THIS STOCK
PURCHASE AGREEMENT (together with the Exhibit and the Schedules
attached hereto and incorporated herein by reference, being
hereinafter referred to as this “Agreement”) is made
and entered into as of the 22 nd day of March, 2004, by and between OneBeacon
Insurance Company, a stock insurance company duly organized and
existing under the laws of the Commonwealth of Pennsylvania
(hereinafter referred to as the “Seller” unless
otherwise stated expressly) and Specialty Underwriters’
Alliance, Inc., a Delaware corporation (the
“Purchaser”).
WHEREAS,
the Seller owns of record and beneficially 300,000 shares of the
voting common stock, $14.00 par value per share, of Potomac
Insurance Company of Illinois, a stock insurance company duly
organized and existing under the laws of the State of Illinois (the
“Company”), representing 100% of the issued and
outstanding capital stock of the Company (such shares being
hereinafter referred to as the “Shares”);
WHEREAS,
the Company was and is engaged in the business of insurance and
variants thereof and in other activities customarily engaged in by
insurance companies, including but not limited to the conduct of
investment and administrative activities; and
WHEREAS,
the Seller desires to sell to the Purchaser, and the Purchaser
desires to purchase from the Seller, all of the Shares, all on the
terms and conditions hereinafter set forth;
NOW
THEREFORE, in consideration of the premises set forth above,
and subject to the terms and conditions stated herein, the parties
hereto agree as follows:
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The Purchase and Sale
Transaction
Section 1.1. Purchase and Sale of the Shares. Subject
to the fulfillment of the terms and conditions of this Agreement,
the Purchaser agrees to purchase from the Seller, and the Seller
agrees to sell, assign, transfer and deliver to the Purchaser, on
the Closing Date (as defined in Section 1.4), the Shares for
the consideration specified in Section 1.2.
Section 1.2. Purchase Price.
(a) the
Purchaser agrees to pay to the Seller, and the Seller agrees to
accept from the Purchaser, as consideration for the Shares an
amount (the “Purchase Price”), payable in immediately
available funds at the Closing (as defined in Section 1.4),
determined as follows:
(i) the amount of
the Company’s capital and surplus as of the close of the
business day prior to the Closing Date determined upon a Statutory
Accounting Basis (as defined below); plus
(ii) the amount of
ten million five hundred thousand dollars ($10,500,000);
minus
(iii) the amount
of two hundred and fifty thousand dollars ($250,000) for each
License (as defined in Section 2.3) which shall have been
suspended or revoked and which suspension or revocation shall not
have been lifted or reversed on or before the Closing Date (any
such License, a “Pre-Closing Impaired License”); plus
(or minus)
(iv) the amount by
which the Fair Market Value (as defined below) of the securities
listed on Schedule 1.2(a) hereto and incorporated by reference
herein (and
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which shall be
updated at the Closing as of the business day prior to the Closing
Date) held by the Company as of the business day prior to the
Closing Date exceeds (or is less than) the book value of such
securities as of such date, determined upon a Statutory Accounting
Basis.
(b) The term
“Fair Market Value” shall mean, in the case of
securities listed on a national securities exchange, the closing
price on such exchange, and in the case of other securities, the
average of the bid and asked prices, for such securities, in each
case on the last business day preceding the Closing Date on which
such securities were traded. The term “Fair Market
Value” shall also include interest accrued on such securities
through the business day next preceding the Closing
Date.
(c) The term
“Statutory Accounting Basis” shall mean the accounting
treatment prescribed or permitted by the Illinois Department of
Insurance (the “Illinois Department”) and employed by
the Company.
(d) The
Purchase Price, less an advance payment in the amount of two
hundred and fifty thousand dollars ($250,000) to be paid by the
Purchaser to the Seller upon the execution of this Agreement (and
any advance payment made pursuant to Section 10.4(c)), shall
be paid by direct wire transfer payable on the Closing Date in
immediately available funds to:
ONEBEACON INSURANCE COMPANY
STATE STREET BANK
BOSTON, MASSACHUSETTS
ACCOUNT # 14579981
ABA # 011-000-028
The
parties agree that the full amount of the advance payment
referenced
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above shall be
fully-earned and non-refundable at the time the Purchaser pays such
advance payment to the Seller, regardless of whether the Closing
shall fail to occur for any reason whatsoever other than a
termination of this Agreement by the Purchaser pursuant to
Section 10.4(a) (but not for any actual or alleged failure of
the Seller to perform its obligations pursuant to Section
4.5(b)).
Section 1.3. Post-Closing Adjustments to Purchase
Price.
