prem14a
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant þ
Filed by a Party other than the Registrant o
Check the appropriate box:
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Preliminary Proxy Statement |
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Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) |
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Definitive Proxy Statement |
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Definitive Additional Materials |
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Soliciting Material Pursuant to §240.14a-12 |
PENN MILLERS HOLDING CORPORATION
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
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No fee required. |
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Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11. |
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Title of each class of securities to which transaction applies: |
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Common stock, par value $0.01 per share |
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Aggregate number of securities to which transaction applies: |
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As of September 15, 2011, 4,974,414 shares of common stock outstanding, 150,984 shares of
common stock subject to options, and 105,838 shares of restricted
stock. |
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Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule
0-11 (set forth the amount on which the filing fee is calculated and state how it was determined): |
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The maximum aggregate value was determined based on the sum of: (i) 4,974,414 shares of common
stock multiplied by $20.50 per share, (ii) options to purchase
150,984 shares of common stock multiplied by the excess of
$20.50 over the per share exercise price of such options, and (iii) 105,838 shares of restricted
stock multiplied by $20.50 per share. In accordance with Section 14(g) of the Securities
Exchange Act of 1934, as amended, the filing fee was determined by multiplying 0.00011610 by the
sum of the preceding sentence. |
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Proposed maximum aggregate value of transaction: |
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$104,897,115 |
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Total fee paid: |
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$12,178.55 |
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Fee paid previously with preliminary materials. |
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Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and
identify the filing for which the offsetting fee was paid previously. Identify the previous filing
by registration statement number, or the Form or Schedule and the date of its filing. |
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Amount Previously Paid: |
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Form, Schedule or Registration Statement No.: |
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Filing Party: |
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Date Filed: |
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Dear Shareholder:
We cordially invite you to attend a special meeting of the
shareholders of Penn Millers Holding Corporation (the
Company), to be held
on ,
2011 at :00 .m. Eastern Time, at the
Companys headquarters at 72 North Franklin Street,
Wilkes-Barre, Pennsylvania
18701-1301.
Holders of record of the Companys common stock at the
close of business
on ,
2011 will be entitled to vote at the special meeting or any
adjournment or postponement thereof.
We have entered into an Agreement and Plan of Merger dated
September 7, 2011 (the Merger Agreement),
whereby Panther Acquisition Corp., a wholly owned subsidiary of
ACE American Insurance Company (ACE), will merge
with and into the Company, with the Company surviving as a
wholly owned subsidiary of ACE. At the special meeting, we will
ask you to adopt the Merger Agreement. If the merger
contemplated by the Merger Agreement (the Merger) is
completed, each outstanding share of Company common stock will
be canceled and you will be entitled to receive $20.50 in cash,
without interest and less any applicable withholding taxes, for
each share of common stock that you own (Merger
Consideration). We cannot complete the Merger unless all
of the conditions to closing are satisfied, including the
adoption of the Merger Agreement by an affirmative vote of at
least a majority of the votes cast by shareholders of the
Company entitled to vote on the proposal at the special meeting.
Our board of directors unanimously determined that the Merger,
the Merger Agreement, the Merger Consideration and the
transactions contemplated thereby are fair to and in the best
interests of the Company and our shareholders, and has adopted
the Merger Agreement and recommended that shareholders vote in
favor of the proposal to adopt the Merger Agreement. Our board
of directors, following a process in which it explored and
evaluated strategic alternatives, made its determination after
receipt of the recommendation of a special committee composed of
independent directors, consultation with its legal and financial
advisors and consideration of a number of other factors. Our
independent financial advisors, Willis Capital
Markets & Advisory, reviewed and considered the terms
and conditions of the Merger. Willis Capital Markets &
Advisory provided an opinion (subject to the assumptions,
qualifications and determinations set forth therein) to our
board of directors that the Merger Consideration to be received
by the holders of Company common stock is fair from a financial
point of view to our shareholders.
At the special meeting, if necessary or appropriate, we will
also be asking you to vote your shares to adjourn the special
meeting to permit further solicitation of proxies if there are
not sufficient votes at the time of the special meeting to adopt
the Merger Agreement.
THE BOARD
OF DIRECTORS RECOMMENDS THAT YOU VOTE:
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FOR THE ADOPTION OF THE MERGER AGREEMENT;
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FOR THE APPROVAL, ON A NON-BINDING, ADVISORY BASIS,
OF THE GOLDEN PARACHUTE COMPENSATION THAT MAY BE
PAYABLE TO THE COMPANYS NAMED EXECUTIVE OFFICERS IN
CONNECTION WITH THE MERGER; AND
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FOR THE ADJOURNMENT OF THE SPECIAL MEETING, IF
NECESSARY OR APPROPRIATE, FOR THE PURPOSE OF SOLICITING
ADDITIONAL PROXIES TO VOTE IN FAVOR OF ADOPTING THE MERGER
AGREEMENT.
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YOUR VOTE
IS VERY IMPORTANT
In the materials accompanying this letter, you will find a
Notice of Special Meeting of Shareholders, a proxy statement
relating to the actions to be taken by our shareholders at the
special meeting and a proxy card. The proxy statement includes
important information about the Merger Agreement, the Merger and
the
other matters to be considered at the special meeting. We
encourage you to carefully read the entire proxy statement,
including its annexes.
Please note that if your shares of Company common stock are held
in the name of a broker, it is important that you contact and
specifically instruct the broker how to vote the shares with
respect to the Merger Agreement. If you do not so instruct the
broker, your shares cannot be voted by the broker, and your
shares will have no effect on the adoption and approval of the
proposals at the special meeting.
All of our shareholders are cordially invited to attend the
special meeting in person. Whether or not you plan to attend the
special meeting, please complete, sign, date and return your
proxy card in the enclosed envelope or appoint a proxy over the
Internet or by telephone as instructed in these materials. It is
important that your shares be represented and voted at the
special meeting. If you attend the special meeting, you may vote
in person as you wish, even though you have previously returned
your proxy card or appointed a proxy over the Internet or by
telephone.
If your shares of Company common stock are held in your account
under the Penn Millers Holding Corporation Employee Stock
Ownership Plan, you will receive a separate voting card with
respect to such shares and you will be provided with
instructions on how to direct the trustee to vote those shares.
On behalf of our board of directors, I thank you for your
support and urge you to vote FOR the adoption of the
Merger Agreement, and FOR the other matters being
considered at the special meeting.
Sincerely,
F. Kenneth Ackerman, Jr.
Chairman of the Board of Directors
John M. Coleman
Chairman of the Special Committee of Independent Directors
Douglas A. Gaudet
President and Chief Executive Officer
This proxy statement is
dated ,
2011 and is first being mailed to our shareholders on or
about ,
2011.
