AGREEMENT AND PLAN OF REORGANIZATION BY AND AMONG EASTERN HOLDING COMPANY, LTD LANCASTER HOLDINGS OF PENNSYLVANIA, INC. AND EDUCATORS MUTUAL LIFE INSURANCE COMPANY DATED AS OF MARCH 17, 2005

Exhibit 2.2

 

 

AGREEMENT AND PLAN OF REORGANIZATION

 

BY AND AMONG

 

EASTERN HOLDING COMPANY, LTD

 

LANCASTER HOLDINGS OF PENNSYLVANIA, INC.

 

AND

 

EDUCATORS MUTUAL LIFE INSURANCE COMPANY

 

DATED AS OF MARCH 17, 2005

 

Table of Contents

 

 

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Table of Contents

(continued)

 

 

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Table of Contents

(continued)

 

 

 

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AGREEMENT AND PLAN OF REORGANIZATION

 

This AGREEMENT AND PLAN OF REORGANIZATION is dated as of March 17, 2005, by and among EASTERN HOLDING COMPANY, LTD, a Cayman Islands corporation (“ EHC ”), LANCASTER HOLDINGS OF PENNSYLVANIA, INC., a Pennsylvania corporation (“ HoldCo ”), and EDUCATORS MUTUAL LIFE INSURANCE COMPANY, a Pennsylvania mutual life insurance company (“ EML ”). (Any capitalized term used and not immediately defined is defined in Section 9.12 of this Agreement).

 

WHEREAS, EML desires to convert from a mutual form to a stock form insurance company to enhance its strategic and financial flexibility and increase its competitive position in a manner that furthers the interest of its Members;

 

WHEREAS, the Board of Directors of EML has adopted a Plan of Conversion (as amended or supplemented from time to time, the “ Plan of Conversion ”) attached hereto as Exhibit A, pursuant to which EML shall convert from a mutual insurance company to a stock insurance company pursuant to the Insurance Company Mutual-to-Stock Conversion Act, 40 P.S. Section 911-A, et seq . (the “ Act ”), and simultaneously sell all of its authorized shares to HoldCo, and as a result become a wholly owned subsidiary of HoldCo (the “ Conversion ”);

 

WHEREAS, HoldCo shall offer to sell a fixed number of shares of its common stock to Eligible Members and others pursuant to and in accordance with a subscription rights offering, and may offer to sell any remaining unsold stock to the public in a community offering as described in the Plan of Conversion;

 

WHEREAS, simultaneously with the Conversion and subject thereto, EHC will become a Pennsylvania corporation and merge (the “ Merger ”) with and into a newly formed and wholly owned subsidiary of HoldCo (“ NewSub ”) pursuant to the Plan of Merger attached hereto as Exhibit B (the “ Plan of Merger ”) and EHC Stockholders will receive HoldCo Common Stock and cash in exchange for their shares of EHC Common Stock;

 

WHEREAS, HoldCo will use part of the net proceeds from the sale of its stock in the Conversion to purchase all of the authorized shares of stock of EML and to pay the cash portion of the consideration to be paid to EHC Stockholders in the Merger;

 

WHEREAS, a special meeting of EML’s Eligible Members will be held to approve the Plan of Conversion and the transactions contemplated by the Plan of Conversion and this Agreement (the “ Contemplated Transactions ”);

 

WHEREAS, a special meeting of the EHC Stockholders will be held to approve this Agreement and the Plan of Merger; and

 

WHEREAS, HoldCo, EML and EHC intend (a) the conversion of EML from a mutual form to a stock form insurance company and the acquisition by HoldCo of all of the authorized shares of capital stock of EML to qualify as a reorganization within the meaning of section 368(a) of the Code, (b) the Merger to qualify as a reorganization within the meaning of section 368(a) of the Code and this Agreement to constitute a plan of reorganization with respect thereto,

 

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and (c) the domestication of EHC pursuant to Section 1.3(b) hereof to qualify as a reorganization within the meaning of section 368(a) of the Code.

 

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

 

ARTICLE I

 

THE CONVERSION AND THE MERGER

 

Section 1.1 The Conversion of EML and the Issuance of EML Shares to HoldCo .

 

(a) Upon the terms and subject to the conditions of the Plan of Conversion and this Agreement, on the Effective Date, EML shall issue to HoldCo 1,000 shares of EML’s common stock, $1.00 par value per share, which shall constitute all of the authorized shares of capital stock of EML, and HoldCo shall contribute to EML such percentage of the net proceeds of the Offerings as required by the Pennsylvania Department of Insurance (the “ Department ”).

 

(b) Subject to the satisfaction of the conditions contained in the Plan of Conversion and this Agreement, HoldCo and EHC shall cause the Articles of Amendment of EML to be filed with the Pennsylvania Department of State on or prior to the Effective Date.

 

Section 1.2 Closing . The closing of the transactions contemplated by the Plan of Conversion and this Agreement (the “ Closing ”) shall take place (a) at the offices of Stevens & Lee, P.C. 25 North Queen Street, Suite 602, Lancaster, Pennsylvania 17603, at 10:00 a.m., Eastern Standard time, on the third Business Day following the date on which the conditions set forth in Article VII (other than those conditions that by their nature are to be satisfied at the Closing, but subject to the fulfillment or waiver of those conditions) shall have been satisfied or waived in accordance with this Agreement, or (b) at such other place and time and/or on such other date as EML, HoldCo and EHC may agree in writing (the “ Closing Date ”).

 

Section 1.3 The Merger .

 

(a) Closing . Subject to the satisfaction of the conditions contained in this Agreement and the Plan of Merger, the closing of the Merger will take place on the Closing Date. On the Closing Date, HoldCo, NewSub and EHC shall cause the Articles of Merger to be duly executed and filed with the Pennsylvania Department of State.

 

(b) Domestication . On or before the Closing Date, EHC shall file articles of domestication in the office of the Secretary of State of the Commonwealth of Pennsylvania pursuant to Section 4161 of the Pennsylvania Business Corporation Law of 1988, as amended (the “ PBCL ”) and thereby become a domestic business corporation under the applicable laws of the Commonwealth of Pennsylvania.

 

(c) The Merger . Subject to the terms and conditions of this Agreement, and after the domestication transaction contemplated by Section 1.3(b), on the Effective Date: EHC shall merge with and into NewSub; the separate corporate existence of EHC shall cease; NewSub shall

 

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be the surviving corporation in the Merger; and all of the property (real, personal and mixed), rights, powers, privileges, franchises, and duties and obligations of EHC shall be taken and deemed to be transferred to and vested in NewSub, as the surviving corporation in the Merger, without further act or deed; all debts, liabilities, obligations, restrictions, disabilities and duties of each of EHC and NewSub shall thereafter be the responsibility of NewSub; all in accordance with the applicable laws of the Commonwealth of Pennsylvania.

 

(d) Change to Structure . Subject to and except as otherwise prohibited by applicable law, the parties may at any time change the method of effecting the acquisition of EHC (including without limitation, by providing for a contribution of all of the outstanding shares of EHC Capital Stock to HoldCo by the EHC Stockholders in exchange for the Merger Consideration) if and to the extent reasonably requested by either party and consented to by the other party (such consent not to be unreasonably withheld); provided , however , that no such change shall (i) alter or change the amount or kind of Merger Consideration, (ii) adversely affect the federal income tax treatment of either party pursuant to this Agreement, or (iii) materially impede or delay completion of the transactions contemplated by this Agreement.

 

(e) HoldCo’s Articles of Incorporation and Bylaws . On and after the Effective Date, the articles of incorporation and bylaws of HoldCo, as in effect immediately prior to the date of this Agreement and in the form attached hereto as Exhibit C, shall automatically be and remain the articles of incorporation and bylaws of HoldCo, until thereafter altered, amended or repealed.

 

(f) Board of Directors and Officers of HoldCo and EML .

 

(i) On and after the date of this Agreement, the Board of Directors of HoldCo shall consist of Lawrence W. Bitner, Paul R. Burke, Bruce M. Eckert, Ronald L. King, Robert M. McAlaine (Chairman), Scott C. Penwell, John O. Shirk, W. Lloyd Snyder, III, Richard Stevens, III, Charles H. Vetterlein, and James L. Zech; provided , however , that in the event that any of such persons is unable or unwilling to serve as a director of HoldCo at any time prior to the Closing Date, then (x) if such person is a member of the Board of Directors of EML, EML may designate a replacement for such person, and (y) if such person is a member of the Board of Directors of EHC, EHC may designate a replacement for such person.

