Exhibit 2.1
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ASSET TRANSFER AGREEMENT
By and Among
RELIANCE GROUP HOLDINGS, INC.,
RELIANCE INSURANCE COMPANY,
RELIANCE NATIONAL INDEMNITY COMPANY,
UNITED PACIFIC INSURANCE COMPANY,
RELIANCE INSURANCE COMPANY OF ILLINOIS,
RELIANCE NATIONAL INSURANCE COMPANY (EUROPE) LTD.,
RELIANCE SURETY COMPANY,
and
TRAVELERS CASUALTY AND SURETY COMPANY
Dated as of April 10, 2000
TABLE OF CONTENTS
Page
ARTICLE I DEFINITIONS....................................................................................2
Section 1.1. Definitions.........................................................................2
ARTICLE II PRE-CLOSING AUDIT; TRANSFER OF ASSETS........................................................13
Section 2.1. Pre-Closing Audit..................................................................13
Section 2.2. Consideration......................................................................14
Section 2.3. Transfer of Transferred Assets and Assumption of Assumed Liabilities...............14
Section 2.4. Place and Date of Closing; Closing Financial Statements; Final Financial
Statements ........................................................................16
Section 2.5. Post-Closing Adjustments...........................................................18
Section 2.6. Closing Items, Recording Fees......................................................22
ARTICLE III REPRESENTATIONS AND WARRANTIES OF SELLER PARTIES............................................23
Section 3.1. Corporate Existence and Power......................................................23
Section 3.2. Corporate Authorization............................................................24
Section 3.3. Governmental Authorization.........................................................24
Section 3.4. Non-Contravention..................................................................24
Section 3.5. Financial Statements...............................................................25
Section 3.6. Seller Financial Statements........................................................25
Section 3.7. Reserves...........................................................................25
Section 3.8. Absence of Certain Changes.........................................................26
Section 3.9. [INTENTIONALLY LEFT BLANK].........................................................27
Section 3.10. Material Contracts.................................................................27
Section 3.11. Litigation.........................................................................28
Section 3.12. Compliance with Laws...............................................................29
Section 3.13. Properties and Assets..............................................................29
Section 3.14. Regulatory Filings.................................................................29
Section 3.15. Intercompany Accounts..............................................................30
Section 3.16. Intellectual Property..............................................................30
Section 3.17. All Assets Necessary...............................................................33
Section 3.18. Third Party Reinsurance Contracts..................................................33
Section 3.19. Solvency; Adequate Capitalization; Ability to Pay Debts............................34
Section 3.20. Taxes..............................................................................34
Section 3.21. Employee Benefit Plans; ERISA......................................................34
Section 3.22. Employee Matters...................................................................35
Section 3.23. Books and Records..................................................................36
Section 3.24. Threats of Cancellation............................................................36
Section 3.25. Brokers............................................................................36
Section 3.26. Treasury Authorization; Treasury Limitations.......................................36
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Section 3.27. Agents; Agency Contracts...........................................................36
Section 3.28. Ratings............................................................................36
Section 3.29. Fairness Opinions..................................................................37
Section 3.30. Collateral and Indemnity Agreements................................................37
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PURCHASER..................................................37
Section 4.1. Corporate Existence and Power......................................................37
Section 4.2. Corporate Authorization............................................................37
Section 4.3. Governmental Authorization.........................................................38
Section 4.4. Non-Contravention..................................................................38
Section 4.5. Ratings............................................................................38
Section 4.6. Licenses and Permits...............................................................38
Section 4.7. Brokers............................................................................38
Section 4.8. Assets Necessary to Perform Administrative Services................................39
Section 4.9. Purchaser Financial Statements.....................................................39
Section 4.10. Solvency; Adequate Capitalization; Ability to Pay Debts............................39
ARTICLE V COVENANTS.....................................................................................39
Section 5.1. Conduct of Seller Parties Prior to the Closing Date................................39
Section 5.2. No Alternative Proposals...........................................................42
Section 5.3. Investigations; Books and Records..................................................44
Section 5.4. HSR Act Filings....................................................................44
Section 5.5. Cooperation and Reasonable Best Efforts............................................44
Section 5.6. Further Assurances.................................................................45
Section 5.7. Notices of Certain Events..........................................................46
Section 5.8. Public Announcements...............................................................46
Section 5.9. Expenses...........................................................................46
Section 5.10. Supplemental Disclosure............................................................47
Section 5.11. Tax Matters........................................................................47
Section 5.12. Reinsurance Treaties...............................................................47
Section 5.13. Certain Intercompany Matters.......................................................48
Section 5.14. Employees..........................................................................48
Section 5.15. Employee Benefits..................................................................49
Section 5.16. Allocation of Purchase Price and Assumed Liabilities...............................52
Section 5.17. Lockboxes..........................................................................53
Section 5.18. Confidentiality....................................................................53
Section 5.19. Non-Compete; Non-Solicitation......................................................54
Section 5.20. Confidentiality Agreements.........................................................56
Section 5.21. Reorganizations and Restructurings.................................................56
Section 5.22. Continuity of Agreements...........................................................57
Section 5.23. Agents.............................................................................57
Section 5.24. Collateral and Indemnity Agreements................................................57
Section 5.25. Administrative Services Agreement..................................................58
Section 5.26. ▇▇▇▇ of Sale.......................................................................58
Section 5.27. Loss and Unearned Premium Reserve Portfolio Reinsurance Agreement..................58
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Section 5.28. Quota Share Reinsurance Agreements.................................................58
Section 5.29. General Assignment and Assumption Agreement........................................58
Section 5.30. Software License Agreement; Use of Third Party Computer Programs...................58
Section 5.31. Transition Services Agreement......................................................60
Section 5.32. Trademark License Agreement........................................................60
Section 5.33. Travelers/Reliance Indemnity Agreement.............................................60
Section 5.34. Additional Intellectual Property Agreements........................................60
Section 5.35. Exclusive Right to Use the Books and Records and Business Intellectual Property....60
Section 5.36. Certain Accounts Receivable........................................................61
Section 5.37. Ratings............................................................................62
Section 5.38. Assignment of Subrogation and Salvage Rights.......................................62
Section 5.39. UCC Financing Statements...........................................................63
Section 5.40. Dissolution of Reliance Surety Group, Inc.; Use of Trademark.......................63
Section 5.41. Use of "Firemark"..................................................................63
Section 5.42. Recordable Intellectual Property Assignments.......................................63
Section 5.43. Accrued Bonuses....................................................................63
Section 5.44. Third Party Computer Programs/Workstations Audit...................................64
Section 5.45. Novation of Travelers/Reliance Indemnity Agreement.................................64
Section 5.46. Purchase Price and Ceding Commission Paid to RIC...................................64
ARTICLE VI CONDITIONS TO THE CLOSING....................................................................64
Section 6.1. Conditions to Obligations of Purchaser and Seller Parties..........................64
Section 6.2. Conditions to Obligations of Purchaser.............................................65
Section 6.3. Conditions to Obligation of Seller Parties.........................................67
ARTICLE VII SURVIVAL; INDEMNIFICATION...................................................................68
Section 7.1. Survival...........................................................................68
Section 7.2. Indemnification....................................................................68
Section 7.3. Procedures for Third Party Claims..................................................70
Section 7.4. Procedures for Direct Claims.......................................................71
Section 7.5. Exclusive Remedy...................................................................72
ARTICLE VIII TERMINATION................................................................................72
Section 8.1. Grounds for Termination............................................................72
Section 8.2. Effect of Termination..............................................................73
ARTICLE IX MISCELLANEOUS PROVISIONS.....................................................................74
Section 9.1. Post-Closing Payments..............................................................74
Section 9.2. Entire Agreement...................................................................74
Section 9.3. Binding Effect.....................................................................74
Section 9.4. No Third-Party Beneficiaries.......................................................74
Section 9.5. Invalidity.........................................................................74
Section 9.6. Governing Law......................................................................75
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Section 9.7. Jurisdiction.......................................................................75
Section 9.8. WAIVER OF JURY TRIAL...............................................................75
Section 9.9. Counterparts.......................................................................75
Section 9.10. Headings...........................................................................75
Section 9.11. Notices............................................................................75
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INDEX OF EXHIBITS
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Exhibit A - Administrative Services Agreements
Exhibit B - ▇▇▇▇ of Sale
Exhibit C - General Assignment and Assumption Agreement
Exhibit D - Loss and Unearned Premium Reserve Portfolio
Reinsurance Agreement
Exhibit E - Quota Share Reinsurance Agreements
Exhibit F - Software License Agreements
Exhibit G - Trademark License Agreements
Exhibit H - Transaction Calculation Memo
Exhibit I - Transition Services Term Sheet
Exhibit J - Travelers/Reliance Indemnity Agreement
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INDEX OF SCHEDULES
Schedule 1.1(a) - Assigned and Assumed Contracts
Schedule 1.1(b) - Assumed Liabilities
Schedule 1.1(c) - Business Intellectual Property
Schedule 1.1(d) - Knowledge
Schedule 1.1(e) - Leases
Schedule 1.1(f) - Reliance National Profit Center
Schedule 1.1(g) - Reliance Profit Center
Schedule 1.1(h) - Reliance Surety Profit Center
Schedule 1.1(i) - Retained Assets
Schedule 1.1(j) - Retained Financial Statement Liabilities
Schedule 1.1(k) - Assumed Reinsurance Transactions
Schedule 1.1(l) - Other Transfer Assets
Schedule 2.1(a) - Special Purpose Balance Sheet and Income
Statement
Schedule 3.3 - Approvals or Filings Under Insurance Laws
Schedule 3.4 - Non-Contravention
Schedule 3.8 - Absence of Certain Changes
Schedule 3.10 - Material Contracts
Schedule 3.11(a) - Litigation
Schedule 3.11(b) - Proceedings Challenging Consummation of
Closing
Schedule 3.12 - Compliance with Laws
Schedule 3.13(a) - Material Liens on Transferred Assets
Schedule 3.13(b) - Liens on Business Assets Reasonably
Necessary to Perform Transition Services
Schedule 3.14(b) - Permits
Schedule 3.14(d) - Non-Compliant Subject Contracts
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Schedule 3.15 - Intercompany Accounts Liability
Schedule 3.16(a) - Patents, Trademarks, Copyrights
Schedule 3.16(c)(i) - Computer Programs - Proprietary Software
Schedule 3.16(c)(ii) - Computer Programs - Public Domain
Schedule 3.16(c)(iii) - Computer Programs - Third Party Software
Schedule 3.16(d)(i) - Agreements Granting Third Parties Rights to
Use Intellectual Property
Schedule 3.16(d)(ii) - Agreements Permitting Seller Parties to Use
Intellectual Property
Schedule 3.16(f) - Judgments and Restrictions Relating to
Intellectual Property
Schedule 3.16(g) - Loss or Impairment of Rights with Respect to
Intellectual Property
Schedule 3.16(i) - Year 2000 Non-Compliant Proprietary Software
Schedule 3.17 - All Assets Necessary
Schedule 3.18(a) - Third Party Reinsurance Contracts
Schedule 3.18(b) - Notices of Commutation of Third Party
Reinsurance Agreements
Schedule 3.20(a) - Taxes
Schedule 3.21 - Employee Benefit Plans; ERISA
Schedule 3.21(c) - Employees Entitled to Severance
Schedule 3.22 - Employment at Will
Schedule 3.24 - Threats of Cancellation
Schedule 3.26 - Treasury Limitations
Schedule 3.27(a) - Agents
Schedule 3.27(b) - Agency Contracts Not in Full Force and
Effect
Schedule 4.3 - Approvals or Filings Under Insurance Laws
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Schedule 4.4 - Non-Contravention
Schedule 4.6 - Licenses and Permits
Schedule 5.1(i) - Form of Commutation Agreement
Schedule 5.2(a) - Form of Agreement Pursuant to Section 5.2
Schedule 5.13 - Certain Intercompany Matters
Schedule 5.19(b) - Carve-Outs to the Non-Compete
Schedule 6.2(iii) - Third Party Consents and Approvals
Schedule 6.2(viii) - Third Party Reinsurer Consents
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ASSET TRANSFER AGREEMENT
This ASSET TRANSFER AGREEMENT (this "Agreement"), dated as of
April 10, 2000, is entered into by and among Reliance Group Holdings, Inc., a
Delaware corporation ("Parent"), Reliance Insurance Company, a Pennsylvania
insurance company and wholly-owned subsidiary of Parent ("RIC"), Reliance
National Indemnity Company, a Wisconsin insurance company and a wholly-owned
subsidiary of RIC ("RNIC"), United Pacific Insurance Company, a Pennsylvania
insurance company and a wholly-owned subsidiary of RIC ("UPIC"), Reliance
Insurance Company of Illinois, an Illinois insurance company and a wholly-owned
subsidiary of RIC ("RICI"), Reliance Surety Company, a Delaware insurance
company and a wholly-owned subsidiary of RIC ("RSC") and Reliance National
Insurance Company (Europe) Ltd., an insurance company organized under the laws
of England and Wales and a wholly-owned subsidiary of RIC ("RNIC Europe")(RIC,
RNIC, UPIC, RICI, RSC and RNIC Europe, collectively, the "Seller Insurer
Parties," and together with Parent, the "Seller Parties"), and Travelers
Casualty and Surety Company, a Connecticut insurance company ("Purchaser").
RECITALS:
WHEREAS, Seller Parties own and operate, and desire to sell to
Purchaser, the Business (as defined below), upon the terms and subject to the
conditions hereinafter set forth; and
WHEREAS, upon the terms and subject to the conditions of this
Agreement, at the Closing (as defined below), the parties hereto will execute
and deliver the following agreements and instruments dated as of the Closing
Date (as defined below) or a date prior thereto: (i) certain Seller Insurer
Parties and Purchaser will enter into the Specified Reinsurance Agreements (as
defined below) providing for, upon the terms and conditions and for the
consideration set forth therein, reinsurance by Purchaser of the liabilities of
Seller Insurer Parties under the Subject Contracts (as defined below); (ii) each
Seller Insurer Party and Purchaser will enter into an Administrative Services
Agreement (as defined below) providing for the servicing by Purchaser of the
Subject Contracts issued in the name of a Seller Party, (iii) the Seller Parties
and Purchaser will enter into a Transition Services Agreement (as defined below)
providing for the provision by the Seller Parties or their Affiliates (as
defined below), as applicable, of certain services to the Business (as defined
below) currently provided by a Seller Party or an Affiliate (as defined below)
of a Seller Party and requested by Purchaser as necessary to enable Purchaser to
operate the Business; (iv) the Seller Parties and Purchaser will enter into the
General Assignment and Assumption Agreement (as defined below) to provide for
the assignment by Seller Parties of certain assets and Leases and the assumption
by Purchaser of certain noninsurance obligations and liabilities relating to the
Business; (v) the Seller Parties and Purchaser will enter into the Software
License Agreement (as defined below); (vi) the Seller Parties and Purchaser will
enter into the Trademark License Agreement (as defined below); and (vii) each
Seller Party will execute and deliver to Purchaser all necessary instruments of
transfer, including, but not limited to, the ▇▇▇▇ of Sale (as defined below);
NOW, THEREFORE, in consideration of the foregoing premises and
the mutual promises and covenants set forth herein and in the Ancillary
Agreements (as defined below), and in reliance upon the representations,
warranties, conditions and covenants contained herein and in the Ancillary
Agreements, and intending to be legally bound hereby and thereby, the parties
hereto do hereby agree as follows:
ARTICLE I
DEFINITIONS
Section 1.1. Definitions. The following terms, when used in
this Agreement, shall have the meanings set forth herein. The terms defined
below shall be deemed to refer to the singular or plural as the context
requires.
"Adjusted GAAP Net Worth" shall have the meaning set forth in
Section 2.4(e).
"Adjusted Policyholders' Surplus" shall have the meaning set
forth in Section 2.4(e).
"Administrative Services" means the services performed
pursuant to the Administrative Services Agreements.
"Administrative Services Agreements" means the Administrative
Services Agreements between Purchaser and each Seller Insurer Party in the form
attached hereto as Exhibit A.
"Affiliate" of any Person shall mean another Person that
directly or indirectly controls, is controlled by, or is under common control
with, such first Person, where "control" means the possession, directly or
indirectly, of the power to direct or cause the direction of the management
policies of a Person, whether through the ownership of voting securities, by
contract, as trustee or executor, or otherwise.
"Allocable Amount" shall have the meaning set forth in
Section 5.16.
"Alternative Proposal" shall have the meaning set forth in
Section 5.2.
"Ancillary Agreements" shall mean the Administrative Services
Agreements, ▇▇▇▇ of Sale, General Assignment and Assumption Agreements, Loss and
Unearned Premium Reserve Portfolio Reinsurance Agreement, Quota Share
Reinsurance Agreement, Software License Agreements, Trademark License
Agreements, Transition Services Agreement, Travelers/Reliance Indemnity
Agreement, Trademark Assignment and Copyright Assignment.
"Antitrust Division" shall have the meaning set forth in
Section 5.4.
"Applicable Law" shall mean any applicable order, law,
statute, regulation, rule, ordinance, writ, injunction, directive, judgment,
decree, principle of
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common law, constitution or treaty enacted, promulgated, issued, enforced or
entered by any Governmental Entity applicable to the parties hereto, or any of
their respective businesses, properties or assets.
"Assigned and Assumed Contracts" means the contracts listed on
Schedule 1.1(a) hereto.
"Assumed Liabilities" shall mean the Liabilities of Seller
Parties assumed by Purchaser pursuant to the General Assignment and Assumption
Agreement identified on Schedule 1.1(b) hereto; provided, however, that in no
event shall Assumed Liabilities be deemed to include Retained Financial
Statement Liabilities, Purchaser Indemnified Liabilities, or any Liabilities of
Seller Parties, their Affiliates or the Business incurred before or after the
Closing that are not expressly assumed by Purchaser under this Agreement or any
Ancillary Agreement.
"Assumed Reinsurance Transactions" shall have the meaning set
forth within the definition of "Subject Contracts," below.
"Audited Opening Financial Statements" shall have the meaning
set forth in Section 2.1.
"Audited Special-Purpose Statements" shall have the meaning
set forth in Section 3.6.
"▇▇▇▇ of Sale" means the ▇▇▇▇ of Sale between Purchaser and
Seller Parties in the form attached hereto as Exhibit B.
"Board of Directors" shall mean, with respect to any Person,
such Person's board of directors or any duly authorized committee thereof.
"Books and Records" shall mean, without limitation, the
originals or copies of all contracts, instruments, filings, customer lists and
data (including, without limitation, data relating to customer renewals and
Subject Contract expirations and information concerning customer identities,
customer performance, marketing and rating methodology), lists of all agents and
brokers, administrative and pricing manuals, records (including, without
limitation, claim records, sales records, underwriting records, financial
records, compliance records and tax records) and other materials relating
principally to the Business, whether or not (i) in the possession of a Seller
Party or its Affiliates or (ii) stored in hardcopy form or on magnetic, optical
or other media.
"Business" means the business of the Reliance Surety Profit
Center relating to the Subject Contracts and the operations and activities of
Seller Parties conducted by the Reliance Surety Profit Center or involved in the
issuance, renewal and, except as contemplated by the Transition Services
Agreement, administration of the Subject Contracts, but excluding (i) the
business, operations and activities of any other Reliance profit center,
including, without limitation, the Reliance National Profit Center and the
Reliance Profit Center and (ii) any issuance of bonds or insurance policies
through Environmental Consulting Services, Inc.
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"Business Assets" shall mean any tangible or intangible assets
(whether or not required by GAAP or SAP to be reflected on a balance sheet)
beneficially owned by a Seller Party that relates to the Business, but not
including investment assets in the investment portfolio of any Seller Party.
"Business Day" shall mean any day other than a Saturday,
Sunday or a day on which banking institutions in New York or Connecticut are
permitted or obligated by law to be closed for regular banking business.
"Business Intellectual Property" shall mean the Intellectual
Property used exclusively in the Business, including, but not limited to, those
items listed on Schedule 1.1(c). Notwithstanding the foregoing, "Business
Intellectual Property" shall not include the following: "RSC", "Reliance
Surety", "Reliance Surety Company" and "▇▇▇▇▇▇▇▇▇▇▇▇▇▇.▇▇▇", all of which shall
be transferred pursuant to the Trademark License Agreement.
"Calculated According to the Transaction Calculation Memo",
when used following a reference to a dollar amount corresponding to GAAP Net
Worth, shall mean that such dollar amount is applicable both before and after
giving effect to the Seller Parties' retention of the Retained Assets and
Retained Financial Statement Liabilities, as shown on the Transaction
Calculation Memo. "Calculated According to the Transaction Calculation Memo",
when used following a reference to a dollar amount corresponding to
Policyholders' Surplus, shall mean that such dollar amount is (i) reduced to the
extent of the pension liability of the Business, net of the related deferred tax
asset, which amount shall not exceed $2.5 million and (ii) applicable both
before and after giving effect to the Seller Parties' retention of the Retained
Assets and Retained Financial Statement Liabilities, in each case as shown on
the Transaction Calculation Memo.
"Ceding Commission" shall mean the ceding commission paid by
Purchaser to the Cedent under the Loss and Unearned Premium Reserve Portfolio
Reinsurance Agreement.
"Closing" means the closing of the transactions contemplated
by this Agreement.
"Closing Date" shall have the meaning set forth in Section
2.4(a).
"Closing Financial Statements" shall have the meaning set
forth in Section 2.4(b).
"Collateral Agreements" shall mean any and all agreements
between a Seller Insurer Party and its customers for which Subject Contracts
have been issued whereby Persons have pledged, assigned or otherwise transferred
assets to guarantee obligations under Subject Contracts or Indemnity Agreements.
"Code" shall mean the Internal Revenue Code of 1986, as
amended.
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"Computer Programs" shall mean (i) any and all computer
software programs, including any and all software implementations of algorithms,
models and methodologies whether in source or object code, (ii) databases and
compilations, including any and all data and collections of data, whether
machine readable or otherwise, (iii) all descriptions, flow-charts and other
work product used to design, plan, organize and develop any of the foregoing,
(iv) all content contained on a Person's Internet site(s), and (v) all
documentation, including user manuals and training materials, relating to any of
the foregoing, in each case, used in the Business, including, but not limited
to, the Computer Programs set forth on Schedules 3.16(c)(i), (ii) and (iii).
"Damages" shall have the meaning set forth in Section 7.2.
"Designee" shall mean an Affiliate or Affiliates of Purchaser,
a trust substantially in the form set forth in the trust agreement attached to
the draft letter from ▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇, Senior Vice President and General
Counsel of TAP to ▇▇▇▇▇ ▇▇▇▇▇▇▇, Esq. of the Pennsylvania Insurance Department,
submitted on April 9, 2000 with such changes as are reasonably, mutually
agreeable to Purchaser and the Seller Parties; or another Person mutually agreed
to by the parties hereto.
"End Date" shall have the meaning set forth in Section 8.1.
"Employee" shall have the meaning set forth in Section 5.14.
"ERISA" shall mean the Employee Retirement Income Security Act
of 1974, as amended, and the regulations thereunder.
"Final Financial Statements" shall have the meaning set forth
in Section 2.4(c).
"FTC" shall have the meaning set forth in Section 5.4.
"GAAP" shall mean United States generally accepted accounting
principles, consistently applied.
"GAAP Audited Opening Financial Statement" shall have the
meaning set forth in Section 2.1.
"GAAP Closing Financial Statement" shall have the meaning set
forth in Section 2.4(b).
"GAAP Financial Statement Methods" shall have the meaning set
forth in Section 2.1.
"GAAP Financial Statements" shall mean the GAAP Opening
Financial Statement, GAAP Audited Opening Financial Statement, GAAP Closing
Financial Statement and GAAP Final Financial Statement.
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"GAAP Final Financial Statement" shall have the meaning set
forth in Section 2.4(c).
"GAAP Net Worth" shall mean an amount corresponding to the
line item "Certain assets in excess of certain liabilities" as shown on any GAAP
Financial Statements prepared or delivered pursuant to Article 2 hereof.
"GAAP Opening Financial Statement" shall have the meaning set
forth in Section 2.1.
"General Assignment and Assumption Agreement" shall mean the
General Assignment and Assumption Agreement between Seller Parties and Purchaser
in the form attached hereto as Exhibit C.
"Governmental Entity" shall mean any foreign, domestic,
federal, territorial, state or local U.S. or non-U.S. governmental authority,
quasi-governmental authority, instrumentality, court or government,
self-regulatory organization, commission, tribunal or organization or any
political or other subdivision, department, branch or Representative of any of
the foregoing.
"HSR Act" shall mean the ▇▇▇▇-▇▇▇▇▇-▇▇▇▇▇▇ Antitrust
Improvements Act of 1976, as amended.
"Impaired" when used with respect to Parent, shall have the
meaning applicable to Parent under Applicable Law or, when used with respect to
Purchaser or a Seller Insurer Party (other than RNIC Europe), shall have the
meaning applicable to Purchaser or such Seller Insurer Party under the insurance
laws of its domiciliary state, or, when used with respect to RNIC Europe, shall
have the meaning ascribed to such term under the National Association of
Insurance Commissioners' Insurers Criminal Sanctions for Failure to Report
Impairment Model ▇▇▇▇.
"Income Tax Regulations" shall mean regulations promulgated
under the Code.
"Indemnified Party" shall have the meaning set forth in
Section 7.3.
"Indemnifying Party" shall have the meaning set forth in
Section 7.3.
"Indemnity Agreements" shall mean any and all contracts,
applications, agreements, instruments or other documents whereby a Person has
undertaken to indemnify, reimburse and/or hold harmless a Seller Insurer Party
relating to the Subject Contracts (excluding the Third Party Reinsurance
Contracts).
"Individually Underwritten Assumed Reinsurance Transactions"
shall have the meaning set forth within the definition of "Subject Contracts,"
below.
"Intellectual Property" shall mean the following intellectual
property rights used or held in, or necessary for the conduct of, the Business,
as currently
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conducted or as presently contemplated to be conducted: all patents and patent
applications; Trademarks; copyrights, copyright registrations and applications;
Computer Programs; trade secrets, confidential information, technology,
know-how, inventions, processes, formulae, algorithms, models and methodologies,
in each case, including, but not limited to, those items listed on Schedule
3.16(a) hereto.
"Intellectual Property Licenses" shall have the meaning set
forth in Section 3.16(d).
"Knowledge" or "knowledge" as to any of the Seller Parties or
Purchaser, shall mean the actual knowledge of those employees and officers of
the Seller Parties and Purchaser, as applicable, listed on Schedule 1.1(d)
hereto.
"Leases" shall mean the leases listed on Schedule 1.1(e).
"Liability" or "Liabilities" shall mean a liability,
obligation, expense, claim or cause of action (of any kind or nature whatsoever,
whether absolute, accrued, contingent or other, and whether known or unknown)
related, directly or indirectly, to the Business, including, but not limited to,
any liability, obligation, expense, claim or cause of action arising pursuant to
or as a result of the issuance of a Subject Contract.