NOTICE OF SPECIAL MEETING OF
SHAREHOLDERS
, ,
2011
To Our Shareholders:
You are cordially invited to attend a special meeting of the
shareholders of Penn Millers Holding Corporation (hereinafter
sometimes referred to as Penn Millers or the
Company) which will be held
at :00 .m., Eastern Time,
on , ,
2011, at the Companys headquarters, 72 North Franklin
Street, Wilkes-Barre, Pennsylvania
18701-1301,
for the following purposes:
(1) To consider and vote on a proposal to adopt the
Agreement and Plan of Merger dated as of September 7, 2011
(the Merger Agreement) between the Company, ACE
American Insurance Company (ACE), and Panther
Acquisition Corp. (Merger Sub), whereby Merger Sub
will merge with and into the Company, with the Company surviving
as a wholly owned subsidiary of ACE, and each outstanding share
of Penn Millers common stock will be canceled and converted into
the right to receive $20.50 per share in cash (the
Merger). A copy of the Merger Agreement is attached
as Annex A to the proxy statement
accompanying this notice, and a copy of the Companys
bylaws that will be in effect immediately following the Merger
will be furnished to shareholders, upon request and without
charge;
(2) To consider and vote, solely on a non-binding, advisory
basis, on a proposal to approve the golden parachute
compensation that may be payable to the Companys named
executive officers in connection with the Merger; and
(3) To consider and vote on a proposal to adjourn the
special meeting, if necessary or appropriate, for the purpose of
soliciting additional proxies to vote in favor of adopting the
Merger Agreement.
At the special meeting, you will be asked to vote on the
adoption of the Merger Agreement. If the Merger, as contemplated
by the Merger Agreement, is completed, you will be entitled to
receive $20.50 in cash, without interest and less any applicable
withholding taxes, for each share of common stock of Penn
Millers that you own. We cannot complete the Merger unless all
of the conditions to closing are satisfied, including the
adoption of the Merger Agreement by an affirmative vote of the
holders of at least a majority of the votes cast by shareholders
of the Company entitled to vote on the proposal.
The board of directors of the Company has fixed the close of
business on , , 2011 as the record date
for the determination of shareholders entitled to notice of, and
to vote at, the special meeting and any postponements or
adjournments of the special meeting. Only holders of common
stock of record at the close of business on that date will be
entitled to notice of, and to vote at, the special meeting or
any adjournment thereof. In the case of Company common stock
held in your account under the Penn Millers Holding Corporation
Employee Stock Ownership Plan, you may direct the trustee to
vote only those shares that are allocated to your account as of
the close of business on the record date. Your attention is
directed to the attached proxy statement.
The board of directors has unanimously determined that the
Merger and the Merger Agreement and the transactions
contemplated thereby are fair to and in the best interests of
the Company and our shareholders, adopted the Merger Agreement
and recommended that all Company shareholders vote in favor of
the proposal to adopt the Merger Agreement. The board of
directors, following a process in which it explored and
evaluated strategic alternatives, made its determination after
receipt of the recommendation of a special committee composed of
independent directors, consultation with its legal and financial
advisors and consideration of a number of other factors.
THE BOARD
OF DIRECTORS RECOMMENDS THAT YOU VOTE:
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FOR THE ADOPTION OF THE MERGER AGREEMENT;
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FOR THE APPROVAL, ON A NON-BINDING, ADVISORY
BASIS, OF THE GOLDEN PARACHUTE COMPENSATION THAT MAY
BE PAYABLE TO THE COMPANYS NAMED EXECUTIVE OFFICERS IN
CONNECTION WITH THE MERGER; AND
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FOR THE ADJOURNMENT OF THE SPECIAL MEETING, IF
NECESSARY OR APPROPRIATE, FOR THE PURPOSE OF SOLICITING
ADDITIONAL PROXIES TO VOTE IN FAVOR OF ADOPTING THE MERGER
AGREEMENT.
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YOUR VOTE
IS VERY IMPORTANT
In the materials accompanying this Notice of Special Meeting of
Shareholders, you will find a proxy statement relating to the
actions to be taken by our shareholders at the special meeting
and a proxy card. The proxy statement includes important
information about the Merger Agreement, the Merger and other
matters to be considered at the special meeting. We encourage
you to carefully read the entire proxy statement, including its
annexes.
All of the Companys shareholders are cordially invited to
attend the special meeting in person. Whether or not you plan to
attend the special meeting, we urge you to submit your proxy
over the Internet or by telephone. These are quick and cost
effective ways for you to submit your proxy. If you would prefer
to vote by mail, please sign, date and return the enclosed proxy
card in the postage-paid envelope provided. Please review the
instructions on the proxy card for each of the voting options.
If you prefer to vote by telephone, please call the toll-free
telephone number provided in the proxy statement
for ,
our proxy solicitation firm, to cast your vote. If you return an
executed proxy or cast your vote by telephone, and then attend
the special meeting, you may revoke your proxy and vote in
person. Attendance at the special meeting will not by itself
revoke a proxy.
If your shares of Company common stock are held in your account
under the Penn Millers Holding Corporation Employee Stock
Ownership Plan, you will receive a separate explanation of the
voting process with respect to such shares and you will be
provided with instructions on how to direct the trustee to vote
those shares. No person has been authorized to give any
information or to make any representations other than those set
forth in the proxy statement in connection with the solicitation
of proxies made hereby, and, if given or made, such information
must not be relied upon as having been authorized by the Company
or any other person.
By Order of the Board of Directors,
Michael O. Banks
Executive Vice President, Chief Financial
Officer & Corporate Secretary
,
2011
YOUR VOTE
IS IMPORTANT
BROKERS ARE NOT PERMITTED TO VOTE ON THE MERGER AGREEMENT
WITHOUT INSTRUCTIONS FROM THE BENEFICIAL OWNER. THEREFORE,
IF YOUR SHARES ARE HELD IN THE NAME OF YOUR BROKER OR BANK,
MAKING SURE YOUR VOTE IS CAST IS ESPECIALLY IMPORTANT.
ACCORDINGLY, WE ENCOURAGE YOU TO VOTE PROMPTLY BY MAIL OR THE
INTERNET, AS PROVIDED BY THE ENCLOSED PROXY CARD, OR BY
TELEPHONE EVEN IF YOU INTEND TO ATTEND THE SPECIAL MEETING. THE
GIVING OF THE PROXY WILL NOT AFFECT YOUR RIGHTS TO VOTE AT THE
MEETING IF THE PROXY IS REVOKED AS SET FORTH IN THE ACCOMPANYING
PROXY STATEMENT.