(a) The
parties agree that with respect to any adjustment to the Purchase
Price pursuant to Section 1.2(a)(iii), the Seller and the
Purchaser shall, for a period of one hundred and eighty
(180) days after the Closing Date (the “License Cure
Period”), work together and use their commercially reasonable
best efforts to have any suspension lifted from or any revocation
reversed with respect to any Pre-Closing Impaired License;
provided, that all such efforts shall be at the sole cost and
expense of the Seller. The parties further agree that the Purchaser
shall pay to the Seller (by wire transfer of immediately available
funds to an account designated in writing by the Seller to the
Purchaser) two hundred and fifty thousand dollars ($250,000) for
each Pre-Closing Impaired License which shall have any suspension
lifted therefrom or revocation reversed thereon within the License
Cure Period, which payment shall be made within five
(5) business days following the Purchaser’s receipt of
evidence reasonably satisfactory to it of the lifting of the
relevant suspension or reversal of the relevant revocation
regarding any such Pre-Closing Impaired License.
(b) In the
event that the adjustment to the Purchase Price provided for in
Section 1.2(a)(iv) is not available at the Closing, the
Purchase Price shall be adjusted not later
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than fifteen
(15) days after the Closing. The adjustment shall be paid by
the party from whom the adjustment is due (by wire transfer of
immediately available funds to an account designated in writing by
the party to whom such payment is due) within five
(5) business days following the date the Purchaser and the
Seller shall have agreed to the amount of any such
adjustment.
Section 1.4. Closing. The Closing of the purchase and
sale of the Shares (the “Closing”) shall take place at
the offices of Stroock & Stroock & Lavan LLP
(“Purchaser’s Counsel”), 180 Maiden Lane, New
York, NY, at 10:00 a.m., New York time, on the fifth business
day after the Seller and the Purchaser receive the last of the
approvals referred to in Sections 6.6 and 7.5 (the
“Closing Date”), subject to satisfaction or waiver of
the terms and conditions provided for herein. The Closing Date and
location may be changed by mutual agreement between the Purchaser
and the Seller. Neither party shall have the obligation to
consummate the Closing unless all regulatory approvals required by
the Illinois Department and the California Department of Insurance
(the “California Department”) shall have been obtained
by August 15, 2004.
At the Closing,
subject to the Purchaser’s payment of the Purchase Price to
the Seller, the Seller shall deliver to the Purchaser all of the
Shares duly assigned to the Purchaser duly endorsed in blank or
accompanied by stock powers duly executed. The obligations of the
parties to make such transfers are conditioned upon the
satisfaction, as of the Closing Date, of all of the terms and
conditions set forth in this Agreement.
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Warranties and Representations by
the Seller
To induce the
Purchaser to enter into this Agreement and (i) to proceed as
required herein in anticipation of the Closing on the Closing Date
and (ii) to cause the transactions provided for in this
Agreement to be consummated on the Closing Date, the Seller
represents and warrants to the Purchaser as follows:
Section 2.1. Organization and Qualification of the
Seller. The Seller is a corporation, duly organized, validly
existing and in good standing under the laws of the state of its
incorporation. The Seller is duly licensed as a domestic property
and casualty insurance company in the Commonwealth of Pennsylvania
and is duly licensed as a foreign property and casualty insurance
company in the State of Illinois.
Section 2.2. Authority Relating to this Agreement. The
Seller has full corporate power and authority to execute and
deliver this Agreement and to take the actions and carry out the
transactions contemplated by this Agreement. The execution,
delivery and performance by the Seller of this Agreement, and the
consummation of the transactions contemplated hereby, have been
duly authorized and approved by all required corporate action. The
execution and delivery of this Agreement by the Seller does not,
and the consummation of the transactions contemplated herein will
not, result in a breach of any term, condition or provision of, or
constitute a default under (i) its charter documents or by-laws;
(ii) any other material agreement or other instrument to which
it or the Company is a party; or (iii) any law, rule,
regulation, or judicial, administration or arbitration order,
award, judgment, writ, injunction
6
or decree
applicable to it.
Section 2.3. Organization and Qualification of the
Company. The Company is a stock insurer, duly organized,
validly existing and in good standing under the laws of the State
of Illinois. Except as set forth in Schedule 2.3(a), the
Company (i) is duly licensed as a domestic property and
casualty insurance company in the State of Illinois; (ii) is
duly licensed as a foreign property and casualty insurance company
in each jurisdiction listed on Schedule 2.3 attached hereto,
which are the only jurisdictions in which the conduct of its
business has required that it be so licensed (individually a
“License” and collectively the “Licenses”)
and (iii) has the required minimum capital, the required
minimum surplus and any Securities on Deposit (as defined in
Section 2.16(d)) required in each such jurisdiction. The
Company is in good standing in each such jurisdiction with no
restrictions on such Licenses unless otherwise noted on
Schedule 2.3 and is qualified to write those lines of business
in each such state as are indicated on the relevant License. The
Company is not required to be qualified to do business as a foreign
corporation in any other jurisdiction as a result of its ownership
or leasing of assets or the conduct of any business. The Seller has
previously provided or will make available to the Purchaser true
and complete copies of each of the Licenses, reflecting all
amendments thereto, in each of the jurisdictions listed in
Schedule 2.3 where the Company is licensed and authorized to
conduct business. Except as set forth in Schedule 2.3(b), there are
no proceedings pending, or to the best of the Seller’s
knowledge threatened, in any jurisdiction to suspend and/or revoke
any License or any basis for any such suspension or revocation or
other penalties. No such proceedings have been pending nor to the
best of the Seller’s knowledge threatened at any
time
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during the past
three (3) years. The Company has not been found in any
administrative hearing to have violated any License and has
conducted its business so as to comply in all material respects
with each License and all applicable Federal, state, local and
foreign statutes and regulations.