"Lien" shall mean any mortgage, pledge, lien, encumbrance,
charge, adverse claim (whether pending or, to the knowledge of the Person
against whom the adverse claim is being asserted, threatened) or restriction of
any kind affecting title or resulting in an encumbrance against property, real
or personal, tangible or intangible, or a security interest of any kind,
including, without limitation, any conditional sale or other title retention
agreement, any right of first refusal, any lease in the nature thereof, and any
filing of or agreement to give any financing statement under the Uniform
Commercial Code (or equivalent statute) of any jurisdiction (other than a
financing statement which is filed or given solely to protect the interest of a
lessor).
"Loss and Unearned Premium Reserve Portfolio Reinsurance
Agreement" shall mean the Loss and Unearned Premium Reserve Portfolio
Reinsurance Agreement by and between Parent, RSC, RNIC Europe and Purchaser in
the form attached hereto as Exhibit D.
"Material Adverse Effect" shall mean a material adverse effect
on the liabilities, results of operation or condition (financial or otherwise)
of a Person or its business; provided, however, that the following shall be
excluded from the definition of "Material Adverse Effect" and from any
determination as to whether a Material Adverse Effect has occurred or may occur:
(i) the effects of changes affecting the economy and securities markets
generally; (ii) the effects of changes affecting the insurance and financial
services industries generally; (iii) any downgrade or potential downgrade of the
financial strength, claims paying ability, insurance or other ratings of RIC or
any other Surety Affiliates or the financial strength, debt or similar ratings
of Parent; and (iv) any adverse change resulting directly from the announcement
of the transactions contemplated by this Agreement.
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"Material Agency Contract" shall have the meaning set forth in
Section 3.27.
"90-Day Treasury Rate" means the annual yield rate, as of any
given date, of actively traded U.S. Treasury securities having a remaining
duration to maturity of three months, as such rate is published under "Treasury
Constant Maturities" in Federal Reserve Statistical Release H.15(519).
"Non-Compete" means the non-competition agreement contained in
Section 5.19 hereof.
"Opening Financial Statements" shall mean the GAAP Opening
Financial Statement and the SAP Opening Financial Statement.
"Outstanding Receivables" shall have the meaning set forth in
Section 5.36.
"Permit" shall have the meaning set forth in Section 3.14.
"Person" shall mean an individual, corporation, partnership,
association, joint stock company, limited liability company, Governmental
Entity, trust joint venture, labor union, estate, unincorporated organization or
other entity.
"Plans" has the meaning set forth in Section 3.21.
"Proprietary Software" shall mean all Computer Programs owned
by a Seller Party.
"Policyholders' Surplus" shall mean an amount corresponding to
the line item "Policyholders' Surplus" as shown on any SAP Financial Statement
prepared or delivered pursuant to Article 2 hereof.
"Pooling Agreement" shall have the meaning set forth in
Section 5.1.
"Purchase Price" shall mean an amount equal to five hundred
twenty seven million dollars ($527,000,000) (subject to the adjustments set
forth in Section 2.5).
"Purchaser's Auditor" shall have the meaning set forth in
Section 2.4(c).
"Purchaser Indemnified Liabilities" means Retained Financial
Statement Liabilities and all other Liabilities of Seller Parties, their
Affiliates or the Business incurred prior to the Closing that are not expressly
assumed by Purchaser under this Agreement or the Ancillary Agreements; provided,
however, that in no event shall Purchaser Indemnified Liabilities be deemed to
include (i) Assumed Liabilities; (ii) Subject Contract Liabilities reinsured by
Purchaser pursuant to the Specified Reinsurance Agreements (as defined below);
or (iii) any Liability that is expressly assumed by Purchaser under this
Agreement or under an Ancillary Agreement.
8
"Quota Share Reinsurance Agreements" shall mean the Quota
Share Reinsurance Agreements by and between each of the Seller Insurer Parties
and Purchaser in the form attached hereto as Exhibit E.
"Receivable" shall have the meaning set forth in Section 5.36.
"Receivables Deficit" shall have the meaning set forth in
Section 5.36.
"Reinsurance Recoverables" shall mean all amounts when due
under Third Party Reinsurance Contracts including all receivables, recoverables,
returns, amounts in respect of profit sharing and all other sums to which Seller
Insurer Party may be entitled under the Third Party Reinsurance Contracts,
except to the extent related to reinsurance recoverables for Excluded
Liabilities (as such term is defined in the Specified Reinsurance Agreements).
"Reliance National Profit Center" has the meaning set forth on
Schedule 1.1(f).
"Reliance Profit Center" has the meaning set forth on Schedule
1.1(g).
"Reliance Surety Profit Center" has the meaning set forth on
Schedule 1.1(h).
"Representative" shall mean, with respect to any Person, such
Person's officers, directors, employees, agents and representatives (including,
without limitation, any investment banker, financial advisor, accountant,
actuary, appraiser, analyst, consultant, legal counsel, agent, representative or
expert retained by or acting on behalf of such Person or its subsidiaries).
"Reserves" means loss (including incurred but not reported
losses) and expense reserves of the Seller Insurer Parties (without regard to
the transactions contemplated by the Specified Reinsurance Agreements) with
respect to the Business.
"Retained Assets" shall mean the assets listed on Schedule
1.1(i).
"Retained Financial Statement Liabilities" shall mean the
Liabilities listed on Schedule 1.1(j).
"RIC Auditor" shall have the meaning set forth in Section 2.1.
"RSG" shall have the meaning set forth in Section 3.6.
"SAP" shall mean, with respect to any Person, the statutory
accounting principles and practices prescribed or permitted by the domiciliary
state of the relevant Person, consistently applied.
"SAP Audited Opening Financial Statement" shall have the
meaning set forth in Section 2.1.
9
"SAP Financial Statement Methods" shall have the meaning set
forth in Section 2.1.
"SAP Closing Financial Statement" shall have the meaning set
forth in Section 2.4(b).
"SAP Final Financial Statement" shall have the meaning set
forth in Section 2.4(c).
"SAP Financial Statements" shall mean the SAP Opening
Financial Statement, SAP Audited Financial Statement, SAP Closing Financial
Statement and SAP Final Financial Statement.
"SAP Opening Financial Statement" shall have the meaning set
forth in Section 2.1.
"Shared Intellectual Property" shall mean any Intellectual
Property not used exclusively in the Business.
"Significant Agreements" shall have the meaning set forth in
Section 3.10.
"Software License Agreement" means the Software License
Agreement between Purchaser and Seller Parties in the form attached hereto as
Exhibit F.
"Solvent" when used with respect to Parent, shall have the
meaning applicable to Parent under Applicable Law or, when used with respect to
Purchaser or a Seller Insurer Party (other than RNIC Europe), shall have the
meaning applicable to Purchaser or such Seller Insurer Party under the insurance
laws of its domiciliary state, or, when used with respect to RNIC Europe, shall
have the meaning ascribed to such term under the National Association of
Insurance Commissioners' Insurers Rehabilitation and Liquidation Model Act. To
the extent that any such law or model act exclusively uses the term "insolvent"
rather than "solvent", "Solvent" when used in this Agreement in reference to a
party shall be interpreted to mean not "insolvent" as defined in such law or
model act.
"Specified Reinsurance Agreements" shall mean the Loss and
Unearned Premium Reserve Portfolio Reinsurance Agreement and the Quota Share
Reinsurance Agreement.
"Subject Contracts" means (a) bonds, policies, and contracts
of insurance classified as surety, fidelity, burglary or fiduciary liability
underwritten by the Reliance Surety Profit Center which can be identified
exclusively by the codes or policy prefixes of "B," "P," or "U" and (b) assumed
reinsurance transactions set forth in Schedule 1.1(k), which reinsure bonds,
policies and contracts of insurance classified as fidelity (including burglary),
fiduciary liability or surety, each of which has been identified exclusively by
the codes or policy prefixes of "B," "P," or "U" ("Assumed Reinsurance
Transactions"); and (c) individually underwritten assumed reinsurance
transactions that have been underwritten by the Reliance Surety Profit Center,
the effective dates of which are prior
10
to January 1, 1995, but only to the extent such individually underwritten
assumed reinsurance transactions reinsure (i) bonds, policies, and contracts of
insurance classified as fidelity (including burglary), fiduciary liability or
surety that have been individually underwritten by the Reliance Surety Profit
Center, and (ii) can be exclusively identified by the codes or policy prefixes
as "B," "P," or "U," ("Individually Underwritten Assumed Reinsurance
Transactions"), in the case of each of (a), (b) and (c), regardless of which
Seller Insurer Party issued the Subject Contract; provided, however, that in no
event shall "Subject Contracts" include any business written by any other
Reliance profit center including, but not limited to, the Reliance National
Profit Center and the Reliance Profit Center; any coverages written by the
Reliance Surety Profit Center or any other profit center of a Seller Party or
its Affiliates for financial guaranty insurance (as defined in Section 6901 of
the New York Insurance Law as in effect on the Closing Date, except that for
purposes hereof, Section 6901(a)(1)(E) of the New York Insurance Law shall be
deemed to read as follows: "other events which the Office of General Counsel of
the New York Insurance Department has determined, in a written opinion issued
prior to the Closing Date, are substantially similar to any of the foregoing"),
general liability, workers compensation, directors and officers liability,
employment practices liability, property or any other coverages that are not
classified as fidelity (including burglary), fiduciary liability or surety; any
bond or insurance product provided through Environmental Consulting Services,
Inc.; any and all obligations underwritten by the Reliance Surety Profit Center
for any other Profit Center or Affiliate at the time written in which such other
Profit Center or Affiliate is a Principal or Insured; provided, further, that in
no event shall any surety, fidelity, fiduciary liability or burglary policy or
contract of insurance, Assumed Reinsurance Transaction or Individually
Underwritten Assumed Reinsurance Transaction issued with an effective date (new
or renewal term) on and after the Closing Date constitute a Subject Contract
under the Loss and Unearned Premium Reserve Portfolio Reinsurance Agreement.
Notwithstanding any provision of this Agreement, in no event shall a Subject
Contract that was rescinded or voided prior to the Closing Date be a Subject
Contract.
"Subject Contract Liabilities" means Reinsured Liabilities (as
defined in each of the Quota Share Reinsurance Agreements) and Reinsured
Liabilities (as defined in the Loss and Unearned Premium Reserve Portfolio
Reinsurance Agreement).
"Subsidiary" shall mean each of those Persons (i) of which
another Person, directly or indirectly through one or more Subsidiaries, owns
beneficially securities having more than 50% of the voting power in the election
of directors (or Persons fulfilling similar functions or duties) of the owned
Person (without giving effect to any contingent voting rights), or (ii) which
another Person, directly or indirectly through one or more Subsidiaries,
controls as the general partner, managing member or Person exercising a similar
function.
"Surety Affiliates" shall mean RIC, Reliance National
Indemnity Company, United Pacific Insurance Company, Reliance Insurance Company
of Illinois, Reliance National Insurance Company (Europe) Ltd. and Reliance
Surety Company.
"TAP" shall have the meaning set forth in Section 5.44.
11
"Taxes" shall mean all taxes, charges, duties, fees, levies,
or other similar assessments or Liabilities, including, without limitation, all
net and gross income, gross receipts, ad valorem, premium, excise, real
property, personal property, windfall profit, sales, use, transfer, license,
withholding, employment, payroll, profit, estimated, severance, stamp,
occupation, value added, registration, environmental, workers compensation,
social security and franchise taxes imposed by the United States Internal
Revenue Service or any taxing authority (whether domestic or foreign, including,
without limitation, any state, county, local or foreign government or any
subdivision or taxing agency thereof (including a United States possession));
and such term shall include any interest, fines, penalties, assessments, or
additions to tax relating to, resulting from, attributable to, or incurred in
connection with any such tax or any contest or dispute thereof.
"Tax Returns" of a Person shall mean any report, return,
information return, or other document (including any related or supporting
information and any amendments thereto) filed or required to be filed with any
federal, state, local, or foreign governmental entity or other authority in
connection with the determination, assessment or collection of any Tax or the
administration of any laws, regulations or administrative requirements relating
to any Tax, or any statement required to be furnished to any Person under any
Tax Law.
"Third Party Accountant" shall have the meaning set forth in
Section 2.4(e).
"Third Party Claims" shall have the meaning set forth in
Section 7.3.
"Third Party Computer Programs" shall mean all Computer
Programs not owned by a Seller Party.
"Third Party Reinsurance Contracts" means those reinsurance
treaties, facultative agreements, binding facilities, counter guarantees and
other indemnity agreements (to the extent related to the Subject Contracts) by
which one insurer (or reinsurer) agrees to indemnify another insurer in respect
of all or some portion of loss and loss expense incurred by the other insurer
because of the issuance by that insurer of bonds, policies or contracts of
insurance classified as surety, fidelity, burglary or fiduciary liability or
assumed reinsurance relating to bonds, policies or contracts of insurance
classified as surety, fidelity, burglary or fiduciary liability.
"Trademarks" shall mean all United States and foreign
trademarks (including service marks and trade names, whether registered or at
common law), registrations and applications therefor, Internet domain names,
logos, designs, slogans and general intangibles of like nature owned by a Seller
Party relating to the conduct of the Business, together with the goodwill
associated therewith, including but not limited to those items set forth on
Schedule 3.16(a).
"Trademark License Agreement" means the Trademark License
Agreement between Purchaser and Seller Parties in the form attached hereto as
Exhibit G.
12
"Transaction Calculation Memo" shall mean the memorandum in
the form of Exhibit H describing the transmittal of funds between the parties on
the Closing Date.
"Transferred Assets" means: (a) all assets reflected on the
Final Financial Statements excluding Retained Assets; (b) the Books and Records;
(c) Business Intellectual Property; (d) the Assigned and Assumed Contracts; (e)
all collateral relating to the Subject Contracts; (f) rights of subrogation and
salvage assigned to Purchaser pursuant to Section 5.38; (g) Collateral
Agreements and Indemnity Agreements assigned to Purchaser pursuant to Section
5.24(a); and (h) any other assets and contracts of a Seller Party listed on
Schedule 1.1(l); provided, however, that in no event shall "Transferred Assets"
be deemed to consist of any Retained Assets or assets not included in the
foregoing definition or otherwise transferred, sold, assigned or conveyed to
Purchaser under the express terms of this Agreement or an Ancillary Agreement.
"Transition Services" means the services performed pursuant to
the Transition Services Agreement.
"Transition Services Agreement" means the Transition Services
Agreement between Purchaser, Parent and RIC to be entered into at the Closing
containing the terms set forth on Exhibit I.
"Travelers/Reliance Indemnity Agreement" means the Indemnity
Agreement between Travelers Property Casualty Corp. and Seller Insurer Parties
in the form attached hereto as Exhibit J.
"Treasury Department" shall have the meaning set forth in
Section 3.26.
"Year 2000 Compliant" means for all dates and times,
including, without limitation, dates and times before, on and after December 31,
1999, when used on a stand-alone system or in combination with other software or
systems: (i) the application system functions and receives and processes dates
and times correctly without abnormal results; (ii) all date related calculations
are correct (including, without limitation, age calculations, duration
calculations and scheduling calculations); (iii) all manipulations and
comparisons of date-related data produce correct results for all valid date
values within the scope of the application; (iv) all reports and displays are
sorted correctly; and (v) leap years are accounted for and correctly identified
(including, without limitation, that 2000 is recognized as a leap year).
ARTICLE II
PRE-CLOSING AUDIT; TRANSFER OF ASSETS
Pre-Closing Audit. Within forty-five (45) days of the date of this
Agreement, Seller Parties, at their own expense, shall cause Deloitte & Touche
LLP (the "RIC Auditor") to (i) audit the statements of certain assets and
liabilities and income statements of the Business attached hereto as Schedule
2.1(a) (the "GAAP Opening Financial Statement" and the "SAP Opening Financial
Statement , " collectively the "Opening Financial Statements") and (ii) issue
(A) an audit report on the GAAP
13
Opening Financial Statement (the "GAAP Audited Opening Financial Statements")
that was prepared in conformity with Note 1 to the GAAP Opening Financial
Statement and GAAP consistently applied (collectively, the "GAAP Financial
Statement Methods") and (B) an audit report on the SAP Opening Financial
Statement (the "SAP Audited Opening Financial Statement") that was prepared in
conformity with Note 1 to the SAP Opening Financial Statement and SAP
consistently applied (collectively, the "SAP Financial Statement Methods"). The
GAAP Audited Opening Financial Statement and the SAP Audited Opening Financial
Statement are referred to hereinafter as the "Audited Opening Financial
Statements". The RIC Auditor shall simultaneously deliver to Purchaser and
Seller Parties the Audited Opening Financial Statements and the reports on the
Opening Financial Statements setting forth the results of its audits. While the
RIC Auditor is conducting its audit, Seller Parties shall provide, and shall
cause the RIC Auditor to provide, the Purchaser and its Representatives access
(during normal business hours and without undue disruption of business) to their
respective books, records and workpapers relating to, and their Representatives
involved in, the preparation of the Audited Opening Financial Statements or the
report furnished by the RIC Auditor pursuant to the foregoing sentence, provided
that (i) Purchaser and its Representatives execute and deliver to the RIC
Auditor release and indemnity agreements in the RIC Auditor standard form and
(ii) with respect to any personal access to any of the personnel of the RIC
Auditor, there is at all times at least one member of the management of the
Business present. Simultaneously with its delivery of the Closing Financial
Statements, Seller Parties shall deliver to Purchaser an update of the
calculations set forth in the Transaction Calculation Memo based on the Audited
Opening Financial Statements.
Section 2.2 Consideration. Upon the terms and subject to (i)
the conditions of this Agreement and (ii) the calculations set forth in the
Transaction Calculation Memo, Purchaser shall pay the Purchase Price and the
Ceding Commission (pursuant to Section 9.3 of the Loss and Unearned Premium
Reserve Portfolio Reinsurance Agreement) to RIC at the Closing by wire transfer
of immediately available funds to the bank account(s) of RIC designated to
Purchaser in writing by Seller Parties, such bank account(s) to be designated at
least two Business Days prior to the Closing Date.
Section 2.3 Transfer of Transferred Assets and Assumption of
Assumed Liabilities. (a) Upon the terms and subject to the conditions of this
Agreement and the payment of the Purchase Price on the Closing Date, Seller
Parties shall sell, assign and transfer to Purchaser all of Seller Parties'
respective right, title and interest in the Transferred Assets; provided,
however, that in no event shall the foregoing provision be deemed to require
that Seller Parties transfer to Purchaser any items not included in the
definition of "Transferred Assets" or not otherwise required to be transferred,
sold, assigned or conveyed to Purchaser under the express terms of this
Agreement or an Ancillary Agreement. All sales, assignments and transfers of the
Transferred Assets shall be effected by (i) the ▇▇▇▇ of Sale and (ii) the
General Assignment and Assumption Agreement. With respect to all Third Party
Computer Programs used exclusively in the Business as that business is conducted
as of the date hereof and as of the Closing, Seller Parties shall: (i) transfer
all right, title and interest in such licenses to the assignees to be designated
by Purchaser; or (ii) obtain a separate license in the name of the entities to
be
14
designated by Purchaser, such license to grant equivalent or greater rights
than Purchaser's in the Third Party Computer Programs. The foregoing choice with
respect to Third Party Computer Programs shall be at Purchaser's election, but
only to the extent permitted by the applicable third party vendor. Purchaser
shall inform Seller Parties of its choice between the foregoing options (i) and
(ii) within ten (10) days after Purchaser receives from Seller Parties a
complete list by vendor of Third Party Computer Programs, which list shall
specify the options that are available for each such program. In the event that
there is a difference in cost between alternative options for a particular Third
Party Computer Program and Purchaser elects the more expensive option, the
incremental cost shall be at Purchaser's expense. Except for such incremental
costs, which shall be paid solely by Purchaser, and royalty or license fees to
be paid in the ordinary course after the Closing Date, all costs and expenses
associated with the foregoing clause (i) or (ii) up to an aggregate amount
(which shall include the amounts specified in the penultimate sentence of
Section 5.30(b)) of $250,000 shall be shared equally between Seller Parties and
Purchaser. Seller Parties shall be responsible for any such costs and expenses
exceeding $250,000.
(b) Upon the terms and subject to the conditions of this
Agreement, on the Closing Date, Seller Parties shall: (i) with respect to all
Proprietary Software not used exclusively in the Business, grant a non-exclusive
license to Purchaser and its Affiliates to use such software, such license to be
in the form of the Software License Agreement attached as Exhibit F hereto; (ii)
with respect to all Trademarks not used exclusively in the Business, grant a
non-exclusive license to Purchaser, with a right to sublicense to its
Affiliates, to use such Trademarks solely in the Business, such license to be in
the form of the Trademark License Agreement attached as Exhibit G hereto; (iii)
with respect to all Third Party Computer Programs not used exclusively in the
Business, sublicense or obtain licenses in accordance with Section 5.30 of this
Agreement. Any Shared Intellectual Property not licensed or sublicensed pursuant
to the Software License Agreement, the Trademark License Agreement or in
accordance with Section 5.30, shall be licensed or sublicensed pursuant to an
amendment to the existing agreements in respect of such Shared Intellectual
Property or, if necessary to effect such license or sublicense, by executing
additional agreements with substantially the same terms and conditions as in the
Trademark License Agreement and the Software License Agreement with respect to
such Shared Intellectual Property.
(c) Upon the terms and subject to the conditions of this
Agreement, on the Closing Date, (i) Purchaser shall enter into the Specified
Reinsurance Agreements and the Administrative Services Agreements with the
Seller Insurer Parties and (ii) Purchaser shall assume the Assumed Liabilities
and Leases pursuant to the General Assignment and Assumption Agreement.
Notwithstanding any other provision of this Agreement to the contrary, (A) the
Purchaser is not assuming, directly or indirectly, any Retained Financial
Statement Liabilities, Purchaser Indemnified Liabilities, or any other
Liabilities of Seller Parties, their Affiliates or the Business incurred before
or after the Closing that are not expressly assumed by Purchaser under this
Agreement or the Ancillary Agreements and (B) Seller Parties are not
transferring to Purchaser the Retained Assets or any other assets not required
to be transferred, sold, assigned or
15
conveyed to Purchaser under the express terms of this Agreement or an Ancillary
Agreement.
(d) Purchaser acknowledges that no provision hereof is
intended to require Seller Insurer Parties to transfer to Purchaser original
copies of any Books and Records which Seller Insurer Parties are required by any
Applicable Laws or contractual obligations to retain.
Section 2.4. Place and Date of Closing; Closing Financial
Statements; Final Financial Statements. (a) The Closing shall take place at the
offices of Skadden, Arps, Slate, ▇▇▇▇▇▇▇ & ▇▇▇▇ LLP, Four Times Square, New
York, New York, at 10:00 a.m. Eastern Time on a date (the "Closing Date") not
later than the third Business Day following the satisfaction or waiver of all
the conditions set forth in this Agreement; provided, however, that the Closing
may occur on such other date or at such other time or place as the parties may
mutually agree in writing.
(b) On the second Business Day prior to the Closing Date,
Seller Parties will deliver to Purchaser (i) an estimated statement of certain
assets and liabilities and income statement of the Business (A) prepared on the
same basis as the GAAP Audited Opening Financial Statement in conformity with
the GAAP Financial Statement Methods, (B) reflecting GAAP Net Worth of no less
than one hundred sixty two dollars ($162 million)(Calculated According to the
Transaction Calculation Memo) and (C) calculated as of the calendar month-end
that is at least ten (10) days immediately preceding the Closing Date (the "GAAP
Closing Financial Statement"); and (ii) an estimated statement of certain assets
and liabilities and income statement of the Business (A) prepared on the same
basis as the SAP Audited Opening Financial Statement in conformity with the SAP
Financial Statement Methods, (B) reflecting Policyholders' Surplus of no less
than one hundred five million dollars ($105 million)(Calculated According to the
Transaction Calculation Memo) and (C) calculated as of the calendar month-end
that is at least ten (10) days immediately preceding the Closing Date (the "SAP
Closing Financial Statement "). The GAAP Closing Financial Statement and the SAP
Closing Financial Statement are referred to hereinafter as the "Closing
Financial Statements". Simultaneously with its delivery of the Closing Financial
Statements, Seller Parties shall deliver to Purchaser an update of the
calculations set forth in the Transaction Calculation Memo based on the Closing
Financial Statements.
(c) No later than ninety (90) days following the Closing Date,
Purchaser will prepare and deliver to Seller Parties (i) a final statement of
certain assets and liabilities and income statement of the Business (A) prepared
on the same basis as the GAAP Audited Opening Financial Statement in conformity
with the GAAP Financial Statement Methods and (B) calculated as of the Closing
Date (the "GAAP Final Financial Statement"), together with an audit report of
Ernst & Young LLP thereon, and (ii) a final statement of certain assets and
liabilities and income statement of the Business (A) prepared on the same basis
as the SAP Audited Opening Financial Statement in conformity with the SAP
Financial Statement Methods and (B) calculated as of the Closing Date (the "SAP
Final Financial Statement"), together with an audit report of Ernst & Young LLP
thereon. The GAAP Final Financial Statement and the SAP Final
16
Financial Statement are referred to hereinafter as the "Final Financial
Statements." Purchaser agrees that it shall consult with Seller Parties and
their Representatives as to, without limitation, amounts currently computed by
Parent, while preparing the Final Financial Statements. If Ernst & Young LLP
shall, for any reason, refuse to issue the audit reports required under this
paragraph (c), Purchaser shall be permitted to obtain such audit reports from
another accounting firm that is not currently serving as Purchaser's principal
outside auditor and shall be allowed a reasonable extension of such ninety (90)
day period as may be necessary to obtain such reports and prepare and deliver
the Final Financial Statements.
(d) Each Final Financial Statement shall be binding and
conclusive upon, and deemed accepted by, Seller Parties unless Seller Parties
shall have notified Purchaser in writing within 30 days after the receipt
thereof of any objections thereto. Any notice to Purchaser under this Section
2.4(d) shall specify in reasonable detail the items in the GAAP Final Financial
Statement and/or the SAP Final Financial Statement which are being disputed by
Seller Parties and a detailed summary of the reasons for such dispute. Any
amounts not so disputed by Seller Parties shall be deemed agreed to by Seller
Parties.
(e) If a notice of objection shall have been delivered to
Purchaser pursuant to Section 2.4(d), senior executives of the Purchaser and
Seller Parties shall, during the 20 days following such delivery, use their
reasonable best efforts to reach agreement on the disputed items. In the event
that any items relating to the GAAP Final Financial Statement and/or the SAP
Final Financial Statement remain in dispute between Purchaser and Seller Parties
following the end of such period, separate written summaries of such items shall
be referred by Purchaser and Seller Parties to ▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ LLP (or if ▇▇▇▇▇▇
▇▇▇▇▇▇▇▇ LLP is unwilling or unable to serve in such role, an independent
accounting firm mutually acceptable to Seller Parties and Purchaser; or if
Seller Parties and Purchaser cannot so agree, an independent accounting firm
mutually acceptable to Seller Parties' and Purchaser's principal independent
accountants) (the "Third Party Accountant") within 10 days after the end of the
period for seeking to resolve such disputes pursuant to the foregoing sentence.