Table of
Contents
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A
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PENN
MILLERS HOLDING CORPORATION
72
North Franklin Street
Wilkes-Barre,
Pennsylvania
18701-1301
PROXY
STATEMENT
for
SPECIAL MEETING OF SHAREHOLDERS
to be held
on ,
2011
INTRODUCTION
This proxy statement is furnished by and on behalf of the board
of directors of Penn Millers Holding Corporation, a Pennsylvania
corporation (Penn Millers, the Company,
we, us, or our), in
connection with its solicitation of proxies to be voted at the
special meeting to be held
on ,
2011, beginning
at :00 .m., Eastern
Time, at the Companys headquarters, 72 North Franklin
Street, Wilkes-Barre, Pennsylvania
18701-1301
for the purposes set forth in the accompanying Notice of Special
Meeting of Shareholders. This proxy statement and enclosed proxy
card is first being mailed on or
about ,
2011 to the Companys shareholders of record as
of ,
2011 (the Record Date). As of the Record
Date, shares
of our common stock were outstanding and entitled to one vote
with respect to the proposals to be voted on at the special
meeting.
The Summary and the Questions and
Answers about the Merger and Special Meeting that
follow summarize the material information in this proxy
statement. We encourage you to carefully read this entire proxy
statement, and the other documents to which this proxy statement
refers you, for a more complete understanding of the matters
being considered at the special meeting. In addition, you may
obtain additional business and financial information about the
Company by following the instructions in Other
Matters Where You Can Find More
Information at page .
This proxy statement contains Forward-Looking
Statements within the meaning of the Private Securities
Litigation Reform Act, Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended (the Exchange Act).
All statements contained in this proxy statement that are not
clearly historical in nature are forward-looking, including
statements regarding whether and when the Merger is expected to
close, whether conditions to the Merger will be satisfied, the
effect of the Merger on our business and operating results, and
all other statements regarding our intent, plans, beliefs,
expectations or those of our directors or officers. Words such
as anticipate, believe,
belief, expect, estimate,
project, plan, intend,
continue, predict, may,
will, should, strategy,
will likely result, will likely
continue, and similar expressions are generally intended
to identify Forward-Looking Statements. However, not all
Forward-Looking Statements contain such identifying words.
Forward-Looking Statements are based on our current expectations
and are subject to a number of risks, uncertainties and
assumptions, including those pertaining to the Merger, which
could cause actual events and developments to differ materially
from those described in the Forward-Looking Statements. The
risks, uncertainties and assumptions that could cause actual
events and developments to differ from the Forward-Looking
Statements include the risks detailed elsewhere in this proxy
statement and in our most recent filings with the Securities and
Exchange Commission (SEC) on
Forms 10-K
and 10-Q.
See Other Matters Where You Can Find More
Information at page .
Forward-Looking Statements are only predictions, and we can give
no assurance that they will prove to be correct. You should not
place undue reliance on Forward-Looking Statements. In light of
the significant uncertainties inherent in the Forward-Looking
Statements included in this proxy statement, you should not
consider the inclusion of such information as a representation
by us or anyone else that we will achieve such results or
developments. The statements made in this proxy statement
represent our views as of the date of the proxy statement, and
it should not be assumed that these statements will remain
accurate as of any future date. We undertake no obligation to
update any Forward-Looking Statement, whether as a result of new
information, future events or otherwise.
1
SUMMARY
The following summary, together with the QUESTIONS AND
ANSWERS ABOUT THE MERGER AND SPECIAL MEETING immediately
following this summary, are intended only to highlight certain
information contained elsewhere in this proxy statement. This
summary and the following question and answer section may not
contain all the information that is important to you and the
other shareholders. To more fully understand the proposed Merger
and the terms of the Merger Agreement, you should carefully read
this entire proxy statement, all of its Annexes and the
documents referenced in this proxy statement before voting. For
instructions on obtaining more information, see the section
entitled OTHER MATTERS WHERE YOU CAN FIND MORE
INFORMATION. The Company has included page number
references in this summary to direct you to a more complete
description of the topics presented in this summary.
The
Parties to the Merger Agreement (See
Page )
Penn Millers Holding Corporation is a Pennsylvania corporation
headquartered in Wilkes-Barre, Pennsylvania. The Company was
originally organized in 1887 and is engaged in the provision of
commercial property and casualty insurance products. The
Companys headquarters are located at 72 North Franklin
Street, Wilkes-Barre, Pennsylvania
18701-1301;
telephone:
(800) 233-8347.
ACE American Insurance Company (ACE) is a
Pennsylvania domestic stock property and casualty insurance
company and a wholly-owned indirect subsidiary of ACE Limited, a
global insurance and reinsurance organization, providing a range
of insurance and reinsurance products. ACE American offers an
extensive array of property, casualty, risk-management, and
accident and health insurance products and services.
ACE American Insurance Company
436 Walnut Street
Philadelphia, Pennsylvania 19106
Telephone:
(215) 640-1000
Panther Acquisition Corp. (the Merger Sub) is a
Pennsylvania corporation that was formed by ACE solely for the
purpose of entering in the Merger Agreement and completing the
transactions contemplated by the Merger Agreement. Upon the
completion of the Merger, the Merger Sub will cease to exist and
the Company will continue as the surviving corporation of the
Merger, which we refer to as the surviving corporation.
Panther Acquisition Corp.
c/o ACE American Insurance Company
436 Walnut Street
Philadelphia, Pennsylvania 19106
Telephone:
(215) 640-1000
The
Merger (See Page )
At the special meeting, you will be asked to consider and vote
on the adoption of the Merger Agreement. Pursuant to the Merger
Agreement, at the effective time of the Merger, the Merger Sub
will merge with and into the Company. After the Merger, the
Company will continue as the surviving corporation and will be
wholly-owned by ACE.
Following and as a result of the Merger, Company shareholders
will no longer have any interest in, and will no longer be
shareholders of, the Company, and will not participate in any of
the Companys future earnings or growth. Shares of our
common stock will no longer be traded on the NASDAQ Global
Market, price quotations with respect to shares of our common
stock will no longer be available, and the registration of
shares of our common stock under the Securities Exchange Act of
1934, as amended, will be terminated.
2
Merger
Consideration
Company
Common Stock
At the effective time of the Merger, each share of Company
common stock issued and outstanding immediately prior to the
effective time of the Merger will automatically be canceled and
converted into the right to receive $20.50 per share in cash,
without interest and less applicable withholding taxes (the
Merger Consideration).
Company
Stock Options
At the effective time of the Merger, each outstanding stock
option, whether or not vested or exercisable, to acquire Company
common stock will become fully vested and thereafter will be
canceled and converted into the right to receive an amount in
cash, less applicable withholding taxes, equal to the product of
the number of shares of our common stock subject to each option
as of the effective time of the Merger, multiplied by the excess
of $20.50 over the per share exercise price of such option. None
of our outstanding options has an exercise price per share equal
to or in excess of $20.50.
