AGREEMENT AND PLAN OF MERGER

Exhibit 2.1

 

AGREEMENT AND PLAN OF MERGER

BY AND AMONG

EASTERN INSURANCE HOLDINGS, INC

EASTERN ACQUISITION CORP.

AND

EMPLOYERS SECURITY HOLDING COMPANY

DATED AS OF AUGUST 6, 2008

 

TABLE OF CONTENTS

 

 

 

i

TABLE OF CONTENTS (Cont’d)

 

 

ii

TABLE OF CONTENTS (Cont’d)

 

Exhibits

 

 

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AGREEMENT AND PLAN OF MERGER

THIS AGREEMENT AND PLAN OF MERGER (the “ Agreement ”) is made and entered into as of August 6, 2008 by and among Eastern Insurance Holdings, Inc., a Pennsylvania corporation (“ Eastern ”), Eastern Acquisition Corp., an Indiana corporation and wholly owned subsidiary of Eastern (“ EA Corp ”), and Employers Security Holding Company, an Indiana corporation (“ Employers ”).

RECITALS

WHEREAS, Employers, holds all the issued and outstanding capital stock in Employers Security Insurance Company, an Indiana domiciled insurance company (“ Employers Insurance ”), and Affinity Management Services, Inc., an Indiana corporation (“ Affinity ”);

WHEREAS, Employers Insurance and Affinity engage in the business of providing workers’ compensation insurance and other insurance-related services (collectively, the “ Business ”);

WHEREAS, the respective Boards of Directors of Eastern, EA Corp and Employers have determined that it is in the best interests of their respective companies to consummate the business combination transaction provided for herein in which EA Corp would merge with and into Employers with Employers being the surviving corporation, becoming a wholly-owned subsidiary of Eastern (the “ Merger ”), in exchange for the receipt by Employers’ shareholders (the “ Employers Shareholders ”) of the Purchase Price (as defined herein), upon the terms and subject to the conditions set forth in this Agreement;

WHEREAS, the respective Boards of Directors of Eastern, EA Corp and Employers have approved the Merger, and, in the case of the Board of Directors of Employers, have declared this Agreement advisable and recommended that it be adopted by the Employers Shareholders;

WHEREAS, the parties contemplate that if requested by any or all of the Employers Shareholders, subsequent to the completion of the Merger, Eastern will cause its wholly owned subsidiary, Eastern Re, Ltd., S.P.C. (“ Eastern Re ”), to form one or more segregated portfolio cells for the purpose of permitting the Employers Shareholders to share in the profit or loss of the business produced by Employers Insurance and Eastern Subsidiaries in the Territory (as hereinafter defined);

WHEREAS, the parties contemplate that as soon as practical after the completion of the Merger, Allied Eastern Indemnity Co., Eastern Advantage Assurance Company and Eastern Alliance Insurance Company (collectively, “ EAIG ”) and Employers Insurance will enter into a pooling arrangement pursuant to which Employers Insurance and EAIG each will cede and assume risk under workers’ compensation policies issued by them under the terms and conditions of a Pooling Agreement; and

WHEREAS, as a material inducement to Eastern to enter into this Agreement, each of the directors and officers of Employers shall have executed the letter attached hereto as Exhibit B pursuant to which such individuals agree to vote shares of Employers common stock beneficially owned by them in favor of the transactions contemplated by this Agreement;

 

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NOW, THEREFORE, in considera t ion of the foregoing and the respective representations, warranties, covenants and agreements set forth herein, the parties hereto hereby agree as follows:

ARTICLE I - DEFINITIONS

1.1 Terms Generally . The words “hereby”, “herein”, “hereof”, “hereunder” and words of similar import refer to this Agreement as a whole (including any Exhibits hereto and the Employers Disclosure Schedules delivered herewith) and not merely to the specific section, paragraph or clause in which such word appears. All references herein to Sections, Exhibits and Employers Disclosure Schedules shall be deemed references to Sections of, Exhibits to, and Employers Disclosure Schedules within this Agreement unless the context shall otherwise require. The words “include”, “includes” and “including” shall be deemed to be followed by the phrase “without limitation.” The definitions given for terms in this Agreement shall apply equally to both the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. Except as otherwise expressly provided herein, all references to “dollars” or “$” shall be deemed references to the lawful money of the United States of America.

1.2 Certain Terms . Whenever used in this Agreement (including in the Employers Disclosure Schedules), the following terms shall have the respective meanings given to them below or in the Sections indicated below:

“ Acquired Group ” means, collectively, Employers, Employers Insurance, and Affinity. All references herein to a “ member ” of the Acquired Group refer to Employers, Employers Insurance, and Affinity, individually.

“ Acquisition Proposal ” shall have the meaning set forth in Section 5.3.

“ Affiliate ” means any entity directly or indirectly controlling, controlled by or under common control of Eastern or Employers, as applicable.

“ Affinity ” shall have the meaning set forth in the recitals.

“ Agreement ” shall have the meaning set forth in the recitals.

“ Applicable Law ” means any applicable order, law, regulation, rule, ordinance, writ, injunction, directive, judgment, decree, principle of common law, constitution or treaty enacted, promulgated, issued, enforced or entered by any Governmental Body applicable to the parties hereto, or any of their respective Subsidiaries, properties or assets as the case may be.

“ Business ” shall have the meaning set forth in the recitals.

“ Certificate ” means any certificate representing the issued and outstanding common stock of Employers with no par value.

“ Closing ” means the completion of the transactions contemplated by this Agreement.

 

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“ Closing Agreement ” shall have the meaning set forth in Section 3.9(k).

“ Closing Balance Sheet ” shall have the meaning set forth in Section 2.5(a).

“ Closing Balance Sheet Date ” shall have the meaning set forth in Section 2.4(b)(ii)(A).

“ Closing Consolidated Shareholders’ Equity ” shall have the meaning set forth in Section 2.4(b)(ii)(A).

“ Closing Date ” means a date specified by the parties which shall be within ten (10) days after satisfaction or waiver (subject to Applicable Law) of the conditions (excluding conditions that, by their terms cannot be satisfied until the Closing Date) set forth in Article VI; provided , however , that if such conditions are satisfied during September 2008, then the Closing Date shall be September 30, 2008, or (ii) such other date as Eastern and Employers shall agree upon.

“ Closing Payment ” shall have the meaning set forth in Section 2.4(e)(ii).

“ Code ” means the Internal Revenue Code of 1986, as amended, or any successor law, and any regulations promulgated by the IRS pursuant to that code or any successor law.

“ Constituent Documents ” means with respect to any entity, the Certificate of Organization, Operating Agreement, Certificate or Articles of Incorporation and Bylaws, or any similar charter or other organizational documents of such entity.

“ Current Premium ” shall have the meaning set forth in Section 5.6(b).

“ D&O Insurance ” shall have the meaning set forth in Section 5.6(b).

“ EA Corp ” shall have the meaning set forth in the recitals.

“ EAIG ” shall have the meaning set forth in the recitals.

“ Eastern ” shall have the meaning set forth in the recitals.

