EXHIBIT 10.1.1
SUBSCRIPTION AGREEMENT
This Agreement (this "AGREEMENT") is made as of October 24,
2001 by and between Arch Capital Group Ltd., a company organized under the laws
of Bermuda (the "COMPANY"), and each of the Purchasers named below (each, a
"PURCHASER" and, collectively, the "PURCHASERS"), in connection with the
purchase by each Purchaser of the Securities (as defined below). Certain terms
are defined in SCHEDULE A hereto.
WHEREAS, the Company has entered into employment arrangements
with ▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇▇ ▇▇▇▇▇ and ▇▇▇▇ Grandisson, true and correct copies of
which have been provided to the Purchasers.
For good and valid consideration, the receipt of which is
hereby acknowledged, the Company and each of the Purchasers agree as follows:
A. SUBSCRIPTION AND PURCHASE OF SECURITIES
1. AGREEMENT TO PURCHASE. Subject to satisfaction of the
conditions set forth in Section C below, each Purchaser, severally and not
jointly, hereby irrevocably subscribes for and agrees to purchase, for the
aggregate purchase price set forth below the name of such Purchaser on the
signature page hereto (such Purchaser's "TOTAL PURCHASE PRICE"), series A
convertible preference shares (the "PREFERENCE SHARES") and class A warrants
(such warrants issued hereunder, the "WARRANTS," and together with the
Preference Shares, the "SECURITIES") of the Company. The Preference Shares will
have the rights and privileges set forth in the form of Certificate of
Designations attached hereto as EXHIBIT I (the "CERTIFICATE"). The Preference
Shares will be convertible, on the terms and conditions set forth in the
Certificate, into Common Shares (such shares, the "CONVERSION SHARES") or, in
the circumstance set forth in Section E hereof, common shares of Newco. The form
of the Warrants is attached hereto as EXHIBIT II. The Warrants will be
exercisable, on the terms and conditions thereof, for Common Shares (such
shares, the "WARRANT SHARES").
2. NUMBER OF SECURITIES PURCHASED. The number of Preference
Shares to be purchased by each Purchaser shall be equal to such Purchaser's
Total Purchase Price divided by the Estimated Per Share Price. Such number is
subject to adjustment as provided in Section B hereof.
The number of Warrants to be purchased by each Purchaser shall
be equal to (a) the Adjusted Warrant Amount times (b) the number of Common
Shares issuable as of the date hereof upon exercise of all class A warrants
outstanding on the date hereof (which is 2,531,079) divided by (c) the number of
Common Shares outstanding as of June 30, 2001 (which is 12,863,079). If the
transactions contemplated by this Agreement, or options granted to management
concurrently herewith, trigger an antidilution adjustment under existing class
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A warrants, the number of Warrants purchased by each Purchaser hereunder shall
be adjusted upward to reflect the greater number of shares issuable upon
exercise of outstanding class A warrants as a result of such antidilution
adjustment.
3. CLOSING DATE. Subject to the terms and conditions hereof,
the purchase and sale of the Securities shall occur at 10:00 a.m. (Eastern time)
on the third business day after the date on which the condition set forth in
Section C.1(a) is satisfied (such date and time, the "CLOSING DATE").
4. DELIVERIES. As of the close of business on the business day
immediately preceding the Closing Date, the Company shall advise the Purchasers
of the Estimated Per Share Price. On the Closing Date, (a) each Purchaser shall
pay its Total Purchase Price by wire transfer of immediately available funds to
the account of the Company designated by the Company and (b) the Company shall
deliver to such Purchaser certificates for the Securities purchased by such
Purchaser, registered in the name of such Purchaser or its designee.
B. POST-CLOSING ADJUSTMENTS
1. AUDIT ADJUSTMENT.
(a) As soon as practicable after the Closing Date, the Company
shall engage (i) PricewaterhouseCoopers (the "PUBLIC ACCOUNTANTS") to audit the
Company's consolidated balance sheet as of June 30, 2001, (ii) an independent
actuary selected by the Transaction Committee and the Purchasers (the
"INDEPENDENT ACTUARY") to review the reserves for claims and claims expenses on
such balance sheet, and (iii) an independent pricing service selected by the
Transaction Committee and the Purchasers (the "PRICING SERVICE") to determine
the estimated fair value as of the Closing Date of the Company's investments in
marketable securities included on such balance sheet. The audit shall be
performed on the same basis as the preparation of the unaudited balance sheet
and, in particular, the $4.3 million liability associated with an anticipated
but incomplete reinsurance transaction shall either remain or be deemed to
remain on the audited balance sheet as a liability. The Pricing Service, the
Public Accountants and the Independent Actuary are referred to as the
"INDEPENDENT ADVISORS."
(b) The Company shall provide the Independent Advisors with
full access to its books and records for the purposes of such audit and reviews.
The Independent Advisors shall keep the Transaction Committee and the Purchasers
informed as to the progress of such audit and reviews, and the Transaction
Committee and the Purchasers shall have the right to participate and comment
upon such audit and reviews. Any reviews pursuant to paragraph (d) below shall
also be subject to the provisions of this paragraph.
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(c) Within 60 days after the Closing Date (or as soon
thereafter as practicable), the Independent Advisors shall deliver the following
to the Board of Directors and the Purchasers (the "INITIAL DETERMINATIONS"):
(i) The Public Accountants shall deliver the Company's
consolidated balance sheet as of June 30, 2001 and an unqualified
report thereto (the "AUDITED BALANCE SHEET").
(ii) The Independent Actuary shall deliver a report on the
reserves for claims and claims expenses on the Audited Balance Sheet
(the "RESERVE REPORT").
(iii) The Pricing Service shall deliver a report of its
determinations of estimated fair value as of the business day
immediately preceding the Closing Date of the marketable securities in
the Company's investment portfolio included in the Audited Balance
Sheet (the "PORTFOLIO REVIEW"). In determining such estimated fair
value, the Pricing Service shall use the ▇▇▇▇ to Market Procedures.
(iv) The Public Accountants shall calculate the Per Share Price
including, without limitation, the amount set forth in clause (i)(A) of
the definition of Per Share Price, and report the amounts to the Board
of Directors and the Purchasers (the "PER SHARE CALCULATION").
(d) After receipt of the Initial Determinations, the
Transaction Committee and the Purchasers shall have the right to make a full
review of the Initial Determinations including, but not limited to, access by
such professionals as Purchasers may deem necessary, to all of the workpapers
and reports prepared by the Independent Advisors in connection with such Initial
Determinations. The Transaction Committee may object to the Initial
Determinations or one or more components thereof by giving written notice to the
Purchasers, and the Purchasers (acting collectively) may object to the Initial
Determinations or one or more components thereof by giving written notice to the
Transaction Committee, in each case, within 30 days of the date on which the
Initial Determinations are delivered. Any such notice shall state the basis of
the objections in reasonable detail. The Transaction Committee and the
Purchasers shall then endeavor in good faith to resolve the dispute as soon as
possible. If the dispute is not resolved within 10 days after receipt of the
objection, within five days thereafter the Transaction Committee and the
Purchasers shall mutually agree on (i) a firm of independent accountants to
review the Audited Balance Sheet or the Per Share Calculation, (ii) an
independent actuary to review the Reserve Report and/or (iii) an independent
pricing service to review the Portfolio Review, who shall complete such reviews
within 30 days of appointment. Based upon such independent reviews, the
independent accountants referred to in the preceding sentence shall select
either the per share calculation recommended by the Transaction Committee or
that recommended by the Purchasers, whichever is closer to the independent
review, and the per share calculation so selected shall be dispositive. If the
Initial Determina-
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tion (if not reviewed) or such review requires an adjustment to the Audited
Balance Sheet, the Audited Balance Sheet as so adjusted shall be deemed to be
the "Audited Balance Sheet" hereunder.
(e) If the Per Share Price is greater than the Estimated Per
Share Price, within five business days after the last date on which the Initial
Determinations may be objected to or after the date that all reviews following
any such objection have been completed (the "APPLICABLE DATE"), each Purchaser
shall either (i) pay to the Company an amount (the "AGGREGATE AMOUNT") in cash
equal to the difference between the Per Share Price and the Estimated Per Share
Price times the number of Preference Shares purchased by such Purchaser or (ii)
surrender to the Company a number of Preference Shares equal to the Aggregate
Amount divided by the greater of (A) the Per Share Price or (B) the Fair Market
Value of a Preference Share as of the Applicable Date. The Purchasers shall make
such payment by wire transfer of immediately available funds to the account of
the Company designated by the Company.
(f) If the Estimated Per Share Price is greater than the Per
Share Price, within five business days after the Applicable Date, the Company
shall issue and deliver to each Purchaser one or more certificates registered in
the name of such Purchaser (or its designee) representing that number of
Preference Shares equal to (i) the difference between the Estimated Per Share
Price and the Per Share Price times (ii) the number of Preference Shares
purchased by such Purchaser on the Closing Date divided by (iii) the Per Share
Price.
2. ADJUSTMENT FOR VESTING OF CLASS B WARRANTS. In the event
that the Company's class B warrants vest (or become exercisable) for any reason,
then, within five business days of such vesting or the Applicable Date
(whichever is later), the Company shall issue and deliver to each Purchaser one
or more certificates registered in the name of such Purchaser (or its designee)
representing that number of Preference Shares equal to the difference between
(i) such Purchaser's Total Purchase Price divided by an amount equal to the
difference between the Per Share Price and $1.50 and (ii) such Purchaser's Total
Purchase Price divided by the Per Share Price. If the transactions contemplated
by this Agreement, or options granted to management concurrently herewith,
trigger an antidilution adjustment under existing class B warrants, the number
of Preference Shares issued to the Purchasers in lieu of class B warrants shall
be adjusted upward to reflect the greater number of shares issuable upon
exercise of outstanding class B warrants as a result of such antidilution
adjustment.
3. FINAL ADJUSTMENT.
(a) The Adjustment Basket, as defined on SCHEDULE B, shall be
determined as soon as practicable after the second anniversary of the Closing
Date or such earlier date as the Purchasers request and the Transaction
Committee agrees, which agreement will not be unreasonably withheld (the "TEST
DATE"). The Company shall engage its independent public
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accountants to prepare and deliver a report to the Transaction Committee and the
Purchasers setting forth in reasonable detail the calculation of the Adjustment
Basket (the "ADJUSTMENT BASKET REPORT").
(b) The Company shall provide such independent public
accountants with full access to its books and records for the purposes of
preparing the Adjustment Basket Report. Such accountants shall keep the
Transaction Committee and the Purchasers informed as to the progress of the
Adjustment Basket Report, and the Transaction Committee and the Purchasers shall
have the right to participate and comment upon the Adjustment Basket Report. Any
reviews pursuant to paragraph (c) below shall also be subject to the provisions
of this paragraph.
(c) After receipt of the Adjustment Basket Report, the
Transaction Committee and the Purchasers shall have the right to make a full
review of the Adjustment Basket Report including, but not limited to, access by
such professionals as Purchasers may deem necessary to all of the workpapers and
reports prepared by the independent public accountants in connection with such
Adjustment Basket Report. The Transaction Committee may object to the Adjustment
Basket Report by giving written notice to the Purchasers, and the Purchasers
(acting collectively) may object to the Adjustment Basket Report by giving
written notice to the Transaction Committee, in each case, within 30 days of the
date on which the Adjustment Basket Report is delivered. Any such notice shall
state the basis of the objections in reasonable detail. The Transaction
Committee and the Purchasers shall then endeavor in good faith to resolve the
dispute as soon as possible. If the dispute is not resolved within 10 days after
receipt of the objection, within five days thereafter, the Transaction Committee
and the Purchasers shall mutually agree on a firm of independent accountants, an
independent actuary and/or an independent pricing service to review the
Adjustment Basket Report or one or more components thereof, who shall complete
such reviews within 30 days of appointment. Based upon such independent reviews,
the independent accountants referred to in the preceding sentence shall select
either the adjusted basket report recommended by the Transaction Committee or
that recommended by the Purchasers, whichever is closer to the independent
review, and the adjusted basket report so selected shall be dispositive.