Company
Restricted Stock
At the effective time of the Merger, each unvested share of
restricted stock will become fully vested and thereafter will be
canceled and converted into the right to receive the Merger
Consideration, without interest and less applicable withholding
taxes.
The
Special Meeting
The special meeting of the shareholders of the Penn Millers will
be held
on ,
2011, at : .m., Eastern Time, at the
Companys headquarters at 72 North Franklin Street,
Wilkes-Barre, Pennsylvania
18701-1301.
Shareholders are cordially invited to attend the special meeting
and are requested to vote on the Merger and other proposals
described in this proxy statement.
At the special meeting, you will be asked to consider and vote
on a proposal to adopt the Merger Agreement, to approve, on a
non-binding advisory basis, the golden parachute
compensation that may be payable to the Companys named
executive officers in connection with the Merger as reported on
the Golden Parachute Compensation table on
page , and to approve a proposal to adjourn the
special meeting, if necessary or appropriate, to solicit
additional proxies if there are insufficient votes at the time
of the special meeting to approve the proposal to adopt the
Merger Agreement.
Record
Date and Quorum
Shareholders are entitled to receive notice of, and to vote at,
the special meeting if they owned shares of Company common stock
as of the close of business
on ,
2011, which date the Company has set as the record date for the
special meeting. A quorum is necessary to adopt the Merger
Agreement and approve the non-binding advisory proposal
regarding golden parachute compensation at the
special meeting. The presence at the special meeting, in person
or by proxy, of holders of a majority of the outstanding shares
of Company common stock entitled to vote shall constitute a
quorum for the transaction of business.
Required
Vote (See Page )
The adoption of the Merger Agreement requires the affirmative
vote of the holders of not less than a majority of the votes
cast by shareholders of the Company entitled to vote on the
proposal at the special meeting. Each outstanding share of our
common stock on the record date entitles the holder to one vote
at the special meeting. Failure to vote your shares of our
common stock and abstentions will have no effect on the approval
of the proposal to adopt the Merger Agreement.
The approval of the proposals regarding golden
parachute compensation and the motion to adjourn the
special meeting, if necessary or appropriate, for the purpose of
soliciting additional proxies to vote in favor of
3
the adoption of the Merger Agreement requires the affirmative
vote of the holders of a majority of the votes properly cast and
entitled to vote thereon at the special meeting. Failure to vote
your shares of our common stock and abstentions will have no
effect on the approval of the proposals regarding golden
parachute compensation or to adjourn the special meeting.
Recommendation
of Our Board of Directors (See Page )
Our board of directors has unanimously determined that the
Merger Agreement and the transactions contemplated thereby are
fair to and in the best interests of the Company and our
shareholders, and recommends that our shareholders vote
FOR the adoption of the Merger Agreement,
FOR the approval, on a non-binding advisory basis,
of the golden parachute compensation that may be
payable to the Companys named executive officers in
connection with the Merger, and FOR the adjournment
of the special meeting, if necessary, to solicit additional
proxies to vote in favor of adoption of the Merger Agreement.
The board of directors, following a process in which it explored
and evaluated strategic alternatives, made its determination
after receipt of the recommendation of a special committee
composed of independent directors, consultation with its legal
and financial advisors, including the advice of its financial
adviser, Willis Capital Markets & Advisory, and
consideration of a number of other factors.
Opinion
of Willis Capital Markets & Advisory (See
Page )
The independent directors of our board of directors retained
Willis Securities, Inc., which we refer to as Willis
Capital Markets & Advisory, to provide it with
financial advisory services and a fairness opinion in connection
with the Merger. The independent directors selected Willis
Capital Markets & Advisory to act as financial advisor
based on Willis Capital Markets & Advisorys
qualifications, expertise and reputation and its knowledge of
the business and affairs of the Company.
In connection with the Merger, the board of directors received
an opinion, dated September 7, 2011, from the financial
advisor to the independent directors, Willis Capital
Markets & Advisory, as to the fairness, from a
financial point of view and as of such date, of the $20.50 per
share cash consideration to be received in the merger by holders
of Company common stock. The full text of Willis Capital
Markets & Advisorys written opinion, which sets
forth, among other things, the assumptions made, factors
considered and qualifications and limitations upon the review
undertaken by Willis Capital Markets & Advisory in
rendering its opinion, is attached as Annex B and is
incorporated by reference in its entirety into this proxy
statement. Willis Capital Markets & Advisorys
opinion was provided for the information of the Companys
board of directors (in its capacity as such) in its evaluation
of the Merger Consideration from a financial point of view and
did not address any other aspect of the Merger. Other than
advising the special committee and the board of directors in the
review of strategic alternatives, Willis Capital
Markets & Advisory expressed no view as to, and its
opinion did not address, the relative merits of the Merger as
compared to alternative business or financial strategies that
might be available to the Company, the effect of any other
transaction in which the Company might engage or the
Companys underlying business decision to engage in the
Merger. The opinion does not constitute a recommendation to any
holders of Company common stock as to how such holder should act
or vote in connection with the Merger or otherwise. Willis
Capital Markets & Advisory and its affiliates in the
past provided, currently are providing and in the future may
provide investment banking and financial advisory services to
ACE and its affiliates unrelated to the Merger and would expect
to receive compensation for such services.
Interests
of our Executive Officers and Directors in the Merger (See
Page )
In considering the recommendation of our board of directors with
respect to the Merger Agreement, you should be aware that the
Companys executive officers have interests in the Merger
that may be different from, or in addition to, the interests of
our shareholders generally upon completion of the Merger as a
result of the Companys executive compensation programs.
These interests include, among others:
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accelerated vesting of stock options and restricted stock;
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cash payments payable to executive officers of the Company
pursuant to change of control severance arrangements between the
Company and such executive officers if such executive officers
incur a qualifying termination following the Merger as provided
in such arrangements;
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accelerated vesting of the accounts of such executive officers,
as participants in the Penn Millers Holding Corporation Employee
Stock Ownership Plan (the ESOP) and allocation of
ESOP earnings after repayment of the ESOP loan;
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accelerated vesting of the entire amount credited to each
participant in the Companys deferred compensation
plan; and
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continued indemnification and directors and officers
liability insurance applicable to the period prior to completion
of the merger.
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Our independent directors represent the shareholders and are
themselves shareholders who purchased their shares with their
own funds. The independent directors also received grants of
stock options from the Company in all cases such
options represent fewer shares than each such director
purchased as a portion of the compensation for their
services. In connection with the Merger, the independent
directors stock options will be accelerated, and such
directors will also receive continued indemnification and
directors liability insurance applicable to the period
prior to the completion of the Merger.