Purchaser and Seller Parties shall be foreclosed from presenting to the Third
Party Accountant for consideration any item not disputed in accordance with the
terms of Section 2.4(d) above. The Third Party Accountant shall determine as
promptly as practicable the manner in which such item or items should be treated
on the GAAP Final Financial Statement and/or the SAP Final Financial Statement ,
as the case may be; provided, however, that the dollar amount of each item in
dispute shall be determined within the range of dollar amounts proposed by
Seller Parties, on the one hand, and Purchaser, on the other hand. If the Third
Party Accountant has been asked to resolve a dispute involving an item or items
on the SAP Final Financial Statement, the Third Party Accountant shall prepare
and deliver simultaneously to Purchaser and Seller Parties an accounting of
Policyholders' Surplus that results from its determinations regarding the
resolution of such disputed item or items ("Adjusted Policyholders' Surplus").
If the Third Party Accountant has been asked to resolve a dispute involving an
item or items on the GAAP Final Financial Statement, the Third Party Accountant
shall prepare and deliver simultaneously to Purchaser and Seller Parties an
accounting of GAAP Net Worth that results from its determinations
17
regarding the resolution of such disputed item or items ("Adjusted GAAP Net
Worth"). Such accountings and determinations by the Third Party Accountant shall
be in writing and shall be binding and conclusive on the parties. The fees,
costs and expenses of the Third Party Accountant shall be shared equally by
Seller Parties, on the one hand, and Purchaser, on the other hand. The parties
shall execute and deliver to ▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ LLP and any other accounting firm
chosen by a party hereto or by its principal independent accountants to serve as
the Third Party Accountant release and indemnity agreements in ▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇
LLP's and such other accounting firm's standard forms.
(f) Seller Parties shall provide the Purchaser and its
Representatives access (during normal business hours and without undue
disruption of business) to their books and records relating to the Business and
employees involved in the Business for purposes of conducting Purchaser's review
of the Closing Financial Statements. Purchaser shall provide the Seller Parties
and their Representatives access (during normal business hours and without undue
disruption of business) to the books and records of the Business and employees
involved in the Business and the preparation of the Final Financial Statements
for purposes of conducting Seller Parties' review thereof and considering any
disputed items under this Section 2.4.
Section 2.5. Post-Closing Adjustments. (a) No Referral to
Third Party Accountant. In the event that both Final Financial Statements are
deemed accepted by Seller Parties pursuant to Section 2.4(d) or Purchaser and
Seller Parties have resolved all disputed matters relating thereto without
referral to the Third Party Accountant pursuant to Section 2.4(e) and (A) the
Policyholders' Surplus of the Business as shown in the SAP Final Financial
Statement exceeds one hundred five million dollars ($105 million)(Calculated
According to the Transaction Calculation Memo) and (B) the GAAP Net Worth of the
Business as shown in the GAAP Final Financial Statement exceeds one hundred
sixty two million dollars ($162 million)(Calculated According to the Transaction
Calculation Memo), Purchaser shall pay an amount equal to the lesser of (w) the
difference between the Policyholders' Surplus of the Business as shown on the
SAP Final Financial Statement and one hundred five million dollars ($105
million)(Calculated According to the Transaction Calculation Memo) and (x) the
difference between the GAAP Net Worth of the Business as shown on the GAAP Final
Financial Statement and one hundred sixty two million dollars ($162
million)(Calculated According to the Transaction Calculation Memo), to Seller
Parties in cash, by wire transfer of immediately available funds, within five
days of the delivery by Purchaser of the Final Financial Statements, plus
interest from and including the Closing Date up to but not including the date of
payment accrued at the 90-Day Treasury Rate; provided, that in no event shall
such payment result in Policyholders' Surplus of the Business as shown on the
SAP Final Financial Statements being less than $105 million (Calculated
According to the Transaction Calculation Memo) or GAAP Net Worth of the Business
as shown on the GAAP Final Financial Statements being less than $162 million
(Calculated According to the Transaction Calculation Memo). In the event that
both Final Financial Statements are deemed accepted by Seller Parties pursuant
to Section 2.4(d) or Purchaser and Seller Parties have resolved all disputed
matters relating thereto without referral to the Third Party Accountant pursuant
to Section 2.4(e) and (C) the Policyholders' Surplus of the Business as shown in
the SAP Final Financial Statement is less than one hundred five
18
million dollars ($105 million)(Calculated According to the Transaction
Calculation Memo) or (D) the GAAP Net Worth of the Business as shown in the GAAP
Final Financial Statement is less than one hundred sixty two million dollars
($162 million)(Calculated According to the Transaction Calculation Memo), Seller
Parties shall pay Purchaser an amount in cash sufficient to ensure that both (y)
the Policyholders' Surplus of the Business as shown on the SAP Final Financial
Statement is at least one hundred five million dollars ($105 million)(Calculated
According to the Transaction Calculation Memo) and (z) the GAAP Net Worth of the
Business as shown on the GAAP Final Financial Statement is at least one hundred
sixty two million dollars ($162 million)(Calculated According to the Transaction
Calculation Memo), by wire transfer of immediately available funds, within five
days of the delivery by Purchaser of the Final Financial Statements, plus
interest from and including the Closing Date up to but not including the date of
payment accrued at the 90-Day Treasury Rate.
(b) Final SAP Financial Statement Only Referred to Third Party
Accountant. In the event that the GAAP Final Financial Statement is deemed
accepted by Seller Parties pursuant to Section 2.4(d) or Purchaser and Seller
Parties have resolved all disputed matters relating thereto without referral to
the Third Party Accountant pursuant to Section 2.4(e); any disputed items
regarding the SAP Final Financial Statement are referred to the Third Party
Accountant pursuant to Section 2.4(e); and (A) the Adjusted Policyholders'
Surplus exceeds one hundred five million dollars ($105 million)(Calculated
According to the Transaction Calculation Memo) and (B) the GAAP Net Worth of the
Business as shown in the GAAP Final Financial Statement exceeds one hundred
sixty two million dollars ($162 million)(Calculated According to the Transaction
Calculation Memo), Purchaser shall pay, within five days of the delivery by the
Third Party Accountant to Purchaser and Seller Parties of its accounting of
Adjusted Policyholders' Surplus, an amount equal to the lesser of (w) the
difference between the Adjusted Policyholders' Surplus and one hundred five
million dollars ($105 million)(Calculated According to the Transaction
Calculation Memo) and (x) the difference between the GAAP Net Worth of the
Business as shown in the GAAP Final Financial Statement and one hundred sixty
two million dollars ($162 million)(Calculated According to the Transaction
Calculation Memo), in cash, by wire transfer of immediately available funds,
within five days of the delivery by the Third Party Accountant of its accounting
of Adjusted Policyholders' Surplus, plus interest from and including the Closing
Date up to but not including the date of payment accrued at the 90-Day Treasury
Rate; provided, that in no event shall such payment result in Policyholders'
Surplus of the Business as shown on the SAP Final Financial Statements being
less than $105 million (Calculated According to the Transaction Calculation
Memo) or GAAP Net Worth of the Business as shown on the GAAP Final Financial
Statements being less than $162 million (Calculated According to the Transaction
Calculation Memo). In the event that the GAAP Final Financial Statement is
deemed accepted by Seller Parties pursuant to Section 2.4(d) or Purchaser and
Seller Parties have resolved all disputed matters relating thereto without
referral to the Third Party Accountant pursuant to Section 2.4(e); any disputed
items regarding the SAP Final Financial Statement are referred to the Third
Party Accountant pursuant to Section 2.4(e); and (C) the Adjusted Policyholders'
Surplus is less than one hundred five million dollars ($105 million)(Calculated
According to the Transaction Calculation Memo) or (D) the GAAP Net Worth of the
Business as shown in
19
the GAAP Final Financial Statement is less than one hundred sixty two million
dollars ($162 million)(Calculated According to the Transaction Calculation
Memo), Seller Parties shall pay, within five days of the delivery by the Third
Party Accountant to Purchaser and Seller Parties of its accounting of Adjusted
Policyholders' Surplus, to Purchaser an amount in cash sufficient to ensure that
both (y) the Policyholders' Surplus of the Business as shown on the SAP Final
Financial Statement is at least one hundred five million dollars ($105
million)(Calculated According to the Transaction Calculation Memo) and (z) the
GAAP Net Worth of the Business as shown on the GAAP Final Financial Statement is
at least one hundred sixty two million dollars ($162 million)(Calculated
According to the Transaction Calculation Memo), by wire transfer of immediately
available funds, plus interest from and including the Closing Date up to but not
including the date of payment accrued at the 90-Day Treasury Rate.
(c) Final GAAP Financial Statement Only Referred to Third
Party Accountant. In the event that the SAP Final Financial Statement is deemed
accepted by Seller Parties pursuant to Section 2.4(d) or Purchaser and Seller
Parties have resolved all disputed matters relating thereto without referral to
the Third Party Accountant pursuant to Section 2.4(e); any disputed items
regarding the GAAP Final Financial Statement are referred to the Third Party
Accountant pursuant to Section 2.4(e); and (A) the Policyholders' Surplus of the
Business as shown in the SAP Final Financial Statement exceeds one hundred five
million dollars ($105 million)(Calculated According to the Transaction
Calculation Memo) and (B) the Adjusted GAAP Net Worth exceeds one hundred sixty
two million dollars ($162 million)(Calculated According to the Transaction
Calculation Memo), Purchaser shall pay, within five days of the delivery by the
Third Party Accountant to Purchaser and Seller Parties of its accounting of
Adjusted GAAP Net Worth, an amount equal to the lesser of (w) the difference
between the Policyholders' Surplus of the Business as shown in the SAP Final
Financial Statement and one hundred five million dollars ($105
million)(Calculated According to the Transaction Calculation Memo) and (x) the
difference between the Adjusted GAAP Net Worth and one hundred sixty two million
dollars ($162 million)(Calculated According to the Transaction Calculation
Memo), in cash, by wire transfer of immediately available funds, plus interest
from and including the Closing Date up to but not including the date of payment
accrued at the 90-Day Treasury Rate; provided, that in no event shall such
payment result in Policyholders' Surplus of the Business as shown on the SAP
Final Financial Statements being less than $105 million (Calculated According to
the Transaction Calculation Memo) or GAAP Net Worth of the Business as shown on
the GAAP Final Financial Statements being less than $162 million (Calculated
According to the Transaction Calculation Memo). In the event that the SAP Final
Financial Statement is deemed accepted by Seller Parties pursuant to Section
2.4(d) or Purchaser and Seller Parties have resolved all disputed matters
relating thereto without referral to the Third Party Accountant pursuant to
Section 2.4(e); any disputed items regarding the GAAP Final Financial Statement
are referred to the Third Party Accountant pursuant to Section 2.4(e); and (C)
the Policyholders' Surplus of the Business as shown in the SAP Final Financial
Statement is less than one hundred five million dollars ($105
million)(Calculated According to the Transaction Calculation Memo) or (D) the
Adjusted GAAP Net Worth is less than one hundred sixty two million dollars ($162
million)(Calculated According to the Transaction Calculation Memo), Seller
Parties shall pay, within five days of the
20
delivery by the Third Party Accountant to Purchaser and Seller Parties of its
accounting of Adjusted GAAP Net Worth, to Purchaser an amount in cash sufficient
to ensure that both (y) the Policyholders' Surplus of the Business as shown on
the SAP Final Financial Statement is at least one hundred five million dollars
($105 million)(Calculated According to the Transaction Calculation Memo) and (z)
the GAAP Net Worth of the Business as shown on the GAAP Final Financial
Statement is at least one hundred sixty two million dollars ($162
million)(Calculated According to the Transaction Calculation Memo), by wire
transfer of immediately available funds, plus interest from and including the
Closing Date up to but not including the date of payment accrued at the 90-Day
Treasury Rate.
(d) Both Final Financial Statements Referred to Third Party
Accountant. In the event that disputed items regarding the GAAP Final Financial
Statement and the SAP Final Financial Statement are referred to the Third Party
Accountant pursuant to Section 2.4(e); and (A) the Adjusted Policyholders'
Surplus exceeds one hundred five million dollars ($105 million)(Calculated
According to the Transaction Calculation Memo) and (B) the Adjusted GAAP Net
Worth exceeds one hundred sixty two million dollars ($162 million)(Calculated
According to the Transaction Calculation Memo), Purchaser shall pay, within five
days of the delivery by the Third Party Accountant to Purchaser and Seller
Parties of its accounting of Adjusted Policyholders' Surplus and Adjusted GAAP
Net Worth, an amount equal to the lesser of (w) the difference between the
Adjusted Policyholders' Surplus and one hundred five million dollars ($105
million)(Calculated According to the Transaction Calculation Memo) and (x) the
difference between the Adjusted GAAP Net Worth and one hundred sixty two million
dollars ($162 million)(Calculated According to the Transaction Calculation
Memo), in cash, by wire transfer of immediately available funds, plus interest
from and including the Closing Date up to but not including the date of payment
accrued at the 90-Day Treasury Rate; provided, that in no event shall such
payment result in Policyholders' Surplus of the Business as shown on the SAP
Final Financial Statements being less than $105 million (Calculated According to
the Transaction Calculation Memo) or GAAP Net Worth of the Business as shown on
the GAAP Final Financial Statements being less than $162 million (Calculated
According to the Transaction Calculation Memo). In the event that disputed items
regarding the GAAP Final Financial Statement and the SAP Final Financial
Statement are referred to the Third Party Accountant pursuant to Section 2.4(e);
and (C) the Adjusted Policyholders' Surplus is less than one hundred five
million dollars ($105 million)(Calculated According to the Transaction
Calculation Memo) or (D) the Adjusted GAAP Net Worth is less than one hundred
sixty two million dollars ($162 million)(Calculated According to the Transaction
Calculation Memo), Seller Parties shall pay, within five days of the delivery by
the Third Party Accountant to Purchaser and Seller Parties of its accounting of
Adjusted Policyholders' Surplus and Adjusted GAAP Net Worth, to Purchaser an
amount in cash sufficient to ensure that both (y) the Policyholders' Surplus of
the Business as shown on the SAP Final Financial Statement is at least one
hundred five million dollars ($105 million)(Calculated According to the
Transaction Calculation Memo) and (z) the GAAP Net Worth of the Business as
shown on the GAAP Final Financial Statement is at least one hundred sixty two
million dollars ($162 million)(Calculated According to the Transaction
Calculation Memo), by wire transfer of immediately available funds, plus
21
interest from and including the Closing Date up to but not including the date of
payment accrued at the 90-Day Treasury Rate.
(e) Simultaneously with its delivery of the Final Financial
Statements to Seller Parties, Purchaser shall designate in writing the bank
account(s) to which any adjustment required to be paid to Purchaser under this
Section 2.5 shall be wire transferred. Any adjustment required to be paid to
Seller Parties under this Section 2.5 shall be wire transferred to the bank
account(s) designated by Seller Parties pursuant to Section 2.2.
Section 2.6. Closing Items, Recording Fees. (a) At the
Closing, Seller Parties, as applicable, shall execute (except as to clauses (xi)
and (xii) of this Section 2.6(a)) and deliver to Purchaser the following:
(i) Loss and Unearned Premium Reserve Portfolio Reinsurance
Agreement
(ii) Quota Share Reinsurance Agreement;
(iii) Administrative Services Agreements;
(iv) Transition Services Agreement;
(v) General Assignment and Assumption Agreement;
(vi) ▇▇▇▇ of Sale;
(vii) Software License Agreement;
(viii) Trademark License Agreement;
(ix) Travelers/Reliance Indemnity Agreement;
(x) Trademark Assignment, Copyright Assignment, and any
other intellectual property assignment agreement necessary for
recordation in the appropriate intellectual property registry;
(xi) evidence of receipt of the Permits described on
Schedule 3.3 hereto;
(xii) evidence of compliance with any applicable regulatory
filings or approvals from which no exemption is available;
(xiii) evidence of receipt of the consents and approvals from
the Persons listed on Schedule 6.2(iii);
(xiv) evidence of the assignments, consents and waivers
required under Section 5.5 from the third party reinsurers listed on
Schedule 6.2(viii);
22
(xv) evidence of the assignments required under the first
sentence of Section 5.24(a); and
(xvi) evidence of the assignments required under Section
5.38.
(b) At the Closing, Purchaser shall execute (except as to
clauses (x) and (xi) of this Section 2.6(b)) and deliver to Seller Parties the
following:
(i) Loss and Unearned Premium Reserve Portfolio Reinsurance
Agreement
(ii) Quota Share Reinsurance Agreement;
(iii) Administrative Services Agreements;
(iv) Transition Services Agreement;
(v) General Assignment and Assumption Agreement;
(vi) ▇▇▇▇ of Sale;
(vii) Software License Agreement;
(viii) Trademark License Agreement;
(ix) Travelers/Reliance Indemnity Agreement;
(x) evidence of receipt of the Permits described on
Schedule 4.3 hereto; and
(xi) evidence of compliance with any applicable regulatory
filings or approvals from which no exemption is available.
(c) Recording fees, transfer Taxes and escrow fees incurred in
connection with the conveyance of the Transferred Assets shall be borne by
Seller Parties and shall not be reflected as an asset or a liability on the
Final Financial Statements. Sales and use Taxes and all other similar Taxes
(other than income and franchise Taxes) and all interest and penalties thereon
incurred in connection with conveyance of property shall be borne by Purchaser.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
OF SELLER PARTIES
Seller Parties represent and warrant to Purchaser that:
Section 3.1. Corporate Existence and Power. Each of Seller
Parties (i) has been duly incorporated, is validly existing and is in good
standing under the laws of
23
its state of incorporation or domicile, (ii) has all corporate powers required
to carry on its business as now conducted, (iii) has all material governmental
licenses, authorizations, permits, consents and approvals required to carry on
its business as now conducted and (iv) is duly qualified to do business as a
foreign corporation and is in good standing in each jurisdiction where such
qualification is necessary, or is duly licensed to do business and is in good
standing in each jurisdiction where such licensing is necessary, as the case may
be, except, in the case of each of clauses (i) through (iv), as would not have a
Material Adverse Effect on the Business. Each of Seller Parties has heretofore
delivered or made available to Purchaser true and complete copies of its
certified charter and bylaws as in effect on the date hereof. No Seller Party is
in violation of any of the provisions of its charter or bylaws with respect to
the conduct of the Business.
Section 3.2. Corporate Authorization. The execution, delivery
and, subject to the receipt of the approvals referred to in Section 3.3,
performance by Seller Parties of this Agreement and the Ancillary Agreements are
within their powers and have been duly authorized by all necessary corporate
action on the part of Seller Parties. This Agreement constitutes, and when
executed and delivered, the Ancillary Agreements will constitute, valid and
legally binding agreements, enforceable against each party thereto in accordance
with their terms, subject to (i) bankruptcy, insolvency, reorganization,
fraudulent transfer, moratorium and other similar laws now or hereafter in
effect relating to or affecting creditors' rights generally and the rights of
creditors of insurance companies generally and (ii) general principles of equity
(regardless of whether considered in a proceeding at law or in equity).
Section 3.3. Governmental Authorization. The execution,
delivery and performance by Seller Parties of this Agreement and the Ancillary
Agreements to which such Seller Party is a party requires no action by or in
respect of, or filing with, any Governmental Entity on the part of Seller
Parties or any Affiliate thereof other than (i) compliance with any applicable
requirements of the HSR Act, (ii) approvals or filings under Applicable Law,
including the insurance laws of the jurisdictions set forth on Schedule 3.3,
(iii) filings and notices not required to be made or given until after the
Closing Date, (iv) filings, at any time, of tax returns, tax reports and tax
information statements and (v) any such other action or filing not contemplated
in the preceding clauses (i) through (iv) as to which the failure to make or
obtain would not, individually or in the aggregate, materially impair the
ability of Seller Parties or Purchaser to conduct the Businesses.
Section 3.4. Non-Contravention. Except as set forth in
Schedule 3.4, the execution, delivery and performance by Seller Parties of this
Agreement and the Ancillary Agreements, do not and will not (i) violate the
charter or bylaws of any Seller Party, (ii) assuming compliance with the
filings, notices, approvals and other matters referred to in Section 3.3,
violate any Applicable Law, (iii) require any consent or other action by any
Person under, constitute a default under, or give rise to any right of
termination, cancellation or acceleration of any right or obligation of any
Seller Party or to a loss of any benefit to which any Seller Party is entitled
under, any material reinsurance agreement, any material agreement or any other
material instrument binding upon any Seller Party, or any material license,
franchise, permit or other similar
24
authorization held by any Seller Party, or (iv) result in the creation or
imposition of any material Lien on any assets which will be Transferred Assets
upon consummation of the Closing.
Section 3.5. Financial Statements. The GAAP Opening Financial
Statement and the SAP Opening Financial Statement fairly present, and the GAAP
Audited Opening Financial Statement and the SAP Audited Financial Statement
shall when prepared fairly present, in all material respects the assets and
liabilities of the Business and, with respect to the GAAP Opening Financial
Statement and the GAAP Audited Opening Financial Statement, GAAP Net Worth of
the Business, in each case as of the date thereof.
(a) The GAAP Closing Financial Statement and the SAP Closing
Financial Statement shall fairly present in all material respects the assets and
liabilities of the Business and, with respect to the GAAP Closing Financial
Statement, GAAP Net Worth of the Business, in each case as of the date thereof.
Section 3.6. Seller Financial Statements. RIC has previously
made available to Purchaser true, complete and correct copies of audited
special-purpose statements of certain assets and liabilities of Reliance Surety
Group, Inc. ("RSG"), a business unit of Parent which was created to own the
Business, as of December 31, 1997 and December 31, 1998, and audited
special-purpose statements of certain revenues and claims and expenses for each
of the three years in the period ended December 31, 1998 (collectively, the
"Audited Special-Purpose Statements"). The Audited Special-Purpose Statements
present fairly in all material respects certain assets and liabilities of RSG
relating to the Business (assuming the transfer of the Business to RSG) at
December 31, 1997 and December 31, 1998, and certain revenues and claims and
expenses for each of the three years in the period ended December 31, 1998, in
conformity with GAAP as described in Note 1 to the Audited Special-Purpose
Statements. Seller Parties have made available to Purchaser copies of internal
financial data with respect to the Business derived from statements of RIC and
the other Surety Affiliates as filed with the Pennsylvania Insurance Department
and other regulatory authorities where required for the nine months ended
September 30, 1999.
Section 3.7. Reserves. The Reserves reflected in the Opening
Financial Statements and, when prepared, the Audited Opening Financial
Statements and the Closing Financial Statements, in each as of the dates
thereof, (i) were or, as to the period between the date hereof and the Closing,
will be computed in accordance with generally accepted actuarial standards
consistently applied and are fairly stated in all material respects in
accordance with sound actuarial principles, (ii) are based on actuarial
assumptions which accurately reflect in all material respects applicable terms
and provisions of each Subject Contract and (iii) meet in all material respects
all requirements of Applicable Law; provided, however, that Purchaser
acknowledges that the mere fact that any such Reserve is, or is determined to
be, inadequate shall not, in and of itself, constitute a breach of the
representations and warranties set forth in this Section 3.7.
25
Section 3.8. Absence of Certain Changes. Except as disclosed
in Schedule 3.8, since December 31, 1998 (or, with respect to clause (iv) of
this Section 3.8, since December 31, 1999) the Business has been conducted in
the ordinary course consistent in all material respects with past practices
(including, without limitation, with regard to underwriting, pricing and
actuarial policies, practices and standards generally) and, to the extent
relating to the Business, there has not been:
(i) any event, claim, occurrence, development or state of
circumstances of facts which has had or would reasonably be expected to
have a Material Adverse Effect on the Business, Opening Financial
Statements or, when prepared, the Audited Opening Financial Statements
or Closing Financial Statements;
(ii) any transaction or commitment made, or any contract or
agreement entered into, by Seller Parties (including the acquisition or
disposition of any assets) or any relinquishment by Seller Parties of
any contract or other right, other than transactions and commitments in
the ordinary course of business consistent in all material respects
with past practices;
(iii) any change in any method of accounting or accounting
practice or policy (including, without limitation, any reserving
method, practice or policy) by Seller Parties, except for any such
change as a result of a concurrent change in GAAP, SAP or as required
by Applicable Law;
(iv) Since December 31, 1999, any (A) employment, deferred
compensation, severance, retirement or other similar agreement entered
into with any officer or employee engaged in the Business (or any
amendment to any such existing agreement), (B) grant of any severance
or termination pay to any officer or employee engaged in the Business,
other than in the ordinary course of business, (C) change in
compensation or other benefits payable to any officer or employee
engaged in the Business, other than (1) increases in base compensation
in the ordinary course of business consistent with past practice (but
in no event greater than 6% in the aggregate on a per annum basis for
all such individuals as a group), (2) with respect to officers, changes
in benefits required by plans and arrangements in effect as of December
31, 1999 and (3) with respect to employees who are not officers,
changes in benefits in accordance with plans or arrangements in effect
as of December 31, 1999 in the ordinary course of business consistent
with past practice or (D) loans or advances to any officers or
employees engaged in the Business, except for ordinary travel and
business expenses in the ordinary course of business consistent with
past practice;
(v) any transaction by Seller Parties involving Business
Assets other than in the ordinary course of business consistent in all
material respects with past practice;
(vi) (i) any entering into of any facultative reinsurance
contract or (ii) any commutation of any facultative reinsurance
contract, or (iii) any entering into
26
or any commutation of any reinsurance treaty, by Seller Parties, in any
such case, other than in the ordinary course of business consistent in
all material respects with past practice;
(vii) any material insurance transaction by Seller Parties
other than in the ordinary course of business consistent with past
practice;
(viii) any significant change by Seller Parties in the
compensation structure of, or benefits available to, any agent under a
Material Agent Contract or with respect to agents generally;
(ix) any investment made in Business Assets which will be
Transferred Assets upon consummation of the Closing other than in the
ordinary course of the Business consistent in all material respects
with past practice;
(x) any agreement or commitment (contingent or otherwise) by
Seller Parties to do any of the foregoing.
Section 3.9. [INTENTIONALLY LEFT BLANK].