“ Eastern 401(k) Plan ” shall have meaning set forth in Section 5.8(a)(ii).

“ Eastern Financials ” means: (i) the audited consolidated financial statements of Eastern as of December 31, 2007, and for the three years then ended, including the notes thereto, and (ii) all consolidated financial statements of Eastern as of and for any period subsequent to December 31, 2007, including the notes thereto, which are filed with the SEC in any Securities Document.

“ Eastern Indemnified Person ” shall have the meaning set forth in Section 8.1

“ Eastern Re ” means Eastern Re Ltd., S.P.C., a Cayman Islands company and wholly-owned subsidiary of Eastern that is authorized by the Cayman Islands Monetary Authority to establish segregated portfolio cells.

“ Eastern Regulatory Agreement ” shall have the meaning set forth in Section 4.5(b).

 

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“ Effective Time ” means the time that the Merger is consummated by filing the Plan of Merger with the Indiana Secretary of State in accordance with the Indiana Business Corporation Law or such later time as may be agreed in writing by the Eastern and Employers and specified in the Plan of Merger.

“ Employers ” shall have the meaning set forth in the recitals.

“ Employers 401(k) Plan ” shall have the meaning set forth in Section 5.8(a)(iii).

“ Employers Actuary ” shall have the meaning set forth in Section 3.12(d).

“ Employers Actuarial Analyses ” shall have the meaning set forth in Section 3.12(d).

“ Employers Annual Statutory Statements ” shall have the meaning set forth in Section 3.7.

“ Employers Balance Sheet ” means the consolidated balance sheet of Employers prepared in accordance with GAAP consistently applied with past practices.

“ Employers Companies ” shall mean collectively Employers and any Employers Subsidiary.

“ Employers Common Stock ” shall mean the common stock of Employers with no par value.

“ Employers Contracts ” shall have the meaning set forth in Section 3.18(a).

“ Employers Disclosure Schedules ” shall have the meaning set forth in the preamble of Article III.

“ Employers Financial Statements ” shall have the meaning set forth in Section 3.7.

“ Employers Indemnified Party ” shall have the meaning set forth in Section 5.6(a).

“ Employers Indemnified Person ” shall have the meaning set forth in Section 8.2

“ Employers Insurance ” shall have the meaning set forth in the recitals.

“ Employers Interim Balance Sheet Date ” shall have the meaning given such term below under “Employers Interim Financial Statements.”

“ Employers Interim Financial Statements ” shall mean the fairly presented, internally prepared, unaudited consolidated balance sheet of Employers as at June 30, 2008 (the “ Employers Interim Balance Sheet Date ”) and the related internally prepared, unaudited consolidated statements of income of Employers for six-month period then ended.

“ Employers Investments ” shall have the meaning set forth in Section 3.13(a).

“ Employers Plan” or “Plan ” shall have the meaning set forth in Section 3.15(a).

 

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“ Employers Quarterly Statutory Statements ” shall have the meaning set forth in Section 3.7(c).

“ Employers Regulatory Agreement ” shall have the meaning set forth in Section 3.11(b).

“ Employers Reinsurance Treaties ” shall have the meaning set forth in Section 3.12(c).

“ Employers Reserves ” shall have the meaning set forth in Section 3.12(c).

“ Employers Shareholders ” shall have the meaning set forth in the recitals.

“ Employers Statutory Financial Statements ” shall have the meaning set forth in Section 3.7(b).

“ Employment Agreement ” means the employment agreement in the form attached hereto as Exhibit A that, as a condition of Closing, shall be executed by Mike Michael and Eastern.

“ Encumbrance ” means any mortgage, pledge, deed of trust, hypothecation, right of others, claim, security interest, encumbrance, burden, title retention agreement, license, occupancy agreement, easement, covenant, condition, encroachment, voting trust agreement, interest, option, right of first offer, negotiation or refusal, proxy, lien, lien with respect to Taxes, charge or other restrictions or limitations of any nature whatsoever, including such Encumbrances as may arise under any written or oral contract, agreement, instrument, obligation, offer, commitment, arrangement or understanding.

“ Environmental Claim ” shall have the meaning set forth in Section 3.19.

“ Environmental Law ” shall have the meaning set forth in Section 3.19.

“ ERISA ” means the Employee Retirement Income Security Act of 1974, as amended, and any regulations issued thereunder.

“ ERISA Affiliate ” means any Person who for purposes of Title IV of ERISA is a member of a control group, or under common control, within the meaning of Section 414 of the Code.

“ Escrow Agreement ” means the agreement between Eastern, Shareholders Representative, and the escrow agent, J.P. Morgan Trust Company, National Association, required under the terms of this Agreement and attached hereto as Exhibit C .

“ Escrow Holdback ” shall have the meaning set forth in Section 2.4(d)(i).

“ Estimated Closing Balance Sheet ” shall have the meaning set forth in Section 2.4(d).

“ Exchange Act ” means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated from time to time thereunder.

“ GAAP ” means generally accepted accounting principles as in effect in the United States, applied on a consistent basis.

 

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“ Governmental Body ” means any United States and non-United States federal, state, county, local, municipal or other governmental or quasi-governmental entity or authority of any nature.

“ Holding Company Act Reports ” means all registration statements, notices and reports, together with all exhibits and amendments thereto, applicable to insurance holding companies under the Insurance Laws.

“ Indemnified Person ” shall have the meaning set forth in Section 8.2

“ Indemnifying Person ” shall have the meaning set forth in Section 8.4.

“ Insurance Laws ” means all laws, rules and regulations applicable to the business of insurance and the regulation of insurance companies and insurance holding companies, whether domestic or foreign, and all applicable orders and directives of Governmental Bodies and market conduct recommendations resulting from market conduct examinations of Insurance Regulators.

“ Insurance Regulators ” means all Governmental Bodies regulating the business of insurance under the Insurance Laws.

“ Intellectual Property ” shall have the meaning set forth in Section 3.17.

“ IRS ” means the United States Internal Revenue Service.

“ Knowledge. ” A Person will be deemed to have “Knowledge” of a particular fact or matter if, after reasonable inquiry, such Person is or reasonably should have been aware of such fact or matter. The phrase “reasonable inquiry,” as used in the preceding sentence, shall include communication in connection with the day-to-day operation of the Business and shall not be confined to matters contemplated by this Agreement.

“ Legal Requirement ” means any United States federal, state or local, and any foreign, law, ordinance, principle of common law, rule, regulation or statute.

“ Liability ” or “ Liabilities ” (and including words of similar import) means, collectively, any debt, obligation, or liability, fixed or contingent, known or unknown, asserted or unasserted, choate or inchoate, liquidated or unliquidated, secured or unsecured.

“ Losses ” shall have the meaning set forth in Section 8.1.

“ Majority Employers Shareholders ” shall have the meaning set forth in Section 5.16(c).