Our board of directors was aware of these interests and
considered them, among other matters, prior to making their
determination to recommend the adoption of the Merger Agreement
to our shareholders.
Approval
of Golden Parachute Compensation
(Page )
In accordance with Section 14A of the Exchange Act and
Rule 14a-21(c)
under the Exchange Act, we are providing shareholders with the
opportunity to cast a non-binding advisory vote with respect to
certain payments that may be made to the Companys
executive officers in connection with the Merger, or
golden parachute compensation, as reported on the
Golden Parachute Compensation table on page .
The board of directors recommends that you vote FOR
approval of the non-binding advisory proposal regarding
golden parachute compensation.
Approval of the non-binding advisory proposal regarding
golden parachute compensation requires the approval
of a majority of the votes properly cast upon this proposal.
Approval of this proposal is not a condition to completion of
the Merger. The vote with respect to golden
parachute compensation is an advisory vote and will not be
binding on the Company. Therefore, regardless of whether
shareholders approve the golden parachute
compensation, if the Merger is approved by the shareholders and
completed, the golden parachute compensation will
still be paid to the Companys executive officers to the
extent payable in accordance with the terms of such compensation.
Tax
Consequences (See Page )
The exchange of shares of Company common stock for cash in the
Merger will generally be a taxable transaction to
U.S. holders for U.S. federal income tax purposes. In
general, a U.S. holder whose shares of Company common stock
are converted into the right to receive cash in the Merger will
recognize a gain or loss for U.S. federal income tax
purposes in an amount equal to the difference, if any, between
the cash you receive as Merger Consideration (determined before
deduction of any applicable withholding taxes) and your adjusted
tax basis in such shares. If you are a
non-U.S. holder
of our common stock, the Merger will generally not be a taxable
transaction to you under U.S. federal income tax laws
unless you have certain connections to the United States. The
Merger may be a taxable transaction to such
non-U.S. holders
under foreign tax laws. Backup withholding may also apply with
respect to cash you receive in the Merger, unless you comply
with the applicable requirements of the backup withholding
rules. With respect to shares of Company common stock held under
the ESOP, the exchange of shares of Company common stock for
cash in the Merger will generally not be a taxable transaction
to any ESOP participant or beneficiary. ESOP participants and
beneficiaries will generally not be taxed on amounts held in the
ESOP until such amounts are distributed from
5
the ESOP in accordance with the terms of the ESOP or following
the termination of the ESOP as described below.
You should consult your own tax advisor for a full understanding
of how the Merger will affect your taxes.
Regulatory
Approvals (See Page )
Under the terms of the Merger Agreement, the Merger cannot be
consummated until the waiting period applicable to the
consummation of the Merger under the
Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the HSR
Act), has expired or been terminated. Under the HSR Act
and the rules promulgated thereunder by the Federal Trade
Commission (FTC), the Merger cannot be consummated
until each of the Company and ACE files a notification and
report form with the FTC and the Antitrust Division of the
Department of Justice under the HSR Act and the applicable
waiting period has expired or been terminated. Under the terms
of the Merger Agreement, each of the Company and ACE will file
such a notification and report form by September 27, 2011.
There can be no assurance as to the outcome of the review.
Insurance laws in Pennsylvania require an acquiring person to
obtain approval from the Insurance Commissioner of Pennsylvania
before acquiring control of an insurance company domiciled in
Pennsylvania. Under the terms of the Merger Agreement, ACE will
file an application for such approval with the Insurance
Commissioner of Pennsylvania by September 27, 2011. There
can be no assurance as to the outcome of such application for
approval.
Under the insurance laws of certain states in which the
Companys two insurance company subsidiaries are licensed,
an acquiring person is required to make a pre-acquisition
Form E filing regarding the potential
competitive impact of the acquisition before acquiring control
of an insurance company licensed in those states if the combined
market share as an immediate result of the acquisition would
exceed certain statutorily-specified levels. The Merger cannot
be consummated until the expiration or termination of the
applicable waiting periods under relevant state insurance laws.
Under the terms of the Merger Agreement, ACE will make such
filings by September 27, 2011. There can be no assurance as
to the outcome of the filings.
Conditions
to the Merger (See Page )
The obligations of the parties to consummate the Merger are
subject to the satisfaction or waiver, to the extent applicable,
of customary conditions including the following conditions:
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the adoption of the Merger Agreement by the affirmative vote of
a majority of the votes cast by shareholders of the Company
entitled to vote thereon;
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the expiration or termination of the waiting period applicable
to the Merger under the HSR Act and the receipt of all other
regulatory authorizations and approvals of any governmental
authority necessary for the consummation of the transactions
contemplated by the Merger Agreement;
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no governmental authority will have enacted, issued,
promulgated, enforced or entered any law that has the effect of
making the acquisition of shares of Company common stock by ACE
or Merger Sub or any affiliate of either of them illegal or
otherwise preventing or prohibiting consummation of the Merger,
and there will not have been instituted or pending any action by
any governmental authority relating to the Merger Agreement;
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each partys representations and warranties in the Merger
Agreement being true and correct as of the date of the Merger
Agreement and the closing date of the Merger; and
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each partys having performed in all material respects its
obligations required to be performed under the Merger Agreement
on or prior to the closing date of the Merger;
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and, with respect to ACE and Merger Sub, the following
additional conditions:
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none of the regulatory approvals obtained will contain and no
law shall have been enacted or in effect that contains any
limitation, requirement or condition that would, individually or
in the aggregate, be reasonably expected to (i) materially
impair or interfere with the ability of the Company and its
subsidiaries to conduct their businesses after the effective
time of the Merger substantially in the manner as such
businesses are conducted as of the date of the Merger Agreement,
(ii) result in the sale, lease, license or disposal by ACE
of any capital stock of the surviving corporation after the
effective time of the Merger or by the Company or its
subsidiaries of any of their material assets, rights product
lines, licenses business or other operations or
(iii) materially and adversely affect the benefits, taken
as a whole, that ACE would otherwise receive from the
transactions contemplated by the Merger Agreement; and
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the absence of a Material Adverse Effect (as defined
below in The Merger Agreement
Representations and Warranties) since the date of the
Merger Agreement.
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Termination
(See Page )
The Company and ACE may mutually agree to terminate the Merger
Agreement at any time prior to the effective time of the Merger.