Section 3.10. Material Contracts. (a) Except as disclosed in
Schedule 3.10, to the extent related to the Business, as of the date
hereof, none of the Seller Parties is a party to or bound by:
(i) any agreement for the purchase of materials, supplies,
goods, services, equipment or other assets that provides for either (A)
annual payments by a Seller Party of $25,000 or more or (B) aggregate
payments by a Seller Party of $100,000 or more;
(ii) any agreement relating to the acquisition or disposition
of any material asset of the Business other than investment securities
(without limitation, whether by sale of assets, commutation of
reinsurance or otherwise);
(iii) any agreement relating to indebtedness in respect of
Transferred Assets or Business Assets used in the performance of the
Transition Services; or any guarantee, pledge, or similar agreement or
arrangement relating thereto;
(iv) any material agreement containing "change in control" or
similar provisions relating to change in control of a Seller Party;
(v) any powers of attorney, other than powers of attorney
granted in the ordinary course of business to authorized agents,
brokers or employees of a Seller Insurer Party to issue Subject
Contracts;
(vi) any other agreements (written or oral) made by a Seller
Party or Affiliate thereof (other than in conjunction with Subject
Contracts issued by the Seller Parties, as the case may be, in the
ordinary course of their business)
27
material to the Business (other than the Third Party Reinsurance
Contracts, Collateral Agreements and Indemnity Agreements); or
(vii) any agreement between Seller Parties and any of their
Affiliates.
(b) Schedule 3.10 lists each contract material to the Business
(other than Third Party Reinsurance Contracts), each as amended or modified to
the date hereof (including any waivers with respect thereto) (the "Significant
Agreements"). Seller Parties heretofore furnished or made available to Purchaser
complete and correct copies of each of the Significant Agreements. Except as
specifically disclosed on Schedule 3.10, and except to the extent not material
to a Seller Party, each of the Significant Agreements is in full force and
effect and enforceable in accordance with its terms, subject to (i) bankruptcy,
insolvency, reorganization, fraudulent transfer, moratorium and other similar
laws now or hereafter in effect relating to or affecting creditors' rights
generally and the rights of creditors of insurance companies generally and (ii)
general principles of equity (regardless of whether considered in a proceeding
at law or in equity); no Seller Party has received any written notice or, to the
knowledge of Seller Parties, oral notice, of cancellation or termination of, or
any expression or indication of an intention or desire to cancel or terminate,
any of the Significant Agreements; no Significant Agreement is the subject of,
or, to the knowledge of Seller Parties, has been threatened to be made the
subject of, any arbitration, suit or other legal proceeding; with respect to any
Significant Agreement which by its terms will terminate as of a certain date
unless renewed or unless an option to extend such Significant Agreement is
exercised, no Seller Party has received any written notice or, to the knowledge
of Seller Parties, oral notice, or otherwise has any knowledge, that any such
Significant Agreement will not be so renewed or that any such extension option
will not be exercised; and there exists no material event of default or
occurrence, condition or act on the part of a Seller Party or, to the knowledge
of Seller Party, on the part of the other parties to the Significant Agreements,
which constitutes or would constitute (with notice or lapse of time or both) a
material breach of or material default under any of the Significant Agreements.
Section 3.11. Litigation. (a) To the knowledge of Seller
Parties, Schedule 3.11(a) sets forth each action, suit, investigation, judgment
or proceeding (other than with respect to claims under Subject Contracts in the
ordinary course of the Business consistent with past practice) against or
affecting the properties of a Seller Party as regards the Business or Business
Assets pending before any court or arbitrator or any governmental body, agency
or official or, to the knowledge of Seller Parties, threatened by any Person.
Except as set forth on Schedule 3.11(a), there is no material action, suit,
investigation, judgment or proceeding (other than with respect to claims under
Subject Contracts in the ordinary course of the Business consistent in all
material respects with past practice) against or affecting the properties of a
Seller Party as regards the Business or Business Assets pending before any court
or arbitrator or any governmental body, agency or official or, to the knowledge
of Seller Parties, threatened by any Person.
(b) There is no action, suit, investigation or proceeding
pending against, or affecting the properties of, a Seller Party as regards the
Business or Business
28
Assets before any court or arbitrator or any governmental body, agency or
official which challenges or seeks to prevent the transactions contemplated
hereby. Except as disclosed in Schedule 3.11(b), no Seller Party nor any of its
properties is subject to any order, writ, judgment, injunction, decree,
determination or award which would prevent or delay the consummation of
transactions contemplated hereby.
Section 3.12. Compliance with Laws. Except as set forth on
Schedule 3.12, no Seller Party has received any written notice since January 1,
1995 from any Governmental Entity alleging any material violation of any
Applicable Law in the conduct of the Business or directing a Seller Party to
take any remedial action with respect to such Applicable Law. There are no
presently existing circumstances that could reasonably be expected to result in
any material violation of any Applicable Law relating to the Business.
Section 3.13. Properties and Assets. (a) Schedule 3.13(a)
lists each material Lien on Business Assets which will constitute Transferred
Assets upon consummation of the Closing (other than Business Intellectual
Property). Each Seller Party has good title to, or in the case of leased
property has valid leasehold interests in, all of its respective Business Assets
which will constitute Transferred Assets upon consummation of the Closing (other
than Business Intellectual Property), and none of such assets are subject to any
Liens, except:
(i) Liens identified on Schedule 3.13(a) or reflected on the
Opening Financial Statements, the Audited Opening Financial Statements
or the Closing Financial Statements; and
(ii) Liens for Taxes not yet due or being contested in good
faith (and for which adequate accruals or Reserves have been
established) specifically reflected on the Opening Financial
Statements, the Audited Opening Financial Statements or the Closing
Financial Statements.
(b) Except as set forth on Schedule 3.13(b), each Seller Party
has good title to, or in the case of leased property has valid leasehold
interests in, or valid licenses to, all of its respective Business Assets which
are reasonably necessary to perform the Transition Services.
Section 3.14. Regulatory Filings.
(a) The Business is being conducted in compliance in all
material respects with all Applicable Laws, including, without limitation, all
insurance laws, ordinances, rules, regulations, decrees and orders of any
Governmental Entity.
(b) Seller Party has all permits and insurance and other
licenses, franchises, approvals, authorizations, exemptions, classifications,
certificates, registrations and similar documents necessary to its conduct of
the Business (each of which, a "Permit") as it is currently conducted in each
jurisdiction (as listed in Schedule 3.14(b)) in which the Seller Parties require
such Permits. The Business has been and is being conducted in compliance, in all
material respects, with all such Permits. All such
29
Permits are in full force and effect, and there is no proceeding or
investigation pending or, to the knowledge of Seller Parties, threatened which
would reasonably be expected to lead to the revocation, amendment, failure to
renew, limitation, modification, suspension or restriction of any such Permit.
No Seller Party is operating under any agreement or understanding with the
regulatory authority of any state which in any way restricts its authority to
conduct the Business or requires any Seller Party to take, or refrain from
taking, any action relating to the conduct of the Business otherwise permitted
by Applicable Law.
(c) Seller Parties have made available for inspection by
Purchaser complete (i) copies of all material registrations, filings and
submissions relating to the Business made since January 1, 1995 by the Seller
Parties with any Governmental Entity and any (ii) reports of examinations issued
since January 1, 1995 by any such Governmental Entity that relate to the Seller
Parties.
(d) All Subject Contracts issued or sold by the Seller Parties
since January 1, 1990 are on forms approved by the insurance regulatory
authority of the jurisdiction where issued or sold or have been filed with and
not objected to by such authority within the period provided for objection, and
have been filed or registered as required with all other applicable governmental
authorities. Except as set forth on Schedule 3.14(d), all Subject Contracts
issued or sold by the Seller Parties since January 1, 1990 complied as to form
when issued or sold, with the provisions of Applicable Law. All the premium
rates required to be filed with or approved by insurance regulatory authorities
since January 1, 1990 have been so filed or approved or not objected to within
the period provided for objection, and all premiums charged conform in all
material respects thereto. No Seller Parties or their Affiliates has, since
January 1, 1995, advertised or used other literature in connection with the
Business that does not comply in all material respects with Applicable Laws.
Section 3.15. Intercompany Accounts. Schedule 3.15 contains a
complete list of (A) all intercompany balances, including loans and advances and
commitments with respect thereto, in respect of the Business, and (b) all
Liabilities relating directly or indirectly to the Business, in each case as of
December 31, 1999, between a Seller Party and any of its Affiliates. Except as
disclosed on Schedule 3.15, since December 31, 1999, there has not been any
incurrence or accrual of liability (as a result of allocations or otherwise) by
a Seller Party to any of its Affiliates or other transaction between a Seller
Party and any of its Affiliates relating, directly or indirectly, to the
Business, except (i) in the ordinary course of business in accordance in all
material respects with past practice or (ii) as contemplated by this Agreement
or the Ancillary Agreements.
Section 3.16. Intellectual Property. (a) Except as set forth
on Schedule 3.16(a), Seller Parties are the sole and exclusive owners of, or
have the valid right to use all Intellectual Property free and clear of all
Liens or other encumbrances. Except as set forth in Schedule 3.16(a), one or
more Seller Parties are currently listed in the records of the appropriate
United States, state or foreign agency as the sole owners of record for each (i)
patents and patent applications, (ii) trademark and service ▇▇▇▇ registrations
and
30
applications and Internet domain name registrations, and (iii) copyright
registrations and applications. Schedule 3.16(a) sets forth a complete and
accurate list (including whether Seller Parties are the owners or licensees
thereof) of all material U.S. and foreign (i) patents and patent applications,
(ii) Trademarks (including Internet domain name registrations), (iii) copyright
registrations and applications, and (iv) unregistered copyrights owned or
licensed by Seller Parties for use in respect of the Business.
(b) The patents, patent applications, copyrights, trademark
applications and registrations, service ▇▇▇▇ applications, and registrations and
Internet domain names listed on Schedule 3.16(a) have been duly maintained,
subsisting, in full force and effect, and have not been cancelled, expired or
abandoned, and to the knowledge of Seller Parties are valid. There is no
pending, existing or, to the knowledge of Seller Parties, threatened opposition,
interference, cancellation proceeding or other legal or governmental proceeding
before any court or registration authority in any jurisdiction against or
relating to the registrations and applications listed on Schedule 3.16(a).
(c) Schedules 3.16(c)(i), (ii) and (iii) list all of the
Computer Programs which are owned, licensed, leased or otherwise used by Seller
Parties in connection with the operation of the Business as currently conducted,
and identifies which is owned, licensed, leased, or otherwise used, as the case
may be. Schedule 3.16(c)(i) sets forth each Computer Program that is Proprietary
Software; Schedule 3.16(c)(ii) sets forth each Computer Program that is
currently in the public domain or otherwise available to a Seller Party without
the license, lease or consent of any third party; and Schedule 3.16(c)(iii) sets
forth each Computer Program that is used under rights granted to a Seller Party
pursuant to a written agreement, license or lease from a third party, which
written agreement, license or lease is identified on Schedule 3.16(c)(iii).
Seller Parties use the Computer Programs set forth on Schedules 3.16(c)(i), (ii)
and (iii) in connection with the operation of the Business as conducted on the
date hereof and such use, to the knowledge of Seller Parties, does not violate
the rights of any third party. To the knowledge of Seller Parties, Seller
Parties have the number of licenses to use the Third Party Computer Programs set
forth on Schedule 3.16(c)(iii). To the knowledge of Seller Parties, all
Proprietary Software identified in Schedule 3.16(c)(i) were either developed by
(i) employees of Seller Parties within the scope of their employment; (ii)
independent contractors as "works-made-for-hire", as that term is defined under
Section 101 of the United States copyright laws, pursuant to written agreements;
or (iii) third parties who have assigned their rights to a Seller Party pursuant
to written agreements. No present, and to the knowledge of Seller Parties, no
former employees, officers or directors of the Seller Parties retain any rights
of ownership or use of the Proprietary Software.
(d) Schedule 3.16(d)(i) sets forth a complete and accurate
list of all agreements granting to third parties any right to use or practice
any rights under any of the Intellectual Property owned by Seller Parties;
Schedule 3.16(d)(ii) sets forth a complete and accurate list of all agreements
permitting Seller Parties to use any Intellectual Property (such agreements,
including, without limitation, agreements, licenses, settlement agreements,
consent decrees and covenants not to ▇▇▇, together with the agreements
referenced in Schedule 3.16(d)(i) are collectively referred to herein as the
31
"Intellectual Property Licenses"). Except as set forth on Schedule 3.16(d) (ii),
the Intellectual Property Licenses are valid and binding obligations of Seller
Parties, enforceable in accordance with their terms, subject to the
enforceability exceptions from Section 3.10 and no Seller Party is in breach or
default thereunder.
(e) The Seller Parties have not licensed or sublicensed their
rights in any Intellectual Property to any party other than a Seller Party, or
received or been granted any such rights, other than pursuant to the
Intellectual Property Licenses;
(f) To the knowledge of Seller Parties, the conduct of the
Business by the Seller Parties does not infringe, violate or dilute any
intellectual property rights owned or controlled by any third party, and no
third party is misappropriating infringing, diluting or violating any
Intellectual Property owned by any Seller Party, and no such claims have been
made against a third party by Seller Party. There are no claims or suits pending
or, to the knowledge of the Seller Parties, threatened, and no Seller Parties
have received written notice of a third party claim or suit (a) alleging that
Seller Parties' activities or the conduct of the Business infringes upon or
constitutes the unauthorized use of the proprietary rights of any third party,
or (b) challenging the ownership, use, validity or enforceability of the
Intellectual Property owned by Seller Parties. Except as set forth on Schedules
3.16(f) and 3.16(d)(ii), there are no settlements, consents, judgments, or
orders or other agreements which restrict a Seller Parties's rights to use any
Intellectual Property, and no concurrent use or other agreements which restrict
a Seller Parties' rights to use any Intellectual Property owned by a Seller
Party. The Seller Parties take all reasonable measures to protect the
confidentiality of their trade secrets and confidential information material to
the Business including requiring third parties having access thereto to execute
written nondisclosure agreements. No trade secret or confidential know-how
material to the Business as currently operated or planned to be operated has
been disclosed or authorized to be disclosed to any third party, other than
pursuant to a non-disclosure agreement that protects Seller Parties' proprietary
interests in and to such trade secrets and confidential know-how;
(g) Except as set forth on Schedule 3.16(g) or as otherwise
provided in this Agreement, the consummation of the transactions contemplated
hereby will not result in the loss or impairment of a Seller Party's right to
own or use any of the Intellectual Property nor will it require the consent of
any Governmental Entity or third party in respect of any such Intellectual
Property.
(h) No present and, to the knowledge of Seller Parties, no
former employee, officer or director of a Seller Party has any right, title, or
interest, directly or indirectly, in whole or in part, in any of the
Intellectual Property owned by the Seller Party.
(i) Except as set forth on Schedule 3.16(i), all Proprietary
Software is Year 2000 Compliant and, to the knowledge of Seller Parties, all
Third Party Computer Programs are Year 2000 Compliant and Seller Parties have no
Knowledge of any Year 2000-related problems in connection with the Computer
Programs and have not received
32
any written notice, or to the knowledge of Seller Parties, oral notice, of any
Year 2000-related problem in connection with Third Party Computer Programs.
Section 3.17. All Assets Necessary. (a) Except as set forth in
Schedule 3.17, and except for Business Assets which will constitute Transferred
Assets upon consummation of the Closing, Seller Parties own, lease or license
(independently of any of their Affiliates) all property and assets necessary to
perform their obligations under the Transition Services Agreement.
(b) Except as specifically contemplated by the Ancillary
Agreements and except for investment portfolio assets, all Business Assets which
will constitute Transferred Assets upon consummation of the Closing will as of
the Closing permit Purchaser to conduct the Business in substantially the same
manner as it has been conducted prior to the Closing.
Section 3.18. Third Party Reinsurance Contracts. (a) The Third
Party Reinsurance Contracts listed on Schedule 3.18(a) comprise all reinsurance
agreements entered into since January 1, 1990 relating to the Business to which
a Seller Insurer Party is a party, either as cedent or retrocedent. Except as
set forth on Schedule 3.18(b), all Third Party Reinsurance Contracts (other than
Assumed Reinsurance Transactions and Individually Underwritten Assumed
Reinsurance Transactions) which have not been voided or commuted are valid,
binding, enforceable and in full force and effect and the Seller Insurer Parties
are not in material breach of any provision thereof and no other party to such
Third Party Reinsurance Contracts (other than Assumed Reinsurance Transactions
and Individually Underwritten Assumed Reinsurance Transactions) is in breach or,
to the knowledge of Seller Parties, has threatened breach of any provision
thereof. There is no event that has occurred which, with the passage of time or
the giving of notice, or both, would create a default or breach by the Seller
Insurer Parties.
(b) Except as set forth in Schedule 3.18(b), none of the
Seller Insurer Parties or any reinsurer under any Third Party Reinsurance
Contract (other than Assumed Reinsurance Transactions and Individually
Underwritten Assumed Reinsurance Transactions) that has not previously been
voided or commuted prior to the date hereof has given any written notice of
termination, commutation, voidance or cancellation or, to the knowledge of
Seller Parties, has threatened termination, commutation, voidance or
cancellation with respect to any such Third Party Reinsurance Contract (other
than Assumed Reinsurance Transactions and Individually Underwritten Assumed
Reinsurance Transactions), and there is no dispute under any Third Party
Reinsurance Contract (other than Assumed Reinsurance Transactions and
Individually Underwritten Assumed Reinsurance Transactions) between the parties
thereto regarding the liability for any claim against the Seller Insurer Parties
by the insureds that are covered by any Third Party Reinsurance Contract (other
than Assumed Reinsurance Transactions and Individually Underwritten Assumed
Reinsurance Transactions). Except as set forth on Schedule 3.18(b), no Seller
Party has knowledge of any information which would reasonably cause it to
believe that the financial condition of any other party to a Third Party
Reinsurance Contract (other than Assumed Reinsurance Transactions and
33
Individually Underwritten Assumed Reinsurance Transactions) with such party is
so impaired as to result in a default thereunder.
(c) The Assumed Reinsurance Transactions and Individually
Underwritten Assumed Reinsurance Transactions which have not been voided or
commuted are valid, binding, enforceable and in full force and effect and the
Seller Insurer Parties are not in material breach of any provision thereof.
There is no (i) dispute with respect to any Assumed Reinsurance Transactions and
Individually Underwritten Assumed Reinsurance Transaction or (ii) event that has
occurred which, with the passage of time or the giving of notice, or both, would
create a default or breach by the Seller Insurer Parties under any Assumed
Reinsurance Transactions and Individually Underwritten Assumed Reinsurance
Transactions. No Seller Party has knowledge of any information which would
reasonably cause it to believe that the financial condition of any other party
to an Assumed Reinsurance Transaction or Individually Underwritten Assumed
Reinsurance Transaction is so impaired as to result in a default thereunder.
Section 3.19. Solvency; Adequate Capitalization; Ability to
Pay Debts. Each Seller Party is and, prior to and after giving effect to the
consummation of this Agreement and the Ancillary Agreements, will be Solvent and
not Impaired. At the time of and after giving effect to the consummation of the
transactions contemplated hereby, no Seller Party will have unreasonably small
capital with which to conduct its business or shall be generally unable to pay
its debts as they become due (in each case as contemplated under Applicable Laws
with respect to voidable or fraudulent transfers and obligations). No Seller
Insurer Party is subject to any supervision, conservation, liquidation,
rehabilitation, delinquency or similar proceeding, or investigation or inquiry
which is reasonably likely to result in any such proceeding, under Applicable
Law. Parent is not subject to any action, suit, investigation, judgment or
proceeding under Federal bankruptcy law, or any investigation or inquiry which
is reasonably likely to result in any of the foregoing.
Section 3.20. Taxes. Except as set forth on Schedule 3.20,
each Seller Insurer Party (i) has duly filed (or there has been filed on its
behalf) with the appropriate taxing authorities all Tax Returns with respect to
the Business required to be filed by it on or prior to the date hereof, and each
such Tax Return is true, correct and complete in all respects, and (ii) has duly
paid in full or made adequate provision in the GAAP Closing Financial Statement,
SAP Closing Financial Statement, GAAP Final Financial Statement or SAP Final
Financial Statement for the payment of all Taxes with respect to the Business of
such Seller Insurer Party.
Section 3.21. Employee Benefit Plans; ERISA.
(a) Schedule 3.21 contains a true and complete list of each
deferred compensation and each incentive compensation, equity compensation plan,
"welfare" plan, fund or program (within the meaning of section 3(1) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"));
"pension" plan, fund or program (within the meaning of section 3(2) of ERISA);
each employment, termination or severance agreement; and each other employee
benefit plan, fund, program, agreement
34
practice or arrangement, in each case, that is sponsored, maintained or
contributed to or required to be contributed to by the Seller Parties or by any
trade or business, whether or not incorporated (an "ERISA Affiliate"), that
together with the Seller Parties would be deemed a "single employer" within the
meaning of section 4001(b) of ERISA, or to which the Seller Parties or an ERISA
Affiliate is party, whether written or oral, for the benefit of any employee of
the Seller Parties engaged in the Business (the "Plans").
(b) No liability under Title IV or section 302 of ERISA has
been incurred by the Seller Parties or any ERISA Affiliate that has not been
satisfied in full, and no condition exists that presents a material risk to the
Seller Parties or any ERISA Affiliate of incurring any such liability, other
than liability for premiums due the Pension Benefit Guaranty Corporation (which
premiums have been paid when due). No Plan is a "multiemployer pension plan," as
defined in section 3(37) of ERISA, nor is any Plan a plan described in section
4063(a) of ERISA. Each Plan has been operated and administered in all material
respects in accordance with its terms and Applicable Law, including, but not
limited to, ERISA and the Code. Each Plan intended to be "qualified" within the
meaning of section 401(a) of the Code is so qualified and the trusts maintained
thereunder are exempt from taxation under section 501(a) of the Code.
(c) Except as disclosed in Schedule 3.21(c), the consummation
of the transactions contemplated by this Agreement will not, either alone or in
combination with another event, (i) entitle any current or former employee or
officer of the Seller Parties or any ERISA Affiliate to severance pay,
unemployment compensation or any other payment, except as expressly provided in
this Agreement, or (ii) accelerate the time of payment or vesting, or increase
the amount of compensation due any such employee or officer.
Section 3.22. Employee Matters.
(a) Each Seller Party is in material compliance with all
Applicable Laws respecting employment and employment practices with respect to
employees engaged in the Business, and the terms and conditions of such
employees' employment and wages and hours. No Seller Party is a party to or
bound by any collective bargaining agreement, nor have they experienced any
strikes, grievances, claims of unfair labor practices, or other collective
bargaining disputes within the past year, in each case, with respect to
employees engaged in the Business. There is no labor strike, dispute,
arbitration, grievance, slowdown, stoppage, organizational effort, dispute or
proceeding by or with any employee or former employee engaged in the Business or
any labor union pending or to the knowledge of the Seller Party threatened
against a Seller Party relating to employees engaged in the Business. No Seller
Party is the subject of any pending written or, to the knowledge of the Seller
Party, oral claim asserting that such entity has committed any unfair labor
practice.
(b) Except as set forth in Schedule 3.22, no employee of a
Seller Party devoted principally to the Business has any employment contract or
other agreement, practice or arrangement by which such employee is employed on
any basis other than as an "at will" employee or by which a Seller Party is
restricted in any manner from
35
terminating the services of such employee at any time without penalty or
payment, subject only to the provisions of the Plans described herein.
Section 3.23. Books and Records. The Books and Records are
complete and accurate in all material respects and have been made available as
requested by Purchaser.
Section 3.24. Threats of Cancellation. Except as disclosed in
Schedule 3.24, since January 1, 2000, no group of customers of the Business or
Persons writing, selling, or producing, either directly or through reinsurance
assumed, Subject Contracts for the Business, that individually or in the
aggregate for each such group or Person, respectively, accounted for 3% or more
of the premium income of the Business for the year ended December 31, 1999, has
terminated or, to the knowledge of a Seller Party, threatened to terminate its
relationship with a Seller Party.
Section 3.25. Brokers. Except for ▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇ & ▇▇▇▇▇▇▇▇
Securities Corp. and Bear ▇▇▇▇▇▇▇ & Co. Inc., there is no investment banker,
broker, finder or other intermediary which has been retained by or is authorized
to act on behalf of any Seller Party who might be entitled to any fee or
commission upon consummation of the transactions contemplated by this Agreement.
Section 3.26. Treasury Authorization; Treasury Limitations.
Each Seller Insurer Party (other than RNIC Europe) is in good standing with the
United States Treasury Department (the "Treasury Department") and appropriately
listed and authorized by the Treasury Department, if required, to issue the
Subject Contracts. Except as set forth on Schedule 3.26, the Subject Contracts
issued in any year by the Business have not been issued in violation in any
material respect of any applicable Treasury Department rules and regulations.
Section 3.27. Agents; Agency Contracts. Schedule 3.27(a) lists
each agent with respect to the Business that has an appointment with or by one
or more Seller Insurer Parties in effect as of March 23, 2000. Seller Parties
have made available to Purchaser prior to the date hereof the forms of agency
contracts used in the Business. Except as set forth on Schedule 3.27(b), each
agency contract relating to the Business is in full force and effect. Each
Seller Party that is a party to an agency contract which resulted, in calendar
year 1999, in more than $25,000 in direct written premium with respect to the
Business (a "Material Agency Contract") is not in material breach of any
provision thereof and no other party to such Material Agency Contract is in
material breach or, to the knowledge of Seller Parties, has threatened breach,
of any provision thereof. The agency contracts relating to the Business which
are not Material Agency Contracts have not resulted, in calendar year 1999, in
more than $12,000,000 in direct written premium in the aggregate with respect to
the Business. There is no event that has occurred which, with the passage of
time or the giving of notice, or both, would create a default or breach by any
Seller Party of any Material Agency Contact.
Section 3.28. Ratings. Except as disclosed to Purchaser in
writing, no Seller Insurer Party has, from December 31, 1999 to the date of this
Agreement, been
36
informed that its (i) rating by A.M. Best Company, Inc. or (ii) claims-paying
ability rating by Standard & Poor's Ratings Group will or may be downgraded.
Section 3.29. Fairness Opinions. Bear ▇▇▇▇▇▇▇ & Co., Inc. has
rendered an opinion with respect to the transactions contemplated hereby, a copy
of which has previously been delivered to Purchaser. ▇▇▇▇▇▇▇▇▇, Lufkin &
▇▇▇▇▇▇▇▇ Securities Corp. has rendered an opinion with respect to the
transactions contemplated hereby, a copy of which has previously been delivered
to Purchaser.