Section 2.4. Authority Relating to the Reinsurance
Agreement.
As of the date of
execution and delivery of the Instrument of Transfer and Assumption
between the Seller and the Company attached hereto as
Exhibit A (the “Reinsurance Agreement”), each of
the Seller and the Company had full corporate power and authority
to execute and deliver the Reinsurance Agreement and to take the
actions required to be taken by the Seller or the Company, as the
case may be, pursuant to the Reinsurance Agreement and the
transactions provided for therein. The execution, delivery and
performance of the Reinsurance Agreement by each of the Seller and
the Company, and the consummation of the transactions contemplated
therein, have been duly authorized and approved by all required
corporate action on the part of the Seller and the Company,
respectively, including the approval of the Boards of Directors of
the Seller and the Company, and such corporate actions have not
been rescinded and remain in full force and effect. Upon approval
of the Reinsurance Agreement by the Illinois Department and the
California Department, the Reinsurance Agreement will constitute a
legal and valid agreement of both the Seller and the Company,
enforceable in accordance with its terms.
Section 2.5. No Subsidiaries of the Company. The
Company does not own, either directly or indirectly, any voting
securities or other equity of any corporation, partnership or other
business entity and is not a participant in any joint venture with
any other person.
8
Section 2.6. Capitalization of the Company. The Company
has only one (1) class of authorized capital stock, consisting
of 800,000 shares of common stock, $14.00 par value per share.
There are 300,000 shares of such common stock issued and
outstanding, which constitute the Shares. All of the Shares have
been and are now duly authorized, validly issued and outstanding,
fully paid and nonassessable. The Shares constitute all of the
issued and outstanding capital stock of the Company. The Seller is
the lawful record and beneficial owner of the Shares, free and
clear of all security interests, liens, charges, encumbrances,
claims and equities of every kind. Except as disclosed in
Schedule 2.6 hereto, there are no outstanding options,
warrants, preemptive or similar rights or, except for this
Agreement, other agreements or rights to purchase or otherwise
acquire, or securities convertible into, any of the Shares or any
other shares of common stock or other equity of the Company.
Neither the Seller nor the Company has made any commitment to issue
or to sell any of the Shares or any other shares of common stock or
other equity of the Company, or any options, warrants, rights or
convertible securities or evidences of indebtedness of the Company.
Upon the transfer of the Shares to the Purchaser in accordance with
this Agreement, good and marketable title in and to the Shares will
have been transferred to the Purchaser, free and clear of all
liens, claims, charges, pledges, security interests, equities,
encumbrances and assessments whatsoever (other than any
restrictions applicable under the Securities Act of 1933, the
Insurance Holding Company Systems Act of the State of Illinois, 215
ILCS 5/131.1, et seq., and any liens, charges, claims, encumbrances
and restrictions created by or under agreements to which the
Purchaser is a party or by which its property is bound).
9
Section 2.7. Articles of Incorporation and By-laws. The
Seller has delivered or will make available to the Purchaser a
true, correct and complete copy of the Articles of Incorporation
and the By-laws of the Company, reflecting all amendments thereto.
Such Articles of Incorporation and By-laws shall not be amended
prior to the Closing, and the Board of Directors and the
shareholder of the Company will not take any action for the purpose
of effecting any amendment or modification of such Articles of
Incorporation or By-laws.
(a) This
Agreement constitutes the legal, valid and binding obligation of
the Seller, enforceable against the Seller, in accordance with its
terms, except only as limited by applicable bankruptcy,
reorganization, insolvency, moratorium and other similar laws
presently or hereafter in force affecting the enforcement of
creditors’ rights generally and subject to general equitable
principles limiting the right to obtain specific performance or
other equitable relief.
(b) The
Reinsurance Agreement will, at Closing, constitute a legal, valid
and binding obligation of each of the Seller and the Company,
enforceable against each of the Seller and the Company,
respectively in accordance with its terms.