(d) If the Adjustment Basket is less than zero, within five
business days after the last date on which the Adjustment Basket Report may be
objected to or the date on which all reviews following any such objection have
been completed (the "SECOND APPLICABLE DATE"), the Company shall issue and
deliver to each Purchaser one or more certificates registered in the name of
such Purchaser (or its designee) representing that number of Preference Shares
equal to the difference between NF - N,
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where:
N = number of Preference Shares purchased by such Purchaser
(after giving effect to any adjustment pursuant to Section
B.1);
P = Per Share Price;
B = absolute value of the Adjustment Basket; and
NF = such Purchaser's Total Purchase Price divided by [P -
B/12.86 million].
(e) If the Adjustment Basket is greater than zero, the Company
at the direction of the Transaction Committee may use cash in an amount equal to
B to repurchase Common Shares (other than any Conversion Shares or Warrant
Shares) without regard to the restriction on repurchases set forth in Article VI
of the Shareholders Agreement.
(f) In addition to paragraph (e), if the Adjustment Basket is
less than zero and in the event that the class B warrants vest, then, on the
Second Applicable Date, the Company shall also issue and deliver to each
Purchaser (as a further adjustment for the vesting of the class B warrants) a
number of Preference Shares equal to the difference between (A) such Purchaser's
Total Purchase Price divided by an amount equal to [P - $1.50 - B/12.86 million]
and (B) the Purchaser's Total Purchase Price divided by an amount equal to (P -
$1.50).
(g) On the fourth anniversary of the Closing Date, there shall
be a calculation of a further Adjustment Basket, taking into account ONLY the
following: (i) the matters listed in clause (iii) of the definition of Non-Core
Assets, to the extent not previously included in the first Adjustment Basket and
(ii) any actual losses arising out of any breach of the representations set
forth in Section D.3.h or D.3.k discovered after the second anniversary of the
Closing.
C. CONDITIONS PRECEDENT TO SALE OF SECURITIES ON THE CLOSING DATE
1. MUTUAL CONDITIONS. The obligation of the Company to sell,
and of each Purchaser to buy, the Securities on the Closing Date, is subject to
the satisfaction, or waiver by the parties hereto, of the following conditions:
(a) If required, the waiting period under the U.S.
▇▇▇▇-▇▇▇▇▇-▇▇▇▇▇▇ Antitrust Improvements Act of 1976, as amended (the
"HSR ACT"), shall have expired or been terminated early.
(b) There shall not be in effect an order or injunction of a
court of competent jurisdiction prohibiting the consummation of the
sale and purchase of the Securities hereunder that are to be purchased
on the Closing Date.
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2. CONDITIONS OF THE COMPANY. The obligation of the Company to
sell the Securities on the Closing Date is subject to the satisfaction, or
waiver by the Company, of the following conditions:
(a) The representations and warranties made by each Purchaser
in this Agreement shall be true and accurate in all material respects
as of the Closing Date.
(b) Each Purchaser shall have complied with and performed all
agreements and covenants to be complied with or performed by it in all
material respects at or prior to the Closing Date.
3. CONDITIONS OF THE PURCHASERS. The obligation of each
Purchaser to buy on the Closing Date the Securities set forth below the name of
such Purchaser on the signature page hereof is subject to the satisfaction, or
waiver by such Purchaser, of the following conditions:
(a) The representations and warranties made by the Company in
this Agreement shall be true and accurate as of the Closing Date
(except that representations and warranties made as of another date
shall be true and accurate as of such other date), except in each case
as would not have a Material Adverse Effect.
(b) The Company shall have complied with and performed all of
its agreements and covenants to be complied with or performed in all
material respects at or prior to the Closing Date.
(c) Such Purchaser shall have received (i) a legal opinion of
▇▇▇▇▇▇▇ ▇▇▇▇ & ▇▇▇▇▇▇▇, Bermuda counsel to the Company, covering such
matters under Bermuda law as are customary for transactions of this
type and (ii) a legal opinion of ▇▇▇▇▇▇ ▇▇▇▇▇▇ & ▇▇▇▇▇▇▇, United States
counsel to the Company, regarding enforceability of this Agreement and
the validity of the private placement exemption with respect to the
sale and purchase of the Securities hereunder. Such opinions may be
subject to such limitations and qualifications as are customary for
legal opinions in transactions of this type.
(d) Such Purchaser shall have received copies of such letters
of resignation from the Board of Directors and certified resolutions of
the Board of Directors electing such directors to fill the resulting
vacancies in accordance with the Company's Bye-laws, all effective with
the consummation of the purchase and sale of Securities hereunder so
that the members of the Board of Directors immediately following the
Closing Dateshall be as contemplated by Section 3.1(b) of the
Shareholders Agreement.
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(e) The Company shall have executed and delivered a
shareholders agreement substantially in the form attached as EXHIBIT IV
hereto (the "SHAREHOLDERS AGREEMENT").
(f) The Company's Board shall have taken all such action as is
necessary to exempt Purchasers from paragraphs 78 and 79(3) of the
Company's Bye-laws.
D. REPRESENTATIONS, WARRANTIES AND AGREEMENTS
1. PURCHASER ACKNOWLEDGMENTS. Each Purchaser, severally and
not jointly, understands, acknowledges and hereby covenants and agrees with the
Company as follows:
(a) Subject to the terms and conditions of this Agreement,
such Purchaser's agreement to purchase Securities hereunder is and
shall be irrevocable.
(b) The offering and sale of the Securities is intended to be
exempt from registration under the United States Securities Act of
1933, as amended (the "ACT"), by virtue of Section 4(2) of the Act. The
Securities, the Conversion Shares and the Warrant Shares have not been
registered under the Act. Except to the extent set forth in the
Shareholders Agreement, the Company is under no obligation to register
the Securities, the Conversion Shares or the Warrant Shares or to
assist such Purchaser in complying with any exemption from
registration.
(c) There is no existing public or other market for the
Securities, and it is not expected that any such market will develop.
There can be no assurance that such Purchaser will be able to sell or
dispose of its Securities. Without limiting the generality of the
foregoing, in order not to jeopardize the offering's exempt status
under the Act, a transferee of such Securities may, among other things,
be required to fulfill the investor suitability requirements
thereunder.
(d) All certificates issued for the Securities, the Conversion
Shares and the Warrant Shares will bear the following legend:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE
OFFERED OR SOLD EXCEPT PURSUANT TO (1) AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE UNITED STATES SECURITIES ACT
OF 1933, AS AMENDED, OR (2) AN APPLICABLE EXEMPTION FROM
REGISTRATION THEREUNDER. ANY SALE PURSUANT TO CLAUSE (2) OF
THE PRECEDING SENTENCE MUST BE ACCOMPANIED BY AN OPINION OF
WACHTELL, LIPTON, ▇▇▇▇▇ & ▇▇▇▇, OR SUCH
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OTHER COUNSEL AS IS REASONABLY SATISFACTORY TO ARCH CAPITAL
GROUP LTD., TO THE EFFECT THAT SUCH EXEMPTION FROM
REGISTRATION IS AVAILABLE IN CONNECTION WITH SUCH SALE."
(e) Prior to the earlier of the Shareholders Meeting (as
defined below) and the four month anniversary of the Closing Date, the
Securities, Conversion Shares and the Warrant Shares may not be sold,
transferred or otherwise disposed of, directly or indirectly, without approval
of the Transaction Committee.
(f) The Purchasers shall not transfer, in one transaction, or
a series of related transactions, to a single Person or group, Common Shares,
and/or securities convertible into Common Shares, representing in excess of
either 51% of the votes then entitled to be cast in the election of directors,
or 51% of the then outstanding Common Shares (taking into account Common Shares
issuable upon conversion of the Preference Shares) without making available to
all holders of Common Shares the right to participate in such transaction on the
same or substantially the same terms as the Purchasers (giving effect to the
securities being transferred).
2. PURCHASER REPRESENTATIONS. Each Purchaser, severally and
not jointly, hereby represents and warrants and covenants to the Company as
follows:
(a) The Securities to be purchased by such Purchaser are being
purchased for such Purchaser's own account, and not with a view to
distribution, assignment or resale to others or to fractionalization in
whole or in part. No other person has or will have a direct or indirect
beneficial interest in such Securities or any component thereof.
(b) The financial situation of such Purchaser is such that it
can afford to bear the economic risk of holding the Securities for an
indefinite period, and such Purchaser can afford to suffer the complete
loss of its investment in the Securities. Such Purchaser has (i)
knowledge and experience in financial and business matters such that it
is capable of evaluating the risks of the investment in the Securities
and (ii) carefully reviewed the terms and provisions of this Agreement
and has evaluated the restrictions and obligations contained herein.
(c) This Agreement has been duly authorized, executed and
delivered by such Purchaser and, assuming due execution and delivery by
each other party hereto, constitutes a valid and binding obligation of
such Purchaser enforceable in accordance with its terms.
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(d) Such Purchaser shall hold the Securities subject to, and
shall have voting rights with respect thereto as specified in, the
Company's Bye-laws and the Certificate in effect from time to time and
shall not assign, sell, hypothecate or otherwise transfer the
Securities, the Conversion Shares or the Warrant Shares other than in
accordance with applicable law and the provisions with respect thereto
in such documents.
(e) Such Purchaser covenants and agrees to make available to
the Company and the appropriate insurance regulatory governmental
authorities all information concerning such Purchaser required to be
furnished to such governmental authorities in connection with obtaining
requisite approvals, and further covenants and agrees to make all
filings, and seek to acquire all consents, required by such
governmental authorities.
(f) The execution, delivery and performance by such Purchaser
of this Agreement and the consummation of the transactions contemplated
hereby do not and will not (i) violate any provision of the
organizational documents of such Purchaser, (ii) assuming compliance
with the matters referred to in Section C.1.a, violate any provision of
any applicable law, statute, ordinance, rule, regulation, judgment,
injunction, order or decree or (iii) violate or result in a default
under any agreement or other instrument binding upon such Purchaser or
any of its Subsidiaries, except in each case as would not reasonably be
expected to have, individually or in the aggregate, a Material Adverse
Effect (as defined below) on such Purchaser.
(g) Such Purchaser has, or will have prior to the Closing
Date, sufficient cash or other sources of immediately available funds
to enable it to make payment of the purchase price for the Securities
as required hereunder and all related fees and expenses.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. Except as
set forth in the disclosure letter delivered to the Purchasers by the Company
dated as of the date hereof (the "COMPANY DISCLOSURE LETTER"), or in the Company
Reports filed since December 31, 2000 but prior to the date hereof, the Company
hereby represents and warrants to each of the Purchasers that:
(a) ORGANIZATION, GOOD STANDING AND QUALIFICATION. (i) Each of
the Company and its Subsidiaries is a corporation or other entity duly
organized, validly existing and, if applicable, in good standing under
the laws of its respective jurisdiction of organization and has all
requisite corporate or similar power and authority to own, operate and
lease its properties and assets and to carry on its business as
presently conducted and is duly qualified to do business and is in good
standing as a foreign corporation or other entity in each jurisdiction
where the ownership, operation or leasing of
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its assets or properties or conduct of its business requires such
qualification except for failures to be so qualified, or to be so in
good standing, which would not have a Material Adverse Effect. The
Company has made available to Parent a complete and correct copy of the
Company's certificate of incorporation, memorandum of association and
Bye-laws, each as amended to date, which are in full force and effect.
(ii) The Company does not have any Subsidiaries which (A)
individually constitute or, if aggregated and treated as one
Subsidiary, would constitute a "SIGNIFICANT SUBSIDIARY" within the
meaning of Rule 1-02(w) of Regulation S-X under the Exchange Act, (B)
have unlimited liability share capital or other equity or similar
interests of unlimited liability, or (C) conduct material insurance,
fund management, broker-dealer, banking or consumer finance operations.
Section 3.2(a)(ii) of the Company Disclosure Letter (X) lists the
jurisdiction of organization of each of the Company's Subsidiaries, (Y)
in the case of the Company's Subsidiaries that conduct insurance
operations (collectively, the "COMPANY INSURANCE COMPANIES"), lists, as
of June 30, 2001, the U.S. jurisdictions where the Company Insurance
Companies are domiciled or "commercially domiciled" and licensed to do
an insurance business for insurance regulatory purposes, and (Z)
indicates which Subsidiaries in which the Company's interest therein
includes unlimited share capital or other equity or similar interests
of unlimited liability. Each of the Company and each of its
Subsidiaries holds all material licenses or authorizations required or
necessary to conduct its business as currently conducted.