“ Material Adverse Effect ” means a material adverse effect on (i) the business, operations, results of operations in the current or any future fiscal year, or financial condition of a party and its Subsidiaries, taken as a whole, or (ii) the ability to consummate the transactions contemplated hereby on or before September 30, 2008, in each case as determined from the perspective of a reasonable person. For purposes of the preceding sentence, the fact that any costs, damages or other liabilities or reasonably expected costs, damages or other liabilities arising from or related to any representation or warranty being untrue or incorrect may be non-recurring or result in only

 

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a one-time charge to earnings shall not affect the assessment of their materiality to the results of operations of a party and its Subsidiaries taken as a whole. In determining whether a Material Adverse Effect has occurred, there shall be excluded any effect resulting from or attributable to: (i) any change after the date of this Agreement in laws, rules or regulations or published interpretations thereof by courts or governmental authorities or in GAAP or regulatory accounting requirements, in any such case applicable to insurance companies or their holding companies generally, except for any such change that has a disproportionate impact on a party and its Subsidiaries, taken as a whole, relative to the other participants in their industry, (ii) the announcement of this Agreement or the transactions contemplated hereby, any action of a party or its Subsidiaries or any action or omission of a party or its Subsidiaries taken or omitted to be taken, pursuant to the terms of this Agreement or with the consent or at the direction of the other party, or (iii) changes after the date of this Agreement in general economic conditions or interest rates affecting insurance companies or their holding companies generally, except for any such change that has a disproportionate impact on a party and its Subsidiaries, taken as a whole, relative to the other participants in their industry.

“ Merger ” shall have the meaning set forth in the recitals.

“ Order ” means any award, decision, injunction, judgment, order, ruling, subpoena, or verdict entered, issued, made, or rendered by any court, administrative agency, or other Governmental Body, or by any arbitral tribunal.

“ Permitted Encumbrances ” means: (i) Encumbrances reflected in the Employers Financial Statements or in the Employers Disclosure Schedules, (ii) Encumbrances incurred in the ordinary course of business, and (iii) Encumbrances that do not materially interfere with the current use of the assets of the Business.

“ Per Share Fraction ” means the fraction obtained by dividing one by the number equal to the total issued and outstanding shares of Employers Common Stock held by all Employers Shareholders immediately prior to the Effective Time.

“ Person ” means any legal person, including any individual, corporation, partnership, limited liability company, association, joint-stock company, trust, unincorporated organization, Governmental Body or other entity of similar nature.

“ Plan of Merger ” means the plan of merger in the form appropriate form for filing with the Indiana Secretary of State to consummate the Merger in accordance with this Agreement and the Indiana Business Corporation Law.

“ Pooling Agreement ” means the pooling agreement attached hereto as Exhibit D to be executed between Employers Insurance and EAIG.

“ Pre-Closing Tax Period ” means, with respect to any Tax, (a) any taxable period ending on or before the Closing Date, and (b) that portion ending on and including the Closing Date of any taxable period that includes but does not end on the Closing Date.

 

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“ Proceeding ” means any action, arbitration, audit, hearing, investigation, litigation, or suit (whether civil, criminal, administrative, investigative or informal) commenced, brought, conducted, or heard by or before, or otherwise involving, any Governmental Body or arbitrator.

“ Pro Rata Share ” means, with respect to each Employers Shareholder, the fraction obtained by dividing (i) the number of shares of Employers Common Stock held by such Employers Shareholder immediately prior to the Effective Time, by (ii) the number of issued and outstanding shares of Employers Common Stock held by all Employers Shareholders immediately prior to the Effective Time.

“ Purchase Price ” shall have the meaning set forth in Section 2.4(b).

“ Purchase Price Deficit ” shall have the meaning set forth in Section 2.5(c)(i).

“ Purchase Price Excess ” shall have the meaning set forth in Section 2.5(c)(ii).

“ Rights ” means warrants, options, rights, convertible securities and other equity equivalents or agreements that obligate a Person to issue its securities or any other equity interest.

“ SEC ” means the Securities and Exchange Commission.

“ Securities Act ” means the Securities Act of 1933, as amended, and the rules and regulations promulgated from time to time thereunder.

“ Securities Documents ” means all registration statements, schedules, statements, forms, reports, proxy materials, and other documents required to be filed under the Securities Laws.

“ Securities Laws ” means the Securities Act and the Exchange Act.

“ Segregated Portfolio Cell ” means any segregated portfolio cell established in Eastern Re that will reinsure a portion of the direct written premium of EAIG and/or Employers Insurance in the Territory.

“ Shareholder Representative ” shall have the meaning set forth in Section 5.16.

“ State Statutory Accounting Practices ” means, with respect to any jurisdiction, the applicable accounting practices prescribed or permitted by such jurisdiction’s Insurance Regulator for purposes of financial reporting.

“ Straddle Period ” shall have the meaning set forth in Section 5.11(b).

“ Subsidiary ” means any corporation, limited liability company or other entity, 50% or more of the capital stock or ownership interests of which are owned, either directly or indirectly, by another entity, except any corporation or other entity the capital stock or ownership interests of which are held in the ordinary course of such entity’s lending activities.

“ Supplemental Closing ” shall have the meaning set forth in Section 2.5(c).

 

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“ Tax ” and “ Taxes ” (including any derivative or variation thereof and whether or not begun with a capital letter) means and includes all income, gross receipts, franchise, excise, insurance premium, license, transfer, severance, value added, ad valorem, sales, bulk sales, use, wage, payroll, workers’ compensation, unemployment compensation, employment, occupation and real and personal property taxes levied, assessed, imposed or collected by or under the authority of any Governmental Body; taxes measured by or imposed on capital by or under the authority of any Governmental Body; levies, imposts, duties, license and legislation fees assessed, imposed or collected by or under the authority of any Governmental Body; all other taxes, levies, assessments, tariffs or duties imposed, assessed or collected by or under the authority of any Governmental Body, including assessments in the nature of or in lieu of taxes; interest, penalties (civil or criminal), fines (civil or criminal), assessments and deficiencies relating to any tax or taxes; transferee, contractual or secondary liability for taxes; and any taxes due as a result of being a member of any affiliated, consolidated, combined or unitary group, or any liability in respect of taxes under a tax sharing, tax allocation, tax indemnity or other agreement.

“ Tax Return ” or “ Return ” (including any derivative or variation thereof and whether or not begun with a capital letter) means and includes all returns, reports, forms, estimates, schedules, declarations, information statements or other document or information relating to any Tax and filed with or submitted to, or required to be filed with or submitted to, any Governmental Body in connection with the determination, assessment, collection or payment of any Tax, including any amendments or supplements thereto.

“ Tax Ruling ” shall have the meaning set forth in 3.9(k).

“ Territory ” shall mean the states of Illinois, Indiana and Missouri.

“ Threatened. ” A Proceeding, claim, dispute or other matter will be deemed to have been “ Threatened ” with respect to any Person, if such Person has received any written demand, statement or other written notice with respect to such Proceeding, claim, dispute or other matter.

“ Treasury Regulations ” means with respect to the Code or any specific Section thereof, the regulations promulgated by the IRS and pertaining to the Code or such specific section.