 

(ii) On or before the filing of the Registration Statement, the Board of Directors of HoldCo shall appoint the following persons as officers of HoldCo to the following offices:

 

 

(g) The Merger Consideration . (i) At the Effective Time, by virtue of the Merger and without any action on the part of HoldCo, EHC, NewSub or the holders of EHC Capital Stock, each issued and outstanding share of EHC Capital Stock shall be converted into the right to receive an amount (the “ Per Share Purchase Price ”) equal to the quotient obtained by dividing

 

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(A) the product of (i) the adjusted consolidated stockholders’ equity of EHC as of the close of business on September 30, 2005 (the “ Adjusted EHC Stockholders’ Equity ”), and (ii) 1.28 (the product of (i) and (ii) is hereinafter called the “ Aggregate Purchase Price ”), by (B) the sum of (1) the aggregate number of shares of EHC Capital Stock outstanding immediately prior to the Effective Time (each such share an “ Outstanding Share ”), and (2) the aggregate number of shares represented by warrants to acquire shares of EHC Common Stock (the “ EHC Warrants ”) outstanding on the date hereof (the “ Warrant Share Number ”). For purposes of this Agreement, Adjusted EHC Stockholders’ Equity shall be EHC’s consolidated stockholders’ equity, as determined in accordance with U.S. GAAP applied consistently with prior accounting practices used by EHC (including without limitation SFAS No. 115 and SFAS No. 150), plus an amount equal to the proceeds that would be received if all outstanding warrants and all options to acquire EHC capital stock permitted to be granted under the EHC Stock Option Plan were exercised as of September 30, 2005; provided , however , that in determining Adjusted EHC Stockholders’ Equity, any increase in EHC’s consolidated stockholders’ equity as a result of the application of SFAS No. 115 shall not result in a cumulative SFAS No. 115 unrealized gain in excess of $1,536,935 (on a pretax basis) at September 30, 2005 and any decrease in EHC’s consolidated stockholders’ equity as a result of the application of SFAS No. 115 shall not result in a cumulative SFAS No. 115 unrealized loss greater than $963,065 (on a pretax basis) at September 30, 2005. In determining the tax applied to any increase or decrease in EHC’s consolidated stockholders’ equity as a result of the application of SFAS No. 115, the maximum statutory effective rate applicable to the jurisdiction in which the respective legal entity is domiciled shall be used. In applying the preceding two sentences in those circumstances in which the aggregate change in market value as a result of the application of SFAS No. 115, on a pretax basis, would exceed the applicable limit ($1,536,935 or $963,065), the amount of the change in market value attributable to each EHC Insurance Subsidiary to be included in determining Adjusted EHC Stockholders’ Equity shall be the change in market value at such EHC Insurance Subsidiary multiplied by a fraction, the numerator of which is the applicable limit and the denominator of which is the aggregate change in market value.

 

On or before October 21, 2005, EHC shall deliver to EML (x) a consolidated balance sheet of EHC as of September 30, 2005 and consolidated statements of income and other comprehensive income of EHC for the nine months ended September 30, 2005, prepared in accordance with U.S. GAAP applied consistently with prior accounting practices used by EHC, (y) a calculation of Adjusted EHC Stockholders’ Equity as of September 30, 2005, and (z) such supporting information as EML may reasonably require.

 

Absent material error, the calculation of Adjusted EHC Stockholders’ Equity shall be binding on EML, HoldCo, EHC and all other persons. If EML does not object to the calculation of Adjusted EHC Stockholders’ Equity on or before October 28, 2005, the calculation of Adjusted EHC Stockholders’ Equity shall be final and binding on all persons for all purposes. If EML timely and reasonably objects to the calculation of Adjusted EHC Stockholders’ Equity on the ground that the calculation is incorrect or that EML has not received sufficient information to review the calculation of Adjusted EHC Stockholders’ Equity, then EML and EHC will act in good faith and use commercially reasonable efforts to resolve any differences within the next three (3) days. If EML and EHC are unable to reach an agreement on the calculation of Adjusted EHC Stockholders’ Equity, then EML and EHC shall engage a nationally recognized certified public accounting firm (independent of each of the parties hereto)

 

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to calculate Adjusted EHC Stockholders’ Equity, which calculation shall be completed on or before November 7, 2005 and such calculation shall be final and binding on EHC, EML, HoldCo and all other persons.

 

In the event that the Closing is not held on or before December 31, 2005, then EHC shall declare a special dividend payable to its stockholders of record as of the close of business on the Business Day immediately preceding the Closing Date equal to the positive change, if any, in EHC’s consolidated stockholders’ equity, as determined in accordance with U.S. GAAP, from November 1, 2005 to the end of the calendar month preceding the Closing Date. Such special dividend shall be paid by HoldCo within thirty (30) days after the Closing Date.

 

Notwithstanding the foregoing, (1) in the event that the Closing is not held on or before March 31, 2006, then EHC shall declare a special dividend, in lieu of and not in addition to the dividend referred to in the preceding paragraph, payable to its stockholders of record as of the close of business on the Business Day immediately preceding the Closing Date equal to the positive change, if any, in EHC’s consolidated stockholders’ equity, as determined in accordance with U.S. GAAP, from February 1, 2006 to the end of the calendar month preceding the Closing Date, and (2) the date of determination of the Adjusted EHC Stockholders’ Equity in connection with determining the Aggregate Purchase Price will be December 31, 2005 instead of September 30, 2005.

 

(ii) Each option to acquire EHC Common Stock that remains outstanding as of the Effective Time shall be cancelled as of the Effective Time and the holder thereof shall not be entitled to any consideration with respect thereto. Each share of EHC Common Stock outstanding immediately prior to the Effective Time that was issued upon the exercise of an option to acquire EHC Common Stock during the period between the date hereof (each, an “Option Share”) and the Effective Time shall be converted into (x) the right to receive cash in an amount equal to the per share exercise price of the option pursuant to which such share of EHC Common Stock was issued, and (y) such number of EHC common stock share equivalents as is equal to the quotient obtained by dividing (1) the Per Share Purchase Price minus such exercise price, by (2) the Per Share Purchase Price (each, an “Original Share Equivalent”). Each Outstanding Share that is not an Option Share is referred to herein as an “Original Share.”

 

(iii) Each Original Share and Original Share Equivalent shall be converted into the right to receive the Per Share Purchase Price in cash and HoldCo Common Stock as follows:

 

(A) each Original Share and Original Share Equivalent shall be converted into the right to receive that amount of cash as shall equal the quotient obtained by dividing (i) 49% of the Aggregate Purchase Price, minus the sum of (1) the aggregate cash payable under Section 1.3(g)(ii), plus (2) the number of shares of EHC Capital Stock with respect to which dissenters’ rights have been asserted and perfected multiplied by $10.00, plus (3) the cash paid in lieu of fractional shares pursuant to Section 1.3(g)(v), by (ii) the sum of the Original Shares plus the Original Share Equivalents (the “Original Share Number”); and

 

(B) each Original Share and Original Share Equivalent shall be converted into the right to receive that number of shares of HoldCo Common Stock as shall equal the quotient obtained by dividing (i) 51% of the Aggregate Purchase Price, minus the product of the

 

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Warrant Share Number and the Per Share Purchase Price, by (ii) the Original Share Number multiplied by $10.00.

 

(iv) Adjustments to Stock and Cash Consideration . Notwithstanding anything herein to the contrary, the total stock consideration shall be increased and the total cash consideration shall be decreased if, but only to the extent, necessary to secure the tax opinions or tax rulings required by Section 7.1(k). For this purpose, the parties agree that the sum of (i) the total cash consideration component of the Aggregate Purchase Price plus (ii) the amount of any dividend to be paid to shareholders of EHC pursuant to Section 1.3(g)(i) hereof, shall not exceed the “Maximum Cash Percentage,” which, for this purpose, shall mean 59% of the sum of (x) the Aggregate Purchase Price plus (xi) the amount of any dividend to be paid to shareholders of EHC pursuant to Section 1.3(g)(i) hereof. In the event that the parties determine that the sum of (Y) the total cash consideration component of the Aggregate Purchaser Price plus (Z) the amount of any dividend to be paid to shareholders of EHC pursuant to Section 1.3(g)(i) hereof will exceed the Maximum Cash Percentage, the total cash consideration component of the Merger Consideration shall be decreased and the total stock consideration shall be increased to the extent necessary to achieve compliance with the Maximum Cash Percentage.

