to Section 8.1(b)
and,
prior to such termination, an Acquisition Transaction by a third party
has been
publicly announced or otherwise become publicly known or a third party
has
publicly announced an intention to make a proposal with respect to
an
Acquisition Transaction and the Company consummates a Termination Transaction
with such third party within 18 months after such termination, then
the Company
shall pay to Parent and the Purchaser the Expense Payment promptly
(but no later
than one Business Day) after Parent and the Purchaser provide the Company
reasonable evidence of such expenses.
(b) If
this Agreement is terminated by the Company pursuant to Section 8.3(a),
then (i)
the Company shall pay to Parent and the Purchaser the Expense Payment
promptly
(but no later than one Business Day) after Parent and the Purchaser
provide the
Company reasonable evidence of such expenses, (ii) the Company shall
pay to
Parent a termination fee equal to $300,000 (the “Interim Fee”) promptly (but no
later than one Business Day) after entering into a definitive acquisition
agreement with respect to a Superior Proposal, and (iii) if within
18 months
after such termination of this Agreement the Company consummates a
Termination
Transaction, the Company shall pay Parent an additional termination
fee equal to
$600,000 (the “Final Fee”) promptly (but in no event later than one Business
Day) after such consummation.
(c) If
this Agreement is terminated by Parent pursuant to Section 8.2(a) (other
than
solely due to a Loss Reserve MAE) or Section 8.2(b), then the Company
shall pay
to Parent and the Purchaser the Expense Payment promptly (but no later
than one
Business Day) after Parent and the Purchaser provide the Company reasonable
evidence of such expenses.
(d) Acceptance
by Parent and Purchaser of any payments referred to in this Section
shall
constitute conclusive evidence that this Agreement has been validly
terminated,
and upon such acceptance the Company shall be fully released and discharged
from
any liability or obligation resulting from or under this Agreement
(except that
acceptance of the Expense Payment shall not relieve the Company from
its
obligation to pay the Termination Fee in accordance with this
Section). The Expense Payment and Termination Fee shall be paid by
wire transfer to Parent.
(e) The
Company acknowledges that the agreements contained in this Section
8.6 are an
integral part of the transactions contemplated by this Agreement, and
that,
without these agreements, Parent would not enter into this Agreement;
accordingly, if the Company fails to timely pay any amount due pursuant
to this
Section 8.6, and, in order to obtain the payment, Parent commences
a suit which
results in a judgment against the Company for the payment set forth
in this
Section 8.6, the Company shall pay to Parent its reasonable costs and
expenses
(including reasonable attorneys’ fees) in connection with this suit, together
with interest on the amount due from each date for payment until the
date of the
payment at the prime rate of interest as charged by Fifth Third Bank,
in effect
on the date the payment was required to be made.
44
(f) For
purposes of this Agreement, a “Termination Transaction” shall mean any
acquisition of more than fifty percent (50%) of the Company and its
subsidiaries, taken as a whole, by means of a merger, consolidation,
share
exchange or other business combination involving the Company and its
subsidiaries, or acquisition of more than fifty percent (50%) of the
assets or
capital stock of the Company and its subsidiaries, taken as a whole,
in each
case other than the transactions with Parent or the Purchaser contemplated
by
this Agreement.
ARTICLE
IX
DEFINITIONS
Section
9.1 Terms
Defined in Agreement. The following terms used herein shall have
the meanings ascribed in the indicated sections.
|
Acquisition
Transaction
|
6.2(a)
|
||
|
Agreement
|
Preamble
|
||
|
Board
|
Recitals
|
||
|
Business
Day
|
10.9
|
||
|
Certificate
of Merger
|
1.2
|
||
|
Certificates
|
3.1(a)
|
||
|
Closing
|
1.1(c)
|
||
|
Code
|
3.1(d)
|
||
|
Company
|
Preamble
|
||
|
Company
Contract
|
4.20(a)
|
||
|
Company
Financial Advisor
|
4.21
|
||
|
Company
Intellectual Property Rights
|
4.15(b)
|
||
|
Company
Material Adverse Effect
|
4.1(a)
|
||
|
Company
Permits
|
4.8(c)
|
||
|
Company
Plan
|
6.12
|
||
|
Company
Preferred Stock
|
4.2
|
||
|
Company
Shareholder Approval
|
4.3
|
||
|
Confidentiality
Agreement
|
6.5
|
||
|
Constituent
Corporations
|
Preamble
|
||
|
Continuation
Coverage
|
6.9(b)
|
||
|
Disclosure
Letter
|
Article
IV
|
||
|
Effective
Time