ARTICLE II - MERGER

2.1 Merger . Subject to the terms and conditions of this Agreement and in accordance with the Indiana Business Corporation Law, at the Effective Time, EA Corp shall merge with and into Employers. Employers shall be the surviving corporation in the Merger. Upon consummation of the Merger the separate corporate existence of EA Corp shall terminate.

2.2 Effect of Merger. At and after the Effective Time, the Merger shall have the effects set forth in this Agreement and the Indiana Business Corporation Law, including the following:

(a) The Articles of Incorporation and Bylaws of Employers shall continue as the Articles of Incorporation and Bylaws of Employers until thereafter changed or amended as provided therein or as required under the Indiana Business Corporation Law.

 

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(b) The Board of Directors of EA Corp shall become the directors of Employers, each to hold office in accordance with the Articles of Incorporation and Bylaws of Employers, until their respective successors are duly elected or appointed, and qualified.

(c) The corporate officers of EA Corp immediately prior to the Effective Time shall become the initial corporate officers of Employers until their respective successors are duly appointed.

2.3 Conversion of EA Corp Stock . At the Effective Time, each share of EA Corp stock that is issued and outstanding immediately prior to the Effective Time shall be converted into one validly issued, fully paid and nonassessable share of Employers Common Stock, and the shares of Employers Common Stock into which the shares of EA Corp stock are so converted shall be the only shares of Employers Common Stock that are issued and outstanding immediately after the Effective Time.

2.4 Conversion of Employers Common Stock .

(a) At the Effective Time, each share of Employers Common Stock that is issued and outstanding immediately prior to the Effective Time shall, as part of the Merger and without the need for any further action on the part of the holder of any such Employers Common Stock, be converted into and represent the right to receive (i) the Per Share Fraction of the Closing Payment and (ii) the Per Share Fraction of the amount, if any, together with interest earned on any such amount, to be distributed to the Employers Shareholders from the Escrow Holdback in accordance with the terms of this Agreement and the Escrow Agreement.

(b) The total consideration to be paid to the Employers Shareholders (the “ Purchase Price ”) shall be equal to the sum of:

(i) 1.87 times the consolidated shareholders’ equity of Employers as of June 30, 2008, as set forth on Employers consolidated balance sheet attached hereto as Exhibit E, as adjusted by the provisions of Section 2.4(d); plus

(ii) 1.87 times the positive or negative difference between:

(A) the consolidated shareholders’ equity of Employers at the end of the last day of the calendar month immediately preceding or ending on the Closing Date (the last day of such calendar month referred to in this Agreement as the “ Closing Balance Sheet Date ”) as determined in accordance with GAAP as applied in the preparation of Employers’ consolidated balance sheet at June 30, 2008 and as adjusted by the provisions of Section 2.4(d) (as so determined and adjusted, the “ Closing Consolidated Shareholders’ Equity ”), and

(B) the consolidated shareholders’ equity of Employers at June 30, 2008, as set forth on Employers consolidated balance sheet attached hereto as Exhibit E, as adjusted by the provisions of Section 2.4(d).

(c) When determining the consolidated shareholders’ equity of Employers at June 30, 2008 and the Closing Consolidated Shareholders’ Equity, there shall be (i) included in the determination of consolidated shareholders’ equity an accrual for expenses incurred by

 

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Employers prior to, and remaining unpaid as of, the Effective Time associated with the transactions contemplated by this Agreement, provided that Eastern shall be responsible for and pay one-half of the cost of the actuarial review of Employers Reserves as of June 30, 2008, and (ii) excluded from consolidated shareholders’ equity:

(A) favorable loss reserve development that is inconsistent with past practice or results in loss reserves being established at a point in the actuarial range that is materially inconsistent with the point in the actuarial range at which loss reserves were established at December 31, 2007;

(B) accrual of loss reserves in the current accident year at a rate that is less than Employers Insurance accident year loss ratio for the year ended December 31, 2007; and

(C) other extraordinary investment or other gains.

(d) At least five (5) days before the Closing Date, Employers shall provide its reasonable, good faith estimate of a consolidated balance sheet for Employers as of the Closing Balance Sheet Date (the “ Estimated Closing Balance Sheet ”), including its reasonable, good faith estimate of the Closing Consolidated Shareholders’ Equity, which shall be used to determine the portion of the preliminary Purchase Price payable at Closing pursuant to Section 2.4(b)(ii). On the Closing Date, Eastern shall pay the preliminary Purchase Price in cash or as a wire transfer as follows:

(i) $1,250,000 shall be paid by Eastern to the escrow agent to be held and disbursed by the escrow agent under the terms of this Agreement and the Escrow Agreement (the “ Escrow Holdback ”); and

(ii) the balance of the preliminary Purchase Price (the “ Closing Payment ”) shall be paid to the Employers Shareholders as provided in Section 2.10.

2.5 Final Purchase Price Determination, Adjustment and Disputes .

(a) As promptly as practicable following the Closing Date, but in no event later than thirty (30) days following the Closing Date, Eastern shall cause to be prepared and delivered to the Shareholder Representative a consolidated balance sheet (the “ Closing Balance Sheet ”) setting forth the calculation of the Closing Consolidated Shareholders’ Equity. The Closing Balance Sheet shall be prepared by Eastern based on GAAP as applied on a basis consistent with the methods, principles, practices and policies employed in the preparation of Employers’ calculation of the consolidated shareholders’ equity at June 30, 2008, except as adjusted by the provisions of Section 2.4(c) of this Agreement. The Shareholder Representative will be permitted to review and obtain copies of the work papers created by or on behalf of Eastern in the preparation of the Closing Balance Sheet and to meet with and ask questions of the individuals who prepared such Closing Balance Sheet and related work papers in connection with the review of the Closing Balance Sheet by Eastern.

 

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(b) In the event, the Shareholder Representative objects to Eastern’s determination of Closing Consolidated Shareholders’ Equity as set forth in the Closing Balance Sheet delivered by Eastern to the Shareholder Representative pursuant to Section 2.5(a), the Shareholder Representative shall provide written notice to Eastern of such objection within thirty (30) days after the Shareholder Representative’s receipt of the Closing Balance Sheet. Such notice shall specify in detail the basis for the disagreement with Eastern’s determination of the Closing Consolidated Shareholders’ Equity. In the event that the Shareholder Representative delivers such a notice, the parties shall attempt to mutually agree upon the Closing Consolidated Shareholders’ Equity. If the parties reach an agreement, the amount of the Closing Consolidated Shareholders’ Equity upon which they agree shall be a final and binding determination. If after a period of twenty (20) days the parties fail to reach an agreement on the determination of the Closing Consolidated Shareholders’ Equity, the parties shall promptly submit their respective positions to the nationally recognized accounting firm of KPMG LLP. Such firm shall determine as promptly as possible the Closing Consolidated Shareholders’ Equity based on GAAP as applied on a basis consistent with the methods, principles, practices and policies employed in the preparation of Employers’ calculation of the consolidated shareholders’ equity at June 30, 2008, except as adjusted by the provisions of Section 2.4(c) of this Agreement. The determination of the Closing Consolidated Shareholders’ Equity by such accounting firm shall be binding upon the parties. The cost of such review shall be borne by the party whose position submitted to KPMG LLP regarding the amount of the Closing Consolidated Shareholders’ Equity represents the greatest difference from the determination of the accounting firm.