 

(v) Cash in Lieu of Fractional Shares . Notwithstanding anything herein to the contrary, no fraction of a whole share of HoldCo Common Stock and no scrip or certificate therefor shall be issued in connection with the Merger. Any EHC Stockholder who would otherwise be entitled to receive a fraction of a share of HoldCo Common Stock shall receive, in lieu thereof, cash in an amount equal to such fraction multiplied by $10.00.

 

(h) Warrants . At the Effective Time the warrant to acquire 300 shares of EHC Common Stock (the “ EHC Warrant ”) held by Lawrence W. Bitner shall cease to represent a right to acquire shares of EHC Common Stock, and shall be converted automatically into a warrant to purchase shares of HoldCo Common Stock. HoldCo shall assume such EHC Warrant. The number of shares of HoldCo Common Stock subject to such EHC Warrant shall be equal to the number of shares of EHC Common Stock subject to such EHC Warrant immediately prior to the Effective Time multiplied by a fraction the numerator of which is the Per Share Purchase Price and the denominator of which is $10.00 (the “ Warrant Exchange Ratio ”), provided that any fractional shares of HoldCo Common Stock resulting from such multiplication shall be rounded down to the nearest share, and (D) the per share exercise price under each such EHC Warrant shall be adjusted by dividing the per share exercise price under each such EHC Warrant by the Warrant Exchange Ratio, provided that such exercise price shall be rounded up to the nearest cent.

 

(i) Surrender of EHC Stock Certificates .

 

(i) Exchange Fund . At or prior to the Effective Time, HoldCo shall deposit with the Exchange Agent, in trust for the benefit of EHC Stockholders, sufficient cash and stock certificates representing shares of HoldCo Common Stock to make all payments and deliveries to EHC Stockholders pursuant to this Section 1.3. Any cash and stock certificates for HoldCo Common Stock deposited with the Exchange Agent shall hereinafter be referred to as the “ Exchange Fund .”

 

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(ii) Exchange Procedures . As soon as reasonably practicable after the Effective Time (and in any case no later than fifteen (15) days thereafter), HoldCo shall cause the Exchange Agent to mail to each record holder of EHC Capital Stock immediately prior to the Effective Time, a letter of transmittal that shall specify that delivery of the certificates representing shares of EHC Capital Stock (“EHC Certificates”) shall be made, and risk of loss and title to the EHC Certificates shall pass, only upon delivery of the EHC Certificates to the Exchange Agent, and which letter shall be in customary form and have such other provisions as HoldCo may reasonably specify and instructions for effecting the surrender of such EHC Certificates in exchange for the cash and shares of HoldCo Common Stock into which such shares of EHC stock have been converted. Upon surrender of an EHC Certificate to the Exchange Agent together with such letter of transmittal, duly executed and completed in accordance with the instructions thereto, and such other documents as may reasonably be required by the Exchange Agent, such EHC Certificate shall be cancelled and the holder of such EHC Certificate shall be entitled to receive within fifteen (15) days in exchange therefor with respect to the number of shares of EHC Capital Stock previously represented by such EHC Certificate (A) a certificate representing the whole number of shares of HoldCo Common Stock that such holder has the right to receive pursuant to Section 1.3(g), and (B) a check in an amount equal to the cash that such holder has the right to receive pursuant to Section 1.3(g). No interest will be paid or will accrue on any cash payment pursuant to Section 1.3(g). In the event of a transfer of ownership of EHC Capital Stock that is not registered in the transfer records of EHC, a certificate representing, in the aggregate, the proper number of shares of HoldCo Common Stock and a check in the proper amount pursuant to Section 1.3(g) may be issued with respect to such EHC Capital Stock to such a transferee if the EHC Certificate formerly representing such shares of EHC Capital Stock is presented to the Exchange Agent, accompanied by all documents required to evidence and effect such transfer and to evidence that any applicable stock transfer taxes have been paid.

 

(iii) Distributions with Respect to Unexchanged Shares . No dividends or other distributions declared or made with respect to shares of HoldCo Common Stock with a record date after the Effective Time shall be paid to the holder of any unsurrendered EHC Certificate with respect to the shares of HoldCo Common Stock that such EHC Certificate holder may be entitled to receive upon surrender of such EHC Certificate until such holder shall surrender such EHC Certificate in accordance with Section 1.3(i)(ii). Subject to the effect of applicable laws, following surrender of any such EHC Certificate, there shall be paid to such holder of shares of HoldCo Common Stock issuable in exchange therefor, without interest, (A) promptly after the time of such surrender, the amount of dividends or other distributions with a record date after the Effective Time theretofore paid with respect to such whole shares of HoldCo Common Stock and (B) at the appropriate payment date, the amount of dividends or other distributions with a record date after the Effective Time but prior to such surrender and a payment date subsequent to such surrender payable with respect to such whole shares of HoldCo Common Stock.

 

(iv) No Further Ownership Rights . All shares of HoldCo Common Stock issued and cash paid upon conversion of shares of EHC Capital Stock in accordance with the terms of this Agreement shall be deemed to have been issued or paid in full satisfaction of all rights pertaining to the shares of EHC Capital Stock.

 

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(v) Termination of Exchange Fund . Any portion of the Exchange Fund that remains undistributed to the holders of EHC Certificates for twelve (12) months after the Effective Date shall be delivered to HoldCo or otherwise on the instructions of HoldCo, and any holders of the EHC Certificates who have not previously complied with this Section 1.3(i) shall thereafter look only to HoldCo for the Merger Consideration with respect to the shares of EHC Capital Stock formerly represented thereby to which such holders are entitled pursuant to Section 1.3(g), any cash in lieu of fractional shares of HoldCo Common Stock to which such holders are entitled pursuant to Section 1.3(g)(v), and any dividends or distributions with respect to shares of HoldCo Common Stock to which such holders may be entitled pursuant to Section 1.3(i)(iii).

 

(vi) No Liability . None of HoldCo, EHC, any of their respective Affiliates or the Exchange Agent shall be liable to any Person in respect of any Merger Consideration from the Exchange Fund delivered to a public official pursuant to any applicable abandoned property, escheat or similar law.

 

(vii) Investment of the Exchange Fund . The Exchange Agent shall invest any cash included in the Exchange Fund as reasonably directed by HoldCo; provided that such investments shall be in obligations of or guaranteed by the United States of America and backed by a full faith and credit of the United States of America. Any interest and other income resulting from such investments shall be payable to HoldCo and not to the EHC Stockholders.

 

(viii) Lost Certificates . If any EHC Certificate shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the Person claiming such EHC Certificate to be lost, stolen or destroyed and, if required by the Exchange Agent or HoldCo, the posting by such Person of a bond in such reasonable amount as HoldCo may direct as indemnity against any claim that may be made against it with respect to such EHC Certificate, the Exchange Agent will deliver or cause to be delivered in exchange for such lost, stolen, or destroyed EHC Certificate the applicable Merger Consideration with respect to the shares of EHC Capital Stock represented thereby and any cash in lieu of fractional shares of HoldCo Common Stock to which the holders thereof are entitled pursuant to Section 1.3(g)(v), and any dividends or other distributions on shares of HoldCo Common Stock to which the holders thereof may be entitled pursuant to Section 1.3(i)(iii).

 

(ix) Withholding Rights . HoldCo shall be entitled to deduct and withhold from the consideration otherwise payable pursuant to this Agreement to any EHC Stockholder such amounts as it is required to deduct and withhold with respect to the making of such payment under the Code, or any provisions of state, local or foreign tax law. To the extent that amounts are so withheld by HoldCo, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the holder of the shares of EHC Capital Stock in respect of which such deduction and withholding was made by HoldCo.