|
1.2
|
||
|
Employee
or Employees
|
4.10(a)
|
||
|
Environmental
Laws
|
4.14(a)
|
||
|
ERISA
|
4.11(a)
|
||
|
ERISA
Affiliate
|
4.11(a)
|
||
|
Exchange
Act
|
4.4(b)
|
||
|
Expense
Payment
|
8.6(a)
|
||
|
Final
Fee
|
8.6(b)
|
||
|
Governmental
Authority or Governmental Authorities
|
4.8(c)
|
||
|
Holding
Company Act Reports
|
4.17(c)
|
45
|
Indemnified
Parties
|
6.9(a)
|
||
|
Insurance
Company SAP Statements
|
4.17(a)
|
||
|
Insurance
Company Subsidiary
|
4.1(c)
|
||
|
Insurance
Filings
|
6.3(a)
|
||
|
Insurance
Laws
|
4.8(a)
|
||
|
Insurance
Policies
|
4.19(a)
|
||
|
Insurance
Regulators
|
4.8(a)
|
||
|
Insurance
Services Subsidiary
|
4.1(c)
|
||
|
Intellectual
Property
|
4.15(a)
|
||
|
Interim
Fee
|
8.6(b)
|
||
|
IRS
|
4.9(a)
|
||
|
Laws
|
4.4(a)
|
||
|
Leased
Real Property
|
4.13(b)
|
||
|
Liens
|
4.1(b)
|
||
|
Loss
and ALAE Ratio
|
4.1(a)
|
||
|
Loss
Reserves
|
4.1(a)
|
||
|
Loss
Reserve MAE
|
4.1(a)
|
||
|
Maximum
Amount
|
6.9(b)
|
||
|
MBCA
|
Recitals
|
||
|
Merger
|
1.1(a)
|
||
|
Merger
Price
|
2.1(a)
|
||
|
Michigan
Insurance Regulators
|
7.1(b)
|
||
|
Modified
Merger Agreement
|
6.2(d)
|
||
|
Other
Reports and Statements
|
4.17(c)
|
||
|
Parent
|
Preamble
|
||
|
Parent
Material Adverse Effect
|
5.3(a)
|
||
|
Paying
Agent
|
3.1(a)
|
||
|
PDIC
Report
|
4.1(a)
|
||
|
Plans
|
4.11(a)
|
||
|
Proxy
Statement
|
6.4(a)
|
||
|
Purchaser
|
Preamble
|
||
|
Real
Estate Leases
|
4.13(b)
|
||
|
Representatives
|
6.2(a)
|
||
|
SAP
|
4.17(b)
|
||
|
SEC
|
4.4(b)
|
||
|
SEC
Documents
|
4.5(a)
|
||
|
Selected
Retained Reserves
|
4.1(a)
|
||
|
Share
or Shares
|
2.1(a)
|
||
|
Shareholder
Meeting
|
6.4(b)
|
||
|
SOX
|
4.5(d)
|
||
|
Superior
Proposal
|
6.2(e)
|
||
|
Surviving
Corporation
|
1.1(a)
|
||
|
Tail
Coverage
|
6.9(b)
|
||
|
Tax
or Taxes
|
4.9(a)
|
||
|
Tax
Returns
|
4.9(a)
|
||
|
Termination
Fee
|
8.6(a)
|
46
|
Termination
Transaction
|
8.6(f)
|
||
|
Third
Party Confidentiality Agreement
|
6.2(b)
|
||
|
Updated
Disclosure Letter
|
6.8
|
The
definition of additional terms and phrases used in this Agreement are
set forth
in Section 10.9.
ARTICLE
X
MISCELLANEOUS
Section
10.1 Amendment
and Modification. Subject to applicable Law, this Agreement may
be amended, modified or supplemented only by written agreement (referring
specifically to this Agreement) of Parent, the Purchaser and the Company
with
respect to any of the terms contained herein; provided, however, that
after any
approval of this Agreement by the shareholders of the Company, no such
amendment, modification or supplement shall be made which reduces the
Merger
Price or the form of consideration therefore or which in any way materially
adversely affects the rights of such shareholders, without the further
approval
of such shareholders.
Section
10.2 Waiver. At
any time prior to the Effective Time, Parent and the Purchaser, on
the one hand,
and the Company, on the other hand, may (i) extend the time for the
performance
of any of the obligations or other acts of the other, (ii) waive any
inaccuracies in the representations and warranties of the other contained
herein
or in any documents delivered pursuant hereto and (iii) waive compliance
by the
other with any of the agreements or conditions contained herein which
may
legally be waived. Any such extension or waiver shall be valid only
if set forth in an instrument in writing specifically referring to
this
Agreement and signed on behalf of such party.
Section
10.3 Survivability;
Investigations. The respective representations and warranties of
Parent, the Purchaser and the Company contained herein or in any certificates
or
other documents delivered prior to or as of the Effective Time shall
not survive
beyond the Effective Time. The covenants and agreements of the
parties hereto (including the Surviving Corporation after the Merger)
shall
survive the Effective Time (except for those which, by their terms,
contemplate
a shorter survival period).
Section
10.4 Notices. All
notices, requests, demands and other communications required to be
given
pursuant to this Agreement shall be in writing and shall be deemed
to have been
duly given on the day of delivery if delivered by hand or if sent by
facsimile
with confirmation on a Business Day (or on the next Business Day if
the day of
delivery is not a Business Day), on the first Business Day following
deposit
with a nationally recognized overnight mail service, or on the third
Business
Day following first class mailing, with first class, postage
prepaid:
47
(a) If
to the Company, to
|
Tracy
T. Larsen
Chairman,
Special Committee of the
Board
of Directors, Professionals Direct, Inc.