(c) At a supplemental closing (the “ Supplemental Closing ”) to be held within ten (10) days after the final determination of Closing Consolidated Shareholders’ Equity, the Purchase Price shall be adjusted as follows:

(i) if the difference between (A) the final determination of Closing Consolidated Shareholders’ Equity and (B) the estimate of the Closing Consolidated Shareholders’ Equity set forth in the Estimated Closing Balance Sheet is a positive number, then each Employers Shareholder shall be entitled to prompt payment by Eastern of his or her Pro Rata Share of 1.87 times such positive difference (the “ Purchase Price Deficit ”); or

(ii) if the difference between (A) the final determination of Closing Consolidated Shareholders’ Equity and (B) the estimate of the Closing Consolidated Shareholders’ Equity set forth in the Estimated Closing Balance Sheet is a negative number, then Eastern shall be entitled to prompt payment of 1.87 times the absolute value of such negative difference (the “ Purchase Price Excess ”). The amount of any Purchase Price Excess, up to a maximum of $250,000, shall be paid promptly by a release from the Escrow Holdback and any amount of the Purchase Price Excess in excess of $250,000 shall be paid pro rata by the Employers Shareholders in proportion to their Pro Rata Shares.

(d) If there is no Purchase Price Excess, $250,000 shall be promptly released from the Escrow Holdback to the Employers Shareholders in proportion to their Pro Rata Shares. If there is a Purchase Price Excess but such excess is less than $250,000, an amount equal to difference of (i) $250,000, minus (ii) the Purchase Price Excess shall be promptly released from the Escrow Holdback to the Employers Shareholders in proportion to their Pro Rata Shares.

 

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2.6 Escrow . The respective rights of Eastern and the Employers Shareholders to $1,000,000 of Escrow Holdback deposited with the escrow agent under the Escrow Agreement shall be as follows:

(a) In the case of each indemnity claim for which an Eastern Indemnified Person is entitled to recover under Article VIII, Eastern shall be entitled to receive a distribution from the Escrow Holdback equal to the lesser of (i) the amount of such indemnity claim and (ii) the then remaining balance of the Escrow Holdback held by the escrow agent under the Escrow Agreement.

(b) On the first anniversary of the Closing Date, each Employers Shareholder who has complied with Section 2.10 of this Agreement shall be entitled to receive a distribution from the Escrow Holdback equal to such Employers Shareholder’s Pro Rata Share of the amount, if any, by which the balance of the Escrow Holdback then held by the escrow agent under the Escrow Agreement exceeds the aggregate amount of all then pending indemnity claims made by Eastern Indemnified Persons for which such Persons are entitled to recover under Article VIII.

(c) On any subsequent date on which the remaining balance of the Escrow Holdback then held by the escrow agent under the Escrow Agreement exceeds the aggregate unsatisfied amount of any then pending indemnity claims made by Eastern Indemnified Persons for which such Persons are entitled to recover under Article VIII, each Employers Shareholder who has complied with Section 2.10 of this Agreement shall be entitled to receive a distribution from the remaining balance of the Escrow Holdback equal to such Employers Shareholder’s Pro Rata Share of such excess.

(d) Each distributee of a distribution from the Escrow Holdback shall also be entitled to concurrently receive a pro-rata portion of the interest or other earnings on the Escrow Holdback that bears the same proportion to the amount of such interest and other earnings then held by the escrow agent as such distribution bears to the amount of the Escrow Holdback held by the escrow agent immediately prior to such distribution.

(e) All such distributions of the Escrow Holdback and related interest to which the Employers Shareholders are entitled to receive shall be made to the Shareholder Representative who shall in turn distribute the appropriate Pro Rata Share of such distributions to each Employers Shareholder.

(f) Whenever an Eastern Indemnified Person or the Employer Shareholders are entitled to a distribution from the Escrowed Amount, Eastern and the Shareholder Representative shall each cooperate with the other in promptly taking such action as required under the Escrow Agreement to cause the escrow agent to make such distribution.

In granting the right to recover indemnity claims from the Escrow Holdback, this Section 2.6 is intended to, and does, impose a real and definite restriction upon the Employers Shareholders and confer a specific economic benefit upon Eastern.

 

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2.7 Closing . The Closing will take place at 10:00 a.m. on the Closing Date at the offices of Bose McKinney & Evans, 2700 M&I Plaza, 135 N. Pennsylvania Street, Indianapolis, or, if agreed by the parties, by the exchange of faxed or scanned signature pages, wire transfer of funds, and communications via telephone, email, fax and other mutually acceptable means of telecommunication, with originals of signature pages to be exchanged by express delivery for receipt the business day following the Closing Date, or in such other manner and such place as the parties may agree. Closing, in any case, will be subject to satisfaction or wavier at or prior to the Closing Date of all conditions to Closing set forth in Article VI (other than the delivery of certificates and other instruments or documents to be delivered at the Closing). As part of the Closing, the parties shall cause the Merger to be consummated by filing the Plan of Merger on the Closing Date with the Indiana Secretary of State.

2.8 Capital Contribution and Preferred Shares . Subsequent to the completion of the Merger and if requested by one or more of the Employers Shareholders: (i) Eastern shall form (i) one or more Segregated Portfolio Cells and contribute $1,000 to the capital of each Segregated Portfolio Cell in exchange for 50% of a preferred share interest in each such Segregated Portfolio Cell, and (ii) the Employers Shareholders shall contribute $1,000 to the capital of each such Segregated Portfolio Cell in exchange for 50% of a preferred share interest in each such Segregated Portfolio Cell.

2.9 Tax Withholding . Eastern shall be entitled to deduct and withhold from any payment otherwise payable pursuant to this Agreement such amounts as it is required to deduct and withhold with respect to such payment under all applicable Tax laws. To the extent that amounts are so withheld, (i) such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the Employers Shareholders in respect of which such deduction and withholding was made; and (ii) Eastern shall pay when due all such amounts withheld to the appropriate Tax authorities and duly and timely file all Tax Returns required under Applicable Law in connection with such payments.

2.10 Exchange of Shares .

(a) Surrender and Cancellation . Each Employers Shareholder who has previously or on the Closing Date, surrendered to Eastern one or more Certificates representing such Employers Shareholder’s shares of Employers Common Stock for cancellation by Eastern shall be entitled to receive payment by cash or wire transfer on the Closing Date for each such share equal to the Per Share Fraction of the Closing Payment. Each Employers Shareholder who subsequently surrenders to Eastern one or more Certificates representing such Employers Shareholder’s shares of Employers Common Stock for cancellation by Eastern shall be entitled to receive, within ten (10) days after such surrender, prompt payment by cash or wire transfer for each such share equal to the Per Share Fraction of the Closing Payment. No interest will be paid or accrued for the benefit of the Employers Shareholders on the amount payable upon the surrender of the Certificates. In addition, each Employers Shareholder who surrenders such a Certificate shall be entitled to receive for each share of Employers Common Stock represented by such Certificate the Per Share Fraction of the amount, if any, to be distributed from the Escrow Holdback to the Employers Shareholders in accordance with the terms of this Agreement and the Escrow Agreement. Until surrendered as contemplated by this Section 2.10, each Certificate shall be deemed at any time after the Closing Date to represent only the right to receive upon such surrender the amounts contemplated by Section 2.4.