Subject to certain exceptions, the Merger Agreement may also be
terminated and the Merger may be abandoned at any time prior to
the effective time of the Merger as a result of any of the
following:
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by the Company or ACE, if:
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the Merger has not been consummated by December 31, 2011,
unless such date, which we refer to as the outside
date, is extended in accordance with the Merger Agreement
in order to obtain any necessary insurance regulatory consents
or approvals (provided, that in no event will the Merger
Agreement be extended beyond March 31, 2012), except that
this termination right will not be available to any party whose
failure to fulfill any obligation under the Merger Agreement has
been a principal cause of or resulted in the failure of the
Merger to occur on or before such date;
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a governmental authority of competent jurisdiction has issued a
nonappealable final injunction, order, decree or ruling, which
has the effect of preventing, prohibiting or making illegal the
consummation of the Merger, except that this termination right
will not be available to any party whose failure to fulfill any
obligation under the Merger Agreement has been a principal cause
of or resulted in such injunction, order, decree or
ruling; or
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our shareholders do not vote to adopt the Merger Agreement at
the special meeting.
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our board of directors fails to recommend that the
Companys shareholders vote to adopt the Merger Agreement
in the proxy statement, there occurs an adverse
recommendation change (as defined below in The
Merger Agreement No Solicitation of
Transactions), our board of directors approves,
endorses or recommends an alternative transaction proposal, the
Company fails to include the Companys recommendation to
shareholders to adopt the Merger Agreement in the proxy
statement, the Company, or any of its subsidiaries or any
representative of the Company or any of its subsidiaries,
breaches the obligations related to the shareholders
meeting, the proxy statement or no solicitation of
alternative transactions or our board of directors or one of its
committees resolves or proposes to take any of the foregoing
actions; or
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we breach any of our representations, warranties, covenants or
agreements in the Merger Agreement and such breach would cause
the conditions to the obligations of ACE and Merger Sub to
consummate the Merger with respect to the accuracy of
representations and warranties of the Company and performance of
covenants and obligations of the Company not to be satisfied and
such breach cannot be cured or is not cured within 30 days
of notice of such breach (or the outside date, if earlier) and
such breach is not waived by ACE;
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ACE or Merger Sub breach any of their representations,
warranties, covenants or agreements in the Merger Agreement and
such breach would cause the conditions to the obligations of the
Company to consummate the Merger with respect to the accuracy of
representations and warranties of ACE and Merger Sub and
performance of covenants and obligations of ACE and Merger Sub
not to be satisfied and such breach cannot be cured or is not
cured within 30 days of notice of such breach (or the
outside date, if earlier) and such breach is not waived by the
Company; or
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our board of directors pursuant to and in compliance with our
non-solicitation obligations under the Merger Agreement enters
into an alternative acquisition agreement for a superior
proposal and prior to or simultaneously with such termination we
pay to ACE in cash a $3.75 million termination fee.
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Termination
Fees and Expenses (See Page )
The Merger Agreement provides, in general, that each party will
pay its own expenses if the Merger is not consummated. If the
Merger Agreement is terminated, depending upon the circumstances
under which such termination occurs, we may be obligated to pay
ACE a termination fee of $3.75 million.
No
Solicitation of Transactions (See
Page )
Subject to the exceptions discussed in the section entitled
The Merger Agreement No Solicitation of
Transactions the Company has agreed that it will not:
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solicit, initiate, or knowingly encourage any inquiries or the
making of any proposals or offers that constitute or could
reasonably be expected to lead to any acquisition proposal;
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furnish any non-public information regarding the Company to any
person in connection with or in response to any inquiry or
indication of interest that could reasonably be expected to lead
to any acquisition proposal;
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engage in discussions or negotiations with any person with
respect to an alternative acquisition proposal;
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approve, endorse or recommend any alternative acquisition
proposal; or
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enter into any letter of intent or similar agreement providing
for any alternative acquisition proposal.
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We have agreed to promptly (and in any event within
24 hours) advise ACE of our receipt of any written
acquisition proposal and the material terms and conditions of
any such acquisition proposal.
Market
Price of Our Common Stock (See Page )
Penn Millers common stock is listed on the NASDAQ Global Market
under the ticker symbol PMIC. Its closing price on
September 7, 2011, the last full trading day prior to the
announcement of the Merger Agreement, was $16.30 per share.
No
Dissenters Rights (See Pages )
Under the Pennsylvania Business Corporation Law, holders of
Company common stock do not have appraisal or dissenters
rights with respect to the Merger or the other transactions
described in this proxy statement.
Delisting
and Deregistration of Company Common Stock (See
Page )
If the Merger is consummated, the Company common stock will be
delisted from the NASDAQ Global Market and deregistered under
the Exchange Act. Accordingly, following the consummation of the
Merger, we would no longer file periodic reports with the SEC on
account of the Company common stock.
8
QUESTIONS
AND ANSWERS ABOUT THE MERGER AND SPECIAL MEETING
The following questions and answers are intended to address
briefly some commonly asked questions regarding the Merger, the
Merger Agreement and the special meeting. These questions and
answers may not address all questions that may be important to
you as a Company shareholder. Please refer to the
Summary and the more detailed information contained
elsewhere in this proxy statement, the annexes to this proxy
statement and the documents referred to in this proxy statement,
which you should read carefully and in their entirety. You may
obtain the information incorporated by reference in this proxy
statement without charge by following the instructions under
Other Matters Where You Can Find More
Information beginning on page .
Why have
I received these materials?
This proxy statement and the accompanying proxy are being mailed
to shareholders of record
on ,
2011. The proxy is being solicited by the board of directors of
the Company in connection with our special meeting of
shareholders that will take place
on , ,
2011, at :00 .m., Eastern Time, at the
Companys headquarters, 72 North Franklin Street,
Wilkes-Barre, Pennsylvania
18701-1301,
and at any adjournment thereof. You are cordially invited to
attend the special meeting and are requested to vote on the
Merger and acquisition proposal described in this proxy
statement.
The Companys proxy statement for the special meeting was
mailed to you. Copies of this proxy statement for the special
meeting can also be viewed on the Companys website at
http://www.pennmillers.com/pmic/investors.
If you are a participant or beneficiary under the ESOP with an
account to which shares of Company common stock were allocated
as of the close of business on the record date, an explanation
from the trustee on how to vote shares allocated to your account
that supplements this proxy statement was also mailed to you.
What is
the proposed transaction and what effects will it have on the
Company?
The proposed transaction is the acquisition of the Company by
ACE pursuant to the Merger Agreement. If the proposal to adopt
the Merger Agreement is approved by our shareholders and the
other closing conditions under the Merger Agreement are
satisfied or waived, Merger Sub will merge with and into the
Company, with the Company being the surviving corporation. As a
result of the Merger, the Company will become a subsidiary of
ACE and will no longer be a publicly held corporation, and you
will no longer have any interest in our future earnings or
growth. In addition, the Company common stock will be delisted
from NASDAQ and deregistered under the Exchange Act, and the
Company will no longer file periodic reports with the SEC on
account of the Company common stock.