Section 2.9. Governmental Approvals. Except for
(x) the approval of the Illinois Director of Insurance
pursuant to the Illinois Insurance Laws and the regulations
thereunder (as interpreted and applied by the Illinois Director of
Insurance) with respect to this Agreement and the Reinsurance
Agreement and (y) the approval of the California Insurance
Commissioner pursuant to the California Insurance Laws and the
regulations thereunder (as
10
interpreted and
applied by the California Insurance Commissioner) with respect to
the Reinsurance Agreement, no authorization, consent or approval or
other order of a governmental or regulatory body or authority is
required for (i) the execution and delivery of this Agreement
by the Seller, (ii) the consummation by the Seller of the
transactions provided for herein, and (iii) the transfer by
the Seller of the Shares to the Purchaser on the Closing
Date.
Section 2.10. Financial Statements.
(a) The
statutory financial statement of the Company for the fiscal year
ended December 31, 2003 (the “2003 Annual
Statement”), as filed by the Company with the Illinois
Department and delivered to the Purchaser prior to the execution
and delivery of this Agreement, has been prepared in accordance
with accounting practices prescribed or permitted by the Illinois
Department, applied on a consistent basis. The 2003 Annual
Statement fairly presents the financial condition, the results of
operations, surplus as regards policyholders and changes in
financial position of the Company as of and for the respective
dates and periods indicated therein, in accordance with accounting
practices prescribed or permitted by the Illinois Department
applied on a consistent basis.
(b) The
financial statements of the Company for the year ended
December 31, 2003, accompanied by the balance sheet,
statements of operations, shareholder’s equity and changes in
financial position and footnotes thereto, and the unaudited results
of operations and shareholders’ equity of the Company for the
fiscal quarters ended June 30, 2003 and September 30,
2003, have been prepared in accordance with statutory accounting
principles applied on a
11
consistent
basis and a copy of all such financial statements and information
have been delivered or made available to the Purchaser prior to the
execution and delivery of this Agreement.
(c) All books
of account of the Company fully and fairly disclose all of the
transactions, properties, assets, liabilities and obligations of
the Company and all of such books of account are in the possession
of the Company and are true, correct and complete in all
respects.
(d) The
investments of the Company held on December 31, 2003 are
reflected in the 2003 Annual Statement and those investments, as
well as all other investments acquired by the Company since
December 31, 2003, comply with the requirements of the
Illinois Insurance Code as well as that of any other applicable
jurisdiction.
(e) Marketable
securities and short term investments reflected in the 2003 Annual
Statement are valued at cost, amortized cost or market value, as
required by applicable law.
Section 2.11. No Adverse Change . Except for the
Reinsurance Agreement, the Company has not engaged in any activity
or entered into or carried out any transaction, or experienced any
occurrence or circumstance since September 30, 2003, which has
had or might reasonably be expected to have a materially adverse
effect on its financial condition, properties or assets.
Section 2.12. Tax Representations and Warranties
.
(a) The
Company timely and properly prepared and filed, or was included in
timely and properly prepared and filed, returns for all Taxes (as
defined in Section 9.1(i)), for all
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periods that
are now due; if any tax returns are now not due, such tax returns
will be properly prepared and timely filed by the Company or the
Seller.
(b) All
Taxes, in respect of periods beginning before the date hereof, have
been paid, or an adequate reserve has been established therefor on
the books and records of the Company and/or Fund American
Enterprises Holdings, Inc., the common parent of the consolidated
tax group which includes the Company. All Taxes, in respect of
periods ending on the Closing Date, will have been paid, or an
adequate reserve will have been established on the Closing Balance
Sheet, and the Company does not and will not have on the Closing
Date any liability for Taxes in excess of the amounts so paid or
reserves so established.
(c) There are
no liens for Taxes (other than for current Taxes not yet due and
payable) on the assets of the Company.
(d) The
tax-sharing agreements or similar arrangements to which the Company
is a party have been approved by the Illinois Department. The
Company shall terminate its participation in all tax-sharing
agreements or similar arrangements to which the Company is a party
on or prior to the Closing Date.
(e) No new
elections with respect to Taxes, or any changes in current
elections with respect to Taxes, affecting the Company shall be
made after the date of this Agreement without the prior written
consent of the Purchaser, with the exception of the Code (as
defined in Section 9.1 (e)) §338(h)(10) election
referenced in Section 9.6 (“Code §338(h)(10)
Election”).
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Section 2.13. Litigation. Except as disclosed on
Schedule 2.13, there are no actions, suits, proceedings,
claims or investigations or legal, administrative or arbitration
proceedings pending or, to the knowledge of the Seller, threatened
in any court or before or by any governmental body against or
affecting the Company. Except as disclosed on Schedule 2.13,
there are no outstanding orders, writs, injunctions or decrees of
any court, governmental agency or arbitration tribunal, against or
affecting the Company or which would restrain, enjoin, prohibit or
in any way impair any of the transactions contemplated by this
Agreement or which have a material adverse effect on the financial
condition of the Company or the conduct of its business or the
status of the Licenses. No circumstance, occurrence or event or
series of events has occurred, to the knowledge of the Seller,
which will or might give rise to the assertion of any suit,
proceeding or other of the foregoing types of procedures against
the Company.