300
Ottawa Avenue N.W.
Suite
500
Grand
Rapids, Michigan 49503
Facsimile:
(616) 742-3999
|
|
|
with
a copy to:
|
|
|
Barnes
& Thornburg LLP
300
Ottawa Avenue N.W.
Suite
500
Grand
Rapids, Michigan 49503
Facsimile:
(616) 742-3999
Attention: R.
Paul Guerre, Esq.
|
|
(b) If
to Parent or the Purchaser, to
|
The
Hanover Insurance Group, Inc.
440
Lincoln St.
Worcester,
MA 01653
Facsimile:
(508) 855-2732
Attention: Mr.
Andrew S. Robinson
|
|
|
with
a copy to:
|
|
|
The
Hanover Insurance Group, Inc.
440
Lincoln St.
Worcester,
MA 01653
Facsimile:
(508) 926-1693
Attention: Mr.
Charles F. Cronin
|
|
|
with
a copy to:
|
|
|
Dykema
Gossett, PLLC
400
Renaissance Center
Detroit,
MI 48243
Facsimile:
(313) 568-6832
Attention:
Thomas S. Vaughn, Esq.
|
Section
10.5 Assignment;
No Third Party Beneficiaries. This Agreement and all of the provisions
hereof shall be binding upon and inure to the benefit of the parties
hereto and
their respective successors and permitted assigns, but neither this
Agreement
nor any of the rights,
48
interests
or obligations hereunder shall be assigned by any of the parties hereto
without
the prior written consent of the other parties; provided that Parent
may assign
the rights and obligations of the Purchaser under this Agreement to
any direct
or indirect wholly-owned subsidiary of Parent, but no such assignment
shall
relieve any party of its obligations under this Agreement. This
Agreement, except for the provisions of Sections 3.1 and 6.9 (which
are intended
to be for the benefit of the persons identified therein, and may be
enforced by
such persons), is not intended to confer any rights or remedies hereunder
upon
any other person except the parties hereto, this Agreement being for
the
exclusive benefit of the parties hereto and their successors and permitted
assigns.
Section
10.6 Governing
Law. This Agreement shall be governed by and construed in
accordance with the applicable Laws of the State of Michigan as applicable
to
contracts made and to be performed in the State of Michigan, without
regard to
conflicts of laws principles. Any action or proceeding seeking to
enforce any provision of, or based on any right arising out of, this
Agreement
or the Merger may only be brought in a court sitting in the State of
Michigan,
County of Kent, City of Grand Rapids, or the United States District
Court for
the Western District of Michigan, and each party hereby irrevocably
consents to
the jurisdiction of such courts (and of the appropriate appellate courts)
in any
such action or proceeding and waives any objection to venue laid
therein. Process in any action or proceeding referred to in the
preceding sentence may be served on a party anywhere in the world.
Section
10.7 Counterparts. This
Agreement may be executed in two or more counterparts, each of which
shall be
deemed an original and together shall constitute one and the same
agreement. A facsimile or pdf (portable document format) signature
will have the same effect as an original signature.
Section
10.8 Certain
Disclosure Matters. Each disclosure of the Company set forth in
the Disclosure Letter shall limit a representation and warranty of
the Company
only to the extent such disclosure specifically references the particular
representation or warranty it is intended to qualify or it is reasonably
apparent on the face of such disclosure that it qualifies such particular
representation or warranty.
Section
10.9 Interpretation. The
article and section headings contained in this Agreement are solely
for the
purpose of reference, are not part of the agreement of the parties
and shall not
in any way affect the meaning or interpretation of this Agreement. As
used in this Agreement, (i) the term “person” or “Person” means and includes any
individual, partnership, joint venture, corporation, trust, unincorporated
organization or association, government (or any department or agency
thereof) or any other entity; (ii) the term “subsidiary” of any person means any
corporation, partnership, joint venture or other legal entity of which
such
person (either alone or through any other subsidiary) owns, directly
or
indirectly, more than 50% of the stock or other equity interests the
holders of
which are generally entitled to vote for the election of the board
of directors
or other governing body of such corporation or other legal entity;
(iii) the
term “including” and words of similar import mean “including, without
limitation” unless the context otherwise requires or unless otherwise specified;
(iv) the term “business day” or “Business Day” means any day other than a day on
which banks in the State of Michigan or the State of Massachusetts
are required
or authorized to be closed; and (v) the term “to the knowledge of
the
49
Company”
(or words of similar import) shall mean to the actual knowledge of
any executive
officer of the Company.