(iii) As of the date hereof, the Company does not own (other
than (A) in a BONA FIDE fiduciary capacity or in satisfaction of a debt
previously contracted, (B) in the ordinary course of its insurance,
annuity or asset management business, (C) in customer accounts held or
maintained in the ordinary course, or (D) in any general account or
otherwise in the ordinary course to offset insurance liabilities)
beneficially, directly or indirectly, (X) any material equity
securities or similar material interests of any Person other than its
Subsidiaries, or (Y) any interest in any general partnership, unlimited
company or other Person with share capital or other equity or similar
interests of unlimited liability, or any general partnership interest
in a limited partnership.
(b) CAPITAL STRUCTURE. (i) The authorized stock of the Company
consists of 200,000,000 Common Shares, of which 12,868,158 Common
Shares (including shares of restricted stock issued pursuant to Company
Stock Plans) were issued and outstanding as of the close of business on
September 30, 2001, and 50,000,000 preference shares, par value $0.01
per share, of which no shares are issued or outstanding as of the date
hereof. All of the issued and outstanding Common Shares have been duly
authorized and are validly issued, fully paid and nonassessable. Since
September 30, 2001, the Company has issued no Common Shares, or
securities convertible or ex-
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changeable into Common Shares. As of the date hereof, the Company has
no commitments (including contingent or conditional commitments) to
issue or deliver Common Shares or preference shares.
(ii) All of the outstanding capital stock of, or other voting
securities or ownership interests in, each Subsidiary, to the extent
owned by the Company, is owned by the Company, directly or indirectly,
free and clear of any mortgage, lien, pledge, charge, security interest
or encumbrance in respect of such property or asset and free of any
other limitation or restriction (including any restriction on the right
to vote, sell or otherwise dispose of such capital stock or other
voting securities or ownership interests, except as set forth in the
Company's Bye-laws). Except as contemplated by this Agreement, there
are no outstanding (A) securities of the Company or any of its
Subsidiaries convertible into or exchangeable for shares of capital
stock or other voting securities or ownership interests in any
Subsidiary or (B) options or other rights to acquire from the Company
or any of its Subsidiaries, or other obligation of the Company or any
of its Subsidiaries to issue, any capital stock or other voting
securities or ownership interests in, or any securities convertible
into or exchangeable for any capital stock or other voting securities
of or ownership interests in, any Subsidiary (the items in clauses (A)
and (B) being referred to collectively with the capital stock of the
subsidiaries as the "SUBSIDIARY SECURITIES"). There are no outstanding
obligations of the Company or any of its Subsidiaries to repurchase,
redeem or otherwise acquire any of the Subsidiary Securities.
(iii) Except as set forth above (A) there is no share capital or
other voting securities of the Company authorized, reserved, issued or
outstanding, (B) neither the Company nor any of its Subsidiaries is
party to any agreement creating preemptive or other outstanding rights,
subscriptions, options, warrants, stock appreciation rights, redemption
rights, repurchase rights, convertible securities or other agreements,
arrangements or commitments of any character relating to, or the value
of which is determined by reference to, the issued or unissued share
capital or other ownership interest of the Company or any of its
Subsidiaries, and (C) neither the Company nor any of its Subsidiaries
is party to any agreement creating any other securities or obligations
convertible or exchangeable into or exercisable for, or giving any
Person a right to subscribe for or acquire, any securities of the
Company or its Subsidiaries, and no securities or obligations
evidencing such rights are authorized, issued or outstanding. Neither
the Company nor any of its Subsidiaries has outstanding any bonds,
debentures, notes or other similar obligations.
(iv) The Preference Shares have been duly authorized and
reserved for issuance, and, when issued in accordance with the terms of
this Agreement, will be validly issued, fully paid and non-assessable.
The Conversion Shares have been duly author-
-13-
ized and reserved for issuance, and when issued in exchange for the
Preference Shares in accordance with the terms of the certificate, will
be validly issued, fully paid and non-assessable.
(v) The Warrants have been duly authorized, and, when executed
and delivered in accordance with the terms of this Agreement, will
constitute legal, valid and binding obligations of the Company,
enforceable against the Company in accordance with their terms. The
Warrant Shares have been duly authorized and reserved for issuance,
and, when issued upon exercise of the Warrants in accordance with the
terms thereof, will be validly issued, fully paid and non-assessable.
(c) CORPORATE AUTHORITY; APPROVAL. The Company has all
necessary corporate power and authority to execute and deliver this
Agreement and to perform its obligations hereunder and to consummate
the transactions contemplated hereby. The execution and delivery of
this Agreement by the Company, and the consummation by the Company of
the transactions contemplated hereby, have been duly and validly
authorized by all necessary corporate action, and no other corporate
proceedings (other than Requisite Shareholder Approval following the
issuance of the Securities) on the part of the Company are necessary to
authorize this Agreement or to consummate the transactions so
contemplated. The Board of Directors has unanimously determined, as of
the date of this Agreement, that it is advisable and in the best
interest of the Company's shareholders for the Company to enter into
this Agreement and to consummate the transactions contemplated hereby
upon the terms and subject to the conditions of this Agreement and, as
of the date of this Agreement, has recommended that the Bye-Law
Amendment and the issuance of the Conversion Shares and Warrant Shares
to the Purchasers in accordance with the terms hereof be approved by
the shareholders of the Company. This Agreement has been duly and
validly executed and delivered by the Company and, assuming the due
authorization, execution and delivery by each other party hereto,
constitutes a legal, valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms. The
Company has received the opinion of its financial advisor, Credit
Suisse First Boston Corporation ("CSFB"), to the effect that, as of the
date hereof, the consideration to be received by the Company for the
issuance and sale of the Securities is fair, from a financial point of
view, to the Company, a true and correct copy of which will be
furnished to Parent.
(d) GOVERNMENTAL FILINGS; NO VIOLATIONS. (i) Other than the
reports, filings, registrations, consents, approvals, permits,
authorizations, applications, expiry of waiting periods and/or notices
under the HSR Act, no notices, reports or other filings are required to
be made by the Company or any of its Subsidiaries with, nor are any
material consents, registrations, approvals, permits applications,
expiry of waiting periods or authorizations required to be obtained by
the Company or any of its Subsidi-
-14-
aries from, any U.S. or non-U.S. governmental or regulatory authority,
agency, commission, tribunal, body or other governmental,
quasi-governmental, regulatory or self-regulatory entity, including,
without limitation, any state insurance department or insurance or
consumer finance regulatory agency, in each case, of competent
jurisdiction (each a "GOVERNMENTAL ENTITY"), in connection with the
execution and delivery of this Agreement by the Company and the
issuance of the Preference Shares and Warrants contemplated hereby.
(ii) The execution, delivery and performance of this Agreement
by the Company do not, and the consummation by the Company of
transactions contemplated hereby will not, constitute or result in (A)
a breach or violation of, or a default under, the certificate of
incorporation, memorandum of association or Bye-laws of the Company or
the comparable governing instruments of any of its Subsidiaries, (B) a
breach or violation of, or a default under, or the creation or
acceleration of any obligations or the creation of a material lien,
pledge, security interest or other encumbrance on the assets of the
Company or any of its Subsidiaries (with or without notice, lapse of
time or both) pursuant to, or the creation or acceleration of any right
of termination under, any material agreement, lease, contract, license,
note, mortgage, indenture, arrangement or other obligation, whether
written or oral ("CONTRACTS" and individually, a "CONTRACT"), binding
upon the Company or any of its Subsidiaries or any of their respective
assets, or (C) any material and adverse change in the rights or
obligations of the Company or any of its Subsidiaries under any
material Contract.
(e) COMPANY REPORTS; FINANCIAL STATEMENTS; UNDISCLOSED
LIABILITIES; STATUTORY STATEMENTS. (i) Each registration statement,
report, proxy statement or information statement prepared by the
Company or its Subsidiaries since December 31, 1999, including the
Company's Annual Report on Form 10-K for the year ended December 31,
2000 (the "COMPANY FORM 10-K"), each in the form (including exhibits,
annexes and any amendments thereto) filed with the SEC (collectively,
including any such reports filed with the SEC subsequent to the date
hereof, the "COMPANY REPORTS"), as of their respective dates, as
amended prior to the date hereof or as supplemented by Company Reports
filed prior to the date hereof, did not, and any Company Reports filed
with the SEC subsequent to the date hereof will not, contain any untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements made therein,
in light of the circumstances in which they were made, not misleading.
Each of the consolidated balance sheets included in or incorporated by
reference into the Company Reports (in-
-15-
cluding the related notes and schedules) fairly presents, or will
fairly present, in all material respects the consolidated financial
position of the Company and its Subsidiaries as of its date, and each
of the consolidated statements of income and of changes in
shareholders' equity and cash flows included in or incorporated by
reference into the Company Reports (including any related notes and
schedules) fairly presents, or will fairly present, in all material
respects the results of operations, retained earnings and changes in
financial position, as the case may be, of the Company and its
Subsidiaries for the periods set forth therein (subject, in the case of
unaudited statements, to notes and normal year-end audit adjustments
that were not, or are not reasonably expected to be, material in amount
or effect), in each case in accordance with U.S. generally accepted
accounting principles ("GAAP") (except in the case of unaudited
statements, as permitted by Form 10-Q) consistently applied during the
periods involved, except as may be noted therein or in the notes
thereto.
(ii) Except for those liabilities that are fully reflected or
reserved against on the consolidated balance sheet of the Company
included in the Company's Quarterly Report on Form 10-Q for the period
ended June 30, 2001 or liabilities described in the notes thereto (or
liabilities for which neither accrual nor footnote disclosure is
required pursuant to GAAP), neither the Company nor any of its
Subsidiaries has incurred any material liability of any nature
whatsoever (whether absolute, accrued, contingent or otherwise and
whether due or to become due), other than liabilities incurred in
connection with the negotiation, execution, delivery and performance of
this Agreement and the transactions contemplated hereby.
(iii) Since December 31, 1999, the Company and each of its
Subsidiaries has timely filed all material periodic statements,
together with all exhibits, interrogatories, notes, schedules and any
actuarial opinions, affirmations or certifications or other supporting
documents in connection therewith, required to be filed with or
submitted to any Governmental Entity on forms prescribed or permitted
thereby (collectively, the "COMPANY REGULATORY REPORTS"). The financial
statements included in the Company Regulatory Reports, including the
notes thereto, were prepared in conformity in all material respects
with applicable statutory accounting practices prescribed or permitted
by the applicable Governmental Entity consistently applied for the
periods covered thereby and present fairly, in all material respects,
the statutory financial position of the Company or such Subsidiary as
at the respective dates thereof and the results of operations thereof
for the respective periods then ended. The Company Regulatory Reports
complied in all material respects with all applicable Laws when filed,
and no material deficiency has been asserted with respect to any
Company Regulatory Report by any Governmental Entity.
(iv) Except as set forth in the Company's proxy statement with
respect to the annual meeting of Company shareholders in 2001, neither
the Company nor any of its Subsidiaries is a party to any Contract with
any officer or director of the Company or any Person in which any such
officer or director holds 5% or more of equity inter-
-16-
ests which would be required to be disclosed under Item 404 of
Regulation S-K promulgated by the SEC.
(f) ABSENCE OF CERTAIN CHANGES. Since December 31, 2000 (A)
the Company and its Subsidiaries have conducted their respective
businesses only in the ordinary course, consistent with past practice,
and (B) there has not been (1) any Material Adverse Effect with respect
to the Company or any development or combination of developments, that,
individually or in the aggregate, has had or is reasonably likely to
have a Material Adverse Effect with respect to the Company; (2) any
material change by the Company in accounting principles, practices or
methods other than as required by GAAP or applicable Law; (3) any
declaration, setting aside or payment of any dividend or other
distribution in respect of the share capital of the Company; (4) any
split in share capital, combination, recapitalization, redenomination
of share capital or other similar transaction or issuance or
authorization of any issuance of any other securities in respect of, in
lieu of or in substitution for share capital of the Company; (5) any
material addition, or any development involving a prospective material
addition, to the Company's consolidated reserves for future policy
benefits or other policy claims and benefits; or (6) any material
change in the accounting, actuarial, investment, reserving,
underwriting or claims administration policies, practices, procedures,
methods, assumptions or principles of the Company or any Subsidiary of
the Company except as required by GAAP or applicable Law.