Will the
Merger be taxable to me?
The exchange of shares of Company common stock for cash pursuant
to the Merger Agreement will generally be a taxable transaction
to U.S. holders for U.S. federal income tax purposes.
If you are a U.S. holder and your shares of Company common
stock are converted into the right to receive cash in the
Merger, you will generally recognize gain or loss for
U.S. federal income tax purposes in an amount equal to the
difference, if any, between the amount of cash received with
respect to such shares (determined before deduction of any
applicable withholding taxes) and your adjusted tax basis in
your shares of Company common stock. If you are a
non-U.S. holder,
the Merger will generally not be a taxable transaction to you
under U.S. federal income tax laws unless you have certain
connections to the United States, but may be a taxable
transaction to you under foreign tax laws, and you are
encouraged to seek tax advice regarding such matters. Backup
withholding may also apply to the cash payments made pursuant to
the Merger unless the holder or other payee complies with the
backup withholding rules. For a discussion of tax-related
implications, see The Merger Material
U.S. Federal Income Tax Consequences of the
Merger beginning on page .
With respect to shares of Company common stock held under the
ESOP, the exchange of shares of Company common stock for cash in
the Merger will generally not be a taxable transaction to any
ESOP participant or beneficiary. ESOP participants and
beneficiaries will generally not be taxed on amounts held in
9
the ESOP until such amounts are distributed from the ESOP in
accordance with the terms of the ESOP or following the
termination of the ESOP as described below.
This proxy statement (and, if applicable to you, the separate
explanation from the ESOP trustee on how to vote shares
allocated to your ESOP account) is not intended to provide
shareholders with tax advice, and the Company makes no
representation as to the tax consequences of a cancellation of
Company common stock in the Merger. Shareholders are encouraged
to consult with their own tax advisor prior to the effective
time of the Merger to determine the particular tax consequences
to them of the Merger.
What am I
being asked to vote on at the special meeting?
You are being asked to consider and vote on a proposal to adopt
the Merger Agreement that provides for the acquisition of the
Company by ACE, to approve, on a non-binding advisory basis, the
golden parachute compensation that may be payable to
the Companys named executive officers in connection with
the Merger as reported on the Golden Parachute Compensation
table on page , and to approve a proposal to
adjourn the special meeting, if necessary or appropriate, to
solicit additional proxies if there are insufficient votes at
the time of the special meeting to approve the proposal to adopt
the Merger Agreement.
Who is
entitled to vote at the special meeting?
Holders of shares of Company common stock, including ESOP
participants and beneficiaries with shares allocated to their
respective ESOP accounts, as of the close of business
on , ,
2011, the record date for the special meeting, will be entitled
to receive notice of and to vote at the special meeting. As of
the record
date, shares
of our common stock were outstanding, each of which is entitled
to one vote with respect to each matter to be voted on at the
special meeting.
What
constitutes a quorum for purposes of the special
meeting?
The presence at the special meeting, in person or by proxy, of
holders of a majority of the outstanding shares of Company
common stock entitled to vote shall constitute a quorum for the
transaction of business. Proxies marked as
withholding or containing broker
non-votes on any matter to be acted upon by shareholders
will be treated as present at the meeting for purposes of
determining a quorum. As noted above, a broker
non-vote occurs when a registered broker holding a
customers shares in the name of the broker has not
received voting instructions on a matter from the customer and
is therefore barred from voting on behalf of the customer on
that matter.
How do I
vote my shares at the special meeting?
If you are a record shareholder of common stock
(that is, if you hold common stock in your own name in the
Companys stock records maintained by our transfer agent,
Registrar and Transfer Company), you may complete and sign the
accompanying proxy card and return it to the Company or deliver
it in person or you may attend the special meeting and vote in
person. Shareholders of record may also vote via the Internet or
over the phone through the Companys proxy
solicitor,
( ).
Internet and telephone voting information is provided on the
proxy card. If you vote via the Internet or telephone, please do
not return a signed proxy card. If you desire to vote by phone
or if you have any questions, or require assistance in voting
your proxy, please call the toll-free telephone number specified
on your proxy card.
If your shares are held in street name (for example,
if your shares of common stock are held by a brokerage firm),
your brokerage firm, as the record holder of your shares, is
required to vote your shares according to your instructions. In
order to vote your shares, you will need to follow the
directions your brokerage firm provides you. Your bank,
brokerage firm or other nominee will only be permitted to vote
your shares of Company common stock if you instruct your bank,
brokerage firm or other nominee how to vote your shares. If you
do not instruct your bank, brokerage firm or other nominee to
vote your shares of Company common stock, your shares of Company
common stock will not be voted and will not have an effect on
the adoption of the Merger Agreement, the non-binding advisory
proposal regarding golden parachute
10
compensation or the proposal to adjourn the special meeting, if
necessary or appropriate, to solicit additional proxies.
If your shares are held in street name and you wish to attend
the special meeting in person, you must bring an account
statement or letter from your brokerage firm showing that you
are the beneficial owner of the shares as of the record date in
order to be admitted to the special meeting
on ,
2011. To be able to vote your shares held in street name at the
special meeting, you will need to obtain a proxy card from the
holder of record (e.g. your brokerage firm) for your shares.
If a
shareholder gives a proxy, how will its shares of Company common
stock be voted?
Regardless of the method you choose to submit your proxy, the
individuals named on the enclosed proxy card, as your proxies,
will vote your shares of Company common stock in the way that
you indicate. When completing the internet or telephone proxy
processes or the enclosed proxy card, you may specify whether
your shares of Company common stock should be voted for or
against or to abstain from voting on all, some or none of the
specific items of business to come before the special meeting.
If you properly sign your proxy card but do not mark the boxes
showing how your shares of Company common stock should be voted
on a matter, the shares represented by your properly signed
proxy will be voted FOR the proposal to adopt
the Merger Agreement, FOR approval of the
non-binding advisory proposal regarding golden
parachute compensation and FOR the
proposal to adjourn the special meeting, if necessary or
appropriate, to solicit additional proxies.
Can I
change my vote or revoke my proxy after I return my proxy
card?
For record shareholders of common stock, yes. After
you have submitted a proxy online or by mail, you may revoke
your proxy or change your vote at any time before the proxy is
exercised by submitting a notice of revocation or a duly
executed proxy bearing a later date prior to the date of the
special meeting, by voting again prior to the time at which our
voting facilities close, or by attending the special meeting and
voting in person. In any event, the latest submitted vote will
be recorded and the earlier vote(s) revoked.
For street name shareholders of common stock, you
will need to review the instructions on the proxy form provided
to you by the institution that holds your shares to determine
whether you may change your vote after you have submitted a
proxy. If you are permitted to change your vote after you have
submitted a proxy, follow the instructions for revocation on
such form to do so.