Section
10.10 Entire
Agreement. This Agreement, the Disclosure Letter, the Updated
Disclosure Letter and the Confidentiality Agreement set forth the entire
agreement and understanding of the parties hereto in respect of the
subject
matter contained herein and therein and supersede all prior agreements
and
understandings between the parties with respect to such subject
matter. No representation, promise, inducement or statement of
intention has been made by any party hereto in connection with the
Merger or the
transactions contemplated by this Agreement, which is not embodied
in this
Agreement, and no party hereto shall be bound by or liable for any
alleged
representation, promise, inducement or statement of intention not so
embodied.
Section
10.11 Waiver
of Jury Trial. EACH OF THE PARTIES HERETO HEREBY KNOWINGLY AND
WILLINGLY WAIVES ITS RIGHTS TO DEMAND A JURY TRIAL IN ANY ACTION OR
PROCEEDING
INVOLVING THIS AGREEMENT, ANY OTHER TRANSACTION DOCUMENT OR THE TRANSACTIONS
CONTEMPLATED HEREBY OR THEREBY. EACH OF THE PARTIES REPRESENTS AND
WARRANTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND
HAS
KNOWINGLY AND VOLUNTARILY WAIVED ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION
WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, THIS AGREEMENT MAY BE
FILED AS A WRITTEN CONSENT TO TRIAL BY THE COURT.
[Signature
page follows.]
50
Parent,
the Purchaser and the Company have caused this Agreement and Plan of
Merger to
be signed by their respective duly authorized officers as of the date
first
above written.
|
THE
HANOVER INSURANCE GROUP, INC.
|
||
|
By:
|
/s/ Andrew S. Robinson | |
|
Name:
|
Andrew
S. Robinson
|
|
|
Title:
|
Senior
Vice President
|
|
|
“Parent”
|
||
|
HANOVER
ACQUISITION CORP.
|
||
|
By:
|
/s/ Andrew S. Robinson | |
|
Name:
|
Andrew
S. Robinson
|
|
|
Title:
|
Vice
President
|
|
|
“Purchaser”
|
||
|
PROFESSIONALS
DIRECT, INC.
|
||
|
By:
|
/s/ Stephen M. Tuuk | |
|
Name:
|
Stephen
M. Tuuk
|
|
|
Title:
|
President
and Chief Executive Officer
|
|
|
“Company”
|
||
51
Appendix
B
June 24,
2007
The
Board of
Directors
Professionals
Direct
Inc.
5211
Cascade Road
S.E.
Grand
Rapids, MI 49546-6495
Members
of the Board of
Directors:
You
have requested our opinion as to the
fairness, from a financial standpoint of view, to the holders of common
stock,
par value $0.00 per share (the “Company Common Stock”), of Professionals Direct,
Inc. (the “Company”) of the consideration to be paid to such holders in the
proposed merger (the “Merger”) of the Company with The
Hanover Insurance
Group, Inc. (the
“Parent”). Pursuant to the Agreement
and Plan of Merger, dated as of
June 25, 2007 (the “Agreement”), among the Company, the Parent and Hanover
Acquisition Corp., the Company will become a wholly-owned subsidiary of
the
Parent, and each outstanding share of the Company Common Stock, other than
shares of Company Common Stock held in treasury or owned by the Parent
and its
affiliates, will be converted into the right to receive $69.61 per share
in cash
(the “Consideration”).
In
arriving at our opinion, we have (i)
reviewed the Agreement; (ii) reviewed certain publicly available business
and
financial information concerning the Company and the industries in which
it
operates; (iii) compared the proposed financial terms of the Merger with
the
publicly available financial terms of certain transactions involving companies
we deemed relevant and the consideration received for such companies; (iv)
compared the financial and operating performance of the Company with publicly
available information concerning certain other companies we deemed relevant
and
reviewed the current and historical market prices of the Company Common
Stock
and certain publicly traded securities of such other companies; (v) reviewed
certain internal financial analyses and forecasts prepared by the management
of
the Company relating to its business; and (vi) performed such other financial
studies and analyses and considered such other information as we deemed
appropriate for the purposes of this opinion.
In
addition, we have held discussions
with certain members of the management of the Company with respect to certain
aspects of the Merger, and the past and current business operations of
the
Company, the financial condition and future prospects and operations of
the
Company, and certain other matters we believed necessary or appropriate
to our
inquiry.
In
giving our opinion, we have relied
upon and assumed, without assuming responsibility or liability for independent
verification, the accuracy and completeness of all information that was
publicly
available or was furnished to or discussed with us by the Company or otherwise
reviewed by or for us. We have not conducted or been provided with
any valuation or appraisal of any assets or liabilities, nor have we evaluated
the solvency of the Company or the Parent under any state or federal laws
relating to bankruptcy, insolvency or similar matters. In relying on
financial analyses and forecasts provided to us, we have assumed that they
have
been reasonably prepared by management of the Company based on assumptions
reflecting the best currently available estimates and judgments by management
as
to the expected future results of operations and financial condition of
the
Company. We express no view as to such analyses
or
Financial
Centre · 695
East Main
Street · Stamford,
CT 06901
Telephone: (203)
348-7365 Fax: (203)
348-4553
www.philosmith.com
forecasts
or the assumptions on which
they were based. We have also assumed that the Merger and the other
transactions contemplated by the Agreement will be consummated as described
in
the Agreement. We have also assumed that the representations and
warranties made by the Company and the Parent in the Agreement and any
related
agreements are and will be true and correct in all respects material to
our
analysis. We are not legal, regulatory or tax experts and have relied
on the assessments made by advisors to the Company with respect to such
issues. We have further assumed that all material governmental,
regulatory or other consents and approvals necessary for consummation of
the
Merger will be obtained without any adverse effect on the Company that
would be
material to our analysis.