(i) The Company has no Knowledge that any material rating
presently held by the Company or any of its Subsidiaries is likely to
modified, qualified, lowered or placed under surveillance for a
possible downgrade for any reason.
(g) LITIGATION. Except to the extent provided as of December
31, 2000 in appropriately identified reserves, there are no material
civil, criminal or administrative actions, suits, claims, hearings,
investigations, inquiries, arbitrations, mediations or proceedings
("ACTIONS") pending or, to the Knowledge of the Company, threatened in
writing against the Company or any of its Subsidiaries.
(h) EMPLOYEE BENEFITS; LABOR. (i) For purposes of this
Agreement, the term (A) "PLAN" shall mean any "employee benefit plan,"
within the meaning of Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), whether or not subject to
ERISA, and any employment, consulting, termination, severance,
retention, change-in-control, deferred or incentive compensation,
commission, stock option or other equity-based, vacation or other
fringe-benefit plan, program, policy, arrangement, agreement or
commitment, and (B) "COMPANY PLAN" shall mean each material Plan which
is sponsored or contributed to by the Company or any of its
Subsidiaries, to which the Company or any such Subsidiary has any
obliga-
-17-
tion to contribute, or with respect to which the Company or any such
Subsidiary is a party or otherwise has any material liability.
(ii) With respect to each Company Plan listed on the Company
Disclosure Letter, the Company will deliver or make available to the
Purchasers, no later than seven days after the date hereof, a true,
correct and complete copy of: (A) each Company Plan, trust agreement,
and insurance contract and other funding vehicle related thereto; (B)
the most recent Annual Report (Form 5500 Series) and accompanying
schedule, if any; (C) the current summary plan description and any
material modifications thereto, if any (in each case, whether or not
required to be furnished under ERISA); (D) the most recent annual
financial report, if any; (E) the most recent actuarial report, if any;
and (F) the most recent determination letter from the U.S. Internal
Revenue Service (the "IRS") if any. Since June 30, 2001, there have
been no amendments to any Company Plan adopted or approved, nor has the
Company or any of its Subsidiaries undertaken to make any such
amendments or to adopt or approve any new Company Plan that is not
reflected in the Company Plan document.
(iii) Each Company Plan has been operated and administered and
is in compliance with its terms and all applicable Laws in all material
respects, and there are no actions, suits, claims or governmental
audits (other than routine claims for benefits in the ordinary course)
pending or, to the Knowledge of the Company, threatened with respect to
any Company Plan or the assets thereof that, if adversely determined,
would, individually or in the aggregate, result in any material
liability or obligation of the Company or any of its Subsidiaries.
(iv) No Company Plan is (A) a multiemployer plan within the
meaning of Section 4001(a)(3) of ERISA, or (B) a multiple employer plan
within the meaning of Section 4063 or 4064 of ERISA. No Company Plan
has an "accumulated funding deficiency" (within the meaning of Section
302 of ERISA or Section 412 of the Code), whether or not waived.
(v) Each Company Plan that is intended to qualify under
Section 401(a) and/or 401(k) of the Code has received a favorable
determination letter from the IRS that it is so qualified and, to the
Knowledge of the Company, nothing has occurred or been done or omitted
to be done since the date of such letter that has adversely affected or
will adversely affect such qualified status. The Company and its
Subsidiaries have timely paid all contributions, premiums and expenses
payable to or in respect of each Company Plan under the terms thereof
and in accordance with all applicable Laws, except where any failure to
pay such amounts has not and will not, individually or in the
aggregate, resulted or result in any material liability or obligation
of the Company or its Subsidiaries.
-18-
(vi) Neither the Company nor any of its Subsidiaries has
incurred or will incur, either directly or indirectly (including as a
result of an indemnification obligation), any material liability under
or pursuant to any provision of Title I or IV of ERISA or the penalty,
excise tax or joint and several liability provisions of the Code
relating to Plans, and, to the Knowledge of the Company, no event,
transaction or condition has occurred, exists or is expected to occur
that would reasonably be expected to result in any such material
liability to the Company or any of its Subsidiaries or, after the
Effective Time, to the Purchasers.
(vii) Neither the execution and delivery of this Agreement, nor
the consummation of the transactions contemplated hereby, either alone
or in combination with any other event (whether contingent or
otherwise) will (A) entitle any current or former employee, consultant
or director of the Company or any of its Subsidiaries to any increased
or modified benefit or payment; (B) increase the amount of compensation
or benefits due to any such employee, consultant or director; (C)
accelerate the vesting, payment or funding of any compensation,
stock-based, incentive or other benefit; (D) result in any "parachute
payment" under Section 280G of the Code (whether or not such payment is
considered to be reasonable compensation for services rendered); (E)
cause any compensation to fail to be deductible under Section 162(m) or
any other provision of the Code or any similar Law; (F) otherwise
result in any payment in the nature of severance or termination pay; or
(G) limit or prohibit (except to the extent required by applicable Law)
the ability to amend, merge, terminate or receive a reversion of assets
from any Company Plan or related trust.
(viii) The Company and its Subsidiaries have no liability for
life, health, medical or other welfare benefits to former employees or
beneficiaries or dependents thereof, except for health continuation
coverage as required by Section 4980B of the Code or Part 6 of Title I
of ERISA and at no expense to the Company and its Subsidiaries.
(ix) No labor organization or group of employees of the Company
or any of its Subsidiaries has made a pending demand for recognition or
certification, and there are no representation or certification
proceedings, or petitions seeking a representation proceeding,
presently pending, or threatened to be brought or filed, with the
National Labor Relations Board or any other labor relations tribunal or
authority. There are no organizing activities, strikes, work stoppages,
slowdowns, lockouts, material arbitrations or material grievances, or
other material labor disputes pending or threatened against or
involving the Company or any of its Subsidiaries. Each of the Company
and its Subsidiaries is in compliance with all applicable laws in all
material respects and collective bargaining agreements respecting
employment and employment prac-
-19-
tices, terms and conditions of employment, wages and hours and
occupational safety and health.
(i) COMPLIANCE WITH LAWS; PERMITS. (i) The businesses of the
Company and each of its Subsidiaries have been (since December 31,
1999), and are being, conducted in compliance in all material respects
with all applicable federal, state, local or non-U.S. laws, statutes,
ordinances, rules, regulations (including, without limitation, the
rules of any applicable self-regulatory organization recognized by the
SEC), rulings, written interpretations, judgments, orders, injunctions,
decrees, arbitration awards, agency requirements, licenses or permits
of any Governmental Entity of competent jurisdiction, including all
regulations regulating the business and products of insurance and all
applicable orders and directives of insurance regulatory authorities
(including federal authorities with respect to variable insurance and
annuity products) and orders resulting from market conduct examinations
of insurance regulatory authorities (including federal authorities with
respect to variable insurance and annuity products) (collectively,
"LAWS"). Except as set forth in the Company Reports filed prior to the
date hereof and for regulatory examinations or reviews conducted in the
ordinary course, no material investigation or review by any
Governmental Entity with respect to the Company or any of its
Subsidiaries is as of the date hereof pending or, to the Knowledge of
the Company, threatened.
(ii) No material change is required in the Company's or any of
its Subsidiaries' processes, properties, practices or procedures in
connection with any such Laws, and the Company has not received any
written notice or communication of any material noncompliance with any
such Laws that has not been cured as of the date hereof.
Notwithstanding the generality of the foregoing, the Company and each
of its Subsidiaries have in place policies and procedures with respect
to themselves and their insurance agents, third-party administrators,
brokers, broker/dealers, distributors and agents intended to assure
that their sales processes and practices are consistent in all material
respects with applicable Law governing such practices and processes,
and, where there has been any material deviation therefrom, such
deviation has been cured, resolved or settled through agreements with
applicable Governmental Entities or are barred by all applicable
statutes of limitations or other equitable principles. To the Knowledge
of the Company, all employees of the Company and its Subsidiaries with
management responsibility with respect to any business line, and all
officers and directors thereof required to be registered with or
licensed under applicable Laws, are so licensed and in good standing
with the applicable Governmental Entity.
(j) TAKEOVER STATUTES. There are applicable to the
transactions contemplated by this Agreement no restrictive provision of
any other applicable "fair price,"
-20-
"moratorium," "control share acquisition," "interested shareholder" or
other similar anti-takeover statute or regulation (each a "TAKEOVER
STATUTE").
(k) TAXES. (i) All material Tax Returns required to be filed
by, or with respect to, the Company or any Subsidiary have been timely
filed (taking into account extensions) and are correct and complete in
all material respects.
(ii) The Company and each of its Subsidiaries has timely paid
all Taxes due and payable by it or for which it may be liable (other
than Taxes that are being contested in good faith and for which
adequate reserves are reflected in accordance with GAAP on the
Company's consolidated balance sheet filed with the Company Form 10-K).
(iii) The Company and each Subsidiary have made adequate
provision in accordance with GAAP on the Company's consolidated balance
sheet filed with the most recent Company Reports for all Taxes payable
for which no Tax Return has yet been filed.
(iv) Neither the Company nor any Subsidiary is doing business
or maintains a taxable presence in a jurisdiction (a "NON-RESIDENT
JURISDICTION") in which it does not file income Tax Returns (or does
file Tax Returns in the manner contemplated by Treasury Regulation
ss.1.882-4(a)(3)(iv) or any comparable provision of applicable law),
and no claim has been made in writing by any taxing authority in a
Non-resident Jurisdiction that the Company or any of its Subsidiaries
are or may be subject to taxation by that jurisdiction.
(v) No material deficiencies for any Taxes have been proposed,
asserted or assessed, in each case in writing, by any taxing authority
against the Company or any of its Subsidiaries that are not adequately
reserved for in accordance with GAAP on the Company's consolidated
balance sheet filed with the Company Form 10-K.
(vi) Within the past three years neither the Company nor any of
its Subsidiaries have been a "distributing corporation" or a
"controlled corporation" in a distribution intended to qualify under
Section 355(a) of the Internal Revenue Code of 1986, as amended (the
"CODE").
(vii) No material amounts of Tax could reasonably be expected to
be imposed on the Company or any Subsidiary as a result of the
reorganization contemplated by the September 26, 2000 proxy
statement/prospectus of Arch Capital Group Ltd. or any related internal
restructuring.
-21-
(viii) No agreements relating to the allocation or sharing of
Taxes exist between the Company and/or any of its Subsidiaries, on the
one hand, and a third party, on the other hand.
(ix) All material Taxes required to be withheld from any
compensation, dividend or other payment by or on behalf of the Company
or any Subsidiary have been withheld, and such withheld Taxes have been
duly and timely paid to the proper taxing authorities.
(x) Based on the advice of its tax advisors, the Company does
not believe that the Company or any of its Subsidiaries presently is a
"personal holding company" within the meaning of Section 542(a) of the
Code, a "foreign personal holding company" within the meaning of
Section 552(a) of the Code, a "controlled foreign corporation" within
the meaning of Section 957 of the Code or a "foreign investment
company" within the meaning of Section 1246 of the Code. Based on the
advice of its tax advisors, the Company does not believe that the
Company presently is, or, at the end of the taxable year that includes
the Closing Date, will be, a "passive foreign investment company"
within the meaning of Section 1297 of the Code.
(xi) The Company has not had and does not expect to have a
disallowance of any deductions under Section 162(m) of the Code for
employee remuneration of any amount paid or payable by the Company or
any Subsidiary. "TAXES," with respect to any person means, (A) any and
all taxes, charges, fees, levies or other assessments, including all
net income, gross income, gross receipts, excise, stamp, real or
personal property, ad valorem, withholding, social security,
unemployment, use, license, net worth, payroll, franchise, severance,
transfer, recording, employment, premium, windfall profits,
environmental, customs duties, capital stock, profits, sales,
registration, value added, alternative or add-on minimum, estimated or
other taxes, assessments or charges imposed by any taxing authority and
any interest, penalties, or additions to tax attributable thereto; (B)
any joint or several liability of such person with any other person for
the payment of any amounts of the type described in clause (A) of this
definition, and (C) any liability of such person for the payment of any
amounts of the type described in clause (A) as a result of any express
or implied obligation to indemnify any other person. "TAX RETURNS"
means any return, report, form or similar statement required to be
filed with respect to any Tax (including any attached schedules),
including any information return, claim for refund, amended return or
declaration of estimated Tax.