Section 2.14. Collective Bargaining Agreements;
Employees.
(a) The
Company does not have any employees or independent contractors and
has not had any employees or independent contractors for more than
the last five (5) years and has no obligation to pay any
compensation or benefits to, and has no other existing or
contingent liability to, any of its former officers, directors,
employees or independent contractors or to others for the use of
their officers, directors or employees, including, without
limitation, for any leased or temporary employees.
(b) As of the
Effective Date (as such term is defined in the Reinsurance
Agreement) there will be no written or oral employment or
consulting agreements, severance pay
14
plans, pension,
retirement, profit sharing, employee relations policies, practices
and arrangements, agreements with respect to leased or temporary
employees, executive compensation plans, incentive compensation
plans or arrangements, vacation pay plans or arrangements, sick pay
plans, deferred compensation and bonus plans, incentive stock
option, stock ownership and stock purchase plans, or any other
employee benefit programs, arrangements, agreements or
understandings, including medical, vision, dental or other health
plans, insurance and disability plans, including, without
limitation, “any employee benefit plan” as defined in
Section 3(3) of the Employee Retirement Income Security Act of
1974, as amended (“ERISA”), to which the Company
contributes or is a party or is bound or under which it may have
liability and under which former employees of the Company (or their
dependents or beneficiaries) are eligible to participate or derive
a benefit (the “Employee Benefit Plans”) which are not
fully assumed by the Seller pursuant to the Reinsurance Agreement.
Also, as of the Effective Date (as such term is defined in the
Reinsurance Agreement) the Company will have no obligation of any
nature whatsoever to any leased or temporary employees.
(c) With
respect to each Employee Benefit Plan (or similar plan of the
Seller, if applicable) in which former employees of the Company
participated or to which contributions were made by such former
employees or by the Company on their behalf, (i) each Employee
Benefit Plan is in compliance and has been administered in
accordance with the requirements prescribed by statutes, orders and
governmental rules or regulations applicable to such Employee
Benefit Plans, including, but not limited to, ERISA and the Code,
in all material respects, (ii) no “employee pension
benefit plan” (as defined in Section 3(2) of ERISA) of
the Company or any
15
affiliate which
is subject to Section 412 of the Code has incurred any
“accumulated funding deficiency” (as defined in
Section 412 of the Code), whether or not waived,
(iii) there has been no “reportable event” within
the meaning of Section 403(b) of ERISA and (iv) none of the
Seller, the Company or any affiliate thereof has any unpaid
liability to the Pension Benefit Guarantee Corporation or to any
other person under Title IV of ERISA.
(d) None of
the former employees of the Company has been covered by a
“multi-employer plan”, subject to ERISA within the
meaning of Section 3(37) of ERISA to which the Seller, the
Company or any affiliate thereof has been a party.
(e) The
Company is not a party to or bound by any collective bargaining
agreement or other labor agreement with any bargaining agent
(exclusive or otherwise) or any of its employees.
Section 2.15. Powers of Attorney and Agents. No person
holds a power of attorney from the Company except in the ordinary
course of business as a statutory agent for service of process
(such persons, “Statutory Agents”). The Company does
not have any agents with binding authority. Any agents or persons
with powers of attorney may be terminated at will without
compensation or cost to the Company.
Section 2.16. Assets and Property; No
Liabilities.
(a) The
Company has good and marketable title to all of its assets and
properties, free of any lien, encumbrance, restriction, claim,
charge or defect of title, except for statutory deposits made in
the ordinary course of business. As of the Closing Date, the
Company will have no assets, except (i) the reinsurance
referred to in the Reinsurance Agreement, (ii) its
16
corporate
Charter, books and records (including those referred to in
Section 2.17) and the Licenses referred to in
Section 2.3, (iii) Securities on Deposit, (iv) cash
or cash equivalents, as specified below, and (v) its other
assets constituting its capital and surplus. Such assets shall be
the minimum necessary to meet the requirements of the Illinois
Department to maintain the Company’s Charter in Illinois and
its Licenses in all of the states referenced in Schedule 2.3,
and except for Securities on Deposit shall consist only of cash or
investments in debt obligations of the United States government or
any agency or instrumentality thereof that have maturities of six
(6) months or less.
(b) All
liabilities of the Company that have arisen or could arise under
any insurance contract or any reinsurance treaty have been, or
prior to the Closing Date will have been, assumed by the Seller
pursuant to the Reinsurance Agreement. Except as provided in the
Reinsurance Agreement, the Company will, at Closing, have no
liabilities of any nature whatsoever, whether absolute, accrued,
contingent or otherwise or whether due or to become due or whether
or not under any insurance or reinsurance policy, which have not
been fully and completely assumed by the Seller under this
Agreement or under the Reinsurance Agreement.