Our
opinion is necessarily based on
economic, market and other conditions as in effect on, and the information
made
available to us as of, the date hereof. It should be understood that
subsequent developments may affect this opinion and that we do not have
any
obligation to update, revise, or reaffirm this opinion. Our opinion
is limited to the fairness, from a financial point of view, of the Consideration
to be paid to the holders of the Company Common Stock in the proposed Merger
and
we express no opinion as to the fairness of the Merger to, or any consideration
received in connection therewith by, the holders of any other class of
securities, creditors or other constituencies of the Company or as to the
underlying decision by the Company to engage in the Merger.
We
have acted as financial advisor to
the Company with respect to the proposed Merger and will receive a fee
from the
Company for our services only if the proposed Merger is
consummated. In addition, the Company has agreed to indemnify us for
certain liabilities arising out of our engagement. In the ordinary
course of our business, we and our affiliates may actively trade the equity
securities of the Company or the Parent for our own account or for the
accounts
of customers and, accordingly, we may at any time hold long or short positions
in such securities.
On
the basis of and subject to the
foregoing, it is our opinion as of the date hereof that the Consideration
to be
paid to the holders of the Company Common Stock in the proposed Merger
is fair,
from a financial point of view, to such holders.
This
letter is provided to the Board of
Directors of the Company in connection with and for the purposes of its
evaluation of the Merger. This opinion does not constitute a
recommendation to any shareholder of the Company as to how such shareholder
should vote with respect to the Merger or any other matter. This
opinion may not be disclosed, referred to, or communicated (in whole or
in part)
to any third party for any purpose whatsoever except with our prior written
approval. This opinion may be reproduced in full in any proxy or
information statement mailed to shareholders of the Company but may not
otherwise be disclosed publicly in any manner without our prior written
approval.
Very
truly yours,
/s/ James A. Amen
James
A. Amen
Managing
Director &
Partner
Appendix
C
VOTING
AGREEMENT
THIS
VOTING AGREEMENT (the “Agreement”) is dated as of June __,
2007 by and among The Hanover Insurance Group, Inc., a Delaware corporation
(“Parent”), Hanover Acquisition Corp., a Michigan corporation and a
subsidiary of Parent (“Merger Sub”) and ____________ (the
“Stockholder”).
WITNESSETH:
WHEREAS,
Parent, Professionals Direct, Inc., a Michigan corporation (“Company”)
and Merger Sub are entering into an Agreement and Plan of Merger of even
date
herewith (the “Merger Agreement”), pursuant to which Parent will
acquire all of the outstanding shares of common stock (“Common Stock”)
of Company pursuant to a merger of Merger Sub with and into Company (the
“Merger”);
WHEREAS,
the Stockholder owns, as of the date hereof, _______ shares of Common Stock
(the
“Shares”);
WHEREAS,
as a condition to the willingness of Parent and Merger Sub to enter into
the
Merger Agreement, and in reliance on the representations, warranties, covenants
and agreements of the Stockholder hereunder, Parent and Merger Sub have
requested that the Stockholder agree, and the Stockholder has agreed, to
enter
into this Agreement; and
WHEREAS,
this Agreement is being entered into concurrently with the execution of
the
Merger Agreement.
NOW,
THEREFORE, in consideration of the representations, warranties,
covenants and agreements herein contained, the parties agree as
follows. Capitalized terms not otherwise defined herein shall have
the meaning set forth in the Merger Agreement.
1. Agreement
to Vote. The Stockholder hereby agrees that, during the term of
this Agreement, at any meeting of the stockholders of Company, however
called,
and in any action by consent of the stockholders of Company, however taken,
the
Stockholder shall cause all of the Shares owned by Stockholder to be present
for
quorum purposes and to vote at such meeting and shall cause all of the
Shares to
be voted in any such consent, and in either case, shall: (a) vote the Shares
in
favor of the adoption of the Merger Agreement and approval of the Merger
and any
of the transactions contemplated by the Merger Agreement (as amended from
time
to time, except for any amendment, modification or waiver that results
in
termination of this Agreement pursuant to Section 4 hereof); (b) vote the
Shares
against any action or agreement that would, or would reasonably be expected
to,
result in a material breach of any covenant, representation or warranty
or any
other obligation or agreement of the Company under the Merger Agreement
or that
would result in a failure to satisfy any condition on the part of the Company
to
be satisfied under the Merger Agreement; and (c) vote the Shares against
any
action or agreement, including but not limited to any extraordinary corporate
transaction (other than the Merger), such as a merger, other business
combination, recapitalization, reorganization or liquidation, involving
the
Company that would, or would reasonably be expected to, impede, interfere
with,
delay, postpone or attempt to discourage the Merger.