 

(x) Stock Transfer Books . At the Effective Time, the stock transfer books of EHC with respect to EHC Capital Stock issued and outstanding prior to the Effective Time shall be closed and, thereafter, there shall be no further registration of transfers on the

 

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records of EHC of shares of EHC Capital Stock issued and outstanding prior to the Effective Time. From and after the Effective Time, the holders of EHC Certificates shall cease to have any rights with respect to such shares of EHC Capital Stock formerly represented thereby, except as otherwise provided herein or by law. On or after the Effective Time, any EHC Certificates presented to the Exchange Agent or HoldCo for any reason shall be exchanged for the applicable Merger Consideration with respect to the shares of EHC Capital Stock formerly represented thereby, any cash in lieu of fractional shares of HoldCo Common Stock to which the holders thereof are entitled pursuant to Section 1.3(g)(v), and any dividends or other distributions on shares of HoldCo Common Stock to which the holders thereof may be entitled pursuant to Section 1.3(i)(iii).

 

(j) NewSub’s Articles and Bylaws . Pursuant to and in accordance with the Plan of Merger, on and after the Effective Date, the articles of incorporation and bylaws of NewSub, as in effect immediately prior to the Merger, shall automatically be and remain the articles of incorporation and bylaws of NewSub, as the surviving corporation of the Merger, until thereafter altered, amended or repealed.

 

Section 1.4 Registration Statement; Prospectus and Special Meeting of Members .

 

(a) Registration Statement . HoldCo shall prepare and, after providing EML and EHC with a reasonable opportunity to review and comment, promptly file with the SEC a registration statement on Form S-1 (the “ Registration Statement ”) for the purpose of registering HoldCo Common Stock under the Securities Act and shall use reasonable best efforts to obtain and furnish the information required to be included by the SEC in the Registration Statement, which shall include the prospectus with respect to the Offerings and the Merger. EML and EHC shall each furnish HoldCo with all information concerning itself and shall take such other action as HoldCo may reasonably request in connection with such Registration Statement and the issuance of HoldCo Common Stock. HoldCo, after consultation with EML and EHC, shall respond as promptly as practicable to any comments made by the SEC with respect to the Registration Statement (copies of which HoldCo shall provide to EML and EHC), and shall use reasonable best efforts to have the Registration Statement declared effective by the SEC.

 

(b) Prospectus . The prospectus that is a part of the Registration Statement shall include the information required with respect to the Plan of Conversion and the Merger and may contain information with respect to and be used by EML as a proxy statement with respect to the EML Special Meeting. EHC may also use such prospectus as part of its proxy statement for its second special meeting of stockholders as provided in Section 1.5 hereof. HoldCo shall use reasonable best efforts to obtain and furnish the information required to be included by state and federal law, including the Act, and to submit the prospectus to the Department (such prospectus is referred to herein as the “ Prospectus ”).

 

(c) Special Meeting of Members . EML, acting through its Board of Directors and subject to Section 6.3, shall duly call, send notice of, convene and hold a special meeting of its Eligible Members (the “ EML Special Meeting ”), as soon as practicable after the later of (a) the date of the approval of the Plan of Conversion by the Insurance Commissioner of the Commonwealth of Pennsylvania (the “ Insurance Commissioner ”), and (b) the date upon which

 

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the Registration Statement is declared effective, whichever is applicable, for the purpose of voting upon a single proposal to adopt: (i) the Plan of Conversion and the transactions contemplated by the Plan of Conversion, including this Agreement, and (ii) the Amended Articles of Incorporation. EML shall mail the Prospectus to its Eligible Members and shall include in the Prospectus the recommendation of the Board of Directors of EML that Eligible Members vote to adopt the Plan of Conversion, including this Agreement, and the Amended Articles of Incorporation. The Prospectus may constitute a proxy statement for adoption of the Plan of Conversion and the Amended Articles of Incorporation.

 

(d) Further Actions . EML and HoldCo shall take any reasonable action required to be taken under applicable securities laws in connection with the issuance of HoldCo Common Stock, and EML shall furnish all information concerning EML and the Eligible Members as may be reasonably requested by HoldCo in connection with such action.

 

Section 1.5 EHC Stockholders Meetings . As soon as practicable after the date of this Agreement, EHC shall convene a special meeting of the stockholders of EHC to vote on and approve the redomestication of EHC as a Pennsylvania corporation effective as of the Closing Date. At the earliest practicable time after the Registration Statement has been declared effective, EHC shall convene a special meeting of the stockholders of EHC to vote on and adopt the Plan of Merger. In connection with such meeting, EHC will cause the Prospectus to be mailed to all stockholders of EHC. HoldCo shall include in the Prospectus a recommendation of the Board of Directors of EHC that EHC Stockholders vote to adopt and approve the Plan of Merger. Section 1906 of the PBCL shall apply to this Agreement and the Plan of Merger with respect to the adoption thereof by the EHC Stockholders. EHC agrees to provide for such class voting on the adoption of this Agreement and the Plan of Merger by the EHC Stockholders as is required by Section 1906 of the PBCL.

 

Section 1.6 No False or Misleading Statements .

 

(a) Each of EHC and EML agrees that the information provided and to be provided by EHC or EML, as the case may be, specifically for use in the Registration Statement and the Prospectus, shall not, with respect to the information supplied by such party:

 

(i) in the case of the Registration Statement, on the date the Registration Statement becomes effective, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading; and

 

(ii) in the case of the Prospectus, (w) on the date on which the Prospectus is mailed to the Eligible Members of EML, (x) on the date of the EML Special Meeting, (y) on the date on which the Prospectus is mailed to stockholders of EHC, and (z) on the date of the second special meeting of stockholders of EHC, contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading.

 

(b) If at any time prior to the applicable dates referred to in Section 1.6(a) any information relating to EHC or EML, or any of their respective affiliates, officers or directors,

 

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that should be set forth in an amendment or supplement to the Prospectus or the Registration Statement so that any of such documents would not include any misstatement of a material fact or omit to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, is discovered by EHC or EML, the party that discovers such information shall promptly notify the other party and, to the extent required by Applicable Law, an appropriate amendment or supplement describing such information shall be promptly prepared and, if applicable, filed with the SEC and disseminated to the Eligible Members or the stockholders of EHC, as the case may be.

 

ARTICLE II

 

REPRESENTATIONS AND WARRANTIES OF EHC

 

Except as otherwise disclosed to EML in the EHC Disclosure Schedule (the “ EHC Disclosure Schedule ”) delivered to EML by EHC prior to the execution of this Agreement (with specific reference to the representations and warranties contained in this Article II to which the information in such schedule relates), EHC represents and warrants to EML, as follows:

 

Section 2.1 Organization . As of the date hereof and prior to its domestication as a Pennsylvania corporation as described in Section 1.3(b), EHC is and will be a Cayman Islands corporation duly organized, validly existing and in good standing under the laws of the Cayman Islands with the corporate power and authority and all governmental approvals necessary to own, lease and operate its properties and to carry on its business as it is now being conducted. EHC is duly qualified as a foreign corporation to do business, and is in good standing, in each jurisdiction where the character of its properties owned or held under lease or the nature of its activities makes such qualification necessary, except where the failure to be so qualified would not individually or in the aggregate have or be reasonably likely to result in an EHC Material Adverse Effect. The copies of EHC’s Constituent Documents that have been delivered to EML are complete and correct and in full force and effect.

 

Section 2.2 Capitalization of EHC . As of the date hereof, the authorized capital stock of EHC consists of 12,000 shares of EHC Class A Common Shares, 6,000 shares of EHC Class B Common Shares, 3,250 shares of EHC Series A Voting Preferred Shares, and 4,750 shares of EHC Series B Non-Voting Preferred Shares. As of the date hereof there are 4,410 shares of EHC Class A Common Shares, no shares of EHC Class B Common Shares, 2,868 shares of EHC Series A Voting Preferred Shares, and 3,902 shares of EHC Series B Non-Voting Preferred Shares issued and outstanding. All of the issued and outstanding shares of EHC Capital Stock are validly issued, fully paid and nonassessable and free of preemptive rights. Except as set forth in Section 2.2 of the EHC Disclosure Schedule, as of the date of this Agreement there are no outstanding options, warrants, subscriptions, calls, rights, convertible securities or other agreements or commitments obligating EHC to issue, transfer, sell, redeem, repurchase or otherwise acquire any shares of its capital stock and all outstanding options have been or will be granted with an exercise price that is not less than the fair market value of the underlying stock to which the option relates as of the date of grant. Prior to the Effective Time, all of the outstanding EHC Series A Voting Preferred Shares and EHC Series B Nonvoting Preferred Shares will have been converted to EHC Class A Common Shares or EHC Class B Nonvoting Common Shares.