Section 3.30. Collateral and Indemnity Agreements. Each
Collateral Agreement and Indemnity Agreement which has not been terminated is
valid, enforceable and in full force and effect and the Seller Parties are not
in material breach of any provision thereof and, to the knowledge of Seller
Parties, no other party to such agreements has threatened breach of any
provision thereof. There is no event that has occurred which, with the passage
of time or the giving of notice, or both, would create a default or breach by
the Seller Parties of any Collateral and Indemnity Agreement. The execution,
delivery and performance of this Agreement and the Ancillary Agreements, do not
and will not require any consent or other action by any Person under, constitute
a default under, or give rise to any right of termination, cancellation or
acceleration of any right or obligation of any Person or to a loss of any
benefit to which any Person is entitled under, any Collateral Agreement or
Indemnity Agreement.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser represents and warrants to Seller Parties that:
Section 4.1. Corporate Existence and Power. Purchaser has been
duly organized and is validly existing as an insurance company in good standing
under the laws of Connecticut and has all corporate powers and all material
governmental licenses, authorizations, permits, consents and approvals required
to carry on its business as now conducted and, subject to the receipt of the
approvals from Governmental Entities contemplated hereby or by any Ancillary
Agreement, to conduct the Business as of the Closing Date, except as would not
have a Material Adverse Effect on the Business.
Section 4.2. Corporate Authorization. The execution, delivery
and, subject to the receipt of the approvals referred to in Section 4.3,
performance by Purchaser of this Agreement and the Ancillary Agreements are
within the corporate powers of Purchaser and have been duly authorized by all
necessary corporate action on the part of Purchaser. This Agreement constitutes,
and when executed and delivered each other Ancillary Agreements will constitute,
a valid and legally binding agreement of Purchaser, enforceable against
Purchaser in accordance with its terms, subject to (i) bankruptcy, insolvency,
reorganization, fraudulent conveyance, moratorium and other similar laws now or
hereafter in effect relating to or affecting creditors' rights generally and the
rights of creditors of insurance companies generally and (ii) general principles
of equity (regardless of whether considered in a proceeding at law or in
equity).
37
Section 4.3. Governmental Authorization. The execution,
delivery and performance by Purchaser of this Agreement and each other Ancillary
Agreement requires no action by or in respect of, or filing with, any
Governmental Entity on the part of Purchaser or any Affiliate thereof other than
(i) compliance with any applicable requirements of the HSR Act, (ii) approvals
of filings under Applicable Law, including the insurance laws of the
jurisdictions set forth in Schedule 4.3, (iii) filings and notices not required
to be made or given until after the Closing Date, (iv) filings, at any time, of
tax returns, tax reports and tax information statements and (v) any such other
action or filing not contemplated in the preceding clauses (i) through (iv) as
to which the failure to make or obtain would not individually or in the
aggregate be material.
Section 4.4. Non-Contravention. Except as set forth in
Schedule 4.4, the execution, delivery and performance by Purchaser of this
Agreement and the Ancillary Agreements do not and will not (i) violate the
certificate of incorporation or by-laws of Purchaser, (ii) assuming compliance
with the filings, notices, approvals and other matters referred to in Section
4.3, violate any Applicable Law, (iii) require any consent or other action by
any Person under, constitute a default under, or give rise to any right to
termination, cancellation or acceleration of any right or obligation of
Purchaser or to a loss of any benefit to which Purchaser is entitled under, any
material agreement or other instrument binding upon Purchaser or any material
license, franchise, permit or other similar authorization held by Purchaser or
(iv) result in the creation or imposition of any material Lien on any material
assets.
Section 4.5. Ratings. Except as disclosed to a Seller Party in
writing, Purchaser has not been informed that its (i) rating by A.M. Best
Company, Inc.; (ii) claims-paying ability rating by Standard & Poor's Ratings
Group or (iii) financial strength rating by ▇▇▇▇▇'▇ Investors Service, Inc. will
or may be adversely affected by consummation of any transaction contemplated
hereby or by an Ancillary Agreement.
Section 4.6. Licenses and Permits. Except as listed on
Schedule 4.6 hereto and subject to the receipt of approvals from Governmental
Entities contemplated by this Agreement or an Ancillary Agreement, Purchaser has
all Permits necessary to reinsure the Subject Contracts and otherwise perform
its obligations under this Agreement and each Ancillary Agreement. All such
Permits are valid and in full force and effect, and Purchaser is not operating
under any agreement or understanding with any Governmental Entity which
restricts its authority to do business or requires the Purchaser to take, or
refrain from taking, any action relating to the conduct of the Business
otherwise permitted by Applicable Law. Except as listed on Schedule 4.6 hereto,
no material violations exist in respect of any such Permit and no investigation
or proceeding is pending or, to the knowledge of Purchaser, threatened, which
would reasonably be expected to result in the revocation, amendment, failure to
renew, limitation, modification, suspension or revocation of any such Permit
and, to the knowledge of Purchaser, there is no reasonable basis for the
assertion of any such violation or the institution of any such proceeding or
investigation.
Section 4.7. Brokers. There is no investment banker, broker,
finder or other intermediary which has been retained by or is authorized to act
on behalf of
38
Purchaser who might be entitled to any fee or commission upon consummation of
the transactions contemplated by this Agreement.
Section 4.8. Assets Necessary to Perform Administrative
Services. Purchaser and its Affiliates shall have good title to, or in the case
of leased property shall have valid leasehold interests in, all of their assets
which are necessary to perform the Administrative Services assuming the transfer
to Purchaser of the Transferred Assets, the effectiveness of the Transition
Services Agreement and the absence of any breach by a Seller Party of the
representations and warranties contained in Sections 3.13 and 3.17 hereof.
Section 4.9. Purchaser Financial Statements. Purchaser's
annual SAP financial statement filed with the Connecticut Department of
Insurance as of and for the calendar year ended December 31, 1999 presents
fairly in all material respects Purchaser's assets and liabilities as of the
date of such financial statement.
Section 4.10. Solvency; Adequate Capitalization; Ability to
Pay Debts. Purchaser is and, prior to and after giving effect to the
consummation of this Agreement and the Ancillary Agreements, will be Solvent and
not Impaired. Purchaser is not subject to any supervision, conservation,
liquidation, rehabilitation, delinquency or similar proceeding, or investigation
or inquiry which is reasonably likely to result in any such proceeding, under
Applicable Law.
ARTICLE V
COVENANTS
Section 5.1. Conduct of Seller Parties Prior to the Closing
Date. On and after the date hereof until the Closing, each Seller Party shall
conduct the Business in the ordinary course consistent in all material respects
with past practice. Without limiting the generality of the foregoing, Seller
Parties each covenant and agree that, to the extent relating to the Business, on
the date hereof and prior to the Closing Date (unless Purchaser shall otherwise
approve in writing, and except as otherwise expressly contemplated by this
Agreement or the Ancillary Agreements):
(a) it shall exercise its commercially reasonable efforts to
maintain itself at all times in all material respects as a corporation duly
organized, validly existing, in good standing, and duly qualified to conduct the
Business;
(b) it shall exercise its commercially reasonable efforts to
not commit any act which constitutes a material breach of or default under any
contract, agreement, plan, lease, policy, or Permit or fail to comply in any
material respect with any Applicable Laws, including, without limitation, any
such breach, default or failure to comply which would be likely to materially
and adversely affect the consummation of the transactions contemplated hereby;
(c) it shall promptly advise Purchaser in writing of any
material adverse change in the condition of the Business Assets which will be
Transferred Assets
39
or which will be necessary to perform the Transition Services upon consummation
of the Closing; Liabilities of which it has knowledge which will be Assumed
Liabilities or Subject Contract Liabilities or which will be otherwise assumed
by Purchaser pursuant to any Ancillary Agreement upon consummation of the
Closing; or earnings of the Business, or of any breach, default or failure to
comply by it of the type referred to in subparagraph (b) immediately above or of
any litigation of which it has knowledge involving it which could reasonably be
expected to have a Material Adverse Effect on the Business;
(d) subject to the restrictions imposed on the conduct of
Seller Parties by this Agreement, it will, use its reasonable best efforts to
preserve its business organization intact and maintain its existing relations
and goodwill with customers, suppliers, reinsurers, agents, brokers,
distributors, creditors, lessors, employees, business associates and others
having business relationships with Seller Parties in respect of the Business;
(e) it shall not transfer, lease, license, guarantee, sell,
mortgage, pledge, dispose of, encumber or otherwise convey any Transferred Asset
or Business Assets necessary to perform the Transition Services or incur or
modify any material indebtedness or other Liability which will be an Assumed
Liability upon consummation of the Closing or which will be otherwise assumed
pursuant to any Ancillary Agreement upon consummation of the Closing;
(f) it shall not pay, discharge or satisfy any material
claims, liabilities or obligations associated with the Business (absolute,
asserted or unasserted, contingent or otherwise) other than the payment,
discharge or satisfaction, in the ordinary course of business consistent in all
material respects with past practices or in accordance with their terms, of
liabilities reflected or reserved against in the Audited Opening Financial
Statements;
(g) it shall not enter into any agreement containing any
provision or covenant limiting in any material respect its ability to (i) sell
any products or services of or to any other Person relating to the Business,
(ii) engage in the Business or (iii) compete with or to obtain products or
services from any Person or limiting the ability of any person to provide
products or services relating to the Business;
(h) it shall not enter into any material contract that would
constitute an Assigned and Assumed Contract, other than in the ordinary course
of business consistent in all material respects with past practices;
(i) it shall not acquire any material asset that would
constitute a Transferred Asset if owned by Seller Parties at Closing, other than
acquisitions or dispositions in the ordinary course of business consistent in
all material respects with past practices;
(j) it shall not knowingly encumber all or any of the
Transferred Assets with any Lien and shall use commercially reasonably efforts
not to permit all or
40
any of the Transferred Assets to be subject to any Lien, except (i) Liens
identified on Schedule 3.13(b) and reflected on each of the Opening Financial
Statements, Audited Opening Financial Statements and Closing Financial
Statements and (ii) for Taxes not yet due or being contested in good faith (and
for which adequate accruals or Reserves have been established) specifically
reflected on the Opening Financial Statements, the Audited Opening Financial
Statements or the Closing Financial Statements;
(k) it shall not terminate the current reinsurance pooling
arrangement in respect of the Seller Insurer Parties;
(l) it shall not terminate, or in any manner material thereto
modify, amend or waive compliance with, any provision of any of the Significant
Agreements except (i) in the ordinary course of the Business consistent in all
material respects with past practice and (ii) as could not reasonably be
expected to materially and adversely affect the benefits which Purchaser could
reasonably expect to derive upon consummation of the transactions contemplated
hereby and by any Ancillary Agreement;
(m) it shall not incur any Liability relating to the Business
which would be a Subject Contract Liability following the Closing except in the
ordinary course of the Business consistent in all material respects with past
practice;
(n) it shall not enter into any new reinsurance agreements
relating to the Business other than in the ordinary course of business
consistent in all material respects with past practice;
(o) it shall not change any of its or their accounting
principles, practices, methods or policies (including, without limitation, any
reserving methods, practices or policies) used by it or them, except as may be
required as a result of a change in Applicable Law, GAAP or SAP;
(p) it shall not cancel any debts or waive any claims or
rights relating to the Business of material value except in the ordinary course
of the Business consistent in all material respects with past practice;
(q) it shall not effect any transactions with any Affiliates,
other than pursuant to arrangements existing as of the date hereof or as
contemplated hereby or by any Ancillary Agreement;
(r) it shall not, and shall cause its Affiliates not to,
directly or indirectly, encourage, initiate, solicit or otherwise facilitate the
transfer of employees engaged in the Business to positions not involved in the
Business;
(s) it shall not take any action or omit to take any action
that would cause any of its representations and warranties herein to become
untrue in any material respect;
41
(t) it shall not take any actions that, individually or in the
aggregate, would cause or could reasonably be expected to cause a Material
Adverse Effect on the Business;
(u) it shall not terminate, cancel or amend any insurance
coverage maintained by it with respect to any Transferred Asset, or Business
Asset necessary to perform the Transition Services following the Closing, which
is not replaced by a comparable amount of insurance coverage or is not deemed
necessary in its reasonable judgment;
(v) it shall not authorize or enter into an agreement (written
or oral) or arrangement of any kind other that would be violative of any of the
prohibitions set forth in this Section 5.1; and
(w) it shall not, with respect to the Business, (i) make any
change in its Tax accounting methods, (ii) make any new election with respect to
Taxes, (iii) make any modification or revocation of any existing election with
respect to Taxes, or (iv) settle or otherwise dispose of any Tax dispute, audit,
proceeding, suit or other similar Tax-related action in a manner that would be
binding on the Purchaser or the Business for periods after the Closing or
otherwise cause an adverse effect to the Purchaser or the Business; provided,
that Purchaser's approval as required by this Section 5.1 for any change,
election, modification, revocation, settlement or other disposal under this
Section 5.1(w) shall not be unreasonably withheld.
Notwithstanding anything in this Section 5.1 to the contrary, Seller Parties
shall, prior to Closing, (i) commute the Reliance Surety Quota Share Reinsurance
Agreement between RSC, as cedent, and RIC, as reinsurer, originally effective
January 1, 1994, as amended, pursuant to a commutation agreement in the form set
forth on Schedule 5.1(i) hereto; (ii) amend the Reliance Insurance Companies
Inter-Company Quota Share Reinsurance Pooling Agreement (the "Pooling
Agreement"), originally effective December 31, 1992, as amended, in order to
return to RIC the ceded loss, loss expense and unearned premium reserves arising
from the Subject Contracts from the retrocessionaires of the Pooling Agreement
to RIC, calculated as of the Closing Date, pursuant to an amendment in a form
reasonably satisfactory to Purchaser; and (iii) be permitted to terminate as of
the Closing Date the reinsurance coverage provided by that certain Cover Note
made effective January 1, 1997 by which RIC provided aggregate stop loss
coverage to RNIC Europe for losses discovered in each calendar year for surety
bonds in excess of $3 million in the aggregate, but only if such termination
would not impair the ability of RNIC Europe to issue Reinsured Contracts (as
defined and provided for in the Quota Share Reinsurance Agreements).
Section 5.2. No Alternative Proposals. (a) From and after the
date hereof until following the Closing, Seller Parties, will not, and will not
permit or cause any of their officers and directors to, and shall direct their
Representatives not to, directly or indirectly, initiate, solicit, encourage or
otherwise facilitate any inquiries or the making of any proposal or offer with
respect to (i) any direct or indirect sale, transfer, pledge, disposition, bulk
reinsurance or other conveyance of the Business or of assets which
42
would constitute Transferred Assets assuming consummation of the Closing other
than a transaction expressly provided for herein; or (ii) a merger,
reorganization, share exchange, consolidation or similar transaction involving,
or any purchase of 5% or more of the assets or any equity securities of, a
Seller Party which could reasonably be expected to materially and adversely
affect the consummation of a transaction contemplated hereby or by any Ancillary
Agreement (any of the foregoing in (i) or (ii), an "Alternative Proposal");
provided, however, that this paragraph shall not be deemed to prohibit Seller
Parties from entering into agreements in respect of or from engaging in
transactions of the type enumerated in the foregoing clause (ii) with a third
party so long as the agreement with such third party (other than any other
Seller Party) does not contemplate the acquisition, directly or indirectly, of
Business Assets which will constitute Transferred Assets upon consummation of
the Closing and, in any case, such third party enters into a written agreement
substantially in the form set forth on Schedule 5.2.
(b) From and after the date hereof until the Closing Date,
subject to paragraph (a) of this Section 5.2, Seller Parties will not, and will
not permit or cause any of their respective officers and directors to, and shall
direct its, employees, agents and Representatives not to, directly or
indirectly, engage in any negotiations concerning, or provide any confidential
information or data to, or have any discussions with, any Person relating to an
Alternative Proposal, whether made before or after the date of this Agreement,
or otherwise facilitate any effort or attempt to make or implement an
Alternative Proposal. Seller Parties will immediately cease and cause to be
terminated any existing activities, discussions or negotiations with any parties
conducted heretofore with respect to any of the foregoing, and agree that they
will take the necessary steps to promptly inform the individuals or entities
referred to in the preceding sentences hereof of the obligations undertaken in
this Section 5.2.
(c) From the date hereof until the Closing Date, Seller
Parties will notify Purchaser as promptly as practicable if any such proposals
or offers in respect of an Alternative Proposal which are reasonably likely to
result in a consummated transaction are received by, any such information with
respect to a transaction which is reasonably likely to be consummated is
requested from, or any such discussions or negotiations with respect to a
transaction which is reasonably likely to be consummated are sought to be
initiated or continued with, any of its Representatives indicating, in
connection with such notice, the name of such Person and the material terms and
conditions of any proposals or offers and thereafter shall keep Purchaser
informed, on a current basis, on the status and terms of any such proposals or
offers and the status of any such negotiations or discussions. It is intended
that the notification provided for in this paragraph (c) shall include matters
contemplated by Section 5.2(a)(ii) and permitted by the proviso in the foregoing
paragraph (a).
(d) Seller Parties also will promptly request each Person that
has heretofore executed a confidentiality agreement in connection with its
consideration of an Alternative Proposal to return or destroy all confidential
information heretofore furnished to such Person by or on behalf of it.
43
Section 5.3. Investigations; Books and Records. Prior to the
Closing Date, Purchaser and its Representatives shall be entitled to make such
further investigation of the assets, liabilities, business, operations and
prospects of the Business, and such further examination of the Books and Records
as they deem necessary. Any investigation, examination or interview by Purchaser
of employees of any Seller Party or access pursuant to any of the provisions of
this Section 5.3 shall be conducted upon reasonable prior notice and during
normal business hours without undue disruption of business; each of the parties
hereto and its Representatives, shall cooperate with the other's
Representatives, as the case may be, in connection with such review and
examination.
Section 5.4. HSR Act Filings. Seller Parties and Purchaser
have filed or caused to be filed Notification and Report Forms under the HSR Act
with the Federal Trade Commission (the "FTC") and the Antitrust Division of the
United States Department of Justice (the "Antitrust Division") in connection
with the transactions contemplated by this Agreement and the Ancillary
Agreements. Seller Parties and Purchaser will use their respective commercially
reasonable efforts to respond as promptly as practicable to all inquiries
received from the FTC or the Antitrust Division for additional information or
documentation and to cause the waiting periods under the HSR Act to terminate or
expire at the earliest possible date.
(a) Seller Parties and Purchaser will each furnish to the
other such necessary information and reasonable assistance as the other may
reasonably request in connection with its preparation of necessary filings or
submissions to any governmental or regulatory agency, including, without
limitation, any additional filings necessary under the provisions of the HSR
Act.
Section 5.5. Cooperation and Reasonable Best Efforts. (a)
Seller Parties and Purchaser shall cooperate and use commercially reasonable
efforts to obtain all consents, approvals and agreements of, and to give and
make all notices and filings with, any Governmental Entity necessary to
authorize, approve or permit the consummation of the transactions contemplated
by this Agreement, the Ancillary Agreements and any other agreements
contemplated hereby or thereby, including, without limitation, obtaining each
Permit set forth on Schedules 3.3 and 4.3 hereto. Purchaser and Seller Parties
will provide each other and their counsel the opportunity to review in advance
and comment on all such filings with any Governmental Entity. Purchaser and
Seller Parties will keep each other informed of the status of matters relating
to obtaining the regulatory approvals specified in Schedule 3.3 and Schedule
4.3. It is expressly understood by the parties hereto that each party hereto
shall use commercially reasonable efforts to ensure that Representatives of both
the Purchaser and Seller Parties shall have the right to attend and participate
in any hearing, proceeding, meeting, conference or similar event before or with
a Governmental Entity or other organization relating to this Agreement or an
Ancillary Agreement. In furtherance of the foregoing, Purchaser and Seller
Parties shall provide each other reasonable advance notice of any such hearing,
proceeding, meeting, conference or similar event. The notice required to be
given under this Section 5.5 shall be given to Representatives of Seller Parties
or Purchaser entitled to receive notices hereunder.
44
(b) Subject to the final two sentences of Section 2.3(a) and
to Section 5.30(b), Seller Parties and Purchaser shall cooperate and use
reasonable best efforts to obtain all approvals and consents to the transactions
contemplated by this Agreement and the Ancillary Agreements from Persons which
are not Governmental Entities, including, but not limited to, the consents of
third parties under Assigned and Assumed Contracts. In the event and to the
extent that Seller Parties are unable to obtain any required approval or consent
of non-governmental or non-regulatory authorities to any agreement to be
assigned to Purchaser hereunder, (i) Seller Parties shall use their reasonable
best efforts in cooperation with Purchaser to (x) provide or cause to be
provided to Purchaser the benefits of any such agreement, (y) cooperate in any
arrangement, reasonable and lawful as to Seller Parties and Purchaser designed
to provide such benefits to Purchaser and (z) enforce for the account of
Purchaser (and at Purchaser's sole cost and expense) any rights of Seller
Parties arising from such agreements, including the right to elect to terminate
in accordance with the terms thereof on the advice of Purchaser and (ii)
Purchaser shall use its commercially reasonable efforts to perform the
obligations of Seller Parties arising under such agreements, to the extent that,
by reason of the transactions consummated pursuant to this Agreement, Purchaser
has control over the resources necessary to perform such obligations. If and
when any such approval or consent shall be obtained or such agreement shall
otherwise become assignable, the applicable Seller Party shall promptly assign
all of its rights and obligations thereunder to Purchaser without the payment of
further consideration and Purchaser shall, without the payment of any further
consideration therefor, assume such rights and obligations and the applicable
Seller Party shall be relieved of any and all obligation or liability hereunder.
(c) Following the Closing, Purchaser and Seller Parties shall
provide reasonable assistance to each other with the investigation of, response
to or defense of any suit, action or proceeding with a third party (subject to
the provisions of Article 7 and the Administrative Services Agreement) that
relates to the Business, Transferred Assets or Transferred Employees (including,
without limitation, making Transferred Employees reasonably available at Seller
Party's expense in connection with Seller Parties' investigation of, response to
or defense of any claims made by a current or former employee of Seller Parties
with respect to employment related matters or decisions).
(d) Subject to Section 5.1 of the Administrative Services
Agreements, Purchaser and Seller Parties shall cooperate fully in effecting the
transition of the Business from approved policy forms of Seller Insurer Parties
to approved policy forms of Purchaser or its Affiliates, which shall include,
without limitation, Purchaser's periodically furnishing Seller Insurer Parties
information concerning the status of its policy form, rate and rule filings
contemplated under Section 3.1 of the Administrative Services Agreement and
Seller Insurer Parties' periodically furnishing Purchaser information concerning
the status of its filings with insurance regulatory authorities pursuant to
state statutes relating to the withdrawal from lines of insurance business
and/or insurance markets.
Section 5.6. Further Assurances. (a) Except as otherwise
provided herein, upon the terms and subject to the conditions herein provided,
on and prior to the Closing Date, each of the Seller Parties and Purchaser shall
use reasonable best efforts to
45
take, or cause to be taken, all actions or do, or cause to be done, all things
or execute any documents necessary, proper or advisable to consummate and make
effective the transactions contemplated by this Agreement, the Ancillary
Agreements and any other agreements contemplated hereby or thereby.
(b) On and after the Closing Date, Seller Parties (as
reasonably requested from time to time by Purchaser) and Purchaser (as
reasonably requested from time to time by Seller) shall take all reasonably
appropriate action and execute any additional documents, instruments or
conveyances of any kind (not containing additional representations and
warranties) which may be reasonably necessary to carry out any of the provisions
of this Agreement or of an Ancillary Agreement, including, without limitation,
putting Purchaser in full possession and operating control of the Transferred
Assets and the Business.
Section 5.7. Notices of Certain Events. Each party shall
promptly notify the other party of:
(a) any notice or other communication received from any Person
alleging that the consent of such Person is or may be required in connection
with the transactions contemplated by this Agreement or any Ancillary Agreement;
(b) any notice or other communication received relating to the
transactions contemplated by this Agreement or any Ancillary Agreement and any
other significant notices or other communications from any Governmental Entity;
and
(c) any actions, suits, claims (other than claims under
Subject Contracts in the ordinary course of the Business consistent in all
material respects with past practice), investigations or proceedings commenced
or, to such party's knowledge, threatened against, relating to or involving or
otherwise affecting such party that relates to the Business, or that relates to
the consummation of a transaction contemplated by this Agreement or any
Ancillary Agreement.
Section 5.8. Public Announcements. The parties agree to
consult with each other before issuing any press release or making any public
statement with respect to this Agreement or the Ancillary Agreements or the
transactions contemplated hereby or thereby and, except as may be required by
Applicable Law or the rules of the New York Stock Exchange, will not make any
such public statement prior to such consultation. Purchaser acknowledges that
Parent is required to file this Agreement and the Ancillary Agreements pursuant
to the Federal securities laws.
Section 5.9. Expenses. Except as otherwise specifically
provided in this Agreement or in any Ancillary Agreement, the parties to this
Agreement shall bear their respective expenses incurred in connection with the
preparation, execution and performance of this Agreement and the consummation of
the transactions contemplated hereby and thereby, including, without limitation,
all fees and expenses of agents, counsel, investment bankers, actuaries and
accountants.
46
Section 5.10. Supplemental Disclosure. (a) Approximately five
(5) Business Days prior to the Closing Date, Seller Parties shall provide
Purchaser, and Purchaser shall provide Seller Parties, with updated Schedules,
if any, to this Agreement disclosing (i) any matter hereafter arising and (ii)
any matter hereafter discovered which, in the case of a matter being disclosed
pursuant to clause (i) hereof if existing at the date hereof or, in the case of
a matter being disclosed pursuant to clause (ii) hereof, if known at the date
hereof, would have been required to be set forth or described in the Schedules
provided by them; provided, however, that, for the purpose of the rights and
obligations of Seller Parties hereunder, any such supplemental or amended
disclosure by any party shall not be deemed to have been disclosed as of the
date hereof, to constitute part of, or an amendment or supplement to, such
party's Schedules or cure any breach or inaccuracy of a representation or
warranty unless so agreed to in writing by Purchaser.
(b) If after the date hereof and prior to the Closing Date,
Seller Parties or Purchaser becomes aware of a breach or inaccuracy of a
representation or warranty made by it herein, such party shall use commercially
reasonable efforts to cure such breach or inaccuracy as promptly as practicable.
Such cure will relieve such party of any liability for such breach or
inaccuracy.
Section 5.11. Tax Matters. Except as otherwise provided for in
the Loss and Unearned Premium Reserve Portfolio Reinsurance Agreement with
respect to premium taxes, (a) the Seller Parties shall be responsible for and
shall pay all Taxes payable with respect to the Business for periods or portions
thereof ending on or before the Closing (the "Pre-Closing Periods") and
Purchaser shall have no responsibility for Taxes payable with respect to the
Business for periods or portions thereof relating to Pre-Closing Periods and (b)
the Purchaser shall pay all Taxes payable with respect to the Business for
periods or portions thereof beginning after the Closing (the "Post-Closing
Periods") and the Seller Parties shall have no responsibility for Taxes payable
with respect to the Business for periods or portions thereof relating to
Post-Closing Periods. Notwithstanding anything in this Agreement or any
Ancillary Agreement to the contrary, except as otherwise provided in the Loss
and Unearned Premium Reserve Portfolio Reinsurance Agreement with respect to
premium taxes, Purchaser shall have no liability for any Tax Liability incurred
by Seller Parties prior to the Closing.