(l) INTELLECTUAL PROPERTY. Each of the Company and its
Subsidiaries owns, or is licensed or otherwise possesses legally
enforceable rights to use, all patents, trademarks, trade names,
service marks, copyrights, and any applications therefor, technology,
know-how, computer software programs or applications, and tangible or
-22-
intangible proprietary information or materials, including trade
secrets (collectively, "INTELLECTUAL PROPERTY") that are used in, and
material to, the business of the Company and its Subsidiaries as
currently conducted, and any such patents, trademarks, trade names,
service marks and copyrights held by the Company and/or its
Subsidiaries are valid and subsisting except, in any such case, as
would not have a Material Adverse Effect.
(m) BROKERS AND FINDERS. Neither the Company nor any of its
officers, directors or employees has employed any broker or finder or
incurred any liability for any brokerage fees, commissions or finders'
fees in connection with the transactions contemplated by this Agreement
based upon arrangements made by or on behalf of the Company or any of
its Subsidiaries, except that the Company has employed CSFB as its
financial advisor pursuant to a written agreement, a true and accurate
copy of which has previously been provided to the Purchasers.
(n) INSURANCE BUSINESS. (i) All actuarial reports with respect
to the Company or any Company Insurance Company relied upon by the
Company or any Company Insurance Company or Governmental Entity since
December 31, 1999, and all attachments, addenda, supplements and
modifications thereto (the "COMPANY ACTUARIAL ANALYSES"), were prepared
using appropriate modeling and other procedures accurately applied, if
relevant, and in conformity with generally accepted actuarial standards
consistently applied, and the projections contained therein were
properly prepared in accordance with the assumptions stated therein.
The information and data furnished by the Company or any Company
Insurance Company to its independent actuaries in connection with the
preparation of the Company Actuarial Analyses were accurate in all
material respects.
(ii) The Company Insurance Companies are in compliance in all
material respects with the underwriting guidelines applicable thereto.
(iii) Except as would not, individually or in the aggregate, be
reasonably likely to result in a material liability to the Company, (A)
each separate account maintained by a Company Insurance Company (a
"SEPARATE ACCOUNT") is duly and validly established and maintained
under the laws of its state of formation and is either exempt from
registration under the 1940 Act or is duly registered as an investment
company under the 1940 Act, and (B) each such Separate Account is
operated and all of its operations conducted, and each contract issued
by a Company Insurance Company under which Separate Account assets are
held has been duly and validly issued, offered and sold, in compliance
with all applicable Laws.
(o) MATERIAL CONTRACTS. (i) Other than contracts or amendments
thereto that have been disclosed in or have been filed as an Exhibit to
a Company Report filed
-23-
prior to the date hereof, neither the Company nor any of its
Subsidiaries is a party to or otherwise bound by any Material Contract.
"MATERIAL CONTRACT" means, with respect to any Person, any Contract
that is material to the business, financial position or results of
operations of such Person and its Subsidiaries, taken as a whole,
including (A) any employment, severance, termination, consulting or
retirement contract with an officer or member of senior management, and
(B) any material Contract relating to the borrowing of money or the
guarantee of any such obligation.
(ii) All of the Company's Material Contracts are in full force
and effect. True and complete copies of all such Material Contracts not
filed as exhibits to the Company Reports prior to the date hereof have
been delivered or made available by the Company to Purchasers. Neither
the Company nor any of its Subsidiaries nor, to the Knowledge of the
Company, any other party is in breach of or in default under any such
Material Contract. Neither the Company nor any of its Subsidiaries is
party to any (A) Contract containing any provision or covenant limiting
in any material respect the ability of the Company or any of its
Subsidiaries to (1) sell any products or services to any other Person,
(2) engage in any line of business, or (3) compete with any Person, or
(B) except for employment agreements disclosed pursuant to another
Section of this Agreement or as provided in the certificate of
incorporation, memorandum of association, Bye-laws or other constituent
documents of the Company or any of its Subsidiaries, any Contract
providing for indemnification of directors or executive officers of the
Company in their capacity as such except as would not have a Material
Adverse Effect.
(p) RISK MANAGEMENT; DERIVATIVES. (i) The Company and its
Subsidiaries have in place risk management policies and procedures
sufficient in scope and operation to protect against risks of the type
and in amounts reasonably expected to be incurred by Persons of similar
size and in similar lines of business as the Company and its
Subsidiaries.
(ii) The adoption of Statement of Financial Accounting
Standards No. 133 will not have a material and adverse impact on the
Company's consolidated results of operations or financial position.
(iii) All material derivative instruments, including, without
limitation, swaps, caps, floors and option agreements, whether entered
into for the Company's own account, or for the account of one or more
of its Subsidiaries or their customers, were entered into (A) only for
purposes of mitigating identified risk or as a means of managing the
Company's long-term debt objectives, (B) in accordance with prudent
practices and in all material respects with all applicable laws, rules,
regulations and regulatory policies, and (C) with counterparties
believed by the Company to be financially responsible at the time; and
each of them constitutes the valid and legally bind-
-24-
ing obligation of the Company or one of its Subsidiaries, enforceable
in accordance with its terms, and are in full force and effect. Neither
the Company nor its Subsidiaries, nor to the Company's Knowledge any
other party thereto, is in breach of any of its material obligations
under any such agreement or arrangement.
(q) AVIATION TREATIES. The Company Disclosure Letter sets
forth a list of all reinsurance treaties relating to aviation insurance
written by the Company or its Subsidiaries with respect to which the
Company or any Subsidiary of the Company may be claimed against,
together with a description of the material terms of such treaties (the
"AVIATION TREATIES"). The information set forth in such schedule, as of
the date hereof, fairly and accurately describes the Aviation Treaties
and reasonably estimates, as of the date hereof, any liabilities that
the Company or any of its Subsidiaries could reasonably be expected to
incur in connection therewith.
4. COVENANTS. The Company and the Purchasers (severally and
not jointly) hereby covenant and agree as follows:
(a) CONDUCT OF THE COMPANY. The Company agrees that from the
date hereof until the Closing Date, (i) except as set forth in the
Disclosure Letter or as otherwise expressly permitted or required by
Sections D.4.b, D.4.e, D.4.h or Section E of this Agreement, or (ii)
except with the prior written consent of the Purchasers (which consent
shall not be unreasonably withheld or delayed), the Company and its
Subsidiaries may conduct insurance and reinsurance businesses and
operations and, in the ordinary course consistent with past practice,
its other businesses and operations, and shall use their reasonable
efforts to preserve intact their business organizations and material
relationships with third parties and to keep available the services of
their present officers and employees. Without limiting the generality
of the foregoing, from the date hereof until the Closing Date, except
as set forth in the Disclosure Letter or as expressly permitted or
required by Sections D.4.b, D.4.e, D.4.h or Section E of this
Agreement, without the prior written consent of the Purchasers:
(A) the Company will not amend, or propose to amend,
its Certificate of Incorporation, memorandum of association,
bye-laws or other organizational documents;
(B) the Company will not, and will not permit any of
its Subsidiaries to, merge or consolidate with any other
person;
(C) the Company will not split, combine, subdivide,
redeem or reclassify its shares or declare, set aside, make,
or pay any dividend or other distribution (whether in cash,
stock or property or any combination thereof) in respect of
its share capital and other equity interests;
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(D) the Company will not, directly or indirectly,
redeem, repurchase or otherwise acquire or offer to redeem,
repurchase, or otherwise acquire, any of its securities;
(E) the Company will not (i) issue, deliver or sell,
or authorize the issuance, delivery or sale of, any of its
shares, or any securities convertible into or exercisable for,
or any rights, warrants or options to acquire, any of its
shares, grant any additional options to purchase Common
Shares, or grant to any person any right to acquire any shares
of the Company or any right, the value of which is based on
the value of Common Shares, other than the issuance of Common
Shares upon the exercise of share options outstanding on the
date hereof in accordance with their present terms, (ii) enter
into any agreement restricting the transfer of, or affecting
the rights of holders of, the Company's securities, (iii)
grant any preemptive or antidilutive rights with respect to
any of the Company's securities, (iv) grant any registration
rights with respect to the Company's securities, or (v) amend
in any term of any outstanding securities of the Company or
any of its Subsidiaries;
(F) the Company will not acquire any assets or
properties for cash or otherwise for an amount in excess of
$500,000, in the aggregate;
(G) the Company will not, and will not permit any of
its Subsidiaries to, acquire (whether pursuant to merger,
stock or asset purchase, joint venture or otherwise) in one
transaction or series of related transactions any equity
interest in, or all or substantially all of the assets of, any
person or any business or division of any person;
(H) the Company will not, and will not permit any of
its Subsidiaries to, incur indebtedness for borrowed money,
guarantee any indebtedness, issue or sell any debt securities
or warrants or rights to acquire any debt securities of the
Company or any of its Subsidiaries or guarantee any debt
securities of others (collectively "DEBT") in excess of
$500,000, or prepay or refinance any indebtedness for
Borrower's money;
(I) the Company will not, and will not permit any of
its Subsidiaries to, sell, lease, license or otherwise dispose
of, any material amount of assets, securities or property,
except pursuant to existing contracts or commitments;
(J) the Company will not (i) change its tax or
financial accounting policies, practices or methods except as
required by accounting principles generally accepted in the
U.S., or by the rules and regulations of the SEC or (ii)
-26-
make any tax election, file any tax return or settle any tax
contest or other matter, in each case, other than in a manner
consistent with past practice;
(K) the First American portion of the Core Insurance
Operations shall not bind any gross or net insurance risk
without the approval of Messrs. Ingrey, ▇▇▇▇▇ or Grandisson;
(L) the Company will not replace the independent
auditors of the Company;
(M) the Company will not increase by 5% or more the
annual base compensation of any officer or key employee of the
Company, or enter into or make any material change in any
severance contract or arrangement with any such officer or key
employee;
(N) the Company will not consummate a complete
liquidation or dissolution of the Company, a merger or
consolidation (i) in which the Company or any Subsidiary is a
constituent corporation, or (ii) with respect to which the
Common Shares would have the right to vote under applicable
law, a sale of all or substantially all of the Company's
assets, or any similar business combination;
(O) the Company will not approve the annual plan,
annual capital expenditure budget or the five-year plan of the
Company and its Subsidiaries, taken as a whole;
(P) the Company will not remove the Chief Executive
Officer or Chairman of the Company, or appoint a new Chief
Executive Officer or Chairman of the Company;
(Q) the Company will not, and shall cause its
Subsidiaries to not, engage in any transaction with any
officer, director, or affiliate of any officer or director, of
the Company;
(R) the Company will not (i) establish, enter into or
amend any collective bargaining agreement, Plan or Company
Plan, including, without limitation, any severance plan,
agreement or arrangement, (ii) increase the compensation
payable or to become payable or the benefits provided to its
current or former directors, officers, employees, consultants
or service providers or (iii) accelerate the vesting or
payment of the compensation payable or the benefits provided
to any current or former director, officer, employee,
consultant or
-27-
service provider, in each case other than as required by
applicable Law or any existing Company Plan; or
(S) the Company will not, and will not permit any of
its Subsidiaries to, agree or commit to do any of the
foregoing.
Nothing in this Section D.4 shall grant to any Purchaser any
right of consent (to the extent that such right would result in such
Purchaser being deemed to "control" an insurance subsidiary of the
Company that is domiciled in the United States where the exercise of
such control would otherwise require the prior approval of such state).
(b) SHAREHOLDERS MEETING. The Company will cause a meeting of
its shareholders (the "SHAREHOLDERS MEETING") to be duly called and
held as soon as reasonably practicable after the Closing Date for the
purpose of voting on (i) the adoption of an amendment (the "BYE-LAW
AMENDMENT") of the Company's bye-law 45 and 75 in the form of EXHIBIT
III hereto, and (ii) the issuance of such number of Conversion Shares
that, together with the total number of Warrant Shares issuable upon
exercise of the Warrants, is in excess of the amount that is permitted
to be issued without shareholder approval under Rule 4350(i)(1)(D) of
the Nasdaq Stock Market. The parties agree and acknowledge that ▇▇▇▇▇▇
▇▇▇▇▇▇▇▇ will serve as Chairman of the Board of Directors so long as he
is a director and is willing to serve in such capacity.