 

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Section 2.3 EHC Subsidiaries .

 

(a) Each EHC Subsidiary is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization and has the corporate power and authority and all government approvals necessary to own, lease and operate its properties and to carry on its business as now being conducted. Each EHC Subsidiary is duly qualified or licensed and 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 would not individually or in the aggregate have or be reasonably likely to result in an EHC Material Adverse Effect. Section 2.3(a) of the EHC Disclosure Schedule sets forth the name of each of the subsidiaries of EHC (the “ EHC Subsidiaries ”) and the state or jurisdiction of its incorporation.

 

(b) Section 2.3(b) of the EHC Disclosure Schedule sets forth the name of each of the EHC Subsidiaries that is as of the date hereof an insurance company (collectively, the “ EHC Insurance Subsidiaries ”). Each of the EHC Insurance Subsidiaries is (i) duly licensed or authorized as an insurance company in its jurisdiction of incorporation, and (ii) duly licensed or authorized to carry on an insurance business in each other jurisdiction where it is required to be so licensed or authorized, except, in each case, where such failure to be licensed or authorized would not individually or in the aggregate have or be reasonably likely to result in an EHC Material Adverse Effect. Each of EHC and the EHC Insurance Subsidiaries has made all required filings under applicable insurance holding company statutes except where the failure to file would not individually or in the aggregate have or be reasonably likely to result in an EHC Material Adverse Effect.

 

(c) Except as set forth in Section 2.3(c) of the EHC Disclosure Schedule, EHC is, directly or indirectly, the record and beneficial owner of all of the outstanding shares of each of the EHC Subsidiaries, there are no proxies with respect to any such shares or equity interests, and no equity securities of any EHC Subsidiary are or may become required to be issued by reason of any options, warrants, subscriptions, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into or exchangeable or exercisable for, shares or other equity interests of any EHC Subsidiary, and there are no contracts, commitments, understandings or arrangements by which EHC or any EHC Subsidiary is or may be bound to issue, redeem, purchase or sell shares or other equity interests of any EHC Subsidiary or securities convertible into or exchangeable or exercisable for any such shares or equity interests. All of such shares or equity interests so owned by EHC are validly issued, fully paid and nonassessable and are owned by it free and clear of Encumbrances.

 

Section 2.4 Authority Relative to this Agreement . EHC has the corporate power and authority to enter into this Agreement and to carry out its obligations hereunder. The execution, delivery and performance of this Agreement by EHC and the consummation by EHC of the transactions contemplated hereby have been duly authorized by the Board of Directors of EHC at a duly called meeting, and except for the adoption and approval of the Plan of Merger by the EHC Stockholders no other corporate proceedings on the part of EHC are necessary to authorize this Agreement or the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by EHC and (assuming this Agreement constitutes a valid and

 

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binding obligation of EML and HoldCo) constitutes a valid and binding agreement of EHC, enforceable against EHC in accordance with its terms.

 

Section 2.5 Consents and Approvals; No Violations .

 

(a) Except (i) for (A) applicable requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “ HSR Act ”), 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, the insurance regulatory authorities in the Commonwealth of Pennsylvania and the Cayman Islands and any other relevant jurisdiction (the requirements in clauses (A) and (B), collectively, the “ Governmental Requirements ”), or (ii) where the failure to make any filing with, or to obtain any permit, authorization, consent or approval of, any court or tribunal or administrative, governmental or regulatory body, agency, commission, board, legislature, instrumentality, division, department, public body or other authority (each, a “ Government Entity ”) would not (1) prevent or delay the consummation of the transactions contemplated by this Agreement, (2) prevent EHC from performing its obligations under this Agreement, or (3) individually or in the aggregate have or be reasonably likely to result in an EHC Material Adverse Effect, no filing with, and no permit, authorization, consent or approval of, any Government Entity is necessary for the execution, delivery and performance of this Agreement by EHC and the consummation of the transactions contemplated hereby.

 

(b) Except as disclosed in Section 2.5 of the EHC Disclosure Schedule, no consent or approval of any other party (other than any Government Entity) is required to be obtained by EHC for the execution, delivery or performance of this Agreement or the performance by EHC of the transactions contemplated hereby, except where the failure to obtain any such consent or approval would not (1) prevent or delay the consummation of the transactions contemplated by this Agreement, (2) prevent EHC from performing its obligations under this Agreement, or (3) individually or in the aggregate, be reasonably likely to result in an EHC Material Adverse Effect.

 

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

 

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

 

(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 EHC or any of the EHC Subsidiaries is a party or by which any of them or any of their properties or assets is bound;

 

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

 

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

 

(v) cause the suspension or revocation of any permit, license, governmental authorization, consent or approval necessary for EHC or any of the EHC 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, creations, impositions, suspensions or revocations that would not individually or in the aggregate have an EHC Material Adverse Effect.

 

Section 2.6 EHC Financial Statements .

 

(a) EHC has delivered to EML complete and correct copies of the EHC Financial Statements. The EHC Financial Statements have been derived from the accounting books and records of EHC and the EHC Subsidiaries and have been prepared in accordance with U.S. GAAP, applied on a consistent basis throughout the periods presented, subject, in the case of interim unaudited EHC Financial Statements, only to normal recurring year-end adjustments and the absence of footnotes. The consolidated balance sheets included in the EHC Financial Statements present fairly in all material respects the consolidated financial position of EHC and the EHC Subsidiaries as at the respective dates thereof, and the consolidated statements of income, consolidated statements of stockholders’ equity, and consolidated statements of cash flows included in such EHC Financial Statements present fairly in all material respects the consolidated results of operations, stockholders’ equity and cash flows of EHC and the EHC Subsidiaries for the respective periods indicated.

 

(b) The term “ EHC Financial Statements ” means the unaudited consolidated financial statements of EHC and the EHC Subsidiaries as at and for the nine-month period ended September 30, 2004, and the audited consolidated financial statements of EHC and the EHC Subsidiaries as at and for the years ended December 31, 2003, December 31, 2002 and December 31, 2001, together with reports on such year-end statements by the independent auditors of EHC, including in each case a consolidated balance sheet, a consolidated statement of income, a consolidated statement of stockholders’ equity and a consolidated statement of cash flows, and accompanying notes.

 

Section 2.7 Statutory Financial Statements . EHC has provided to EML copies of (i) the Annual Statements, together with all exhibits and schedules thereto, of Eastern Alliance Insurance Co. (“Eastern Alliance”) and Allied Eastern Indemnity Co. (“Allied Eastern”) as filed with the Department for the years ended December 31, 2003, December 31, 2002 and December 31, 2001, and (ii) the audited financial statements of Eastern Re Ltd, SPC (“Eastern Re”) for the years ended December 31, 2003, 2002, and 2001, respectively, together with all exhibits and schedules thereto (collectively, the “ EHC Annual Statutory Statements ”), and (iii) the quarterly statements for the quarters ended March 31, June 30, and September 30, 2004,

 

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respectively, together with all exhibits and schedules thereto (collectively, the “ EHC Quarterly Statutory Statements ”) (all EHC Annual Statutory Statements and all EHC Quarterly Statutory Statements, together with all exhibits and schedules thereto, referred to in this Section 2.7 are hereinafter referred to as the “ EHC Statutory Financial Statements ”). The EHC Statutory Financial Statements have been prepared in accordance with the applicable accounting practices prescribed or permitted by the Department and the Cayman Monetary Authority for purposes of financial reporting (“ Statutory Accounting Practices ”), and such accounting practices have been applied on a basis consistent with such Statutory Accounting Practices throughout the periods involved, except as expressly set forth in the notes, exhibits or schedules thereto, and the EHC Statutory Financial Statements present fairly in all material respects the financial position and the results of operations for the respective EHC Insurance Subsidiaries as of the dates and for the periods therein in accordance with applicable Statutory Accounting Practices. The financial statements contained in the EHC Annual Statutory Statements for the years ended December 31, 2003, 2002, and 2001 have been audited by PricewaterhouseCoopers LLP, the independent auditors of EHC, and EHC has made available to EML true and complete copies of all audit opinions related thereto. EHC has made available to EML true and complete copies of all examination reports of insurance departments and any insurance regulatory agencies since January 1, 2001 relating to the EHC Insurance Subsidiaries. EHC has delivered to EML true and complete copies of the EHC Annual Statutory Statements and the EHC Quarterly Statutory Statements.