Section 5.12. Reinsurance Treaties. (a) Prior to Closing,
Seller Parties shall use their reasonable best efforts, at their own expense, to
(i) assign to Purchaser or its Designee effective as of the Closing their right,
title and interest in the Reinsurance Recoverables (which shall include, without
limitation, the right to collect the Reinsurance Recoverables) and (ii) obtain
from the reinsurers under the Third Party Reinsurance Contracts consents to the
assignments required under the foregoing clause (i) and the transactions
contemplated by the Specified Reinsurance Agreements and Administrative Services
Agreements and waivers of net retention clauses, policy administration
restrictions, change of control restrictions and any similar restrictions
contained in the Third Party Reinsurance Contracts, as applicable, as may be
reasonably necessary to ensure that the Third Party Reinsurance Contracts remain
in full force and effect following the consummation of the Closing; and (iii)
obtain any endorsements from the reinsurers under the Third Party Reinsurance
Contracts to the extent reasonably necessary
47
to ensure that Purchaser or its Designee is entitled to obtain the benefit of
such Third Party Reinsurance Contracts. Such assignments, consents and waivers
shall be in form (A) which gives effect to the requirements enumerated in
clauses (i), (ii) and (iii) of the foregoing sentence and (B) reasonably
satisfactory to Purchaser.
(b) Following the Closing, Seller Parties shall continue to
use their reasonable best efforts, at their own expense, to obtain the
assignments, consents and waivers enumerated in the foregoing paragraph (a) if
any such assignments, consents and waivers have not been obtained prior to the
Closing. Such assignments, consents and waivers shall be in form (A) which gives
effect to the requirements enumerated in clauses (i), (ii) and (iii) of the
first sentence of paragraph (a) and (B) reasonably satisfactory to Purchaser.
(c) Subject to Section 5.1 of the Administrative Services
Agreements, Purchaser and Seller Parties shall cooperate fully in effecting the
transition of the Business from approved policy forms of Seller Insurer Parties
to approved policy forms of Purchaser or its Affiliates, including, without
limitation, in obtaining from each of the then current reinsurers under the
Third Party Reinsurance Contracts new reinsurance contracts with Purchaser on
substantially the same terms and providing Purchaser or its Affiliates with
substantially the same benefits as Seller Insurer Parties are entitled to under
the then current Third Party Reinsurance Contracts. Seller Insurer Parties shall
furnish all consents and waivers which may be reasonably requested by Purchaser
or any reinsurer under a Third Party Reinsurance Contract as necessary to give
effect to the matters contemplated by the foregoing sentence.
Section 5.13. Certain Intercompany Matters. Except (i) as
provided in the Ancillary Agreements or (ii) as set forth on Schedule 5.13
hereto, (x) on or prior to the Closing Date, all data processing, accounting,
insurance, banking, personnel, legal, communications and other products or
services provided to the Business by Seller Parties or any of their Affiliates,
including any agreements or understandings (written or oral) with respect
thereto, will terminate and (y) no existing tax sharing agreement shall by its
terms apply to the Business.
Section 5.14. Employees. (a) Seller Parties shall, within two
(2) Business Days after the date hereof, furnish to Purchaser a list of
employees of Seller Parties currently employed in the Business (an "Employee" or
the "Employees", as the context requires). For purposes of the preceding
sentence, the term "Employee" shall include (i) each employee who is actively
employed on the date hereof and (ii) each employee who is not physically at work
on such day solely because he is on employer-approved sick leave, short-term
disability leave, vacation leave, maternity leave, paid time off, or leave under
the Family and Medical Leave Act of 1993, but shall not include any person who
on the date hereof is on long-term disability leave. Seller Parties shall
provide Purchaser with reasonably unrestricted access to performance data,
organizational charts, compensation history and other personnel data with
respect to Employees. Any transfers, promotions, reassignments, terminations,
salary adjustments and similar changes with respect to such Employees prior to
the Closing Date, other than normal (not exceeding in the aggregate 6% of the
salaries of the employees receiving
48
such adjustments) salary adjustments, shall be subject to the prior approval of
Purchaser. Purchaser shall offer employment to such Employees as it shall
determine in its sole discretion, on terms no less favorable with respect to
compensation and incentives than those provided by the Purchaser to its own
employees. Each such Employee who actually transfers to employment with
Purchaser on the Closing Date is hereafter referred to as a "Transferred
Employee" and each Employee described in clause (ii) of the first section of
this Section 5.14(a) who actually commences employment with Purchaser after the
Closing Date shall become a Transferred Employee on the date such employee
commences active employment (and each reference to the Closing Date in this
section 5.14 shall, with respect to any person who becomes a Transferred
Employee after the Closing Date, refer to the date such person becomes a
Transferred Employee). As of and after the Closing Date Seller Parties shall
remain liable for all benefits under the Plans with respect to the period prior
to the Closing Date including severance obligations and, except to the extent
indemnified by Purchaser pursuant to Section 7.2(b) hereof, shall retain all
liabilities with respect to Employees who are not Transferred Employees. Seller
Parties shall use their reasonable best efforts to effect the transfer of such
Employees to Purchaser as contemplated by this Section 5.14(a).
(b) Without limiting the generality of the first sentence of
Section 5.1, Seller Parties each covenant and agree that, to the extent relating
to the Business, on the date hereof and prior to the Closing Date (unless
Purchaser shall otherwise approve in writing, and except as required by
Applicable Law or as expressly contemplated by this Agreement or the Ancillary
Agreements), Seller Parties shall not take any action which increases the
amounts payable or benefits made available to any Employee of the Business under
the Plans, other than in the ordinary course of business consistent with past
practice of the Business. Notwithstanding anything herein to the contrary,
Seller Parties shall be permitted to (A) make payments to employees under the
Reliance Surety Division Long-Term Incentive Plan (i) with respect to the
1996-98 performance period thereunder and (ii) with respect to a pro rata
portion (taking into account the period from January 1, 1999 through the Closing
Date) of the 1999-2001 performance period thereunder and (B) pay the amounts and
take the other actions set forth on Schedule 3.8(iv).
Section 5.15. Employee Benefits.
(a) Seller Parties shall take any action that may be necessary
or appropriate to ensure that each Transferred Employee is 100% vested in his or
her account balance and accrued benefit under the Seller Parties' Savings
Incentive Plan ("Sellers' Savings Plan") and the Seller Parties Pension Plan as
of the Closing Date and shall cause the trustee of the Sellers' Savings Plan to
permit distribution of such account balance to such Transferred Employee or his
or her beneficiary in accordance with the terms of the Sellers' Savings Plan.
The Sellers' Savings Plan shall be amended prior to the Closing Date to provide
that, solely with respect to Transferred Employees, any outstanding loan notes
thereunder with respect to Transferred Employees shall not go into default
following the Closing Date if such Transferred Employees continue to make any
required payments under such outstanding loan notes following the Closing Date
in accordance with the provisions of such amendment. As of the Closing Date,
Transferred
49
Employees shall become eligible to participate in Purchaser's Cash Balance
Pension Plan and each Transferred Employee shall be granted credit for all
service with Seller Parties prior to the Closing Date for purposes of such
eligibility, vesting, and cash balance credits under the plan; provided, that
such crediting does not result in duplication of benefits. As of the Closing
Date, Transferred Employees shall become eligible to participate in Purchaser's
401(k) Plan and each Transferred Employee shall be granted credit for all
service with Seller Parties prior to the Closing Date for purposes of
eligibility and vesting credits under such plan. Transferred Employees' account
balances under Purchaser's 401(k) Plan shall be fully vested to the extent such
account balances are attributable to eligible rollovers from Sellers' Savings
Plan pursuant to this Section 5.15(a).
(b) Seller Parties shall remain responsible for all claims
under the applicable Plans for health, accident, sickness, and disability
benefits that are deemed incurred by Employees prior to the Closing Date or,
with respect to Transferred Employees who do not actually transfer to employment
with Purchaser on the Closing Date, through such later date a Transferred
Employee begins active employment with Purchaser. For all purposes under such
Plans, Transferred Employees will be deemed to have terminated employment with
Seller Parties and Affiliates as of the Closing Date. For purposes of this
Agreement: (i) a claim for health benefits (including, without limitation,
claims for medical, prescription drug, dental, and vision care expenses) will be
deemed to have been incurred on the date on which the related medical service or
material was rendered to or received by the Employee claiming such benefit, (ii)
a claim for sickness or disability benefits will be deemed to have been incurred
upon the occurrence of the event giving rise to such claims (with any person who
is actively at work immediately before the Closing Date to be considered to have
recovered from any sickness or disability related to a prior event in accordance
with the terms of the applicable Plan); provided the claim relating to such
event is made within six months following the Closing Date, and (iii) in the
case of any claim for benefits other than as described in (i) and (ii) above
(e.g., life insurance benefits), a claim will be deemed to have been incurred
upon the occurrence of the event giving rise to such claims. As of the Closing
Date, Transferred Employees shall become participants in all of Purchaser's
welfare benefit plans pursuant to the terms and conditions of such plans.
Notwithstanding the foregoing, if the Purchaser shall notify the Seller Parties
within 15 days prior to the Closing that it is unable to effectuate the
provisions of the foregoing sentence with respect to any welfare benefit plan,
Seller Parties shall use their commercially reasonable efforts to cause each
applicable insurer, administrator, health maintenance organization, or other
provider associated with any comparable welfare plan maintained by Seller
Parties, to enter into an agreement with Purchaser to provide similar services
or benefits with respect to each Purchaser's welfare benefit plan (a "Transition
Plan") under the terms and conditions in existence as of the Closing Date
between Seller and such provider, for a transition period beginning on the
Closing Date and ending no later than 90 days after the Closing Date. Any
Transition Plan shall be maintained by Purchaser and Seller Parties shall have
no liability thereunder; provided, however, that, at Purchaser's request, Seller
Parties shall administer any Transition Plan on behalf of Purchaser. Purchaser
shall reimburse Seller Parties for any direct costs of such administration.
Notwithstanding anything in this Section 5.15(b) to the contrary,
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Purchaser and Seller Parties agree that where applicable with respect to any
medical or dental benefit plan of Purchaser, (i) each Transferred Employee shall
be granted credit for all service with Seller Parties prior the Closing Date for
purposes of eligibility under such plans, (ii) Purchaser shall waive, with
respect to any Transferred Employee, any pre-existing condition exclusion and
actively-at-work requirement (to the extent such exclusion or requirement would
not have applied under the applicable Plan) and (iii) any covered expenses
incurred on or before the Closing Date by a Transferred Employee or a
Transferred Employee's covered dependents shall be taken into account for
purposes of satisfying applicable deductible, coinsurance and maximum
out-of-pocket provisions after the Closing Date to the same extent as such
expenses would be taken into account if incurred by similarly situated employees
of Purchaser.
(c) [INTENTIONALLY LEFT BLANK]
(d) Purchaser shall cause each Transferred Employee to be
covered by vacation, sick leave, and other paid time-off benefit programs
comparable to those provided to similarly situated employees of Purchaser
("Purchaser PTO Plans"), to the extent each such Employee satisfies generally
applicable eligibility requirements for such coverage. An amount equal to
Transferred Employees' base wages for accrued and unused vacation and personal
days, determined as of the Closing Date for calendar years prior to 2000, if
any, shall be paid by Seller Parties to Transferred Employees within 90 days
after the Closing Date. An amount equal to Transferred Employees' base wages for
accrued and unused vacation and personal days determined as of the Closing Date
for calendar year 2000, if any, shall be paid by Seller Parties to Purchaser
within 90 days after the Closing Date. With respect to any unused vacation and
personal days of a Transferred Employee in respect of which Seller Parties shall
have made a payment to Purchaser pursuant to the preceding sentence, Purchaser
shall allow such Transferred Employee to utilize such unused vacation and
personal days; provided, however, that if (a) Purchaser deems it necessary not
to allow any such Transferred Employee to take such unused vacation and personal
days or (b) Purchaser's employment of any such Transferred Employee terminates
for any reason prior to the time such vacation and personal days have been fully
utilized, Purchaser shall be liable for and pay such Transferred Employee an
amount equal to the base wages due in respect of such vacation and personal
days. In the case of Purchaser PTO Plans in which a Transferred Employee is
eligible to participate under this Section 5.15(d), such Transferred Employee
shall be credited with all service performed for Seller Parties prior to the
Closing Date for purposes of seniority, if applicable, and eligibility.
(e) As of the Closing Date, the account balances of
Transferred Employees in the Seller Parties' flexible spending account plans
("Seller FSA") shall be carried over to Purchaser's flexible spending account
plan ("Purchaser FSA") and, as of such Date, Transferred Employees shall
commence participation in Purchaser FSA. Within 90 days after the Closing Date,
Seller Parties shall transfer in cash the aggregate positive account balances of
Transferred Employees under Seller FSA as of the Closing Date, without any
offset for negative account balances ("Negative Balances"). Within 90 days after
March 31, 2001, with respect to each Transferred Employee who has a Negative
Balance, Purchaser shall transfer to Seller Parties an amount equal to the
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aggregate deposits to the Purchaser FSA account of such Transferred Employee
during the period from the Closing Date through December 31, 2000, less the
amount paid out from such account during such period, to the extent that such
difference is a positive number. To the extent that the Negative Balances exceed
the amount paid to Seller Parties pursuant to the preceding sentence, Purchaser
shall pay Seller Parties any such shortfall from year 2000 forfeitures under
Purchaser FSA (to the extent such forfeitures are not used to offset negative
account balances under Purchaser FSA). The payment described in the preceding
sentence shall be made within 45 days of March 31, 2001.
(f) Prior to the Closing Date, no communications shall be made
by Seller Parties to any Transferred Employee relating to any of the provisions
of this Agreement without the prior approval of Purchaser, which approval shall
not be unreasonably delayed or withheld.
(g) Seller Parties agree that they will cooperate fully with
Purchaser's investigation of, response to, or defense of, any claims made by
Transferred Employees, or their legal representatives, with respect to
employment-related matters or decisions, including employee benefit plan
determinations, made or alleged to have been made by Seller Parties or their
directors, officers, employees, or agents.
(h) If Purchaser shall notify the Seller Parties within 15
days prior to the Closing that it is unable to incorporate the Transferred
Employees into its payroll system as of the Closing Date, Seller Parties shall
provide Purchaser with data and system support to process such payroll on behalf
of Purchaser for a period beginning on the Closing Date and ending no later than
90 days after the Closing Date. Purchaser shall reimburse Seller Parties for any
direct costs of such administration.
(i) Seller Parties shall remain responsible for all
educational reimbursement claims attributable to any educational courses in
which Transferred Employees were enrolled as of or prior to the Closing Date.
Following the Closing Date, Transferred Employees shall be eligible to
participate in Purchaser's educational reimbursement program to the same extent
as similarly situated employees of Purchaser.
Section 5.16. Allocation of Purchase Price and Assumed
Liabilities.
(a) Seller Parties and Purchaser agree to allocate the
Purchase Price and the liabilities assumed by Purchaser hereunder and under the
Ancillary Agreements (other than the Loss and Unearned Premium Reserve Portfolio
Reinsurance Agreement), (collectively, the "Allocable Amount") among the
Transferred Assets (other than those relating to the Loss and Unearned Premium
Reserve Portfolio Reinsurance Agreement), assets transferred pursuant to the
Ancillary Agreements (other than those relating to the Loss and Unearned Premium
Reserve Portfolio Reinsurance Agreement) and the Non-Compete in accordance with
this Section 5.16 for federal income tax purposes; provided, however, that
Purchaser's cost may differ from the Allocable Amount hereunder to reflect
capitalizable costs incurred in connection with the transactions contemplated by
this Agreement.
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(b) The Allocable Amount shall be allocated among the
Transferred Assets (other than those relating to the Loss and Unearned Premium
Reserve Portfolio Reinsurance Agreement), assets transferred pursuant to the
Ancillary Agreements (other than those relating to the Loss and Unearned Premium
Reserve Portfolio Reinsurance Agreement) and the Non-Compete in accordance with
the fair market value of such assets, using the residual method as described
under Income Tax Regulations Section 1.1060-1T(c).
(c) Within 60 days of the later of the finalization of the SAP
Final Financial Statement or the GAAP Final Financial Statement, Purchaser shall
prepare and deliver to Seller Parties a schedule reflecting the determination
and allocation of the Allocable Amount. If, within 60 days of Seller Parties'
receipt of such schedule, Seller Parties shall not have objected in writing to
the determination or allocation of the Allocable Amount, such determination and
allocation shall be used by Seller Parties and Purchaser for purposes of filing
Form 8594 (and any replacement or successor form) and, unless otherwise required
by law, for all other federal income tax purposes. If, within 15 days of any
objection in writing to the determination or allocation of the Allocable Amount,
Seller Parties and Purchaser shall not have agreed in writing to such
determination and allocation, any disputed aspects shall be submitted by the
Parties to the Third Party Accountant and resolved by the Third Party Accountant
within 30 days of the submission of the dispute to the Third Party Accountant by
Seller Parties and Purchaser. The decision of the Third Party Accountant shall
be final, and the costs, expenses, and fees of the Third Party Accountant shall
be borne equally by Seller Parties, on the one hand, and Purchaser, on the other
hand.
Section 5.17. Lockboxes. Pursuant to the General Assignment
and Assumption Agreement, Seller Parties shall transfer to Purchaser the
lock-boxes of Seller Parties used solely in the operation of the Business.
Seller Parties shall execute such additional agreements and instruments as may
be required to effectuate the transfer to Purchaser of such lock-boxes.
Section 5.18. Confidentiality. Each party hereto (Seller
Parties to be considered to be one party for purposes of this Section 5.18) will
hold, and will use its commercially reasonable efforts to cause its Affiliates,
and their respective Representatives to hold, in strict confidence from any
Person (other than any such Affiliates or Representatives), except with the
prior written consent of the other party or unless (i) compelled to disclose by
judicial or administrative process (including, without limitation, in connection
with obtaining the necessary approvals of this Agreement and the transactions
contemplated hereby of governmental or regulatory authorities) or by other
requirements of Applicable Law, (ii) disclosed in an action or proceeding
brought by a party hereto in pursuit of its rights or in the exercise of its
remedies hereunder or (iii) disclosed in conjunction with such party's
communications with any agent, producer or broker, all documents and information
concerning the other party or any of its Affiliates furnished to it by the other
party or such other party's Representatives in connection with this Agreement or
any Ancillary Agreement or the transactions contemplated hereby or thereby,
except to the extent that such documents or information can be shown to have
been (a) previously known by the party receiving such documents or information,
(b) in
53
the public domain (either prior to or after the furnishing of such documents or
information hereunder) through no fault of such receiving party or (c) later
acquired by the receiving party from another source if the receiving party is
not aware that such source is under an obligation or duty to another party
hereto to keep such documents and information confidential; provided that
following the Closing the foregoing restrictions will not apply to Purchaser's
use of documents and information concerning the Business and Transferred Assets
furnished by Seller Parties hereunder. In the event the transactions
contemplated by this Agreement are not consummated, upon the request of the
other party, each party hereto will, and will cause its Affiliates and their
respective Representatives to promptly redeliver or cause to be redelivered all
copies of confidential documents and information furnished by the other party in
connection with this Agreement or any Ancillary Agreement or the transactions
contemplated hereby or thereby and destroy or cause to be destroyed all notes,
memoranda, summaries, analyses, compilations and other writings related thereto
or based thereon prepared by the party furnished such documents and information
or its Representatives. The parties agree that the information on Schedule
5.19(b) denoted with an " ** " is subject to the provisions of this Section
5.18.
Section 5.19. Non-Compete; Non-Solicitation. (a) For a period
of five (5) years following the Closing Date, neither Seller Parties nor any of
their Affiliates shall engage (for its own account or for the benefit of any
other Person), directly or indirectly, as a principal or solely or jointly with
others, or as stockholders, partners, members or other owners in or of any
Person, in any business that competes directly or indirectly, with the Business
(including, without limitation, marketing, servicing and underwriting activities
and providing substantial assumption reinsurance relating to the surety or
fidelity lines of business).
(b) Notwithstanding any other provision of this Section 5.19
to the contrary, Seller Parties and their Affiliates shall not be prohibited
from (A) making investments of assets in the ordinary course of business in
entities that compete, directly or indirectly or through a Subsidiary, with the
Business; provided that each such investment is a passive investment where
neither Seller Parties nor any of their Affiliates (i) intends to or has the
right to influence or direct the operation or management of any such entity or
(ii) is a participant with any other Person in any group with such intention or
right; (B) making investments in Purchaser and its Affiliates; (C) managing
investment funds that make investments in the ordinary course of business in
such entities; (D) subject to the proviso in Section 5.2(a) and to Section 5.22,
selling Parent or any of its assets or businesses to a Person engaged in lines
of business that compete with the Business; provided, however, that no provision
hereof shall be interpreted to permit Seller Parties to, and Seller Parties are
expressly prohibited from, entering into any agreement or engaging in any
transaction that involves, directly or indirectly, the licensing, transfer or
conveyance of any right to use the name "Reliance" or any other name or
Trademark comprising Transferred Assets to any Person that competes directly or
indirectly with the Business for use in such Person's or its Affiliate's
business relating to surety or fidelity products; (E) performing their
respective obligations under the Ancillary Agreements pursuant to the express
terms thereof; (F) engaging in the businesses described on Schedule 5.19(b); or
(G) acquiring any business that includes
54
operations the conduct of which by Seller Parties would otherwise violate
paragraph (a) above; provided that (i) such operations do not, in the aggregate,
represent more than ten (10) percent of the consolidated assets or contribute
more than ten (10) percent of the consolidated revenues of the overall business
so acquired and (ii) Seller Parties or an Affiliate of a Seller Party, as
applicable, sells or otherwise disposes of any such operations within twelve
(12) months of such acquisition (regardless of whether such twelve (12) month
period would terminate subsequent to the prohibition contained in this Section
5.19(b)); provided, however, that Seller Parties agree that they shall not,
directly or indirectly, take any action which would facilitate conduct by any
Person who competes, directly or indirectly, with the Business that would, if
engaged in by a Seller Party, be inconsistent with the provisions of this
Section 5.19.
(c) From and after the date hereof until one (1) year after
the Closing Date, none of the Seller Parties or their Affiliates shall solicit
or hire any Employee without the prior written consent of Purchaser; provided,
however, that this Section 5.19(c) shall not prohibit any Seller Party from
hiring any Employee whose employment has been terminated by Purchaser or an
Affiliate of Purchaser, as applicable, where none of Seller Parties nor their
Affiliates has solicited such Employee for employment prior to the date of the
termination of such Employee by Purchaser or its Affiliate, as applicable.
Notwithstanding the foregoing, nothing shall prohibit Seller Parties from
offering employment to: (i) Persons who respond to a general solicitation or
advertisement that is not specifically directed only to the employees of
Purchaser; (ii) Persons who have ceased being employed by Purchaser prior to the
commencement of employment discussions with Seller Parties; or (iii) Persons who
are referred to Seller Parties by search firms, employment agencies or other
similar entities provided that such entities have not been instructed to solicit
the employees of Purchaser.
(d) The parties to this Agreement acknowledge that the
covenants set forth in this Section 5.19 are an essential element of this
Agreement and that, but for these covenants, the parties would not have entered
into this Agreement. The parties to this Agreement acknowledge that this Section
5.19 constitutes an independent covenant and shall not be affected by
performance or nonperformance of any other provision of this Agreement or any
Ancillary Agreement by the parties.
(e) The parties to this Agreement acknowledge that the type
and periods of restriction imposed in the provisions of this Section 5.19 are
fair and reasonable and are reasonably required for the protection of the
parties. If any of the restrictions or covenants in paragraphs (a), (b) or (c)
of this Section 5.19 are hereafter construed to be invalid or unenforceable, the
same shall not affect the remainder of the covenant or covenants, which shall be
given full effect, without regard to the invalid portions. If any of the
restrictions or covenants contained in paragraphs (a), (b) or (c) of this
Section 5.19, or any portion thereof, are deemed to be unenforceable because
such covenant or restriction is held to cover a geographic area or to be of such
duration as is not permitted under Applicable Law, the parties agree that the
court making such determination shall have the power to reduce the duration
and/or areas of such provision and, in its reduced from, said provision shall
then be enforceable. The parties hereto intend to and hereby confer jurisdiction
to enforce the covenants contained in paragraphs
55
(a), (b) or (c) of this Section 5.19 upon the courts of any state or other
jurisdiction within the geographical scope of such covenants. In the event that
the courts of any one or more of such jurisdictions shall hold such covenants
wholly unenforceable by reason of the breadth of such scope or otherwise, it is
the intention of the parties hereto that such determination not bar or in any
way affect the parties' rights to the relief provided above in the courts of any
states or jurisdictions within the geographical scope of such covenants as to
breaches of such covenants in such other respective states or jurisdictions, the
above covenants as they relate to each such jurisdiction being, for this
purpose, severable into diverse and independent covenants.
(f) If any party hereto commits a breach, or is about to
commit a breach, of any of the provisions of this Section 5.19, each of the
other parties hereto shall have the right to have the provisions of this Section
5.19 specifically enforced by any court having equity jurisdiction, it being
acknowledged and agreed that any such breach or threatened breach may cause
irreparable injury to each of the non-breaching parties and that money damages
may not provide an adequate remedy to such parties. In addition, in connection
with this Section 5.19, each of the parties hereto may take all such other
actions and remedies available to it under law or in equity and shall be
entitled to such damages as it can show it has sustained by reason of such
breach.
(g) Seller Parties agree that the covenants in this Section
5.19 are for the benefit of Purchaser and each of its Affiliates.
Section 5.20. Confidentiality Agreements. Seller Parties (i)
shall use commercially reasonable efforts to assign (to the extent permitted
under the terms thereof but solely to the extent such terms affect the
Business), effective upon the Closing, their rights under any confidentiality
agreement or similar agreement pursuant to which information or due diligence
items that relate, in any way, directly or indirectly, to the Business or access
to the Business were provided to any Person (other than Purchaser) and (ii)
agree not to amend or modify any such agreements without Purchaser's written
consent. If any such agreements cannot be assigned to Purchaser, Seller Parties
shall vigorously enforce their rights under such agreements and Purchaser shall
reimburse Seller Parties for their documented and itemized reasonable expenses
incurred in the enforcement of such rights. Such reimbursement shall be made
promptly after submission to Purchaser of such documentation.
Section 5.21. Reorganizations and Restructurings. Each Seller
Insurer Party shall not, from the date hereof until the fifth anniversary of the
Closing Date, and Parent shall not, from the date hereof until the earlier of
(A) such time as Parent has effected the restructuring of its debt obligations
identified to Purchaser in writing prior to the date hereof and (B) the fifth
anniversary of the Closing Date, liquidate, wind-up or dissolve itself (or
suffer any liquidation or dissolution) or engage in any reorganization
(including, without limitation, any pre-packaged reorganization or pre-packaged
bankruptcy, as the case may be), restructuring, statutory division or similar
transaction which is reasonably possible to materially and adversely affect the
benefits which Purchaser could reasonably expect to derive from consummation of
the transactions contemplated hereby or by any Ancillary Agreement.