(c) PROXY STATEMENT. (i) Promptly after the Closing Date, the
Company shall prepare and file with the SEC the proxy statement (the
"PROXY STATEMENT") relating to the Shareholders Meeting. The Company
shall mail the Proxy Statement to its shareholders as promptly as
practicable after the Closing Date and, if necessary, after the Proxy
Statement shall have been so mailed, promptly circulate amended,
supplemental or supplemented proxy material, and, if required in
connection therewith, resolicit proxies. The parties acknowledge and
agree that no shareholder approval is required prior to the Closing
Date in connection with the sale and purchase of the Securities and the
consummation of the transactions contemplated hereby.
(ii) The Company will advise the Purchasers and the Transaction
Committee, promptly after it receives notice thereof, of the time when
any supplement or amendment has been filed or any request by the SEC
for amendment of the Proxy Statement or comments thereon and responses
thereto or requests by the SEC for additional information. If at any
time the Company or the Purchasers, respectively, discover any
information relating to the Company or the Purchasers, or any of their
respective affiliates, officers or directors, that should be set forth
in an amendment or supplement to the Proxy Statement so that the
document will not include any misstatement of a material fact or omit
to state any material fact necessary to make the statements therein, in
the light of the circumstances under which they were made, not
-28-
misleading, then the party that discovers any misleading information
shall promptly notify the other parties hereto and an appropriate
amendment or supplement describing the information shall be promptly
filed with the SEC and, to the extent required by law or regulation,
disseminated to the Company's shareholders.
(d) GOVERNMENT FILINGS. The Company and the Purchasers shall
cooperate with one another in (i) determining whether any other action
by or in respect of, or filing with, any federal, state or local court,
administrative or regulatory agency or commission or other governmental
authority or agency, domestic or foreign (each, a "GOVERNMENTAL
ENTITY") is required in connection with the consummation of the
transactions contemplated hereby or the effectiveness of the Bye-Law
Amendment and (ii) seeking any consents, approvals or waivers, taking
any actions, or making any filings, furnishing information required in
connection therewith and seeking promptly to obtain any consents,
approvals or waivers. The Company and the Purchasers agree, if
required, to make an appropriate filing of a Notification and Report
Form pursuant to the HSR Act with respect to the transactions
contemplated hereby as promptly as practicable and to supply as
promptly as practicable any additional information and documentary
material that may be requested pursuant to the HSR Act and to take all
other actions necessary to cause the expiration or termination of the
applicable waiting period under the HSR Act as soon as practicable.
(e) DISPOSITIONS; PENDING ACQUISITIONS. Prior to the Closing,
the Company shall endeavor in good faith, subject to prevailing market
conditions, to (i) sell, and cause its Subsidiaries to sell, all
marketable securities, publicly traded equity securities,
non-investment grade debt securities and illiquid securities owned by
it (other than shares of any Subsidiary) and (ii) invest the proceeds
from such sales prior to Closing Date in short-term, liquid, investment
grade debt securities, and after the Closing Date, as determined by
Board of Directors. The Company shall also use its commercially
reasonable efforts to consummate the acquisition of Rock River.
(f) PUBLIC ANNOUNCEMENTS. Upon the execution of this
Agreement, the Company and the Purchasers will consult with each other
with respect to the issuance of a press release to be released by the
Company with respect to this Agreement and the transactions
contemplated hereby, which release shall require the prior approval of
the Purchasers. Prior to the Closing Date, except as otherwise agreed
to by the parties, the parties shall not issue any report, statement or
press release or otherwise make any public statements with respect to
this Agreement, except as in the reasonable judgment of the party may
be required by law, any national stock exchange or the Nasdaq Stock
Market or in connection with the obligations of a publicly-held
company. The Company and the Purchasers will consult with each other
with respect to the issuance of a press release on or after the Closing
Date with respect to the consummation of the
-29-
transactions contemplated by this Agreement, which release shall
require the prior approval of the Purchasers.
(g) ACCESS; INFORMATION. From the date hereof until the
Closing Date and subject to applicable law, the Company shall (i) give
to each Purchaser, its counsel, financial advisors, auditors and other
authorized representatives reasonable access to the offices,
properties, books and records of such party, (ii) provide access to
each Purchaser, its counsel, financial advisors, auditors and other
authorized representatives to such financial and operating data and
other information as such persons may reasonably request and (iii)
instruct its employees, counsel, financial advisors, auditors and other
authorized representatives to cooperate with the Purchasers in its
investigation. Any investigation pursuant to this Section shall be
conducted in such manner as not to interfere unreasonably with the
conduct of the business of the Company. Unless otherwise required by
law, each Purchaser will hold, and will cause its respective officers,
employees, counsel, financial advisors, auditors and other authorized
representatives to hold, any nonpublic information obtained in any such
investigation or otherwise, when conducted before or after the date
hereof, in confidence and shall not use for its own benefit in a manner
adverse to the Company, and shall take reasonable steps to prevent
disclosure of, any confidential information that it receives, and shall
use at least the same degree of care to avoid disclosure of such
information as it uses with respect to its own confidential
information; PROVIDED, HOWEVER, that no Purchaser shall have any
obligations hereunder with respect to information which (A) is known by
such Purchaser on a non-confidential basis at the time of disclosure by
the Company, (B) is at the time of disclosure, or becomes thereafter,
publicly available other than pursuant to a breach of this subsection
by such Purchaser, (C) is received from a third party without
restriction on further disclosure, (D) is independently developed by
such Purchaser, or (E) is requested or required to be disclosed by
self-regulatory organizations or by applicable law on request of any
Governmental Entity. In the event of clause (E), such Purchaser will
give prior notice to the Company of such disclosure in order to enable
the Company to seek a protective order or other remedy or to waive
compliance with this subsection.
Each Purchaser shall give to the Company and its counsel such
information regarding ownership of the Company, ownership of such
Purchaser and related areas as they reasonably request in connection
with preparing disclosure in filings under the Act or the Exchange Act
on issues arising under the Internal Revenue Code of 1986, as amended,
including the rules applicable to "controlled foreign corporations"
thereunder.
The Company shall, to the extent practicable, cause its
Subsidiaries to maintain under separate ledgers the components
necessary to calculate the Adjustment Basket.
-30-
(h) INDEMNIFICATION; INSURANCE. (i) To the fullest extent
permitted by law, from and after the Closing Date, all rights to
indemnification as of the date hereof in favor of the directors,
officers, employees and agents of the Company or any of its
Subsidiaries with respect to their activities as such prior to the
Closing Date and, with respect to the Transaction Committee also, after
the Closing Date, as provided in the bye-laws or other organizational
documents of the Company and its Subsidiaries in effect on the date
hereof, or otherwise in effect on the date hereof, shall continue in
full force and effect for a period of not less than six years from the
Closing Date. The Purchasers shall not cause the Company to take any
action inconsistent with this Section D.4.h.
(ii) To the extent, if any, not provided by an existing right
of indemnification or other agreement or policy, after the Closing
Date, the Company shall, to the fullest extent permitted by applicable
law, indemnify and hold harmless, each present and former director or
officer of the Company or any of its Subsidiaries (collectively, the
"INDEMNIFIED PARTIES") against all costs and expenses (including
reasonable attorneys' fees), judgments, fines, losses, claims, damages,
liabilities and settlement amounts paid in connection with any claim,
action, suit, proceeding or investigation (whether arising before or
after the Closing Date), whether civil, administrative or
investigative, arising out of or pertaining to any action or omission
in their capacity as a director, officer, employee or agent of the
Company or any of its Subsidiaries, in each case before the Closing
Date (including the transactions contemplated by this Agreement) and,
with respect to the Transaction Committee, also after the Closing Date.
In the event of any such costs, expenses, judgments, fines, losses,
claims, damages, liabilities or settlement amounts (whether or not
arising before the Closing Date), (A) the Company shall pay the
reasonable fees and expenses of counsel selected by the Indemnified
Parties, which counsel shall be reasonably satisfactory to the Company,
promptly after statements therefor are received, and otherwise advance
to the Indemnified Parties upon request reimbursement of documented
expenses reasonably incurred, in either case, to the extent not
prohibited by the applicable law and (B) the Company shall cooperate in
the defense of any such matter. In the event any Indemnified Party is
required to bring any action to enforce rights or to collect moneys due
under this Agreement and is successful in such action, the Company
shall reimburse such Indemnified Party for all of its expenses in
bringing and pursuing such action.
(iii) For a period of at least six (6) years after the Closing
Date, the Company shall cause to be maintained in effect the directors'
and officers' liability insurance policies maintained by the Company
and its Subsidiaries or substitute policies with at least the same
coverage containing terms and conditions which are substantially
equivalent with respect to matters occurring prior to the Closing Date,
but the
-31-
Company shall not, in any event, be required to pay more than 200% of
the current cost of such coverage.
(iv) In the event the Company or any of its successors or
assigns (A) consolidates with or merges into any other person and shall
not be the continuing or surviving corporation or entity of such
consolidation or merger or (B) transfers all or substantially all of
its properties and assets to any person, then, and in either such case,
proper provision shall be made so that the successors and assigns of
the Company, shall assume the obligations set forth in this Section
D.4.h. This Section D.4.i is intended to benefit (and shall be
enforceable by) the Indemnified Parties and their respective heirs,
executors and personal representatives.
(i) FURTHER ASSURANCES. Subject to the terms and conditions of
this Agreement, each of the parties hereto agrees to use its reasonable
best efforts to take, or cause to be taken, all action, and to do, or
cause to be done, all things necessary or desirable under applicable
legal requirements, to consummate and make effective the transactions
contemplated by this Agreement. If at any time after the Closing Date,
any further action is necessary or desirable to carry out the purposes
of this Agreement, the parties hereto shall use their reasonable best
efforts to take or cause to be taken all such necessary or desirable
action and execute, and deliver and file, or cause to be executed,
delivered and filed, all necessary or desirable documentation.
(j) CERTAIN TAX MATTERS. (i) With respect to each taxable year
during which any Purchaser owns shares of the Company, the Company
shall use its reasonable best efforts to cause the Company and each of
its Subsidiaries (A) not to constitute a "passive foreign investment
company" within the meaning of Section 1297 of the Code, (B) not to
satisfy the gross income requirement set forth in Section 542(a) of the
Code, (C) not to satisfy the gross income requirement set forth in
Section 552(a) of the Code, and (D) not to have any related person
insurance income within the meaning of Section 953(c)(2) of the Code.
(ii) In the event that the Company or any of its Subsidiaries
constitutes a personal holding company, a foreign personal holding
company, a controlled foreign corporation, a foreign investment company
or a passive foreign investment company for U.S. federal income tax
purposes with respect to any taxable year, the Company shall provide,
and shall cause its Subsidiaries to provide, each Purchaser with such
information as such Purchaser may reasonably request to satisfy its
legitimate tax, accounting or other reporting requirements.
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E. RIGHT TO EXCHANGE PREFERENCE SHARES
1. FORMATION OF NEWCO. The Company shall use best efforts to
(a) form a wholly owned Subsidiary ("NEWCO") to which the Company shall
contribute 100% of its equity interest in Arch Reinsurance Ltd., a Bermuda
company ("ARL") and (b) contribute, or cause the appropriate Subsidiary to
contribute, all Core Insurance Operations other than Arch Reinsurance Company, a
Nebraska corporation ("ARC"), in each case, no later than 90 days after the
Closing Date (subject, in the case of direct or indirect contribution of U.S.
domiciled insurance companies, to any necessary regulatory approvals or material
third party approvals). From and after such formation and contribution, the
Company shall not engage in the insurance business other than through Newco,
except for (i) its holding of ARC and (ii) the operations of American
Independent Insurance Holding Company, a Pennsylvania corporation ("AIIH") and
▇▇▇▇▇ & Co., Inc., a Delaware corporation ("▇▇▇▇"), but only to the extent of
the current nature and scope of such operations of AIIH and ▇▇▇▇. The Company
shall (1) use its best efforts to cause Newco to have the benefit of, or obtain
independently, the same insurance authorizations as currently held by ARC, and
(2) seek to accomplish the transactions contemplated by this paragraph in as
tax-efficient a manner as possible.