 

Section 2.8 Absence of Certain Changes . Since September 30, 2004, there has been no event or condition that has had (or is reasonably likely to result in) an EHC Material Adverse Effect, and except as set forth in Section 2.8 of the EHC Disclosure Schedule, EHC and the EHC Subsidiaries have in all material respects conducted their businesses in the ordinary course consistent with past practice and have not taken any action which, if taken after the date hereof, would violate Section 5.1.

 

Section 2.9 Litigation . Except as set forth in Section 2.9 of the EHC Disclosure Schedule and except for insurance claims litigation 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 Government Entity or before any arbitrator) pending or, to the Best Knowledge of EHC, threatened against or affecting EHC or any of the EHC Subsidiaries, the outcome of which would individually or in the aggregate have or be reasonably likely to result in an EHC Material Adverse Effect, nor is there any judgment, decree, injunction, rule or order of any Government Entity or arbitrator outstanding against EHC or any of the EHC Subsidiaries that would individually or in the aggregate have or be reasonably likely to result in an EHC Material Adverse Effect.

 

Section 2.10 Absence of Undisclosed Liabilities . Except as set forth in Section 2.10 of the EHC Disclosure Schedule, EHC and the EHC Subsidiaries do not have any liabilities or obligations, contingent or otherwise, except (a) liabilities and obligations in the respective amounts reflected on or reserved against in EHC’s consolidated balance sheet of September 30, 2004 included in the EHC Financial Statements, and (b) liabilities and obligations incurred in the ordinary course of business consistent with past practice since that date which would not be prohibited by this Agreement.

 

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Section 2.11 Taxes . Except as set forth in Section 2.11 of the EHC Disclosure Schedule:

 

(a) EHC and the EHC Subsidiaries have duly and timely filed (or there has been filed on their behalf) with the appropriate Government Entity all material Tax Returns required to be filed by them (determined after giving effect to any applicable extensions), all such Tax Returns are correct and complete in all material respects, all Taxes shown on such Tax Returns have been timely paid, all material Taxes otherwise due have been timely paid, and all current material Taxes not yet due and payable have been properly provided for in accordance with U.S. GAAP.

 

(b) No federal, state, local or foreign audits, actions, or administrative or court proceedings are pending or have been threatened in writing with regard to any Taxes or Tax Returns of EHC or the EHC Subsidiaries wherein an adverse determination or ruling in any one such action or proceeding or in one or more of such actions and proceedings in the aggregate would have or are reasonably likely to result in an EHC Material Adverse Effect.

 

(c) The income Tax Returns of EHC and the EHC Subsidiaries have never been examined by the IRS or any other taxing authority.

 

(d) There are no unresolved questions or claims regarding EHC’s or any EHC Subsidiary’s Tax liability that are reasonably likely, individually or in the aggregate, to result in an EHC Material Adverse Effect. None of EHC or the EHC Subsidiaries is subject to a waiver of any statute of limitations in respect of material Taxes or any extension of time with respect to a material Tax assessment or deficiency. None of EHC or the EHC Subsidiaries has agreed to or is required to make by reason of a change in accounting method any adjustment under Section 481(a) of the Code. None of EHC or the EHC Subsidiaries has been a distributing corporation or a controlled corporation within the meaning of Section 355 of the Code. None of the EHC Subsidiaries is a US real property holding corporation within the meaning of Section 897 of the Code. None of EHC or any of the EHC Subsidiaries has ever been a controlled foreign corporation within the meaning of Section 957 of the Code.

 

None of EHC or the EHC Subsidiaries has taken or agreed to take any action, or failed to take any action, that, to their knowledge, is reasonably likely to prevent either the domestication pursuant to Section 1.3(b) hereof or the Merger from qualifying as a reorganization within the meaning of Section 368(a) of the Code. Except as disclosed in Section 2.22 of the EHC Disclosure Schedule, none of EHC or any of the EHC Subsidiaries is a party to any tax sharing or allocation agreement.

 

(e) “ Taxes ” means all federal, state, local and foreign taxes, and other assessments of a similar nature (whether imposed directly or through withholding), including any interest, additions to tax, or penalties applicable thereto and any liability for such as a result of being a member of an affiliated, combined, consolidated, or similar group, a transferee or successor, by contract or otherwise. “ Tax Returns ” means all returns, declarations, statements, reports, schedules, forms and information returns and any amendments to any of the foregoing relating to Taxes.

 

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Section 2.12 Title to Property . Except as set forth in Section 2.12 of the EHC Disclosure Schedule, EHC and the EHC Subsidiaries (a) have good and valid title to all of their respective properties, assets and other rights that do not constitute real property, free and clear of all Encumbrances, except for EHC Permitted Encumbrances, and (b) own, have valid leasehold interests in or valid contractual rights to use, all of the assets, tangible and intangible, used by, or necessary for the conduct of, their respective business except where the failure to own such assets or have such valid leasehold interests or such valid contractual rights would not, individually or in the aggregate, have or be reasonably likely to result in an EHC Material Adverse Effect. Neither EHC nor any of the EHC Subsidiaries owns any real property.

 

Section 2.13 Insurance Practices; Permits and Insurance Licenses .

 

(a) The EHC Insurance Subsidiaries have all requisite power and authority to carry on their insurance business pursuant to and to the extent of the certificate of authority issued under the laws of the jurisdictions in which they are authorized to issue insurance. The EHC Insurance Subsidiaries are not required to be licensed in any other jurisdiction. The certificates of authority of the EHC Insurance Subsidiaries have not been revoked, restricted, suspended, limited, or modified; to the Best Knowledge of EHC, there is no basis for a proceeding for revocation, restriction, suspension, limitation or modification; nor are any of the EHC Insurance Subsidiaries operating under any formal or informal agreement or understanding with any Government Entity to restrict its authority to do business, or requires such company to take, or refrain from taking, any action. Except as disclosed in EHC Disclosure Schedule 2.13(a), neither EHC nor any EHC Subsidiary has issued any surplus note or similar instrument.

 

(b) Except as otherwise would not individually or in the aggregate have or be reasonably likely to result in an EHC Material Adverse Effect, all policies, binders, slips, certificates, and other agreements of insurance, whether individual or group, in effect as of the date hereof (including all applications, supplements, endorsements, riders and ancillary agreements in connection therewith) that are or have been issued by EHC Insurance Subsidiaries (the “ EHC Insurance Contracts ”) and any and all marketing materials, are, to the extent required under applicable law, on forms approved by applicable insurance regulatory authorities or have been filed and not objected to by such authorities within the period provided for objection (the “ Forms ”). The Forms comply in all material respects with the insurance statutes, regulations and rules applicable thereto and, as to premium rates established by the EHC Insurance Subsidiaries that are required to be filed with or approved by insurance regulatory authorities, the rates have been so filed or approved, the premiums charged conform thereto in all material respects, and such premiums comply in all material respects with the insurance statutes, regulations and rules applicable thereto.

 

(c) The business of EHC and each of the EHC Subsidiaries is being conducted in compliance, in all material respects, with all Applicable Laws, including all insurance laws, ordinances, rules, regulations, decrees and orders of any Government Entity, and all material notices, reports, documents and other information required to be filed thereunder within the last three years were properly filed and were in compliance in all material respects with such laws, except where failure to have so filed or to be in such compliance would not, individually or in the aggregate, have or be reasonably likely to result in an EHC Material Adverse Effect.