1
2. Irrevocable
Proxy. In furtherance of Section 1, the Stockholder hereby
irrevocably grants to, and appoints, Parent, and any individual designated
in
writing by Parent, and each of them individually, as Stockholder’s proxy and
attorney-in-fact (with full power of substitution), for and in the name,
place
and stead of Stockholder, to vote, act by written consent or grant a consent,
proxy or approval with respect to the Shares in accordance with Section
1 hereof
(i) at any meeting of the stockholders of the Company called with respect
to any
of the matters specified in this Agreement and (ii) by execution of a written
consent to action in lieu of any such meeting. The Stockholder
understands and acknowledges that Parent is entering into the Merger Agreement
in reliance on its execution and delivery of this Agreement. The
Stockholder hereby affirms that the proxy set forth in this Section 2 is
given
by it in connection with the execution of the Merger Agreement, that such
proxy
is irrevocable and that such irrevocable proxy is given to secure the
performance of its duties under this Agreement. Except as otherwise
provided for herein, the Stockholder hereby (i) affirms that the irrevocable
proxy is coupled with an interest and may under no circumstances be revoked,
(ii) ratifies and confirms all that the proxies appointed hereunder may
lawfully
do or cause to be done by virtue hereof and (iii) affirms that this irrevocable
proxy is executed and intended to be irrevocable in accordance with the
provisions of Section 422 of the Michigan Business Corporation
Act. Notwithstanding any other provision of this Agreement, the
irrevocable proxy granted hereunder shall automatically terminate on the
termination of this Agreement pursuant to Section 4.
3. Representations
and Warranties of Stockholder. The Stockholder represents and
warrants to Parent and Merger Sub with respect to itself and the Shares
that are
owned by it as follows:
3.1 Ownership
of Shares. On the date hereof, Stockholder is the sole record and
beneficial owner of the Shares. For purposes of this Agreement,
beneficial ownership of securities shall be determined in accordance, with
Rule
13d-3 under the Securities Exchange Act of 1934, as amended (the “Exchange
Act”). The Stockholder currently has with respect to the Shares,
and at Closing will have with respect to such Shares, good, valid and marketable
title, free and clear of all liens, encumbrances, restrictions, options,
warrants, rights to purchase, voting agreements or voting trusts, and claims
of
every kind (other than the encumbrances created by this Agreement and other
than
restrictions on transfer under applicable federal and state securities
laws). On the date hereof, the Shares constitute all of the shares of
Common Stock of the Company owned of record or beneficially owned by the
Stockholder.
3.2 Power;
Binding Agreement. Stockholder has the full legal right, power
and authority to enter into and perform all of Stockholder’s obligations under
this Agreement. The execution, delivery and performance of this
Agreement by Stockholder will not violate any other agreement to which
Stockholder is a party including, without limitation, any voting agreement,
stockholder agreement or voting trust. This Agreement has been duly
authorized, executed and delivered by Stockholder and constitutes a legal,
valid
and binding agreement of Stockholder, enforceable in accordance with its
terms. The execution, delivery and performance of this Agreement does
not, and the consummation of the transactions contemplated hereby and compliance
with the provisions hereof will not, contravene, conflict with, or result
in any
violation of, breach of or default by (with or without notice or lapse
of time,
or both) the Stockholder under,
2
or
give
rise to a right of termination, cancellation or acceleration of any obligation
under, or result in the creation of any lien, security interest, charge
or
encumbrance upon any of the Shares under, any provision of: (i) any
loan or credit agreement, note, bond, mortgage, indenture, lease or other
agreement, instrument, permit, concession, franchise or license applicable
to
the Stockholder or (ii) any judgment, order, decree, statute, law, ordinance,
injunction, rule or regulation applicable to the Stockholder or any of
the
Shares, other than such conflicts, violations, defaults, rights, liens,
security
interests, charges or encumbrances that, individually or in the aggregate,
would
not materially impair the ability of the Stockholder to perform its obligations
hereunder.
3.3 Finder’s
Fees. No person or entity is, or will be, entitled to any
commission or finder’s fees from Stockholder in connection with this Agreement
or the transactions contemplated herein.
3.4 Sophistication. The
Stockholder acknowledges being a sophisticated investor who, together with
their
financial advisors and independent legal counsel, has undertaken such
investigation as they have deemed necessary, including inquiries of the
Company
and review of the Merger Agreement and this Agreement, to enable the Stockholder
to make an informed and intelligent decision with respect to the Merger
Agreement and this Agreement, and the transactions contemplated
hereby.