 

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(b) Lost Certificates . In the event any Certificate shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the Employers Shareholder to Eastern claiming such Certificate to be lost, stolen or destroyed and, if required by Eastern, the posting by such person of a bond in such amount as Eastern may determine is reasonably necessary as indemnity against any claim that may be made against it with respect to such Certificate, Eastern will pay in exchange for each share represented by such lost, stolen or destroyed Certificate the Per Share Fraction of the Closing Consideration. In addition, any such Employers Shareholder who furnishes such an affidavit and, if required, such bond shall be entitled to receive for each share of Employers Common Stock represented by the lost, stolen or destroyed Certificate the Per Share Fraction of the amount, if any, to be distributed from the Escrow Holdback to the Employers Shareholders in accordance with the terms of this Agreement and the Escrow Agreement.

ARTICLE III - REPRESENTATIONS AND WARRANTIES OF EMPLOYERS

Except as otherwise disclosed to Eastern in Employers disclosure schedules referenced in this Agreement (the “ Employers Disclosure Schedules ”) delivered to Eastern by Employers prior to the execution of this Agreement (with specific references to the representations and warranties contained in this Article III to which the information in such schedules relates), Employers represents and warrants to Eastern as of the date hereof, as follows:

3.1 Organization . Each Employers Company is a corporation duly organized, validly existing and in good standing under the laws of the state of its organization and is qualified to do business in every jurisdiction in which its ownership of property or conduct of business requires it to qualify, except in such jurisdictions where the failure to be so duly qualified or licensed and in good standing would not individually or in the aggregate have or be reasonably likely to result in a Material Adverse Effect. Schedule 3.1 sets forth the name of each Employers Company, the state of its incorporation and each jurisdiction in which it is qualified to do business. Each Employers Company possesses all requisite power and authority and all licenses necessary to own and operate its properties, to carry on its business as now conducted and presently proposed to be conducted and to carry out the transactions contemplated by this Agreement.

3.2 Capitalization; Title . As of the date hereof, the issued and outstanding shares of capital stock of Employers consists of 3,495,842 shares of common stock with no par value, all of which have been duly authorized, validly issued, fully-paid and nonassessable, and except as set forth on Schedule 3.2 , there are no Rights outstanding relating to the equity of Employers.

3.3 Corporate Affairs .

(a) The copies of the Constituent Documents of each Employers Company have been furnished to Eastern and reflect all amendments made thereto at any time prior to the date of this Agreement and are correct and complete. The minute books (containing the records of meetings of the board of directors and shareholders or the managers and members of each Employers Company) and the stock or membership ledger record books of each Employers Company have been furnished to Eastern and are correct and complete in all material respects. Schedule 3.3(a) sets forth (i) a list of all of the Employers Shareholders together with the number of shares of Employers Common Stock owned by each Employers Shareholder, and (ii) a list of all of the directors, officers and managers of each Employers Company.

 

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(b) Except as set forth on Schedule 3.3(b) , the books and records of Employers and each of the Employers Subsidiaries (i) are and have been properly prepared and maintained in form and substance adequate for preparing audited consolidated financial statements, in accordance with GAAP consistently applied and any Applicable Law, (ii) reflect only actual transactions, and (iii) fairly and accurately reflect all assets and liabilities of Employers and each of the Employers Subsidiaries and all contracts and other transactions to which Employers or any of the Employers Subsidiaries is or was a party or by which Employers or any of the Employers Subsidiaries or any of their respective businesses or assets is or was affected to the extent necessary for preparing audited consolidated financial statements in accordance with GAAP consistently applied (including materiality standards) and any Applicable Law.

(c) The minute books and stock ledgers of Employers accurately and completely list and describe all issuances, transfers and cancellations of shares of capital stock of Employers. The minute books and stock or membership ledgers of each Employers Subsidiary accurately and completely list and describe all issuances, transfers and cancellations of units or shares of capital stock of such Employers Subsidiary.

(d) Except for restrictions on business activities of insurance companies under Applicable Law and the necessity of obtaining any required governmental authorizations, licenses and permits, no Employers Company is restricted from conducting any particular business or conducting business in any particular place.

3.4 Employers Subsidiaries .

(a) Employers Insurance is an insurance company (i) domiciled in Indiana and is also duly licensed as an insurance company in the states of Illinois and Missouri, and (ii) is not licensed or authorized to carry on an insurance business in any other jurisdiction.

(b) Affinity Management Services, Inc. is an Indiana company that operates as a third party administrator.

(c) Employers is, directly or indirectly, the record and beneficial owner of all of the outstanding shares of each of the Employers Subsidiaries, there are no proxies with respect to any such shares, and no shares or equity securities of any Employers Subsidiary are or may become required to be issued by reason of any Rights. All of such shares so owned by Employers are validly issued, fully paid and nonassessable and are owned by Employers free and clear of any Encumbrance.

3.5 Authority Relative to this Agreement . Employers has the corporate power and authority, to enter into this Agreement and, subject to the receipt of the required approval of any Governmental Body, to carry out its obligations hereunder. The execution, delivery and performance of this Agreement by Employers and the consummation by Employers of the transactions contemplated hereby have been duly authorized by the board of directors of Employers at a duly called meeting, and except for approval by Employers Shareholders, no other corporate proceedings on the part of Employers are necessary to authorize this Agreement

 

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or the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by Employers (assuming this Agreement constitutes a valid and binding obligation of Eastern) constitutes a valid and binding agreement of Employers, enforceable against it in accordance with its terms.

3.6 Consents and Approvals; No Violations .

(a) Except (i) for (A) applicable requirements of state laws relating to takeovers, state securities or blue sky laws, state insurance laws and the regulations promulgated thereunder, and (B) the filing of appropriate documents with, and approval of, Insurance Regulators in Indiana, Illinois and Missouri, and any other relevant jurisdiction, or (ii) where the failure to make any filing with, or to obtain any permit, authorization, consent or approval of, any Governmental Body would not prevent or delay the consummation of the transactions contemplated by this Agreement, or otherwise prevent Employers and the Employers Shareholders from performing their obligations under this Agreement, or individually or in the aggregate have or be reasonably likely to result in a Material Adverse Effect, no filing with, and no permit, authorization, consent or approval of, any Governmental Body is necessary for the execution, delivery and performance of this Agreement by Employers and the consummation of the transactions contemplated hereby.