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Section 5.22. Continuity of Agreements. Seller Parties shall
require any Person that (i) acquires more than fifty percent (50%) of the voting
power of any Seller Insurer Party or (ii) reinsures substantially the entire
business of a Seller Insurer Party, to enter into a written agreement
substantially in the form set forth on Schedule 5.2.
Section 5.23. Agents. Seller Parties shall use commercially
reasonable efforts to enable Purchaser to appoint and enter into agency
contracts with each agent listed on Schedule 3.27(a) that is not currently an
agent of Purchaser. For a period of four (4) years from the Closing Date, Seller
Parties (i) shall refrain from taking any action (or failing to take any action)
which, as regards the Business, is reasonably likely to negatively affect in any
meaningful way Purchaser's relationships with customers, suppliers, reinsurers,
agents, brokers, distributors, creditors, lessors, employees, business
associates and other Persons associated with the Business; (ii) shall not, and
shall cause their Affiliates not to, alter the rate or any other type of
compensation with respect to the Business to any agent or amend or terminate any
contract with any agent with respect to the Business without Purchaser's prior
written consent, except that this clause (ii) shall not prevent Seller Insurer
Parties from withdrawing authority for any lines unrelated to the Business or
taking any action to recover amounts due, from any agent unrelated to the
Business; and (iii) shall use commercially reasonable efforts to continue the
appointments of agents with respect to the Business and to ensure that the
contracts between Seller Insurer Parties and such agents remain in full force
and effect. Seller Parties and Purchaser agree that they will fully cooperate
and consult with respect to, and that Seller Parties shall obtain Purchaser's
prior written consent (which shall not be unreasonably withheld or delayed) to,
(A) any investigation of or response to any disciplinary matter and (B) subject
to clause (ii), disciplinary or other action or proceeding relating to an agent
with respect to such agent's conduct related to the Business.
Section 5.24. Collateral and Indemnity Agreements. (a) Seller
Parties agree to assign, to the extent assignable, effective as of the Closing,
those rights and obligations under Collateral Agreements and Indemnity
Agreements identified by, and in a form reasonably satisfactory to, Purchaser,
such assignment (i) to be made to Purchaser and Affiliates or their Designees
and (ii) to the extent permissible under the Collateral Agreements or Indemnity
Agreements, as the case may be, shall, without limitation, (A) apply to all
existing Subject Contracts issued by a Seller Insurer Party and/or any Subject
Contracts issued in the future by Purchaser and an Affiliate, in each case as
specified by Purchaser; (B) entitle Purchaser and its Affiliates to enforce such
Collateral Agreements and Indemnity Agreements against any party in its own
names, as specified by Purchaser; and (C) contain such other provisions as may
be reasonably specified by Purchaser as necessary to give effect to the
assignment of those rights and obligations under Collateral Agreements and
Indemnity Agreements identified by Purchaser. From and after the Closing,
Purchaser shall use commercially reasonable efforts to collect, at its own
expense, amounts due under such assigned Collateral Agreements and Indemnity
Agreements. To the extent that any Collateral Agreements or Indemnity Agreements
may not be lawfully assigned, the provisions of the following subsection (c)
shall apply.
(b) Effective as of the Closing, Seller Insurer Parties hereby
request Purchaser and all Travelers Surety Affiliates to execute, procure or
issue Subject
57
Contracts on behalf of any Person that has executed Indemnity Agreements for the
benefit of Seller Insurer Parties.
(c) In the event and to the extent that Seller Parties are
unable to obtain the assignment of any Collateral Agreements or Indemnity
Agreements as required under Section 5.24(a), or if Purchaser does not request
that particular Collateral Agreements or Indemnity Agreements be assigned to it
pursuant to the first sentence of Section 5.24(a), (i) Seller Parties shall use
their reasonable best efforts in cooperation with Purchaser to (x) provide or
cause to be provided to Purchaser the benefits of each such Collateral
Agreements and Indemnity Agreements, (y) cooperate in any arrangement,
reasonable and lawful as to Seller Parties and other parties to such Collateral
Agreements and Indemnity Agreements, on the one hand, and Purchaser, on the
other hand, designed to provide such benefits to Purchaser and (z) enforce for
the account of Purchaser (at Purchaser's sole cost and expense) any rights of
Seller Parties arising from such Collateral Agreements and Indemnity Agreements,
and (ii) Purchaser shall use its commercially reasonable efforts to perform any
obligations of Seller Parties arising under such agreements, to the extent that,
by reason of the transactions consummated pursuant to this Agreement, Purchaser
has control over the resources necessary to perform such obligations.
Section 5.25. Administrative Services Agreement. At the
Closing, Seller Insurer Parties and Purchaser shall execute and deliver to each
other the Administrative Services Agreement, which shall be effective as of the
Closing Date, in the form of Exhibit A hereto.
Section 5.26. ▇▇▇▇ of Sale. At the Closing, Seller Parties
shall execute and deliver to Purchaser the ▇▇▇▇ of Sale, which shall be
effective as of the Closing Date, in the form of Exhibit B hereto.
Section 5.27. Loss and Unearned Premium Reserve Portfolio
Reinsurance Agreement. Purchaser, RIC and RNIC Europe shall execute and deliver
to each other the Loss and Unearned Premium Reserve Portfolio Reinsurance
Agreement, in the form of Exhibit D hereto, which shall be effective as of the
Closing Date.
Section 5.28. Quota Share Reinsurance Agreements. Purchaser
and each of the Seller Insurer Parties shall execute and deliver to each other
Quota Share Reinsurance Agreements, in the form of Exhibit E hereto, which shall
be effective as of the Closing Date.
Section 5.29. General Assignment and Assumption Agreement. At
the Closing, Seller Parties and Purchaser shall execute and deliver to each
other the General Assignment and Assumption Agreement, which shall be effective
as of the Closing Date, in the form of Exhibit C hereto.
Section 5.30. Software License Agreement; Use of Third Party
Computer Programs. (a) With respect to all Proprietary Software not used
exclusively in the Business as that business is conducted as of the date hereof
and as of the Closing, at the
58
Closing, Seller Parties and Purchaser shall execute and deliver the Software
License Agreement, which shall be effective as of the Closing Date, in the form
attached hereto as Exhibit F.
(b) With respect to all Third Party Computer Programs not used
exclusively in the Business as that business is conducted as of the date hereof,
Seller Parties shall (i) obtain a separate license in the name of the entities
to be designated by Purchaser, such license to grant equivalent or greater
rights than Purchaser's in the Third Party Computer Programs; or (ii) obtain
equivalent or greater rights in the Third Party Computer Programs under existing
licenses, in the name of the entities to be designated by Purchaser. The
foregoing choice with respect to Third Party Computer Programs shall be at
Purchaser's election, but only to the extent permitted by the applicable third
party vendor. Purchaser shall inform Seller Parties of its choice between the
foregoing options (i) and (ii) within ten (10) days after Purchaser receives
from Seller Parties a complete list by vendor of Third Party Computer Programs,
which list shall specify the options that are available for each such program.
In the event that there is a difference in cost between alternative options for
a particular Third Party Computer Program and Purchaser elects the more
expensive option, the incremental cost shall be at Purchaser's expense. Except
for such incremental costs, which shall be paid solely by Purchaser, and royalty
or license fees to be paid in the ordinary course after the Closing Date, all
costs and expenses associated with the foregoing clause (i) or (ii) up to an
aggregate amount (which shall include the amounts specified in the penultimate
sentence of Section 2.3(a)) of $250,000 shall be shared equally between Seller
Parties and Purchaser. Seller Parties shall be responsible for any such costs
and expenses exceeding $250,000.
(c) In the event that Seller Parties are unable to effect the
transfer or license to the Purchaser of any such Computer Programs, Seller
Parties shall continue following the Closing to use commercially reasonable
efforts to effect such transfer or license in accordance with this Section 5.30,
and shall in the interim make arrangements for the provision of replacement
Computer Programs to the Purchaser, as of the Closing, which replacement
Computer Programs shall be reasonably acceptable to Purchaser, the cost of which
arrangements shall be paid by Seller Parties other than royalty or license fees
after the Closing Date not in excess of those paid by Seller as of the date
hereof in respect of the Computer Programs being replaced.
(d) From the date hereof until the Closing Date, each Seller
Party agrees that (i) to the extent it develops, acquires or licenses any
Computer Programs that are not used exclusively in the operation of the
Business, any such Computer Programs that are Proprietary Software shall be
licensed to Purchaser prior to the Closing on the same terms and conditions as
set forth in the Software License Agreement, and any such Computer Programs that
are Third Party Computer Programs shall be licensed in accordance with Section
5.30 (b), and (ii) to the extent it develops, acquires or licenses any Computer
Programs that are used exclusively in the Business, any such Computer Programs
shall be transferred in accordance with Section 2.3(a).
(e) To the extent that Seller Parties negotiate or renegotiate
licenses, leases, extensions of leases, purchases or sales of Computer Programs
referred to in
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paragraphs (b), (c) and (d) above, Seller Parties shall notify Purchaser of such
discussions and Purchaser and Seller Parties shall jointly participate in such
negotiations or renegotiations as long as any Seller Party has ongoing
obligations under this Section 5.30.
Section 5.31. Transition Services Agreement. At the Closing,
Parent, RIC and Purchaser shall execute and deliver to each other the Transition
Services Agreement.
Section 5.32. Trademark License Agreement. With respect to all
Trademarks not used exclusively in the Business, at the Closing, Seller Parties
and Purchaser shall execute and deliver the Trademark License Agreement, which
shall be effective as of the Closing Date, in the form of Exhibit G hereto.
Section 5.33. Travelers/Reliance Indemnity Agreement. At the
Closing, Seller Insurer Parties and Purchaser shall execute and deliver to each
other the Travelers/Reliance Indemnity Agreement, which shall be effective as of
the Closing Date, in the form of Exhibit J hereto.
Section 5.34. Additional Intellectual Property Agreements. To
the extent there exists Intellectual Property not used exclusively in the
business, and not transferred or licensed to Purchaser pursuant to the Software
License Agreement or Trademark License Agreement, Seller Parties and Purchaser
shall execute and deliver such agreements as are necessary to effect such
transfer or license.
Section 5.35. Exclusive Right to Use the Books and Records and
Business Intellectual Property. (a) Each Seller Party acknowledges (without
limitation to the agreements set forth in Section 2.3(a)) that the intent of
this Agreement and the Ancillary Agreements is to convey to Purchaser all right,
title and interest in the Books and Records, Business Intellectual Property and
any confidential or proprietary information relating exclusively to the
Business. As of and after the Closing, (i) Purchaser and its Affiliates shall
have the exclusive right to use in any manner (including, without limitation, in
the solicitation of customers, insureds, agents, producers and brokers) the
Books and Records, Business Intellectual Property and any confidential or
proprietary information relating exclusively to the Business and (ii) Seller
Parties and their Representatives and Affiliates may not in any way use
(including, without limitation, in the solicitation of customers, insureds,
agents, producers and brokers) the Books and Records, Business Intellectual
Property and any confidential or proprietary information relating exclusively to
the Business in their businesses, operations and activities (unless subsequently
such Books and Records, Business Intellectual Property or confidential or
proprietary information are lawfully conveyed to Seller Parties or their
Affiliates by Purchaser or its successor-in-interest).
(b) The parties to this Agreement acknowledge that the
covenant set forth in this Section 5.35 is an essential element of this
Agreement and that, but for these covenants, the parties would not have entered
into this Agreement. The parties to this Agreement acknowledge that this Section
5.35 constitutes an independent covenant and
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shall not be affected by performance or nonperformance of any other provision of
this Agreement or any Ancillary Agreement by the parties.
(c) The parties to this Agreement acknowledge that the
restrictions imposed by this Section 5.35 is fair and reasonable and is
reasonably required for the protection of Purchaser and its Affiliates. If any
of the restrictions or covenants in paragraph (a) of this Section 5.35 are
hereafter construed to be invalid or unenforceable, the same shall not affect
the remainder of the restrictions or covenants, which shall be given full
effect, without regard to the invalid portions. If any of the restrictions or
covenants contained in paragraph (a) of this Section 5.35, or any portion
thereof, are deemed to be unenforceable because such covenant or restriction is
held to cover a geographic area or to be of such duration as is not permitted
under Applicable Law, the parties agree that the court making such determination
shall have the power to reduce the duration and/or areas of such provision and,
in its reduced from, said provision shall then be enforceable. The parties
hereto intend to and hereby confer jurisdiction to enforce the covenants
contained in paragraph (a) of this Section 5.35 upon the courts of any state or
other jurisdiction within the geographical scope of such covenants. In the event
that the courts of any one or more of such jurisdictions shall hold such
covenants wholly unenforceable by reason of the breadth of such scope or
otherwise, it is the intention of the parties hereto that such determination not
bar or in any way affect the parties' rights to the relief provided above in the
courts of any states or jurisdictions within the geographical scope of such
covenants as to breaches of such covenants in such other respective states or
jurisdictions, the above covenants as they relate to each such jurisdiction
being, for this purpose, severable into diverse and independent covenants.
(d) If any party hereto commits a breach, or is about to
commit a breach, of any of the provisions of this Section 5.35, each of the
other parties hereto shall have the right to have the provisions of this Section
5.35 specifically enforced by any court having equity jurisdiction, it being
acknowledged and agreed that any such breach or threatened breach may cause
irreparable injury to each of the non-breaching parties and that money damages
may not provide an adequate remedy to such parties. In addition, in connection
with this Section 5.35, each of the parties hereto may take all such other
actions and remedies available to it under law or in equity and shall be
entitled to such damages as it can show it has sustained by reason of such
breach.
(e) Seller Parties agree that the covenant in this Section
5.35 is for the benefit of Purchaser and each of its Affiliates.
Section 5.36. Certain Accounts Receivable. (a) Following the
Closing, Purchaser shall use commercially reasonable efforts to collect at its
own expense accounts receivable (including, without limitation, Reinsurance
Recoverables, and premiums receivable) reflected on the Final Balance Sheet
(each, a "Receivable") that as of the Closing Date were more than 90 days but
less than 180 days past due (collectively, "Outstanding Receivables"); provided,
however, that Purchaser shall be under no obligation to engage in, or to incur
any expenses with respect to, any litigation, arbitration or other legal
proceeding to collect such Outstanding Receivables.
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(b) In the event that any Outstanding Receivables are not
collected in full within 3 months of the Closing Date (the amount by which such
accounts receivable are not collected in full by such date, the "Receivables
Deficit"), Purchaser shall notify Seller Parties in writing of the Receivables
Deficit (which notice shall provide reasonably detailed supporting
documentation) and Seller Parties shall pay Purchaser or its Designee (within
five Business Days after receipt of Purchaser's notice) by wire transfer of
immediately available funds to an account of Purchaser set forth in Purchaser's
notice an amount equal to the Receivables Deficit.
(c) Subject to the receipt of any required consents, if any,
Purchaser shall, and will cause its Designee to, assign such Outstanding
Receivables to Seller Parties simultaneously with receiving payment therefor.
(d) Purchaser will forward to the Seller Parties all cash it
or any of its Affiliates or Designees receives with respect to any Outstanding
Receivables assigned to Seller Parties pursuant to the foregoing clause (c),
within five (5) Business Days of its receipt thereof.
(e) Following the Closing, Purchaser shall use commercially
reasonable efforts to collect at its own expense all receivables that as of the
Closing Date were over 180 days past due; provided, however, that Purchaser
shall be under no obligation to engage in, or to incur any expenses with respect
to, any litigation, arbitration or other legal proceeding to collect such
receivables. Purchaser shall, and will cause its Designee to, forward to the
Seller Parties all cash it or any of its Affiliates or Designees receives with
respect to such receivables within five (5) Business Days of its receipt of such
cash.
(f) For purposes of this Section 5.36, cash received with
respect to a specific Receivable shall be credited to such Receivable.
Section 5.37. Ratings. From the date hereof until the first
anniversary of the Closing Date, each Seller Party shall keep Purchaser informed
on a current basis of any communications from rating agencies indicating a
reasonable likelihood of a downgrade in, or a credit watch with potential
negative implications on, its (i) ratings by A.M. Best Company, Inc. or (ii)
claims-paying ability ratings by Standard & Poor's Ratings Group. Any
information received by Purchaser pursuant to the foregoing sentence shall be
held on a confidential basis by Purchaser and only used for purposes related to
the transactions contemplated by this Agreement and the Ancillary Agreements or
to the rights, obligations and remedies of the parties hereunder, unless
Purchaser is compelled to disclose such information by judicial or
administrative process or by other requirements of Applicable Law.
Section 5.38. Assignment of Subrogation and Salvage Rights.
Effective as of the Closing, Seller Parties shall assign to Purchaser or its
Designee their rights of subrogation and salvage relating to the Business, all
Reinsured Contracts (as defined in each of the Specified Reinsured Contracts)
and the Subject Contract Liabilities. Such
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assignment shall be in form (A) which gives effect to the requirements of the
foregoing sentence and (B) reasonably satisfactory to Purchaser.
Section 5.39. UCC Financing Statements. Seller Parties shall
execute and deliver UCC financing statements with respect to any and all
intangible assets assigned or transferred to Purchaser or its Designee hereunder
or under any Ancillary Agreements that are deemed reasonably necessary by
Purchaser, including, without limitation, in order to perfect the assignments
described in Section 5.12, Section 5.24 and Section 5.38 of this Agreement.
Section 5.40. Dissolution of Reliance Surety Group, Inc.; Use
of Trademark. (a) No later than five (5) Business Days prior to the Closing
Date, Seller Parties shall provide Purchaser with evidence that the Reliance
Surety Group, Inc., a Delaware corporation, has been dissolved.
(b) Seller Parties shall abandon pending application number
75-831,248 in the United States Patent and Trademark Office for the service ▇▇▇▇
RELIANCE SURETY GROUP, INC. Neither Parent, nor any Seller Party, nor any future
Affiliate of Parent or any Seller Party shall apply for registration of such
service ▇▇▇▇, in any United States or foreign jurisdiction.
(c) Neither Parent, nor any Seller Party nor any future
Affiliate of Parent or any Seller Party shall use the words "RELIANCE SURETY
GROUP, INC." in connection with any existing or future businesses.
Section 5.41. Use of "Firemark". As of the Closing, Seller
Parties shall not use "Firemark" in any manner (except as used by Seller Parties
prior to the date of this Agreement, including, but not limited to, the use of
"Firemark" in connection with RIC's internal newsletter or to refer to RIC's
"Firemark" logo). However, Seller Parties shall not use the term "Firemark" for
the sale of surety bonds. Purchaser shall not have rights to the "Firemark"
logo.
Section 5.42. Recordable Intellectual Property Assignments.
(a) With respect to any Business Intellectual Property being assigned to
Purchaser in accordance with this Agreement and any Ancillary Agreement,
Purchaser and Seller Parties shall use commercially reasonable efforts to
prepare separate intellectual property assignment agreements, and corresponding
schedules, in a form suitable for recordation in the United States Patent and
Trademark Office and the United States Copyright Office, as applicable.
(b) At the Closing, Seller Parties shall execute and deliver
to Purchaser all separate intellectual property assignment agreements,
including, but not limited to, the Trademark Assignment and the Copyright
Assignment.
Section 5.43. Accrued Bonuses. On or prior to the Closing
Date, Seller Parties shall pay in full to the Employees all bonuses accrued with
respect to the Employees.
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Section 5.44. Third Party Computer Programs/Workstations
Audit. Seller Parties shall conduct an audit to determine its license
requirements, if any, with respect to Third Party Computer Programs and all
workstations. At Closing, Seller Parties will deliver a report based on such
audit, and if additional licenses are required, Seller Parties shall obtain, at
its sole cost and expense, such licenses for Purchaser, within three (3) months
after Closing.
Section 5.45. Novation of Travelers/Reliance Indemnity
Agreement. If at any time during the term of the Travelers/Reliance Indemnity
Agreement, Purchaser is not at least a 50% or more owned, direct or indirect,
subsidiary of Travelers Property Casualty Corp. ("TAP") or any successor, then
Purchaser shall assume TAP's liability under the Travelers/Reliance Indemnity
Agreement. As a condition of such assumption, Seller Insurer Parties shall be
deemed to release TAP from its obligations under the Indemnity Agreement and
upon request of TAP or Purchaser, Seller Insurer Parties shall execute a written
release of such obligations of TAP.
Section 5.46. Purchase Price and Ceding Commission Paid to
RIC. The parties agree and acknowledge that the Purchase Price and Ceding
Commission shall be remitted to, and be for the account of, RIC as of the
Closing Date.
ARTICLE VI
CONDITIONS TO THE CLOSING
Section 6.1. Conditions to Obligations of Purchaser and Seller
Parties. The respective obligations of the Purchaser and the Seller Parties to
consummate the Closing are subject to the satisfaction (or waiver by each such
person) at or prior to the Closing of the following conditions:
(i) Any waiting period (and any extensions thereof) applicable
to the consummation of the Closing under the HSR Act shall have
terminated or expired;
(ii) All Permits, regulatory consents, approvals and
clearances from Governmental Entities necessary for the consummation of
the Closing and the transactions contemplated hereby shall have been
obtained and shall be in effect as of the Closing Date; provided,
however, that no such Permits, regulatory consents, approvals or
clearances shall, individually or in the aggregate, (A) contain any
material limitations, requirements or conditions on Purchaser or the
operation of the Business; (B) vary in any meaningful way the financial
or other terms of the transactions contemplated hereby or any other
Ancillary Agreement; or (C) materially and adversely affect the
benefits which the Purchaser is reasonably likely to otherwise receive
from the transactions contemplated by this Agreement;
(iii) No statute, rule, regulation, order, decree or
injunction shall have been enacted, entered, promulgated or enforced by
any Governmental Entity
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which prohibits, restricts or makes illegal the consummation of the
Closing or any of the transactions contemplated thereby; and
(iv) There shall not be in effect any temporary restraining
order, preliminary injunction or permanent injunction or other order
issued by any court of competent jurisdiction preventing the
consummation of the transactions contemplated hereby; provided that the
party invoking this condition shall have used its best efforts to have
such order or injunction vacated.
Section 6.2. Conditions to Obligations of Purchaser. The
obligation of the Purchaser to consummate the Closing is further subject to the
satisfaction (or waiver by the Purchaser) at or prior to the Closing of the
following conditions:
(i) (A) The representations and warranties of Seller Parties
contained in this Agreement and in any certificate or other writing
delivered by a Seller Party to Purchaser shall be true and correct on
and as of the Closing Date with the same force and effect as though
made on and as of the Closing Date (except that any such
representations and warranties that are given as of a particular date
and refer solely to a particular date or period shall be true and
correct as of such date or period with the same force and effect as if
made on and as of such date or period), except where the failure to be
true and correct, disregarding all qualifications and exceptions
contained therein relating to materiality or Material Adverse Effect,
would not have a Material Adverse Effect, (B) Seller Parties shall have
duly performed and complied in all material respects with each
obligation, covenant and agreement required by this Agreement to be
performed or complied with by Seller Parties at or prior to the
Closing, and (C) Purchaser shall have received certificates signed by
the Chief Executive Officers and Chief Financial Officers of Parent to
the effect that the foregoing conditions have been satisfied;
(ii) No Governmental Entity shall have commenced any suit,
action or other proceeding seeking a temporary restraining order,
preliminary or permanent injunction or other order preventing the
consummation of a transaction contemplated hereby, or damages other
than any such proceeding which would not be reasonably likely to (A)
materially interfere with the consummation of a transaction
contemplated hereby or (B) materially and adversely affect the benefits
which Purchaser could reasonably expect to derive from consummation of
such transaction;
(iii) All (A) consents and approvals of each Person set forth
on Schedule 6.2(iii) and (B) other consents and approvals which, if not
obtained, would be material to the Business, shall have been obtained,
and the Purchaser shall have received written evidence reasonably
satisfactory to the Purchaser that all such consents and approvals have
been obtained;
(iv) The Audited Opening Financial Statements and the Closing
Financial Statements shall reflect Policyholders' Surplus of at least
one hundred five million dollars ($105 million)(Calculated According to
the Transaction
65
Calculation Memo) and GAAP Net Worth of at least one hundred sixty two
million dollars ($162 million)(Calculated According to the Transaction
Calculation Memo);
(v) The Audited Opening Financial Statements shall not be
materially different from the Opening Financial Statements (except as
otherwise required by the GAAP Financial Statement Methods or SAP
Financial Statement Methods, as applicable);
(vi) Seller Parties have fulfilled their obligations pursuant
to the first sentence of Section 5.24(a), provided that Purchaser
fulfills its notice obligation set forth in the first sentence of
Section 5.24(a);
(vii) There shall not, in any three-month period commencing
with January 2000, be a reduction of gross written premium relating to
the Business that is greater than 25% of the amount of gross written
premium attributable to the Business over the same three-month period
in the prior calendar year;
(viii) Seller Parties have obtained the assignments, consents
and waivers from the third party reinsurers listed on Schedule
6.2(viii) relating to the Reinsurance Recoverables under the Third
Party Reinsurance Contracts to which such reinsurers are a party, in
accordance with the requirements set forth in Section 5.12(a);
(ix) Seller Parties have fulfilled their obligations under
Section 5.38;
(x) The Pennsylvania Insurance Department or Insurance
Commissioner (the "Commissioner") shall have notified RIC that the RBC
Company Action Plan submitted by RIC to the Commissioner on March 31,
2000 pursuant to the provisions of 40 P.S. ss.221.1-A et seq. is
acceptable;
(xi) Purchaser shall have received copies of the responses
from the Pennsylvania Insurance Department to the letters regarding the
transactions contemplated hereby sent by (i) ▇▇▇▇▇ ▇. ▇▇▇▇▇▇, Corporate
Senior Vice President, General Counsel and Corporate Secretary of RIC,
to ▇▇▇▇▇▇ ▇▇▇▇▇▇▇ of the Pennsylvania Insurance Department, dated April
7, 2000, and (ii) ▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇, Senior Vice President and General
Counsel of TAP to ▇▇▇▇▇ ▇▇▇▇▇▇▇, Esq. of the Pennsylvania Insurance
Department, dated on or about April 10, 2000, which responses shall be
reasonably acceptable to Purchaser;
(xii) Each Seller Party shall be, prior to and after giving
effect to the consummation of this Agreement and the Ancillary
Agreements, Solvent and not Impaired;
(xiii) No Seller Party, as of or after giving effect to the
consummation of this Agreement and the Ancillary Agreements, shall have
unreasonably small capital with which to conduct its business or shall
be unable to pay its debts as
66
they become due (in each case as contemplated under Applicable Laws
with respect to voidable or fraudulent transfers and obligations);
(xiv) No Seller Insurer Party shall be subject to any
supervision, conservation, liquidation, rehabilitation, delinquency or
similar proceeding, or investigation or inquiry which is reasonably
likely to result in such a proceeding, under Applicable Law;
(xv) Parent shall not be subject to any action, suit,
investigation, judgment or proceeding under Federal bankruptcy law, or
any investigation or inquiry which is reasonably likely to result in
any of the foregoing;
(xvi) Seller Parties have sold, assigned and transferred to
Purchaser all of Seller Parties' respective right, title and interest
in the Transferred Assets;
(xvii) Seller Parties have licensed to Purchaser all of Seller
Parties' right, title and interest in the Shared Intellectual Property;
(xviii) Seller Parties have entered into the Specified
Reinsurance Agreements and the Administrative Services Agreements;
(xix) Each Seller Party shall have executed and delivered each
of the Ancillary Agreements to which it is a party.