4. Termination. The
term of this Agreement commences on the execution and delivery of this
Agreement
by all of the parties hereto and continues until it is terminated in accordance
with its terms. The Agreement may be terminated as to the Stockholder
at any time by mutual written consent of the Stockholder and
Parent. This Agreement, and all the obligations of the Stockholder
hereunder shall terminate, without any action by the parties hereto, upon
the
earliest to occur of (a) in the event of an amendment or modification to
or
waiver under the Merger Agreement that is or would be adverse to the
Stockholder, upon such amendment, modification, waiver or reduction, (b)
in the
event the Merger Agreement is terminated by any party in accordance with
its
terms, upon such termination, or (c) in the event the Merger is consummated,
upon the Effective Time (as defined in the Merger Agreement)[, or (d) the
determination by the Stockholder after receiving the advice of legal counsel
that failure to terminate this Agreement would be inconsistent with his
fiduciary duties as Chairman of the Special Committee of the Board of Directors
of the Company].
5. Expenses. Each
party hereto will pay all of its expenses in connection with the transactions
contemplated by this Agreement including, without limitation, the fees
and
expenses of its counsel and other advisers.
6. No
Disposition or Encumbrance of Shares; No Proxies. The Stockholder
represents, covenants and agrees that, except for the proxy granted in
Section 2
and as contemplated by this Agreement: (a) Stockholder will not,
directly or indirectly, during the term of this Agreement, offer for sale
or
agree to sell, transfer, tender, assign, pledge, hypothecate or otherwise
dispose of or enter into any contract, option or other arrangement or
understanding with respect to, or consent to, the offer for sale, sale,
transfer, tender, pledge, hypothecation, encumbrance, assignment or other
disposition of, or create any security interest, lien, claim, pledge, option,
right of first refusal, agreement, limitation on voting rights, charge
or other
encumbrance of any nature whatsoever with respect to any or all of the
Shares or
any interest thereon now legally and/or beneficially owned by the Stockholder;
(b) Stockholder shall not, during the term of this Agreement, grant any
proxy,
irrevocable proxy or power of attorney or
3
deposit
any Shares into a voting trust or enter into a voting agreement with respect
to
the voting of the Shares (each, a “Voting Proxy”) with any person
except to vote in favor of any of the transactions contemplated by this
Agreement or the Merger Agreement; (c) Stockholder has granted no Voting
Proxy
which is currently (or which during the term of this Agreement will become)
effective with respect to the Shares, and if any Voting Proxy has been
granted
to any person, such Voting Proxy is hereby revoked; (d) no Voting Proxy
shall be
given or written consent executed by the Stockholder after the date hereof
with
respect to the Shares (and if given or executed, shall not be effective)
so long
as this Agreement remains in effect; and (e) during the term of this Agreement,
Stockholder shall not, and shall not offer to agree to, acquire any additional
shares of Common Stock without the prior written consent of Parent or Merger
Sub.
7. Shares. The
only Shares covered by this Agreement shall be the Shares owned by the
Stockholder on the date hereof, unless the Parent elects in writing to
have any
other Shares hereafter acquired by the Stockholder covered by this
Agreement.
8. Survival
of Representations and Warranties. The representations and
warranties of the Stockholder set forth in Section 3 hereof shall not survive
the termination of this Agreement.
9. Notices.
All notices or other communications required or permitted
hereunder shall be in writing (except as otherwise provided herein), given
in
the manner provided in the Merger Agreement, and shall be deemed duly given
when
received, addressed as follows:
If
to
Parent or Merger Sub:
The
Hanover Insurance Group, Inc.
440
Lincoln St.
Worcester,
Massachusetts 01653
Attention: Andrew
S. Robinson
Facsimile: (508)
855-2732
With
a
copy to:
Dykema
Gossett PLLC
400
Renaissance Center
Detroit,
Michigan 48243
Attention: Thomas
S. Vaughn, Esq.
Facsimile: (313)
568-6915
If
to the
Stockholder:
[STOCKHOLDER]
Facsimile:
(___)
4
With
a
copy to:
Barnes
&
Thornburg
LLP
300
Ottawa Avenue, NW, Suite
500
Grand
Rapids, Michigan
49503
Attention:
R. Paul Guerre,
Esq.
Facsimile:
(616) 742-3999
10. Entire
Agreement; Amendment. This Agreement, together with the documents
expressly referred to herein, constitute the entire agreement among the
parties
hereto with respect to the subject matter contained herein and supersede
all
prior agreements and understandings among the parties with respect to such
subject matter. This Agreement may not be modified, amended, altered
or supplemented except by an agreement in writing executed by Parent and
the
Stockholder.
11. Assigns. This
Agreement shall be binding on and inure solely to the benefit of the parties
hereto and their respective successors, assigns and personal representatives,
but neither this Agreement nor any of the rights, interests or obligations
hereunder shall be assigned by any of the parties hereto without the prior
written consent of the other parties.
12. Governing
Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Michigan, without regard to the
principles of conflicts of laws thereof.
13. Injunctive
Relief. The parties agree that in the event of a breach of any
provision of this Agreement, the aggrieved party may be without an adequate
remedy at law. The parties therefore agree that in the event of a
breach of any provision of this Agreement, the aggrieved party shall be
entitled
to obtain in any court of competent jurisdiction a decree of specific
performance or to enjoin the continuing breach of such provision in each
case
without the requirement that a bond be posted and without having to prove
actual
damages, as well as to obtain damages for breach of this
Agreement. By seeking or obtaining such relief, the aggrieved party
will not be precluded from seeking or obtaining any other relief to which
it may
be entitled.