(c) Schedule 2.16(c)
contains a list of all deposits which have been made with the
Insurance Departments of jurisdictions where the Company currently
holds Licenses and the location of such deposits (“Securities
on Deposit”). The Securities on Deposit are the only deposits
which are required by any insurance regulatory authorities having
jurisdiction over the Company.
(d) Schedule 2.16(d)
contains a complete and correct listing of each bank
account
17
or safe deposit
box maintained by the Company. Schedule 2.16(d) also sets
forth a complete and correct list of all credit cards issued or
caused to be issued by the Company to any person or under which the
Company may be liable for charges or payments, all of which shall
be cancelled prior to the Closing Date.
Section 2.17. Corporate Records.
(a) The
Seller has made or will make available to the Purchaser originals
or copies of the stock record books of the Company, which are
current and true, correct and complete in all material respects and
contain all original issuances, subsequent transfers and any
repurchases of the Company’s capital stock through the date
hereof.
(b) The
Seller has made or will make available to the Purchaser originals
or copies of the corporate minute books of the Company. Such minute
books contain a true, complete and correct record of all
proceedings and actions taken at all meetings of, and all actions
taken by written consent of, the holders of its capital stock and
its board of directors and all committees thereof.
Section 2.18. Business of the Company. The Seller has
delivered or will deliver to the Purchaser following the execution
and delivery of this Agreement complete, correct and legible copies
of the Annual Statement of the Company for each of the years ended
December 31, 2001 through 2003.
The Company will
not on or after the Effective Date (as such term is defined in the
Reinsurance Agreement), issue or renew any policies of insurance or
reinsurance or otherwise engage in the insurance or reinsurance
business, other than as provided in the Reinsurance
Agreement.
18
Section 2.19. Compliance. The Company is not, to the
best of the Seller’s knowledge, in violation of any
applicable law, rule, regulation, ordinance, order, judgment,
injunction or decree, or any other requirement of any court or
Federal, state, municipal or other governmental department,
commission, board or instrumentality material to its property or
the Company’s business. The Company is not a party to or
subject to any agreement, judgment, order, writ, injunction or
decree of any court or governmental body that could reasonably be
expected to prevent in any material manner the rendering of, or the
right to render, the services of the Company as a property and
casualty insurance company after the Closing or the Company’s
full use of the Licenses to conduct the business permitted under
such Licenses as listed on Schedule 2.3 hereof. During the
past five (5) fiscal years the Company has not been the
subject of any governmental proceedings or investigations,
including without limitation any Insurance Department proceedings
or investigations, which were adversely determined, and resulted in
the Company being bound or held to be in violation or contravention
of any material law relating to its business, business practices or
employment practices.
Section 2.20. Brokers or Finders. (i) No broker,
advisor or finder has acted directly or indirectly for the Seller
or the Company in connection with this Agreement, or the
transactions contemplated hereby; (ii) no person is entitled
to any brokerage, advisory or finder’s fee or other
commission based in any way on agreements, arrangements or
understandings with the Seller or the Company relating to the sale
of the Company to the Purchaser (“Seller Fees”);
(iii) if any Seller Fees are due, they will be the sole
obligation of the Seller and neither the
19
Company nor the
Purchaser shall have any liability therefor; and (iv) the
Seller will hold the Purchaser and the Company harmless from and
against any claim or demand for any Seller Fees.
Section 2.21. Contracts . Except as set forth in
Schedule 2.21 and except as will be fully assumed by the
Seller pursuant to the Reinsurance Agreement, the Company is not a
party to any contract, mortgage, indenture, note guaranty, lease or
agreement of any kind.
Section 2.22. Absence of Certain Changes or Events.
Since September 30, 2003 there has not been:
(a) any
material adverse change in the condition (financial or otherwise)
of the Company;
(b) any
redemption, purchase or other acquisition of any of its capital
stock or other securities by the Company;
(c) any
granting of any option to purchase or other right to acquire any of
the Shares or any capital stock of the Company, any granting of any
stock appreciation rights, or any issuance of shares of capital
stock (whether treasury shares or otherwise) by the
Company;
(d) any
indebtedness incurred for borrowed money or commitment to borrow
money by the Company; or
(e) any
amount due and payable, now or in the future, by the Company in
respect of any guaranties or similar instruments, issued by the
Company guaranteeing loans advanced to its agents by any financial
institution under any agent loan program or similar type
program.
Section 2.23. Status as of the Closing Date. All of the
warranties and representations made by the Seller in this Agreement
will be true and correct on the Closing
20
Date, with the
same force and effect, as if made on and as of the Closing
Date.
Warranties and Representations by
the Purchaser
To induce the
Seller to enter into this Agreement and (i) to proceed as
required herein in anticipation of the Closing on the Closing Date
and (ii) to cause the transactions provided for in this
Agreement to be consummated on the Closing Date, the Purchaser
warrants and represents to the Seller as follows:
Section 3.1. Corporate Existence, Power and Authority.