Section 6.3. Conditions to Obligation of Seller Parties. The
respective obligations of each of the Seller Parties to effect the Closing are
further subject to the satisfaction (or waiver by each such person) at or prior
to the Closing of the following conditions:
(i) (A) the representations and warranties of Purchaser
contained in this Agreement and in any certificate or other writing
delivered by Purchaser to a Seller Party, shall be true and correct on
and as of the Closing Date with the same force and effect as though
made on and as of the Closing Date (except that any such
representations and warranties that are given as of a particular date
and refer solely to a particular date or period shall be true and
correct as of such date or period with the same force and effect as if
made on and as of such date or period), except where the failure to be
true and correct, disregarding all qualifications and exceptions
contained therein relating to materiality or Material Adverse Effect,
would not have a Material Adverse Effect, (B) the Purchaser shall have
duly performed and complied in all material respects with each
obligation, covenant and agreement required by this Agreement to be
performed or complied with by the Purchaser at or prior to the Closing
and (C) Seller Parties shall have received certificates signed by the
Chief Executive Officers and Chief Financial Officers of Purchaser to
the effect that the foregoing conditions have been satisfied;
(ii) Purchaser shall be, prior to and after giving effect to
the consummation of this Agreement and the Ancillary Agreements,
Solvent and not Impaired;
67
(iii) Purchaser shall not be subject to any supervision,
conservation, liquidation, rehabilitation, delinquency or similar
proceeding, or investigation or inquiry which is reasonably likely to
result in such a proceeding, under Applicable Law;
(iv) Purchaser shall have paid the Purchase Price and the
Ceding Commission specified in Section 9.3 of the Loss and Unearned
Premium Reserve Portfolio Reinsurance Agreement;
(v) Purchaser has assumed the Assumed Liabilities pursuant to
the General Assignment and Assumption Agreement; and
(vi) Purchaser has executed and delivered each of the
Ancillary Agreements.
ARTICLE VII
SURVIVAL; INDEMNIFICATION
Section 7.1. Survival. The representations and warranties of
the parties hereto contained in this Agreement, any Ancillary Agreement or in
any certificate or other writing delivered pursuant to or in connection with any
Ancillary Agreement shall survive the Closing until two years after the Closing
Date; provided that the representations and warranties contained in Sections
3.1, 3.2, 3.3, 3.4, 4.1, 4.2, 4.3 and 4.4 shall survive indefinitely, the
representations and warranties contained in Section 3.16 shall survive the
Closing until four years after the Closing Date and the representations and
warranties contained in Section 3.20 shall survive until expiration of the
statute of limitations applicable to the matters covered thereby (giving effect
to any waiver, mitigation or extension thereof), if later. Notwithstanding the
preceding sentence, any representation or warranty in respect of which indemnity
may be sought under this Agreement shall survive beyond the time at which it
would otherwise terminate pursuant to the preceding sentence, if notice of the
inaccuracy or breach thereof giving rise to such right of indemnity shall have
been given to the party against whom such indemnity may be sought prior to the
scheduled termination of such representation or warranty, as applicable. The
covenants and agreements of the parties (including, without limitation, the
covenants and agreements of the parties set forth in this Article 7) contained
in this Agreement or in any Ancillary Agreement shall survive indefinitely,
except to the extent expressly provided otherwise herein or therein.
Section 7.2. Indemnification. (a) Seller Parties hereby
indemnify Purchaser and its Affiliates against and agrees to hold each of them
harmless on an after-Tax basis (subject to Section 7.2(c)) from any and all
damage, loss, liability and expense (including, without limitation, reasonable
attorneys' fees and reasonable expenses of investigation in connection with any
action, suit or proceeding) ("Damages"), incurred or suffered by Purchaser or
any Affiliate of Purchaser, arising out of any misrepresentation or breach of
warranty, covenant or agreement made or to be performed by Seller Parties
pursuant to this Agreement (other than pursuant to Article 7), all Purchaser
Indemnified
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Liabilities, the operation of the Business prior to the Closing other than
Subject Contract Liabilities and Assumed Liabilities, any claim by any present
or former employee of a Seller Party or Affiliate thereof, including, without
limitation, the Transferred Employees, which arises under federal, state or
local statute (including, without limitation, Title VII of the Civil Rights Act
of 1964, the Civil Rights Act of 1991, the Age Discrimination in Employment Act
of 1990, the Equal Pay Act, the Americans with Disabilities Act of 1990, ERISA
and all other statutes regulating the terms and conditions of employment),
regulation or ordinance, under the common law or in equity (including any claims
for wrongful discharge or otherwise), or under the Plans or under any policy,
agreement, understanding or promise, written or oral, formal or informal,
between a Seller Party or Affiliate thereof and such present or former employee,
which arose out of any action, event or omission that occurred (or, in the case
of omissions, failed to occur) prior to the Closing, or the enforcement of their
rights under this Section 7.2; provided, however, that Seller Parties shall not
be liable under the foregoing clause (i) of this Section 7.2(a) for any
misrepresentation or breach of warranty (x) unless the aggregate amount of
Damages (other than Damages with respect to breaches of the representations and
warranties set forth in Section 3.13(a), the first sentence of Section 3.16(a)
or Section 3.20 or to a breach of the covenants set forth in Section 5.11) with
respect to all misrepresentations and breaches of warranties referred to in this
Section 7.2(a) exceeds $8,700,000 (and then only to the extent of such excess)
and (y) in an amount exceeding $580,000,000 in the aggregate (it being agreed
that the limitation set forth in clause (x) of this proviso shall not apply to
breaches of the representations and warranties set forth in Section 3.13(a), the
first sentence of Section 3.16(a) or Section 3.20 or to a breach of the
covenants set forth in Section 5.11). The fact that the survival period with
respect to any representation or warranty has terminated or that indemnification
for breaches of representations and warranties is subject to the limitation set
forth in the proviso to the immediately preceding sentence shall not limit or
affect in any respect Seller Parties' indemnification obligations with respect
to any Retained Liability (even if such Retained Liability is also the subject
of a representation or warranty).
(b) Purchaser hereby indemnifies Seller Parties and their
Affiliates against and agrees to hold each of them harmless on an after-Tax
basis (subject to Section 7.2(c)) from any and all Damages incurred or suffered
by Seller Parties or any of its Affiliates arising out of (i) any
misrepresentation or breach of warranty, covenant or agreement made or to be
performed by Purchaser pursuant to this Agreement, (ii) the enforcement of their
rights under this Section 7.2, (iii) Assumed Liabilities, (iv) the operation of
the Business following the Closing, (v) any action (or failure to act) by
Purchaser, in violation of Applicable Law, with respect to the hiring or terms
of employment of any person who is an Employee immediately before the Closing
Date, or (vi) any claim by any present or former employee of a Seller Party or
Affiliate thereof, including, without limitation, the Transferred Employees,
which arises under federal, state or local statute (including, without
limitation, Title VII of the Civil Rights Act of 1964, the Civil Rights Act of
1991, the Age Discrimination in Employment Act of 1990, the Equal Pay Act, the
Americans with Disabilities Act of 1990, ERISA and all other statutes regulating
the terms and conditions of employment), regulation or ordinance, under the
common law or in equity (including any claims for wrongful discharge or
otherwise), or under any employee benefit plan or program of Purchaser or any
Affiliate
69
of Purchaser, or under any policy, agreement, understanding or promise, written
or oral, formal or informal, between Purchaser or an Affiliate thereof and such
present or former employee, which arose out of any action, event or omission
that occurred (or, in the case of omissions, failed to occur) following the
Closing.
(c) Required payments by any Indemnifying Party (as
hereinafter defined) pursuant to this Article 7 shall be limited to the amount
of any Damages that remains after deducting therefrom (i) any insurance proceeds
recoverable by any Indemnified party (less any increase in premium reasonably
related to the incurrence of such Damages) and (ii) any indemnity, contribution
or other similar payment recoverable by any Indemnified Party from any third
party, in each case with respect to such Damages. The Indemnified Party shall
use commercially reasonable efforts to collect all such insurance proceeds and
indemnity, contribution and other similar payments.
(d) Notwithstanding the exception set forth on Schedules
3.16(a), 3.16(c)(i), 3.16 (d)(ii) and 3.16 (f) under the heading "Consultant
Agreements", Seller Parties hereby indemnify Purchaser and its Affiliates
against and agrees to hold each of them harmless on an after-Tax basis (subject
to Section 7.2(c)) from any and all Damages incurred or suffered by Purchaser or
any of its Affiliates arising out of any claim that Purchaser's use, and/or its
Affiliates' use of the computer programs Sierra Camp, Sierra Branch, Sierra ESP,
Sierra Fidelity, Bravo and Powers of Attorney, violates the proprietary rights
of Ajilon Services Inc., ▇▇▇▇▇ Associates, Maxim Group, RCG Information
Technology, Inc. and Actium, Inc., or any current or former employee or
independent contractors of the foregoing companies. Seller Parties agree that
this indemnity shall not be subject to Seller Parties' indemnification limits
set forth in Section 7.2(a). Notwithstanding the foregoing, Seller Parties shall
have no obligation to indemnify Purchaser and its Affiliates under this Section
7.2(d) for Purchaser's or its Affiliates' (1) distribution (other than to an
Affiliate) of said computer programs for a fee, (2) running a service bureau for
third parties involving such computer programs or (3) leasing the computer
programs or performing outsourcing services using such computer programs.
Section 7.3. Procedures for Third Party Claims. (a) The party
seeking indemnification under Section 7.2 (the "Indemnified Party") agrees to
give prompt notice (in accordance with Section 9.11) to the party against whom
indemnity is sought (the "Indemnifying Party") of the assertion of any claim, or
the commencement of any suit, action or proceeding in respect of which indemnity
may be sought under Section 7.2 (the "Third Party Claims"). Such notice referred
to in the preceding sentence shall state the relevant facts and include
therewith relevant documents and a statement in reasonable detail as to the
basis for the indemnification sought. The failure by any Indemnified Party so to
notify the Indemnifying Party shall not relieve any Indemnifying Party from any
Liability which it may have to such Indemnified Party with respect to any claim
made pursuant to this Section 7.3, except to the extent such failure shall
actually prejudice an Indemnifying Party. In the event of the assertion of any
claim or the commencement of any suit, action or proceeding in respect of which
indemnity would be sought by the Indemnified Party but for the fact that the
notice of such claim, suit, action
70
or proceeding was sent to the Indemnifying Party, the Indemnifying Party shall
give prompt notice to the Indemnified Party of such claim, suit, action or
proceeding.
(b) Upon receipt of notice from the Indemnified Party pursuant
to Section 7.3(a), the Indemnifying Party will have the right to, subject to the
provisions of Section 7.3(c), assume the defense and control of such Third Party
Claims. In the event the Indemnifying Party assumes the defense of a Third Party
Claim, the Indemnified Party shall have the right but not the obligation to
participate in the defense of such Third Party Claim with their own counsel and
at their own expense (except as provided in Section 7.3(c)) and the Indemnifying
Party will cooperate with the Indemnified Party. Any election by an Indemnifying
Party not to assume the defense of a Third Party Claim must be received by the
Indemnified Party reasonably promptly following its receipt of the Indemnified
Party's notice delivered pursuant to Section 7.3(a). If the Indemnifying Party
elects to assume the defense of a Third Party Claim, the Indemnifying Party
shall select counsel reasonably acceptable to the Indemnified Party; shall take
all steps necessary in the defense or settlement of such Third Party Claims; and
shall at all times diligently and promptly pursue the resolution of such Third
Party Claims. The Indemnified Party shall, and shall cause each of their
Affiliates and representatives to, cooperate fully with the Indemnifying Party
in the defense of any Third Party Claim defended by the Indemnifying Party.
(c) Except with respect to Tax Claims (as defined below), the
Indemnifying Party shall be authorized to consent to a settlement of, or the
entry of any judgment arising from, any Third Party Claim as to which the
Indemnifying Party has assumed the defense in accordance with the terms of
Section 7.3(b), without the consent of any Indemnified Party, but only to the
extent that such settlement or entry of judgment (i) provides solely for the
payment of money by the Indemnifying Party or imposes an obligation of
confidentiality and (ii) provides a complete release of any Indemnified Party
potentially affected by such Third Party Claim from all matters that were or
could have been asserted in connection with such claims. Except as provided in
the foregoing sentence, settlement or consent to entry of judgment shall require
the prior approval of the Indemnified Party, such approval not to be
unreasonably withheld or delayed. The Indemnifying Party shall be authorized to
consent to a settlement of, or the entry of any judgment arising from, any
audit, contest, examination, litigation or similar proceeding as it relates to
Taxes ("Tax Claims") as to which the Indemnifying Party has assumed the defense
in accordance with the terms of Section 7.3(b) without the consent of the
Indemnified Party, but only if such settlement or entry of judgment would not be
binding on the Indemnified Party or the Business as conducted by Purchaser after
the Closing (in the case where the Indemnified Party is the Purchaser) for
periods after the Closing or otherwise cause an adverse effect to the
Indemnified Party or the Business as conducted by Purchaser after the Closing
(in the case where the Indemnified Party is the Purchaser); provided, however,
that the Indemnified Party's consent as required by this Section 7.3(c) for any
settlement of, or the entry of any judgment arising from, any Tax Claim shall
not be unreasonably withheld.
Section 7.4. Procedures for Direct Claims. In the event any
Indemnified Party shall have a claim for indemnity against any Indemnifying
Party that does not
71
involve a Third Party Claim, the Indemnified Party shall deliver notice of such
claim with reasonable promptness to the Indemnifying Party. Such notice referred
to in the preceding sentence shall state the relevant facts and include
therewith relevant documents and a statement in reasonable detail as to the
basis for the indemnification sought. The failure by any Indemnified Party so to
notify the Indemnifying Party shall not relieve the Indemnifying Party from any
Liability that it may have to such Indemnified Party with respect to any claim
made pursuant to this Section 7.4, it being understood that notices for claims
in respect of a breach of a representation or warranty must be delivered prior
to the expiration of the survival period for such representation or warranty.
Section 7.5. Exclusive Remedy. The parties hereto expressly
acknowledge that (i) the provisions of this Article 7 shall be the sole and
exclusive remedy for Damages caused as a result of breaches of the
representations and warranties contained in this Agreement and (ii) no
Indemnifying Party shall be liable for punitive or treble Damages in connection
with any action, suit or proceeding brought by Purchaser against one or more
Seller Parties or by one or more Seller Parties against Purchaser.
ARTICLE VIII
TERMINATION
Section 8.1. Grounds for Termination. This Agreement may be
terminated at any time prior to the Closing:
(a) by mutual written agreement of Seller Parties and
Purchaser;
(b) by either Seller Parties or Purchaser if the Closing shall
not have been consummated on or before August 31, 2000 ("End Date"); provided,
however, that neither Purchaser nor Seller Parties may terminate this Agreement
pursuant to this Section 8.1(b) if the Closing shall not have been consummated
by the End Date by reason of the failure of such party to perform in all
material respects any of its covenants or agreements contained in this
Agreement;
(c) by Purchaser, if a breach of any representation, warranty,
covenant or agreement on the party of Seller Parties set forth in this Agreement
shall have occurred which would cause any of the conditions set forth in
Sections 6.1 or 6.2 not to be satisfied, and such breach is incapable of being
cured or, if capable of being cured, shall not have been cured within 30
Business Days following receipt by Seller Parties of written notice of such
breach from Purchaser;
(d) by Seller Parties, if a breach of any representation,
warranty, covenant or agreement on the part of Purchaser set forth in this
Agreement shall have occurred which would cause any of the conditions set forth
in Sections 6.1 or 6.3 not to be satisfied, and such breach is incapable of
being cured or, if capable of being cured, shall not have been cured within 30
Business Days following receipt by Purchaser of written notice of such breach
from Seller Parties;
72
(e) by either Seller Parties or Purchaser if there shall be
any law or regulation that makes consummation of the transactions contemplated
hereby illegal or otherwise prohibited or if consummation of the transactions
contemplated hereby would violate any non-appealable final order, decree or
judgment of any Governmental Entity having competent jurisdiction;
(f) by Purchaser, if the Audited Opening Financial Statements
and the Closing Financial Statements do not reflect Policyholders' Surplus of at
least one hundred five million dollars ($105 million)(Calculated According to
the Transaction Calculation Memo) and GAAP Net Worth of at least one hundred
sixty two million dollars ($162 million)(Calculated According to the Transaction
Calculation Memo);
(g) by Purchaser, if the Audited Opening Financial Statements
are materially different from the Opening Financial Statements (except as
otherwise required by the GAAP Financial Statement Methods or SAP Financial
Statement Methods, as applicable);
(h) by Purchaser, unless Seller Parties are, prior to and
after giving effect to the consummation of this Agreement and the Ancillary
Agreements, Solvent and not Impaired.
(i) by Purchaser, if any Seller Party has, as of or after
giving effect to the consummation of this Agreement and the Ancillary
Agreements, unreasonably small capital with which to conduct its business or is
unable to pay its debts as they become due (in each case as contemplated under
Applicable Laws with respect to voidable or fraudulent transfers and
obligations);
(j) by Purchaser, if a Seller Insurer Party is subject to a
supervision, conservation, liquidation, rehabilitation, delinquency or similar
proceeding, or any investigation or inquiry which is reasonably likely to result
in such a proceeding, under Applicable Law;
(k) by Seller Parties, if Purchaser is subject to a
supervision, conservation, liquidation, rehabilitation, delinquency or similar
proceeding, or any investigation or inquiry which is reasonably likely to result
in such a proceeding, under Applicable Law; or
(l) by Purchaser, if Parent is subject to any action, suit,
investigation, judgment or proceeding under Federal bankruptcy law, or any
investigation or inquiry which is reasonably likely to result in any of the
foregoing.
The party desiring to terminate this Agreement pursuant to clauses 8.1(b)
through 8.1(l) shall provide written notice of such termination to the other
party in accordance with Section 9.11, which termination shall be effective upon
the transmittal of such notice.
Section 8.2. Effect of Termination. If this Agreement is
terminated as permitted by Section 8.1, such termination shall be without
liability of any party (or any stockholder, director, officer, employee, agent,
consultant or other Representative of such
73
party) to any other party to this Agreement; provided that if such termination
shall result from the (i) willful or grossly negligent failure of either party
to fulfill a condition to the performance of the obligations of the other party,
(ii) willful failure to perform a covenant of this Agreement, or (iii) willful
or grossly negligent breach of either party hereto of any representation or
warranty contained herein, such party shall be fully liable for any and all
Damages incurred or suffered by the other party as a result of such failure or
breach. The provisions of Sections 5.9 and 5.18 shall survive any termination
hereof pursuant to Section 8.1.
ARTICLE IX
MISCELLANEOUS PROVISIONS
Section 9.1. Post-Closing Payments. Unless prohibited by
Applicable Law, Seller Parties and Purchaser shall treat all payments pursuant
to Sections 2.5 and 7.2 as adjustments to the Purchase Price and to the
Allocable Amount.
Section 9.2. Entire Agreement. This Agreement, including all
Schedules and Exhibits attached hereto or thereto, constitute the entire
contract between the parties and there are no understandings other than as
expressed in this Agreement or the Ancillary Agreements. All Schedules and
Exhibits hereto are expressly made a part of this Agreement and the Ancillary
Agreements as fully as though completely set forth herein. Any amendment or
modification hereto or to the Ancillary Agreements shall be null and void unless
made by amendment to this Agreement and the Ancillary Agreements, as applicable,
and signed by the parties affected by such amendment.
Section 9.3. Binding Effect. This Agreement and the Ancillary
Agreements are and shall apply to, and inure to the benefit of and be binding
upon and enforceable against, each party hereto and its successors and permitted
assigns (including, without limitation, any subsequent direct or indirect
shareholder of any Seller Insurer Party).
Section 9.4. No Third-Party Beneficiaries. Nothing in this
Agreement and the Ancillary Agreements is intended or shall be construed to give
any person, other than the parties hereto, any legal or equitable right, remedy
or claim under or in respect of this Agreement or the Ancillary Agreements or
any provision contained herein, unless otherwise expressly provided herein.
Section 9.5. Invalidity. Unless the invalidity or
unenforceability of any provision or portion thereof frustrates the intent of
the parties or the purpose of this Agreement or the Ancillary Agreements, such
invalidity or unenforceability shall not affect the validity or enforceability
of the other provisions or portions thereof. In the event that such provision
shall be declared unenforceable by a court of competent jurisdiction, such
provision or portion thereof, to the extent declared unenforceable, shall be
stricken. However, in the event any such provision or portion thereof shall be
declared unenforceable due to its scope, breadth or duration, then it shall be
modified to
74
the scope, breadth or duration permitted by law and shall continue to the be
fully enforceable as so modified.
Section 9.6. Governing Law. This Agreement shall be deemed to
have been made under and governed by the laws of New York, without regard to New
York choice of law rules.
Section 9.7. Jurisdiction. Each of the parties hereto
irrevocably and unconditionally submits to the exclusive jurisdiction of The
United States District Court for the Southern District of New York or, if such
court does not have jurisdiction, New York State Supreme Court in the borough of
Manhattan, for purposes of enforcing this Agreement. The parties shall take such
actions as are within their control to cause any matter contemplated hereby to
be assigned to the Commercial Division of the Supreme Court. In any such action,
suit or other proceeding, each of the parties hereto irrevocably and
unconditionally waives and agrees not to assert by way of motion, as a defense
or otherwise any claims that it is not subject to the jurisdiction of the above
court, that such action or suit is brought in an inconvenient forum or that the
venue of such action, suit or other proceeding is improper. Each of the parties
hereto also agrees that any final and unappealable judgment against a party
hereto in connection with any action, suit or other proceeding shall be
conclusive and binding on such party and that such award or judgment may be
enforced in any court of competent jurisdiction, either within or outside of the
United States. A certified or exemplified copy of such award or judgment shall
be conclusive evidence of the fact and amount of such award or judgment. Without
limiting the foregoing, each party agrees that service of process on such party
as provided in Section 9.11 shall be deemed effective service of process on such
party.
Section 9.8. WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO
HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL
PROCEEDING ARISING OUT OF OR RELATED TO THIS AGREEMENT OR THE TRANSACTIONS
CONTEMPLATED HEREBY.
Section 9.9. Counterparts. This Agreement may be executed in
two or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument. This Agreement
shall become effective when one or more counterparts have been signed by each
party hereto and delivered to the other parties hereto.
Section 9.10. Headings. The headings in this Agreement are for
the convenience of reference only and shall not affect its interpretations.
Section 9.11. Notices. All notices and other communications
under this Agreement shall be in writing and shall be delivered personally, sent
by facsimile transmission or sent by overnight courier or certified, registered
or express mail, postage prepaid. Any such notice or other communication shall
be deemed given: (i) upon actual delivery if presented personally or sent by
facsimile transmission, (ii) one (1) Business Day following delivery to an
overnight courier or (iii) three (3) Business Days following
75
deposit in the United States mail, if sent by certified, registered or express
mail, postage prepaid, in each case to the following addresses:
(i) If to Purchaser:
▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇, Esq.
Senior Vice President and General Counsel
Travelers Property Casualty Corporation
▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Facsimile No.: (▇▇▇) ▇▇▇-▇▇▇▇
With concurrent copies, which shall not constitute
notice, to:
▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇, Esq.
Skadden, Arps, Slate, ▇▇▇▇▇▇▇ &
▇▇▇▇, L.L.P.
▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇ ▇▇▇▇, ▇▇ ▇▇▇▇▇-▇▇▇▇
Facsimile No.: (▇▇▇) ▇▇▇-▇▇▇▇
(ii) If to Seller Parties:
Reliance Insurance Company
▇▇▇▇▇ ▇▇▇▇▇▇▇
▇▇▇▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇
Attn: General Counsel
Facsimile No.: (▇▇▇) ▇▇▇-▇▇▇▇
With concurrent copies, which shall not constitute
notice, to:
Reliance Group Holdings
Park Avenue Plaza
▇▇ ▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇ ▇▇▇▇▇
▇▇▇ ▇▇▇▇, ▇▇ ▇▇▇▇▇
Attn: General Counsel
Facsimile No.: (▇▇▇) ▇▇▇-▇▇▇▇
and
▇▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇, Esq.
▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇ LLP
▇▇▇▇ ▇▇▇▇▇▇ ▇▇ ▇▇▇ ▇▇▇▇▇▇▇▇
▇▇▇ ▇▇▇▇, ▇▇ ▇▇▇▇▇
Facsimile No.: (▇▇▇) ▇▇▇-▇▇▇▇
76
IN WITNESS WHEREOF, this Agreement has been duly executed and
delivered by the duly authorized officers of Purchaser and Seller Parties as of
the date first above written.
RELIANCE GROUP HOLDINGS, INC.
By: /s/ ▇▇▇▇▇ Grill
------------------------------------------
Name: ▇▇▇▇▇ Grill
Title: Vice President
RELIANCE INSURANCE COMPANY
By: /s/ ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇
------------------------------------------
Name: ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇
Title: Senior Vice President &
Chief Financial Officer
RELIANCE NATIONAL INDEMNITY
COMPANY
By: /s/ ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇
------------------------------------------
Name: ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇
Title: Senior Vice President &
Chief Financial Officer
UNITED PACIFIC INSURANCE COMPANY
By: /s/ ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇
------------------------------------------
Name: ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇
Title: Senior Vice President &
Chief Financial Officer
RELIANCE INSURANCE COMPANY OF
ILLINOIS
By: /s/ ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇
------------------------------------------
Name: ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇
Title: Senior Vice President &
Chief Financial Officer
RELIANCE NATIONAL INSURANCE
COMPANY (EUROPE) LTD.
By: /s/ ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇
------------------------------------------
Name: ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇
Title: Chairman
RELIANCE SURETY COMPANY
By: /s/ ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇
------------------------------------------
Name: ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇
Title: Senior Vice President &
Chief Financial Officer
TRAVELERS CASUALTY AND SURETY COMPANY
By: /s/ ▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇
------------------------------------------
Name: ▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇
Title: Senior Vice President &
General Counsel