 

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(d) EHC and the EHC Insurance Subsidiaries have all permits and insurance licenses the use and exercise of which are necessary for the conduct of its business as now conducted, other than such permits and insurance licenses the absence of which would not, individually or in the aggregate, have or be reasonably likely to result in an EHC Material Adverse Effect. The business of EHC and each of the EHC Insurance Subsidiaries has been and is being conducted in compliance, in all material respects, with all such permits and insurance licenses. All such permits and insurance licenses are in full force and effect, and there is no proceeding or investigation pending or, to the Best Knowledge of EHC, threatened which would reasonably be likely to lead to the revocation, amendment, failure to renew, limitation, suspension or restriction of any such permit or insurance license.

 

(e) Except where failure to do so would not individually or in the aggregate be reasonably likely to result in an EHC Material Adverse Effect, EHC and the EHC Insurance Subsidiaries have marketed, sold and issued insurance products in compliance with all Applicable Laws, all applicable orders and directives of insurance regulatory authorities, and all market conduct recommendations resulting from market conduct examinations of insurance regulatory authorities in Pennsylvania including, without limitation, compliance with all Applicable Laws relating to the underwriting, marketing, sale and issuance of, or refusal to sell, any insurance product to insureds or potential insureds of any race, color, creed or national origin.

 

Section 2.14 Regulatory Filings . EHC has made available for inspection by EML complete copies of all material registrations, filings and submissions made since January 1, 2002 by EHC and any EHC Subsidiary with any Government Entity and any reports of examinations issued since January 1, 2002 by any such Government Entity that relate to EHC or any of the EHC Subsidiaries. EHC and the EHC Subsidiaries have filed all reports, statements, documents, registrations, filings or submissions required to be filed by any of them with any Government Entity, except where the failure to file, in the aggregate, would not have or be reasonably likely to result in an EHC Material Adverse Effect. To the Best Knowledge of EHC, all such reports, statements, documents, registrations, filings and submissions were in all material respects true, complete and accurate when filed. This Section 2.14 does not apply to Taxes, which are covered exclusively by Section 2.11.

 

Section 2.15 Investments .

 

(a) The EHC Financial Statements and EHC Statutory Financial Statements set forth by category all securities, mortgages and other investments (collectively, the “ EHC Investments ”) owned by EHC or the EHC Insurance Subsidiaries as of December 31, 2003, together with the cost basis, book or amortized value, as the case may be, as of December 31, 2003, and the changes in the EHC Investments from January 1, 2004 through September 30, 2004. All transactions in EHC Investments by EHC or the EHC Insurance Subsidiaries from September 30, 2004 to the date hereof have complied in all material respects (i) with the Investment Policy of EHC, and (ii) with all Applicable Laws.

 

(b) Except as set forth in the EHC Financial Statements and EHC Statutory Financial Statements, either EHC or the EHC Insurance Subsidiaries have good and marketable title to the EHC Investments reflected in the EHC Financial Statements and EHC Statutory Financial

 

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Statements or acquired in the ordinary course of business since September 30, 2004 other than with respect to those EHC Investments that have been disposed of in the ordinary course of business or as contemplated by this Agreement or redeemed in accordance with their terms since such date and other than with respect to statutory deposits that are subject to certain restrictions on transfer.

 

(c) A complete list of all investments owned, directly or indirectly, by EHC or any EHC Subsidiary as of September 30, 2004 that are in default, in bankruptcy, nonperforming, restructured, or foreclosed, or that are included on any “watch list” are set forth in Section 2.15 of the EHC Disclosure Schedule, and there have been no changes since that date that would have or be reasonably likely to result in an EHC Material Adverse Effect.

 

(d) Except as set forth in the EHC Financial Statements or the EHC Statutory Financial Statements, there are no Encumbrances on any of the EHC Investments, other than EHC Permitted Encumbrances and special deposits reflected in the EHC Statutory Financial Statements.

 

Section 2.16 Reserves . The aggregate reserves of EHC as recorded in the EHC Financial Statements and the EHC Statutory Financial Statements have been determined in accordance with generally accepted actuarial principles consistently applied (except as set forth therein). The insurance reserving practices and polices of EHC have not changed, in any material respect, since December 31, 2003, and the results of the application of such practices and policies are reflected in the EHC Financial Statements and the EHC Statutory Financial Statements. All reserves of EHC set forth in the EHC Financial Statements and the EHC Statutory Financial Statements are fairly stated in accordance with sound actuarial principles and meet the requirements of the insurance laws of each EHC Subsidiary’s respective domiciliary jurisdiction, except where the failure to so state such reserves or meet such requirements would not have or be reasonably likely to result in an EHC Material Adverse Effect.

 

Section 2.17 Information in Registration Statement and Prospectus .

 

(a) None of the information supplied by EHC for inclusion in the Prospectus will (1) on the date mailed to Eligible Members, (2) on the date mailed to stockholders of EHC, (3) at the date of the EML Special Meeting, and (4) at the date of the second special meeting of stockholders of EHC, contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading.

 

(b) The information supplied by EHC in writing for inclusion in the Registration Statement (or any amendment thereof or supplement thereto), at the date it becomes effective and at the time of EML Special Meeting and the second special meeting of EHC Stockholders, will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading.

 

Section 2.18 Brokers . Other than Griffin Financial Group, LLC, no person is entitled to any brokerage, financial advisory, finder’s or similar fee or commission payable by EHC in

 

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connection with the transactions contemplated by this Agreement based upon arrangements made by and on behalf of EHC. EHC has disclosed to EML the fees payable to Griffin Financial Group, LLC in connection with the Contemplated Transactions. Except as provided in Section 9.6, fees payable to Griffin Financial Group, LLC prior to the Closing of the Merger are the sole responsibility of EHC.

 

Section 2.19 Employee Benefit Plans; ERISA .

 

(a) Section 2.19 of the EHC Disclosure Schedule sets forth a list that is complete and accurate in all material respects of each bonus, deferred compensation, incentive compensation, stock purchase, stock option, equity-based award, severance or termination pay, hospitalization or other medical, accident, disability, life or other insurance, supplemental unemployment benefits, fringe and other welfare benefit, profit-sharing, pension, or retirement plan, program, agreement or arrangement (collectively, “ Benefit Plans ”), and each other employee benefit plan, program, agreement or arrangement, that is sponsored, maintained or contributed to or required to be contributed to by EHC or the EHC Subsidiaries or by any trade or business, whether or not incorporated, that together with EHC, would or would have been at any date of determination occurring within the preceding five years, deemed a “single employer” within the meaning of Section 4001 of the Employee Retirement Income Security Act of 1974, as amended (“ ERISA ”), or considered as being members of a controlled group of corporations, under common control, or members of an affiliated service group within the meaning of Subsections 414(b) or (c) of the Code or Section 4001(a)(14) of ERISA, in each case for the benefit of any employee or terminated employee of EHC or any of the EHC Subsidiaries (the “ EHC Plans ”). No EHC Plan is a “multiemployer pension plan,” as defined in Section 3(37) of ERISA, nor is any EHC Plan a plan described in Section 4063 of ERISA.

 

(b) With respect to each EHC Plan listed in Section 2.19 of the EHC Disclosure Schedule, to the extent applicable, EHC has heretofore made available or has caused to be made available, or will make available or cause to be made available prior to the Closing, to EML true and complete copies of the following documents:

 

(i) a copy of each written EHC Plan;

 

(ii) a copy of the most recent annual report on Form 5500 and actuarial report, if required under ERISA;

 

(iii) a copy of the most recent summary plan description required under ERISA with respect thereto;

 

(iv) if the EHC Plan is funded through a trust or any third party funding vehicle, a copy of the trust or other funding agreement and the latest financial statements thereof; and

 

(v) the most recent determination letter received from the Internal Revenue Service with respect to each EHC Plan intended to qualify under Section 401 of the Code.

 

(c) Each EHC Plan intended to be qualified under Section 401(a) of the Code, and the trust (if any) forming a part thereof, has received a favorable determination letter from the

 

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Internal Revenue Service as to its qualification under the Code and to the effect that each such trust is exempt from taxation under Section 501(a) of the Code, and nothing has occurred with respect to such EHC Plan since the date of such determination letter that could reasonably be expected to result in an EHC Material Adverse Effect.

 

(d) No material liability under Title IV of ERISA has been incurred by EHC or, to the Best Knowledge of EHC, any ERISA Affiliate, that has not been satisfied in full, and to the Best Knowledge of EHC, no condition exists that presents a material risk to EHC or any ERISA Affiliate of incurring a material liability under such Title.