The Purchaser is a company duly organized, validly existing and in
good standing under the laws of its jurisdiction of incorporation
or formation.
Section 3.2. Authority Relating to this Agreement. The
Purchaser has full corporate power and authority to execute and
deliver this Agreement and to take the actions and carry out the
transactions contemplated by this Agreement. The execution,
delivery and performance by the Purchaser of this Agreement, and
the consummation of the transactions contemplated hereby, have been
duly authorized and approved by all required corporate action. The
execution and delivery of this Agreement by the Purchaser does not,
and the consummation of the transactions contemplated herein will
not, result in a breach of any term, condition or provision of, or
constitute a default under (i) its charter documents or
by-laws; (ii) any other material agreement or other instrument
to which it is a party; or (iii) any law, rule, regulation, or
judicial, administration or arbitration order, award, judgment,
writ, injunction or decree applicable to it.
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Section 3.3. Validity. This Agreement when executed and
delivered by the Purchaser as provided for herein will constitute
the valid and binding obligation of the Purchaser enforceable in
accordance with its terms, except as may be limited by applicable
bankruptcy, reorganization, insolvency, moratorium and other
similar laws now or hereafter in force affecting the enforcement of
creditors’ rights generally and subject to general equitable
principles limiting the right to obtain specific performance or
other equitable relief.
Section 3.4. Brokers or Finders. (i) Except for
John Durkin (the “Purchaser Broker”), no broker,
advisor or finder has acted directly or indirectly for the
Purchaser in connection with this Agreement, or the transactions
contemplated hereby; (ii) except for the Purchaser Broker, no
person is entitled to any brokerage, advisory or finder’s fee
or other commission based in any way on agreements, arrangements or
understandings with the Purchaser relating to the sale of the
Company to the Purchaser (“Purchaser Fees”);
(iii) if any Purchaser Fees are due, they will be the sole
obligations of the Purchaser and neither the Company nor the Seller
shall have any liability therefor; and (iv) the Purchaser will
hold the Seller and the Company harmless from and against any claim
or demand by the Purchaser Broker for any fees, commissions,
expenses or other remuneration claimed to be due in connection with
this Agreement or for any Purchaser Fees claimed to be due in
connection with this Agreement.
Section 3.5. Governmental Approvals. Except for
(x) the approval of the Illinois Director of Insurance
pursuant to the Illinois Insurance Laws and the
regulations
22
thereunder (as
interpreted and applied by the Illinois Director of Insurance) with
respect to the Purchaser’s acquisition of the Shares and of
the Reinsurance Agreement and (y) the approval of the
California Insurance Commissioner pursuant to the California
Insurance Laws and the regulations thereunder (as interpreted and
applied by the California Insurance Commissioner) with respect to
the Reinsurance Agreement, no authorization, consent or approval or
other order or action of or filing with any court, administrative
agency or other governmental or regulatory body or authority is
required for the execution and delivery by the Purchaser of this
Agreement or the Purchaser’s consummation of the transactions
contemplated herein.
Section 3.6. Litigation. There is no action, suit,
proceeding or investigation of the Purchaser which is pending, or,
to the knowledge of the Purchaser, threatened, which questions the
validity or propriety of this Agreement or any action taken by the
Purchaser in connection herewith.
Section 3.7. Name. Within thirty (30) days after
the Closing Date, the Purchaser will take all corporate action
necessary to cause the Company’s Articles of Incorporation to
be amended so as to change the Company’s name to a name which
does not include any reference to “Potomac Insurance Company
of Illinois”, “Potomac” or any similar reference
(each a “Retained Name” and collectively, the
“Retained Names”) and will file all required
documentation with the Illinois Director of Insurance and other
regulatory officials (including, without limitation, all filings
and amendments thereto necessary for the Company to qualify to do
business as a foreign corporation and all filings and amendments
thereto made with insurance regulatory authorities necessary for
the Company to be licensed or authorized to write
23
insurance or
reinsurance) to effectuate such name change and will cease using
any name which includes any reference to any Retained Name.
Notwithstanding the foregoing, following such thirty (30) day
period, the Company may use any Retained Name in those
jurisdictions where proceedings to change the name of the Company
pursuant to this Section 3.7 have commenced but have not been
concluded until, with respect to any particular jurisdiction, such
time as the Company has been notified that the name change is
effective in such jurisdiction; provided, that any such use shall
be accompanied by a clear and prominent statement to the effect
that the Company is not a member company of White Mountains
Insurance Group, Ltd. (“White Mountains”) and is not an
affiliate of Potomac Insurance Company, a member company of White
Mountains.