14. Counterparts;
Facsimile Signatures. This Agreement may be executed,
including execution by facsimile, in any number of counterparts, each of
which
shall be deemed to be an original and all of which together shall constitute
one
and the same document.
15. Severability.
Any term or provision of this Agreement that is invalid or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such invalidity or unenforceability without rendering
invalid
or unenforceable the remaining terms and provisions of this Agreement or
affecting the validity or enforceability of any of the terms or provisions
of
this Agreement in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, such provision shall be
interpreted to be only so broad as is enforceable.
16. Further
Assurances. Each party hereto shall execute and deliver such
additional documents and take such additional actions as may be necessary
or
desirable to consummate the transactions contemplated by this
Agreement.
5
17. Third
Party Beneficiaries. Nothing in this Agreement, expressed or
implied, shall be construed to give any person or entity other than the
parties
hereto any legal or equitable right, remedy or claim under or by reason
of this
Agreement or any provision contained herein.
18. Stockholder
Capacity. Notwithstanding anything herein to the contrary, the
Stockholder makes no agreement or understanding herein in his or her capacity
as
a director or officer of the Company or any subsidiary of the Company,
and the
agreements set forth herein shall in no way restrict the Stockholder in
the
exercise of his or her fiduciary duties as a director or officer of the
Company
or any subsidiary of the Company or limit or affect any actions taken by
the
Stockholder in his capacity as an officer or director of the Company or
any
subsidiary of the Company. The Stockholder has executed this
Agreement solely in his or her capacity as the record and/or beneficial
holder
of the Shares.
[Signatures
on next page.]
6
IN
WITNESS WHEREOF, Parent, Merger Sub and Stockholder have executed this
Agreement or caused this Agreement to be executed by their duly authorized
officers, as the case may be, each as of the date first above
written.
|
|
THE
HANOVER INSURANCE GROUP, INC.
|
||
|
By:
|
|||
|
Name:
|
|||
|
Title:
|
|||
|
HANOVER
ACQUISITION CORP.
|
|||
|
By:
|
|||
|
Name:
|
|||
|
Title:
|
|||
|
STOCKHOLDER
|
|||
|
By:
|
|||
|
[Name]
|
|||
7
|
Proxy
|
PROFESSIONALS
DIRECT, INC.
5211
Cascade Road, S.E.
Grand
Rapids, Michigan 49546
Special
Meeting of Shareholders
To
be held ______, 2007
|
The
undersigned shareholder appoints STEPHEN M. TUUK and STEPHEN M. WESTFIELD,
or
either of them, each with power to appoint his substitute, attorneys
and proxies
to represent the shareholder and to vote and act with respect to all
shares that
the shareholder would be entitled to vote on all matters that come before
the
special meeting of shareholders of PROFESSIONALS DIRECT, INC. referred
to above
or any adjournment of that meeting.
This
proxy is solicited on behalf of the Board of Directors. If
this proxy is properly executed, the shares represented by this proxy
will be
voted as specified. If no specification is made, the shares
will be voted FOR the adoption and approval of the Agreement and Plan
of Merger
dated as of June 25, 2007, by and among Professionals Direct, Inc., The
Hanover
Insurance Group, Inc., and its wholly-owned subsidiary Hanover Acquisition
Corp,
and the merger of Hanover Acquisition Corp. with and into Professionals
Direct,
Inc. The shares represented on this proxy will be voted in
the discretion of the proxies on any other matters that may come before
the
meeting. The undersigned acknowledges receipt of the Proxy Statement
and Notice of the meeting, dated ____________, 2007.
|
1.
|
Adoption
and approval of the Agreement and Plan of Merger dated as of
June 25,
2007, by and among Professionals Direct, Inc., The Hanover
Insurance
Group, Inc., and its wholly-owned subsidiary Hanover Acquisition
Corp, and
the merger of Hanover Acquisition Corp. with and into Professionals
Direct, Inc.
|
|
For
|
Against
|
Abstain
|
|
Your
Board of Directors recommends that you vote FOR adoption and
approval
of
the merger agreement and the merger
Sign
this
proxy in the same way that your stock is registered with the Company
(as may be
shown on the printed label affixed below). Corporate officers should
indicate their title and the corporation’s full name. Persons signing
on behalf of other entities should indicate their capacity and the entity’s full
name.
|
Dated:
_______________, 2007
|
||
|
Shareholder
Name
(shown
on stock certificate or address label)
|
||
|
Place
Label
Here
|
||
|
By:
|
||
|
Representative
capacity, if any
|
||
For
purposes of planning the special meeting, please indicate whether you
plan to
attend the special meeting in person: __ Yes __ No
Please
Sign, Date, and Return this Proxy Promptly Using the Enclosed
Envelope