 

(e) No EHC Plan or any trust established thereunder that is subject to Section 302 of ERISA and Section 412 of the Code has incurred any “accumulated funding deficiency” (as defined in Section 302 of ERISA and Section 412 of the Code), whether or not waived, as of the last day of the most recent fiscal year of each EHC Plan ended prior to the Closing Date. To the Best Knowledge of EHC, all contributions required to be made with respect thereto (whether pursuant to the terms of any EHC Plan or otherwise) on or prior to the Closing Date have been timely made or will be timely made prior to the Closing Date.

 

(f) Neither EHC, nor, to the Best Knowledge of EHC, any ERISA Affiliate, has engaged in a transaction in connection with which EHC or the ERISA Affiliate could be subject to penalties under the excise tax or joint and several liability provisions of the Code relating to employee benefit plans that would, individually or taken together with any amounts arising as a result of noncompliance with any of the other paragraphs of this Section 2.19, have or be reasonably likely to result in an EHC Material Adverse Effect.

 

(g) To the Best Knowledge of EHC, each EHC Plan has been operated and administered in all material respects in accordance with its terms and Applicable Law, including ERISA and the Code, except where such noncompliance, individually, or taken together with any amounts arising as a result of noncompliance with any of the other paragraphs of this Section 2.19, would not have or be reasonably likely to result in an EHC Material Adverse Effect.

 

(h) Except as set forth in Section 2.19(h) of the EHC Disclosure Schedule, the consummation of the transactions contemplated by this Agreement will not (x) entitle any current or former employee, director or officer of EHC or any of the EHC Subsidiaries to severance pay, unemployment compensation or any other payment, except as expressly provided in this Agreement, or (y) accelerate the time of payment or vesting, or increase the amount of compensation due any such employee, director or officer.

 

(i) There are no pending or, to the Best Knowledge of EHC, threatened or anticipated actions, suits or claims by or on behalf of any EHC Plan, by any employee or beneficiary covered under any EHC Plan, or otherwise involving any such EHC Plan (other than routine claims for benefits) that would, individually, or taken together with any amounts arising as a result of noncompliance with any of the other paragraphs of this Section 2.19 have or be reasonably likely to result in an EHC Material Adverse Effect.

 

(j) Except for retiree medical benefits (which program has been disclosed to EML), no EHC Plan provides benefits, including death or medical benefits (whether or not insured), with

 

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respect to current or former employees after retirement or other termination of service other than (i) coverage mandated by Applicable Law, (ii) death benefits or retirement benefits under any “employee pension plan,” as that term is defined in Section 3(2) of ERISA, (iii) deferred compensation benefits accrued as liabilities on the books of EHC, or (iv) benefits, the full cost of which is borne by the current or former employee (or his or her beneficiary).

 

Section 2.20 Labor Relations; Employees . None of the employees of EHC or any of the EHC Subsidiaries are represented by any labor organization and, to the Best Knowledge of EHC, no union claims to represent these employees have been made. To the Best Knowledge of EHC, there have been no union organizing activities with respect to employees of EHC or any of the EHC Subsidiaries within the past five years. To the Best Knowledge of EHC, neither EHC nor any of the EHC Subsidiaries is or has been engaged in any unfair labor practices as defined in the National Labor Relations Act or similar Applicable Law, ordinance or regulation, nor is there pending any unfair labor practice charge.

 

Section 2.21 Intellectual Property Rights .

 

(a) EHC and the EHC Subsidiaries own, free of Encumbrances other than EHC Permitted Encumbrances, or has a valid and binding license to use, all Intellectual Property material to the conduct of the business of EHC or such EHC Subsidiary taken as a whole.

 

(b) Except for defaults and infringements which would not, individually or in the aggregate, have or be reasonably likely to result in an EHC Material Adverse Effect, (i) neither EHC nor any of the EHC Subsidiaries is in default (or with the giving of notice or lapse of time or both, would be in default) under any license to use such Intellectual Property, and (ii) to the Best Knowledge of EHC, (A) all Intellectual Property material to the conduct of the businesses of EHC or any of the EHC Subsidiaries taken as a whole and owned by EHC or such EHC Subsidiary is not being infringed by any third party, and (B) neither EHC nor any of the EHC Subsidiaries is infringing any Intellectual Property of any third party.

 

(c) There is no pending or, to the Best Knowledge of EHC, threatened significant claim or dispute regarding the ownership of, or use by, EHC or any EHC Subsidiary of any Intellectual Property, and to the Best Knowledge of EHC, consummation of the transactions contemplated hereby will not result in the loss of use of any Intellectual Property material to the business of EHC or any of the EHC Subsidiaries.

 

(d) For purposes of this Agreement, “ Intellectual Property ” means patents and patent rights, trademarks and trademark rights, trade names and trade name rights, service marks and service mark rights, service names and service name rights, copyrights and copyright rights and other proprietary intellectual property rights and all pending applications for and registrations of any of the foregoing, and computer and network software programs and trade secrets and trade secret rights.

 

Section 2.22 Contracts .

 

(a) Section 2.22 of the EHC Disclosure Schedule sets forth a list of each contract (collectively, the “ EHC Contracts ”) to which EHC or any of the EHC Subsidiaries is a party or by which it is bound which:

 

(i) contains obligations in excess of $25,000 or is otherwise material to the current business of EHC taken as a whole;

 

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(ii) is a reinsurance or retrocession contract which requires the payment of premiums by EHC of amounts in excess of $25,000 per year;

 

(iii) contains covenants limiting the freedom of EHC or any of the EHC Subsidiaries to engage in any line of business in any geographic area or to compete with any person or entity or restricting the ability of EHC or any of the EHC Subsidiaries to acquire equity securities of any person or entity; or

 

(iv) is an employment or severance contract applicable to any employee of EHC or any of the EHC Subsidiaries, including contracts to employ executive officers and other contracts with officers or directors of EHC or any of the EHC Subsidiaries, other than agent contracts with insurance agents and any such contract which by its terms is terminable by EHC on not more than 60 days’ notice without material liability.

 

(b) With respect to each of the EHC Contracts:

 

(i) such contract is (assuming due power and authority of, and due execution and delivery by, the other party or parties thereto) valid and binding upon EHC and, to the Best Knowledge of EHC, each other party thereto and is in full force and effect;

 

(ii) there is no material default or claim of material default thereunder by EHC, or the Best Knowledge of EHC, by any other party thereto, and no event has occurred which, with the passage of time or the giving of notice (or both), would constitute a material default thereunder by EHC, or to the Best Knowledge of EHC, by any other party thereto, or would permit material modification, acceleration or termination thereof; and

 

(iii) the consummation of the transactions contemplated by this Agreement will not give rise to a right of the other party or parties thereto to terminate such contract or impose liability under the terms thereof on EHC or any of the EHC Subsidiaries.

 

Section 2.23 Environmental Laws and Regulations .

 

(a) EHC and the EHC Subsidiaries and their respective properties and operations are in compliance with all Applicable Laws relating to pollution or protection of human health or the environment (including, without limitation, ambient air, surface water, ground water, land surface or subsurface strata) (collectively, “ Environmental Laws ”), which compliance includes, but is not limited to, the possession by EHC and the EHC Subsidiaries of all permits and other authorizations of Governmental Entities required under applicable Environmental Laws, and compliance with the terms and conditions thereof, except for non-compliance which, individually or in the aggregate, has not had, and is not reasonably likely to result in, an EHC Material Adverse Effect.

 

(b) EHC has not received written notice of, or is the subject of, any actions, causes of action, claims, investigations, demands or notices by any Person asserting personal injury,

 

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property damages or the obligation of EHC or any of the EHC Subsidiaries to conduct investigations or clean-up activities under any Environmental Laws or alleging liability under or non-compliance with any Environmental Laws (collectively, “ Environmental Claims ”) which, individually or in the aggregate, has had, or is reasonably likely to result in, an EHC Material Adverse Effect.

 

(c) To the Best Knowledge of EHC, there are no facts, circumstances or conditions in connection with the operation of its business or any currently or formerly owned properties or any investment properties or any other properties that have led to or are reasonably likely to lead to any Environmental Claims or impositions of any institutional or engineering contr