Section 3.8. No Securities Acts Violation. The
Purchaser acknowledges that the Shares to be delivered to the
Purchaser have not been registered under the Securities Act of 1933
or any state securities law (the “Acts”). On the
Closing Date, the Purchaser will acquire the Shares for its own
account for investment, with no present intention of reselling or
otherwise disposing of all or any portion of the Shares in a manner
which would constitute a violation of the Acts, subject
nevertheless to the requirement of applicable law that the
disposition of its assets be at all times within its
control.
Section 3.9. Status as of the Closing Date. All of the
warranties and representations made by the Purchaser in this
Agreement will be true and correct on the Closing Date, with the
same force and effect, as if made on and as of the Closing
Date.
24
Section 4.1. Preservation of Licenses. The Seller
covenants and agrees that from and after the date of the execution
and delivery of this Agreement through and including the Closing
Date, except only as otherwise specifically required by or provided
in this Agreement, the Seller will cause the Company to use
commercially reasonable efforts to preserve the
Licenses.
Section 4.2. Dividends and Other Distributions. The
Seller covenants and agrees that between the date of execution of
this Agreement and the Closing Date, other than as contemplated by
the Reinsurance Agreement, the Seller will not cause to be made, or
permit the Company to make or agree to, any distribution of cash or
of properties or other assets by way of dividends, distributions,
redemptions or otherwise, and whether or not in respect of the
Shares.
Section 4.3. Access to Records. The Seller agrees that
(i) between the date of execution of this Agreement and the
Closing Date, the Seller will cause the Company to make available
to the Purchaser and its authorized representatives (with the right
to copy) at reasonable times and under reasonable circumstances all
of the Company records, minute books, stock books, seals,
examination reports, annual statements, financial statements,
income tax returns, contracts and any other documents of the
Company reasonably requested by the Purchaser (including, without
limitation, a true and correct list of all Statutory Agents of the
Company) and (ii) after the Closing Date, the Seller will
provide the Purchaser with any information which the Purchaser
reasonably may request to respond to litigation, to comply with
regulatory
25
requirements
and requests. In addition, both before and after the Closing Date,
the Seller shall instruct its officers, employees, counsel and
accountants to be available for a reasonable period of time during
normal business hours for, and to respond to, any questions of the
Purchaser and its authorized representatives. The Purchaser
recognizes the proprietary nature of all of these documents and
agrees not to reveal their contents to any third party, other than
to the Purchaser’s authorized representatives who have a need
to know such information for the purpose of evaluating or
consummating the transactions contemplated hereby, A.M. Best
Company, Inc. or to such other individuals or entities as may be
required by applicable law.
Section 4.4. Notification of Changes and Default. The
Seller covenants and agrees that between the date of execution of
this Agreement and the Closing Date, inclusive, the Seller will
promptly give notice, or will cause the Company to give notice, to
the Purchaser of (i) the occurrence of any event or
circumstance or the discovery of any inaccuracy, omission or
mistake, which, in any way, would cause any warranty and
representation made by the Seller in ARTICLE II, or any of the
information or documents heretofore provided to the Purchaser to be
changed, modified, inaccurate or otherwise not true and correct in
any material respect, whether as of the date of execution of this
Agreement or any time subsequent thereto and prior to the Closing
Date; or (ii) the occurrence of any events or circumstances
that would result in a violation or breach by the Seller of any of
the terms and provisions of this Agreement obligatory upon the
Seller. No such notice shall avoid compliance by the Seller with
the requirements of Section 4.6. The Seller shall report
promptly to the Purchaser any fact, circumstance or occurrence
which in the reasonable business judgment of management of the
Seller or the
26
Company may
result in an adverse change in the status of any
License.
Section 4.5. State Regulatory Approvals; Rate and
Form Filings.
(a) The
Seller shall cooperate with the Purchaser in connection with the
Purchaser’s preparation and filing of the Acquisition
Statement (as defined in Section 5.1) and shall use its
reasonable best efforts to facilitate approval of the transactions
contemplated by this Agreement. The Seller will use its reasonable
best efforts to obtain all required regulatory approvals for the
Reinsurance Agreement from the Illinois Department and the
California Department on or prior to Closing.
(b) Prior to
the Closing, the Seller shall use its commercially reasonable
efforts to effect the approval of premium rate and policy form
filings (“Rate and Form Filings”) in those States
where, and for the lines of insurance that, the Purchaser intends
to cause the Company to write business following the Closing;
provided, that (i) that the Purchaser shall pay any and all
costs of the Seller and its affiliates incurred in connection with
such endeavors (including, without limitation, filing fees, and
reasonable costs and expenses and staff-time at an hourly rate of
$150/hour) on demand and upon receipt of an invoice from the
Seller, (ii) the Purchaser and/or its authorized
representatives shall prepare or provide the Seller and/or its
authorized representatives with all information and documentation
(including, without limitation, actuarial computations and policy
forms) necessary to prepare the relevant Rate
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