(b) Except as set forth in Schedule 3.6(b) , no consent or approval of any other party (other than any Governmental Body) is required to be obtained by Employers for the execution, delivery or performance of this Agreement or the performance by Employers of the transactions contemplated hereby, except where the failure to obtain any such consent or approval would not prevent or delay the consummation of the transactions contemplated by this Agreement, or otherwise prevent Employers from performing its obligations under this Agreement or be reasonably likely to result in a Material Adverse Effect.

(c) Neither the execution, delivery or performance of this Agreement by Employers nor the consummation by Employers of the transactions contemplated hereby, nor compliance by Employers with any of the provisions hereof, will:

(i) conflict with or result in any breach of any provisions of the Constituent Documents of Employers or any of the Employers Subsidiaries;

(ii) except as set forth in Schedule 3.6(c)(ii) , result in a violation or breach of, or constitute (with or without notice or lapse of time or both) a default (or give rise to any right of termination, cancellation, acceleration, vesting, payment, exercise, suspension or revocation) under, any of the terms, conditions, or provisions of any note, bond, mortgage, deed of trust, security interest, indenture, license, contract, agreement, plan or other instrument or obligation to which Employers, any Employers Shareholder, or any of the Employers Subsidiaries is a party or by which any of them or any of their properties or assets is bound;

(iii) violate any order, writ, injunction, decree, statute, rule or regulation applicable to Employers, any Employers Shareholder, any Employers Subsidiary or any of their properties or assets;

 

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(iv) result in the creation or imposition of any Encumbrance on any asset of Employers, any Employers Shareholder, or any Employers Subsidiary; or

(v) cause the suspension or revocation of any permit, license, governmental authorization, consent or approval necessary for Employers or any of the Employers Subsidiaries to conduct its business as currently conducted,

except in the case of clauses (ii), (iii), (iv) and (v) for violations, breaches, defaults, terminations, cancellations, accelerations, vestings, exercises, violations, creations, impositions, suspensions or revocations which would not individually or in the aggregate have a Material Adverse Effect.

3.7 Employers Financial Statements .

(a) Employers has delivered to Eastern complete and correct copies of the consolidated balance sheets of Employers as of June 30, 2008, December 31, 2007 and 2006 and the related consolidated statements of income, shareholders’ equity and cash flows for each of the periods then ended (the “ Employers Financial Statements ”). The Employers Financial Statements for the periods ended December 31, 2007 and 2006 are accompanied by the report on such statements by the independent auditors of Employers and accompanying notes. The Employers Financial Statements have been derived from the accounting books and records of Employers and the Employers Subsidiaries and have been prepared in accordance with GAAP, applied on a consistent basis throughout the periods presented. The Employers Financial Statements present fairly in all material respects the consolidated financial position of Employers and the Employers Subsidiaries as at the respective dates thereof in accordance with GAAP, and present fairly in all material respects the consolidated results of operations, shareholders’ equity and cash flows of Employers and the Employers Subsidiaries for the respective periods indicated in accordance with GAAP, subject to the exceptions set forth on Schedule 3.7(a) with respect to Employers Financial Statements as of, and for the interim period ended on June 30, 2008.

(b) Statutory Financial Statements . The Annual Statements and Quarterly Statements of Employers Security Insurance Company, as filed or to be filed with the applicable Insurance Regulator for the years ended December 31, 2007, December 31, 2006 and December 31, 2005, or such shorter period as may have been required (the “ Employers Annual Statutory Statements ”), and for the quarter ended March 31, 2008 (the “ Employers Quarterly Statutory Statements ”), respectively, together with all exhibits and schedules thereto (all Employers Statutory Statements and all Employers Quarterly Statutory Statements, together with all exhibits and schedules thereto, referred to in this Section 3.7(b) are hereinafter referred to as the “ Employers Statutory Financial Statements ”), have been prepared in accordance with State Statutory Accounting Practices, and such accounting practices have been applied on a basis consistent with such State Statutory Accounting Practices throughout the periods involved, except as expressly set forth in the notes, exhibits or schedules thereto, and the Employers Statutory Financial Statements present fairly in all material respects the financial position and the results of operations for Employers Insurance as of the dates and for the periods therein in accordance with applicable State Statutory Accounting Practices. The financial statements contained in the Employers Annual Statutory Statements have been audited by London Witte Group, the independent auditors of Employers, and Employers has made available to Eastern true and complete copies of all audit opinions related thereto. Employers has delivered to

 

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Eastern true and complete copies of the Employers Annual Statutory Statements and the Employers Quarterly Statutory Statements. No deficiencies have been asserted by any Insurance Regulator with respect to such Employers Statutory Financial Statements.

(c) Absence of Undisclosed Liabilities . Except as set forth in Schedule 3.7(c) , Employers and the Employers Subsidiaries do not have any liabilities or obligations, contingent or otherwise, except (i) liabilities and obligations in the respective amounts reflected on or reserved against in the Employers Financial Statements, (ii) liabilities and obligations not required by GAAP or State Statutory Accounting Practices to be reflected in the Employers Financial Statements or in the notes thereto, and (iii) liabilities and obligations incurred in the ordinary course of business consistent with past practice since that date which are not prohibited by this Agreement.

(d) Absence of Certain Changes . Except as set forth in Schedule 3.7(d) , since December 31, 2007, (i) there has been no event or condition that has had (or is reasonably likely to result in) a Material Adverse Effect, and (ii) Employers and the Employers Subsidiaries have in all material respects conducted their businesses in the ordinary course consistent with past practice.

(e) Regulatory Reports . Since January 1, 2005, Employers (i) has filed or submitted with all applicable Insurance Regulators the Holding Company Act Reports, (ii) has 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, and (iii) have paid all fees and assessments due and payable by them under the Insurance Laws. Schedule 3.7(e) sets forth a list of, and Employers has made available to Eastern, accurate and complete copies of, Holding Company Act Reports and all other reports and statements filed by Employers or any of the Employers Subsidiaries with any Insurance Regulator for periods ending and events occurring, after January 1, 2005 and prior to the Closing Date, and the latest requests for approval of a rate increase in each state or other jurisdiction that Employers writes insurance. All Holding Company Act Reports and other reports and statements were prepared in good faith and complied in all material respects with the Insurance Laws when filed and, as of their respective dates, contained all information required under the Insurance Laws and did not contain any false statements or material misstatements of fact or omit to state any material facts necessary to make the statements set forth therein not materially misleading in light of the circumstances under which such statements were made. No deficiencies have been asserted by any Insurance Regulator with respect to Holding Company Act Reports and other reports and statements.

(f) Investigations . Except for normal examinations conducted by a Governmental Body in the regular course of the business of Employers and its Subsidiaries, and except as set forth in Schedule 3.7(f) , no Governmental Body has initiated any proceeding or investigation into the business or operations of Employers, any Employers Subsidiary, or any director or officer of Employers or any Employers Subsidiary, since January 1, 2005. There is no unresolved violation, criticism, or exception by any Governmental Body with respect to any examinations of Employers or any of its Subsidiaries.