2. CAPITAL STRUCTURE OF NEWCO. Newco shall be a company
organized under the laws of Bermuda, with a number and kind of authorized and
outstanding capital shares (including shares and warrants identical to the
Preference Shares and Warrants), and a memorandum of association and bye-laws
that replicate, as nearly as possible, those of the Company. All of such
outstanding shares shall, upon such formation and contribution, be held by the
Company. Until the latest of (a) the receipt of Requisite Shareholder Approval,
(b) the receipt of Requisite Regulatory Approval and (c) ninety days following
consummation of the Final Adjustment contemplated by Section B.3. of this
Agreement to the extent that the number and kind of outstanding capital shares
of the Company change from time to time, a corresponding adjustment shall be
made by the Company in the number and kind of outstanding capital shares of
Newco.
3. EXCHANGE RIGHT. From and after the occurrence of an
Exchange Trigger Event, the Preference Shares and Warrants may be exchanged, in
whole or in part (provided that Preference Shares representing a minimum of $150
million in Liquidation Preference shall be required for the initial such
exchange), for preference shares and warrants of Newco bearing identical rights
and privileges, including the right to convert into, or be exercised for, common
shares of Newco. Such right to exchange shall be exercisable upon delivery to
the Company and Newco of an exchange notice, which notice shall specify the
number of Preference Shares and Warrants surrendered for exchange. Once
delivered, the exchange notice shall be irrevocable, subject to the delivery of
the required preference shares and/or warrants of Newco by the Company to the
surrendering holder. Each exchange shall be deemed to have been effected at the
close of business on the date of receipt by the Company
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of the exchange notice, and the person exercising such exchange right shall be
deemed to be the record holder of Newco preference shares and/or warrants as of
the close of business on such date. From and after the exercise of such exchange
right, the Company shall replicate, as nearly as possible, the rights and
benefits, including governance rights and registration rights, provided for the
benefit of Purchasers under this Agreement, the Certificate, the Shareholders
Agreement and as otherwise contemplated under this Agreement for the benefit of
the holders of preference shares and/or warrants of Newco. An "EXCHANGE TRIGGER
EVENT" shall mean any one or more of the following: (a) failure to obtain the
Requisite Shareholder Approval (unless such failure was due to a breach by the
Purchaser of a covenant hereunder) within five months of Closing Date, (b)
failure to obtain the Requisite Regulatory Approval within six months of Closing
Date or (c) if the Final Adjustment contemplated by Section B.3. of this
Agreement is less than zero and its absolute value exceeds $250 million.
4. MAINTENANCE OF NEWCO. Until the latest of (a) the receipt
of Requisite Shareholder Approval, (b) the receipt of Requisite Regulatory
Approval and (c) ninety days following the consummation of the Final Adjustment
contemplated by Section B.3. of this Agreement, the Company shall maintain
intact the business, customers and employees of Newco and its operations as
contemplated by Section E.1 and shall not (i) sell, dispose, exchange or
distribute by way of dividend or otherwise any of the capital stock of Newco,
(ii) sell, dispose, or exchange any assets of Newco, except in the ordinary
course of business and to the extent the proceeds are retained in Newco, (iii)
pay any dividend or distribution to the Company, or (iv) permit Newco, or any of
its Subsidiaries to engage in any merger, business combination, consolidation or
other similar transaction except for such transactions between wholly owned
Subsidiaries of Newco.
5. FAILURE OF REGULATORY APPROVAL. To the extent approval of
any governmental authority is necessary either (a) for the Company to satisfy
its obligations under Section E.1, or (b) for a holder of Preference Shares or
Warrants to exercise its exchange right under clause (3) above, and such
approval has not occurred at the time a holder gives an exchange notice, the
Company will hold Newco, the assets and operations to be contributed in Newco,
and ARC in trust for the benefit of such exchanging holder, and shall use best
efforts to restructure such holdings, if necessary, to obtain such approval, or
to provide the same economic and governance benefit as intended to be provided
by the exchange right for preference shares and warrants of Newco.
6. MODIFICATION OR AMENDMENT. The original signatories to this
Agreement shall be the sole parties required to agree with the Company to any
modification amendment or waiver of the provisions of this Section E and no
other holder of Preference Shares shall have such consent rights.
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F. ADDITIONAL PROVISIONS
1. MODIFICATION. This Agreement may not be modified, amended
or supplemented except in writing and signed by the party against whom any
modification, amendment or supplement is sought. No term or condition of this
Agreement may be, or will be deemed to have been, waived except in writing by
the party charged with the waiver. A waiver shall operate only as to the
specific term or condition waived and will not constitute a waiver for the
future or act on anything other than that which is specifically waived. Any
modification, amendment, supplement or waiver to be executed by the Company must
be approved by the Transaction Committee.
2. PURCHASERS' COSTS AND EXPENSES. The Company will reimburse
the Purchasers for their costs and expenses in connection with the transactions
contemplated by this Agreement, including, without limitation, (a) the fees and
expenses of the Purchaser's accountants, attorneys and other advisors and (b)
any and all losses, liabilities, claims, damages and any out-of-pocket costs and
expenses incurred in connection with any claims, disputes, proceedings or
litigation arising directly or indirectly out of the transactions contemplated
by this Agreement, provided that any such reimbursed costs and expenses shall
not be reflected in any reduction of Book Value included under "C" in Schedule
B.
3. NOTICES. Any notice or other communications required or
permitted to be given pursuant to this Agreement shall be in writing and shall
be sent by registered or certified mail, return receipt requested, postage
prepaid, by hand delivery (including courier services), or by facsimile as
follows:
if to the Company, to:
Arch Capital Group Ltd.
▇▇ ▇▇▇▇▇▇▇▇▇ ▇▇▇▇
▇▇▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Attention: General Counsel
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
with copies to:
▇▇▇▇▇▇ ▇▇▇▇▇▇ & ▇▇▇▇▇▇▇
▇▇ ▇▇▇▇ ▇▇▇▇▇▇
▇▇▇ ▇▇▇▇, ▇▇ ▇▇▇▇▇
Attention: ▇▇▇▇▇▇▇▇ ▇▇▇▇, Esq.
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
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and if to any Purchaser, at its address set forth on the signature pages hereof
or, with respect to the Company and the Purchasers, to such other person or
address as either party shall specify by like notice to the other party. Any
notice or communication shall be deemed given or made (a) when delivered by
hand, (b) when mailed, three business days after being deposited in the mail,
postage prepaid, sent by certified mail, return receipt requested, and (c) when
sent by facsimile, receipt acknowledged.
4. SUCCESSORS, ASSIGNS. This Agreement and all of the terms
and provisions hereof shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and assigns; PROVIDED that this
Agreement is not transferable or assignable by any Purchaser (other than to any
Affiliate of such Purchaser) without the Company's consent. Notwithstanding the
foregoing, a Purchaser shall be free to assign its rights and obligations
hereunder with respect to up to 30% of such Purchaser's Total Purchase Price to
any Person previously discussed with the Company, provided that such assignee
becomes a party hereto, whereupon such assignee shall have the rights of, and be
subject to the obligations of, a "Purchaser" hereunder. Following any assignment
(including from a Purchaser to its Affiliates) the assignor shall have no
further obligations under, and shall have no rights or benefits of any kind
under, the Agreement with respect to the subscription so assigned. Following the
assignment by any of the signatories on pages S-2 to S-5 ( "WARBURG PURCHASER")
to its Affiliate, such Warburg Purchaser shall have no further obligations
under, and shall have no rights or benefits of any kind under, this Agreement.
5. TRANSACTION COMMITTEE. During the period from the date of
this Agreement through the Second Applicable Date, in the event that the
Company's Board of Directors is required to act with respect to (a) an
amendment, modification or waiver of rights under, this Agreement, the
Certificate, the Warrants or the Shareholders Agreement (the "RELATED
AGREEMENTS"), (b) the enforcement of obligations of the Purchasers under the
Related Agreements or (c) approval of actions relating to the disposition of
Non-Core Assets, such action shall be deemed approved by the Board if approved
by the Transaction Committee.
6. GOVERNING LAW. The validity and effects of this Agreement
shall be governed by and construed and enforced in accordance with the laws of
the State of New York.
7. SURVIVAL. The representations and warranties set forth in
Section D.3 of this Agreement shall survive the Closing Date, but the exclusive
remedy shall be through the Adjustment Basket(s) contemplated by Section B.3. of
this Agreement.
8. ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement among the parties hereto and supersedes all prior agreements,
understandings and arrangements, oral or written, among the parties hereto with
respect to the subject matter hereof.
-36-
9. SEVERABILITY. If any one or more of the provisions
contained in this Agreement shall be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
will not affect any other provision hereof.
10. COUNTERPARTS. This Agreement may be executed in any number
of counterparts, each of which shall be considered an original and all of which
together shall be deemed to be one and the same instrument.
11. CURRENCIES. Unless otherwise specifically indicated, all
payments and currency amounts indicated herein refer to and shall be denominated
in United States Dollars. "Dollars" and "$" shall denote United States Dollars.
[Signature pages follow]
S-1
IN WITNESS WHEREOF, each Purchaser has executed this Agreement
as of the date first above-written.
WARBURG PINCUS PRIVATE
EQUITY VIII, L.P.,
By: Warburg, ▇▇▇▇▇▇ & Co.,
its General Partner
By: /s/ ▇▇▇▇▇▇▇ ▇▇▇
-----------------------------
Name: ▇▇▇▇▇▇▇ ▇▇▇
Title: Partner
Amount Subscribed: $250 million
Notices to: Warburg Pincus Private Equity VIII, L.P.
▇▇▇ ▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇
Attention: ▇▇▇▇▇▇▇ ▇▇▇
Telephone: (▇▇▇) ▇▇▇-▇▇▇▇
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
With copies to: Wachtell, Lipton, ▇▇▇▇▇ & ▇▇▇▇
▇▇ ▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇
▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇
Attention: ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇▇
Telephone: (▇▇▇) ▇▇▇-▇▇▇▇
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
S-2
IN WITNESS WHEREOF, each Purchaser has executed this Agreement
as of the date first above-written.
WARBURG PINCUS INTERNATIONAL
PARTNERS, L.P.,
By: Warburg, ▇▇▇▇▇▇ & Co.,
its General Partner
By: /s/ ▇▇▇▇▇▇▇ ▇▇▇
----------------------------
Name: ▇▇▇▇▇▇▇ ▇▇▇
Title: Partner
Amount Subscribed: $240 million
Notices to: Warburg Pincus International Partners, L.P.
▇▇▇ ▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇
Attention: ▇▇▇▇▇▇▇ ▇▇▇
Telephone: (▇▇▇) ▇▇▇-▇▇▇▇
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
With copies to: Wachtell, Lipton, ▇▇▇▇▇ & ▇▇▇▇
▇▇ ▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇
▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇
Attention: ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇▇
Telephone: (▇▇▇) ▇▇▇-▇▇▇▇
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
S-3
IN WITNESS WHEREOF, each Purchaser has executed this Agreement
as of the date first above-written.
WARBURG PINCUS NETHERLANDS
INTERNATIONAL PARTNERS I, C.V.
By: Warburg, ▇▇▇▇▇▇ & Co.,
its General Partner
By: /s/ ▇▇▇▇▇▇▇ ▇▇▇
-----------------------------
Name: ▇▇▇▇▇▇▇ ▇▇▇
Title: Partner
Amount Subscribed: $6 million
Notices to: Warburg Pincus Netherlands International
Partners I, C.V.
▇▇▇ ▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇
Attention: ▇▇▇▇▇▇▇ ▇▇▇
Telephone: (▇▇▇) ▇▇▇-▇▇▇▇
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
With copies to: Wachtell, Lipton, ▇▇▇▇▇ & ▇▇▇▇
▇▇ ▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇
▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇
Attention: ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇▇
Telephone: (▇▇▇) ▇▇▇-▇▇▇▇
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
S-4
IN WITNESS WHEREOF, each Purchaser has executed this Agreement
as of the date first above-written.
WARBURG PINCUS NETHERLANDS
INTERNATIONAL PARTNERS II, C.V.