 

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(g) Examinations . Schedule 3.7(g) lists all financial examinations that any Insurance Regulator has conducted with respect to Employers since January 1, 2005. Employers has made available to Eastern correct and complete reports issued by the applicable Insurance Regulator with respect to such financial examinations. There are no regulatory examinations of Employers or of Employers Insurance currently in process.

(h) Form A Notices . Neither Employers nor any Employers Subsidiary has received from any Person any 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 Employers, if after the consummation thereof such Person would directly or indirectly be in control of Employers.

(i) Internal Controls . Employers and each Employers Subsidiary maintains accurate books and records reflecting its assets and liabilities and maintains proper and adequate internal accounting controls over financial reporting to provide reasonable assurance that: (i) transactions are executed with management’s authorization; (ii) transactions are recorded as necessary to permit preparation of the consolidated financial statements of Employers and to maintain accountability for the consolidated assets of Employers; (iii) access to assets is permitted only in accordance with management’s authorization; (iv) the reporting of assets is compared with existing assets at regular intervals; and (v) accounts, notes and other receivables and inventory are recorded accurately, and proper and adequate procedures are implemented to effect the collection thereof on a current and timely basis.

3.8 Litigation . Except as set forth in Schedule 3.8 and except for insurance claims litigation (other than bad faith claims) arising in the ordinary course of business for which reserves have been established, there is no suit, action, proceeding or investigation (whether at law or equity, before or by any Governmental Body or before any arbitrator) pending or, to the Knowledge of Employers, threatened against or affecting Employers, any of the Employers Subsidiaries, or any director, officer, manager or member of Employers or any of the Employers Subsidiaries, nor is there any judgment, decree, injunction, rule or order of any Governmental Body or arbitrator outstanding against Employers or any of the Employers Subsidiaries.

3.9 Tax Matters . Except as set forth on Schedule 3.9 :

(a) Tax Returns . Employers and each member of the Acquired Group has timely filed all Tax Returns that such Person is or was required to file pursuant to all applicable Legal Requirements. All such Tax Returns were and are true, complete and correct. No claim has been made by a Governmental Body in any jurisdiction where any member of the Acquired Group does not file Tax Returns to the effect that such member is or may be subject to taxation by that jurisdiction, and to the Knowledge of each member of the Acquired Group, no reasonable basis exists for such a claim to be made against any member of the Acquired Group as to any prior period. No member of the Acquired Group has requested any extension of time within which to file any Tax Return, which Tax Return has not since been timely filed, and no member of the Acquired Group has executed any outstanding waivers or comparable consents regarding the application of a statute of limitations with respect to any Taxes or Tax Returns.

 

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(b) Taxes . Employers and each member of the Acquired Group has, within the time and in the manner prescribed by Applicable Law, paid all Taxes that are or were due and payable by such Person. To the Knowledge of Employers, no deficiency for any Tax has been proposed, asserted or assessed against Employers or any member of the Acquired Group that has not been resolved and paid in full. To the Knowledge of Employers, no facts exist that would be reasonably likely to result in the assessment of any Liability for Taxes against Employers or any member of the Acquired Group for any prior periods for which Tax Returns were or should have been filed.

(c) Tax Reserves . All Taxes not yet due and payable by, or with respect to the income, assets, properties, activities or operations of, the Employers Companies, (i) as of the Employers Interim Balance Sheet Date, did not exceed the reserve for Tax liabilities (excluding deferred Taxes established to reflect timing differences between book and Tax income) set forth on the face of the balance sheets comprising a portion of the Employers Interim Financial Statements (rather than in any notes thereto) and (ii) as of the Closing Balance Sheet Date, do not exceed that reserve or Tax liabilities (excluding deferred Taxes established to reflect timing differences between book and Tax income) set forth in the Closing Balance Sheet, in accordance with the past custom and practice in filing Tax Returns relating to such Taxes.

(d) Audit, Administrative and Court Proceedings . No audits or other Proceedings by any Governmental Body are presently pending, or, to the Knowledge of Employers, threatened, with regard to any Taxes or Tax Returns of any member of the Acquired Group. During the five (5) year period immediately preceding the date hereof, there has been no audit or other Proceedings by any Governmental Body commenced against any member of the Acquired Group.

(e) Withholding Taxes . Each member of the Acquired Group has complied in all respects with the provisions of the Code and all other applicable Legal Requirements relating to information reporting and returns and the payment and withholding of Taxes, including, without limitation, the withholding and reporting requirements under Sections 1441 and 1464, 3401 through 3406 and 6041 through 6060 of the Code, as well as similar provisions under any other Legal Requirements, and has, within the time and in the manner prescribed by applicable Legal Requirements, withheld and paid over to the proper Governmental Body all Taxes required to have been withheld and paid in connection with amounts paid or owing to any employee, independent contractor, creditor, member, stockholder, or other third party.

(f) Tax Liens; Liability For Taxes . There are no Tax liens or Encumbrances for Taxes upon any of the assets of any member of the Acquired Group, and as of the end of the day on the Closing Date there will be no Tax liens or Encumbrances for Taxes upon any of the assets of any member of the Acquired Group. There is not and, as of the end of the Closing Balance Sheet Date there will not be, any Liability for Taxes arising out of or attributable to any member of the Acquired Group for which Eastern will at any time have any Liability for payment, except for Taxes that remain unpaid as of the Closing Balance Sheet Date that were included as an expense or liability in the determination of the Closing Consolidated Shareholders’ Equity.

 

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(g) Tax Accounting . No member of the Acquired Group shall be required to include any item of income in, or exclude any item of deduction from, taxable income for any taxable period (or portion thereof) ending after the Closing Date as a result of any (i) change in method of accounting for a taxable period ending on or prior to the Closing Date, (ii) Closing Agreement (as defined in Section 3.9(k) below) executed on or prior to the Closing Date, (iii) installment sale or open transaction disposition made on or prior to the Closing Date, or (iv) any “subpart F” income arising from income, investments, receipts or transactions occurring on or before the Closing Date.

(h) Listed Transactions . No member of the Acquired Group has engaged in any transaction that is a “listed transaction” or “reportable transaction” as those terms are defined in the Treasury Regulations or other authoritative pronouncement published by the IRS.

(i) Tax Sharing Agreements . As of the date hereof and as of the end of the day on the Closing Date, no member of the Acquired Group is or will be a party to or bound by, or have any obligation under, any agreement relating to the assumption, allocation or sharing of Taxes or have any Liability for the Taxes of any Person other than such Person, as a transferee, successor or otherwise (including any Liability under Treasury Regulation Section 1.1502-6 or any similar provision of state, local or foreign law).

(j) United States Real Property Holding Company . No member of the Acquired Group is or has been a United States real property holding company within the meaning of Section 897(c)(2) of the Code during the applicable period specified in Section 897(c)(1)(A)(ii) of the Code. No Tax is required to be withheld pursuant to §1445 of the Code as a result of any of the transfers contemplated by this Agreement.

(k) Availability of Tax Returns . Prior to the Closing Date, Employers and each Employers Subsidiary will make available to Eastern complete and accurate copies of (i) all Tax Returns for open years, and any amendments thereto, filed by or on behalf of each member of the Acquired Gr