By: Warburg, ▇▇▇▇▇▇ & Co.,
its General Partner
By: /s/ ▇▇▇▇▇▇▇ ▇▇▇
--------------------------------
Name: ▇▇▇▇▇▇▇ ▇▇▇
Title: Partner
Amount Subscribed: $4 million
Notices to: Warburg Pincus Netherlands International
Partners II, C.V.
▇▇▇ ▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇
Attention: ▇▇▇▇▇▇▇ ▇▇▇
Telephone: (▇▇▇) ▇▇▇-▇▇▇▇
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
With copies to: Wachtell, Lipton, ▇▇▇▇▇ & ▇▇▇▇
▇▇ ▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇
▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇
Attention: ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇▇
Telephone: (▇▇▇) ▇▇▇-▇▇▇▇
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
S-5
IN WITNESS WHEREOF, each Purchaser has executed this Agreement
as of the date first above-written.
HFCP IV (BERMUDA), L.P.,
By: H&F Investors IV, LLC,
its General Partner
By: H&F Investors III, Inc.,
its Manager,
By: /s/ ▇▇▇▇ ▇. ▇▇▇▇▇, ▇▇.
-------------------------------
Name: ▇▇▇▇ ▇. ▇▇▇▇▇, ▇▇.
Title: Vice President
Amount Subscribed: $250 million
Notices to: HFCP IV (Bermuda), L.P.
c/▇ ▇▇▇▇▇▇▇ & ▇▇▇▇▇▇▇▇ LLC
▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇▇
▇▇▇▇▇ ▇▇▇▇
▇▇▇ ▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇
Attention: ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇
Telephone: (▇▇▇) ▇▇▇-▇▇▇▇
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
With copies to: Wachtell, Lipton, ▇▇▇▇▇ & ▇▇▇▇
▇▇ ▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇
▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇
Attention: ▇▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇
Telephone: (▇▇▇) ▇▇▇-▇▇▇▇
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
S-6
Accepted and agreed to as of the date first above-written.
ARCH CAPITAL GROUP LTD.
By: /s/ ▇▇▇▇▇ ▇▇▇▇▇▇▇▇
------------------------------------------------
Name: ▇▇▇▇▇ ▇▇▇▇▇▇▇▇
Title: Senior Vice President and General Counsel
SCHEDULE A
CERTAIN DEFINITIONS
"ADJUSTED WARRANT AMOUNT" means, with respect to each
Purchaser, (a) the product of 0.5 times (b) an amount equal to (i) such
Purchaser's Total Purchase Price divided by (ii) the Estimated Per Share Price
minus $1.50.
"AFFILIATE" shall have the same meaning as set forth in the
Shareholder Agreement.
"COMMON SHARES" means the common shares, par value $0.01 per
share, of the Company.
"CORE INSURANCE OPERATIONS" shall mean the following assets
and capital:
(i) Arch Reinsurance Ltd., a Bermuda company
("ARL"),
(ii) Arch Capital Group (U.S.) Inc., a Delaware
corporation ("ACG(US)"),
(iii) Arch Reinsurance Company, a Nebraska
corporation ("ARC"),
(iv) Cross River Insurance Company, a Nebraska
corporation (including funding for Rock
River Insurance Company, a Wisconsin
corporation ("ROCK RIVER")),
(v) Arch Risk Transfer Services Ltd., a Cayman
Islands company (including First American
Financial Corporation, a Missouri
corporation),
(vi) capital held at the holding company level,
gross of capital to be invested in unfunded
private equity commitments which, when
funded, shall be deemed to be Non-Core
Assets, and
(vii) $2.5 million in segregated assets and
liabilities in cell companies.
"ESTIMATED PER SHARE PRICE" means (a) the Company's total
shareholders' equity as of June 30, 2001 as set forth on its unaudited
consolidated balance sheet as of such date (which is $271,652,000), adjusted
using the ▇▇▇▇ to Market Procedures, so that marketable securities in the
Company's investment portfolio are valued at their estimated fair value as of
the business day immediately preceding the Closing Date in accordance with GAAP,
di-
A-1
vided by (b) the total number of Common Shares outstanding as of June 30, 2001
(which is 12,863,079).
"FAIR MARKET VALUE" shall mean (a) with respect to Common
Shares, the average of the high and low daily sales price on the Nasdaq of the
Common Shares for the 20 trading days immediately preceding the date of which
Fair Market Value is to be calculated, and (b) with respect to a security
convertible into exchangeable for Common Shares, the product of (i) the average
of the high and low daily sales price on the Nasdaq of the Common Shares for the
20 trading days immediately preceding the date of which Fair Market Value is to
be calculated, and (ii) the number of Common Shares into which such security is
then convertible or exchangeable.
"GAAP" means accounting principles generally accepted in the
United States applied on a basis consistent with those used in preparation of
the Audited Balance Sheet.
"KNOWLEDGE" refers to the actual knowledge of an officer or
the Chairman of the Company.
"▇▇▇▇ TO MARKET PROCEDURES" means that the Company will
liquidate all non treasury securities prior to the Closing Date and reinvest the
proceeds in short term U.S. Treasury Securities. All remaining securities held
at the Closing Date will be marked to market based on the closing bid price on
the Closing Date. A purchase price adjustment computed will be made as follows:
Realized gains (losses) in the period from XXX
July 1, 2001 to day before the closing
Plus(minus) the change in unrealized gains in
the period July 1, 2001 to the Closing Date
As follows
Unrealized gain (loss) at June 30 XXX
net of Unrealized gain (loss) at closing XXX +XXX (net unrealized)
Market value change XXX
Less Tax effect at 18.5%
Purchase price adjustment XXX
"MATERIAL ADVERSE EFFECT" on the Company means a material
adverse effect on the properties, assets, liabilities, condition (financial or
otherwise), business, operations or operating earnings of the Company and its
Subsidiaries, taken as a whole, or an effect which is
A-2
reasonably likely to prevent or materially delay or materially impair the
ability of the Company to consummate the transactions contemplated by this
Agreement, excluding any such effect resulting from changes in general economic
or industry conditions, announcement of the transaction contemplated hereby or
the performance by the Company of its obligations hereunder.
"NON-CORE ASSETS" shall mean the following:
(a) American Independent Insurance Holding Company, a
Pennsylvania corporation,
(b) ▇▇▇▇▇ & Co., Inc., a Delaware corporation,
(c) escrow assets under the Folksamerica disposition
agreement, net of the contingent reserve recorded as of June 30, 2001, as
adjusted for 18.5% tax benefits and minus all liabilities, contingent or
otherwise, not transferred to the purchaser under such disposition agreement,
including "Excluded Liabilities" under such disposition agreement,
(d) all non-public securities held by the Company, ACG (US),
and ARC and
(e) all commitments to The Trident Partnership, II and
Distribution Partners, as and when funded.
"PER SHARE PRICE" means (a) the Company's total shareholders'
equity as of June 30, 2001 as set forth on the Audited Balance Sheet, adjusted
(ii) so that marketable securities in the Company's investment portfolio are
valued at their estimated fair value as of the business day immediately
preceding the Closing Date, using the ▇▇▇▇ to Market Procedures, as set forth in
the Portfolio Review and (ii) to give effect to those expenses that are
described in "C" on Schedule B that are ascertainable prior to the calculation
of the Per Share Price (whether or not paid prior to Closing) and that would
otherwise result in a decrease of total shareholders' equity of the Company,
divided by (b) the total number of Common Shares outstanding as of June 30, 2001
(which is 12,863,079).
"PERSON" shall mean any individual, corporation, partnership,
trust, limited liability company, association or other entity or organization,
including a government or political subdivision or an agency or instrumentality
thereof.
"TRANSACTION COMMITTEE" means a committee of the Board of
Directors consisting of persons who either (a) were members of the Board of
Directors on the date prior to the date of this Agreement and/or (b) were
designated as members of the Transaction Committee by a person who was a member
of the Board of Directors on the date prior to the date of this Agreement.
A-3
SCHEDULE B
ADJUSTMENT BASKET
The Adjustment Basket shall be equal to A + B - C, where:
A = sum of (Realized Value - Adjusted Closing Book Value) of each Non-Core
Asset.
"REALIZED VALUE" means (a) with respect to any Non-Core Asset that is
disposed of on or prior to the Test Date: (i) all cash
proceeds realized from the disposition of such asset from July
1, 2001 through the Test Date (the "Realization Period") to
the extent such proceeds are received by the Company, Newco or
a subsidiary of Newco and would be distributable to the
Company, net of all taxes or withholding that would be payable
if such proceeds were so distributed, plus (ii) the after-tax
amount of any dividends or distributions made from such asset
during the Realization Period (to the extent received by the
Company or Newco), minus (iii) taxes payable (plus actual tax
benefits) resulting from such disposition, minus (iv)
earn-outs and other incentive payments actually made, or
committed to, in connection with such disposition (with
reasonable estimates with respect to commitments which are
outstanding as of the Test Date), minus (v) investment
banking, brokerage, legal and consulting fees and other costs
actually incurred in connection with such disposition, minus
all contingent liabilities, guarantee and escrows associated
with such disposition; and (b) with respect to any Non-Core
Asset that is not disposed of on or prior to the Test Date:
the appraised value, as determined by a reputable appraisal
firm selected by the Purchasers and the Transaction Committee.
Such appraisal shall take into account, among other things,
without duplication, the illiquid nature of such assets, the
size of the business, the minority nature of the interest and
an expected future 20% cost of capital for such business.
"ADJUSTED CLOSING BOOK VALUE" means, with respect to any Non-Core Asset
that is or is not disposed of on or prior to the Test Date,
its book value, determined in accordance with GAAP, as of June
30, 2001 as set forth in the Audited Balance Sheet, plus, in
the case of Non-Core Assets, a capital charge equal to 15% per
annum, compounded annually, computed from the Closing Date to
the Test Date (or in the case of Non-Core Assets disposed of,
the disposition date).
B = Test Date Balances - Closing Date Balances
"TEST DATE BALANCES" means the sum of (a) the Insurance Balances at
the Test Date, calculated on the same basis as the Audited
Balance Sheet, and (b) all related cash collections
(including, without limitation, premiums and reinsurance
re-
B-1
coveries) and cash payments from June 30, 2001 to the Test
Date. It is anticipated that cash flows subject to these
provisions will be maintained under separate general ledger
control.
"CLOSING DATE BALANCES" means the Insurance Balances at June 30, 2001
as set forth on the Audited Balance Sheet, including, without
limitation, the amount set forth in clause (i)(x) of the
definition of Per Share Price.
For the avoidance of doubt, A or B can be either a positive or negative
balance.
"INSURANCE BALANCES" means premiums receivable, unpaid claims and
claims expenses recoverable, prepaid reinsurance premiums,
reinsurance balances receivable, deferred policy acquisition
costs, claims and claims expenses, unearned premiums,
reinsurance balances payable, and any other insurance balance
(e.g., assets held in separate accounts, claims payable,
aggregate deductible fund, payables to Bermuda cell and
commissions payable) of the Core Insurance Operations with
respect to any policy or contract written or having an
effective date prior to the Closing Date. The Insurance
Balances as contemplated herein are intended to incorporate,
among other things, return and additional premiums,
retrospectively rated contract features, extra-contractual
obligations, commissions, fees and guarantee funds and
residual market assessments and other cash flows associated
with in force business as of the Closing Date and all
obligations arising from business that expired prior to
Closing.
C = Reductions in Book Value arising from the following (and without
duplication of any expenses included in the calculation of
Realized Value and without duplication of any expenses
otherwise reflected in the determination of the Per Share
Price), all costs and expenses relating to the purchase and
sale of Securities and the transactions provided for hereunder
(including, without limitation, all costs and expenses arising
from performance by the Company of its obligations hereunder,
all costs associated with the purchase price adjustments, all
costs of any payments that become due to any third party as a
result of the transactions hereunder, and all costs relating
to litigation concerning this Agreement), actual losses
arising out of breach of representations of the Company
hereunder, the rationalization of the Company's operations and
elimination of overhead undertaken in connection with this
transaction with the approval of the Transaction Committee,
the reduction in book value resulting from any other expenses
(including internal incentive arrangements), employee
separation agreements, fee payable by the Company to Credit
Suisse First Boston Corporation or any other investment
banking firm or broker, legal fees payable to counsel engaged
by or on behalf of the Company, and other related breakage
costs, in each case in connection with the transactions
hereby.
B-2