How do I
vote shares allocated to my account under the ESOP?
You are permitted to direct the ESOP trustee in the voting of
shares allocated to your ESOP account only in accordance with
instructions provided by the trustee. The ESOP trustee will not
disclose the confidential voting directions of any individual
participant or beneficiary to the Company. You must also follow
instructions to revoke your proxy or change your vote after you
have submitted a proxy card in accordance with such
instructions. If you do not vote the shares allocated to your
account, the ESOP trustee will vote those shares in its sole
discretion.
What vote
is required to adopt the Merger Agreement at the special
meeting?
The adoption of the Merger Agreement requires the affirmative
vote of a majority of the votes properly cast by shareholders of
the Company entitled to vote on the proposal at the special
meeting.
Because the affirmative vote required to approve the proposal to
adopt the Merger Agreement is based upon the total number of
votes cast, if you fail to submit a proxy or to vote in person
at the special meeting, or if you vote ABSTAIN, or
if you do not provide your bank, brokerage firm or other nominee
with voting instructions, it will have no effect on the approval
of the proposal.
11
What vote
is required for the Companys shareholders to approve the
proposal regarding golden parachute compensation and
the proposal to adjourn the special meeting, if necessary or
appropriate?
Approval of the proposals regarding golden parachute
compensation and adjournment of the special meeting, if
necessary or appropriate, requires the approval of a majority of
the votes properly cast upon each of these proposals.
If you vote ABSTAIN on the proposal regarding
golden parachute compensation or the proposal to
adjourn the special meeting, if necessary or appropriate, to
solicit additional proxies, this will have no effect on these
proposals. If you fail to submit a proxy or to vote in person at
the special meeting, or if you do not provide your bank,
brokerage firm or other nominee with voting instructions, your
shares of Company common stock will not be voted on these
proposals, and this will have no effect on these proposals.
Why am I
being asked to cast a non-binding advisory vote to approve
golden parachute compensation that the
Companys named executive officers will receive in
connection with the Merger?
The SECs recently adopted new rules require us to seek a
non-binding advisory vote with respect to certain payments that
may be made to the Companys named executive officers in
connection with the Merger, or golden parachute
compensation.
What will
happen if shareholders do not approve the golden
parachute compensation at the special meeting?
Approval of golden parachute compensation payable
under existing agreements that the Companys named
executive officers may receive in connection with the Merger is
not a condition to completion of the Merger. The vote with
respect to golden parachute compensation is an
advisory vote and will not be binding on the Company. Therefore,
regardless of whether shareholders approve the golden
parachute compensation, if the Merger Agreement is adopted
by the shareholders and the Merger is completed, the
golden parachute compensation will still be paid to
the Companys named executive officers to the extent
payable in accordance with the terms of such compensation.
What will
happen to the Company as a result of the Merger?
Upon completion of the Merger, the Company will cease to be a
publicly-traded company and will become wholly-owned by ACE.
Following completion of the Merger, the registration of our
common stock and our reporting obligations with respect to our
common stock under the Exchange Act will be terminated. In
addition, upon completion of the Merger, shares of our common
stock will no longer be listed on any stock exchange, including
the NASDAQ Global Market or quotation system.
What will
I receive if the Merger is consummated?
Upon completion of the Merger, each outstanding share of Company
common stock, other than shares held by ACE or the Merger Sub,
will automatically be canceled and will be converted into a
right to receive the Merger Consideration of $20.50 per share in
cash, less any applicable withholding taxes. Any Merger
Consideration relating to shares allocated to your account under
the ESOP will be paid to the ESOP and allocated to your account
under the ESOP.
Will I
own any shares of Company common stock after the
Merger?
No. At the effective time of the Merger, your shares of Company
common stock will be canceled and you will have the right to be
paid cash for your shares. Our shareholders will not have the
option to receive shares of the Merger Sub or the surviving
corporation in exchange for their shares instead of cash.
What
happens to Company stock options in the Merger?
Upon the consummation of the Merger, all outstanding stock
options to acquire Company common stock will become fully vested
and thereafter will be canceled and converted into the right to
receive an amount in
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cash equal to the number of shares of Company common stock
underlying the option multiplied by the amount (if any) by which
$20.50 exceeds the exercise price for each share of Company
common stock underlying the option, without interest and less
any applicable withholding taxes.
When do
you expect the Merger to be completed?
We are working toward completing the Merger as quickly as
possible, but we cannot predict the exact timing of when the
Merger will be completed. Assuming timely satisfaction of
necessary closing conditions, including the approval by our
shareholders of the proposal to adopt the Merger Agreement, we
currently anticipate that the Merger will be consummated no
later than the first quarter of 2012.
What
happens if the Merger is not consummated?
If the Merger Agreement is not adopted by the shareholders of
the Company or if the Merger is not consummated for any other
reason, the shareholders of the Company would not receive any
payment for their shares of Company common stock in connection
with the Merger. Instead, the Company will remain an independent
public company, and the Company common stock would continue to
be listed on the NASDAQ Global Market. Under specific
circumstances, the Company may be required to pay to ACE, a fee
with respect to the termination of the Merger Agreement, as
described under The Merger Agreement
Termination Fees beginning on page .
When will
I receive the Merger Consideration for my shares of Company
common stock?
Shortly after the completion of the Merger, the shareholders of
record will receive written instructions, including a letter of
transmittal (the Letter of Transmittal), which will
explain how to exchange their shares for the Merger
Consideration of $20.50 in cash, less any applicable withholding
taxes, for each share of Company common stock that they own.
When such shareholders properly complete and return the required
documentation described in the written instructions to the
Letter of Transmittal, they will promptly receive from the
paying agent a payment of the Merger Consideration for their
shares. If your shares are held in a brokerage account or by a
bank or other nominee, your account will be automatically
credited with the Merger Consideration in exchange for your
shares, and it will not be necessary for you to submit any
documentation. Any consideration relating to shares allocated to
your account under the ESOP will be paid to the ESOP and
allocated to your account under the ESOP.
Should I
send in my stock certificates now?
No. The Letter of Transmittal described in this proxy statement
will provide instructions to you about when and where to send
your stock certificates. If your shares of Company common stock
are held under the ESOP, you do not have to take any of the
actions described in the Letter of Transmittal with respect to
shares allocated to your account under the ESOP as the ESOP
trustee will be responsible for taking those actions.
Am I
entitled to dissenters rights?
No. Under the Pennsylvania Business Corporation Law, holders of
Company common stock do not have appraisal or dissenters
rights with respect to the Merger or the other transactions
described in this proxy statement.
What
happens if I sell my shares of Company common stock before the
special meeting or the effective time of the Merger?
The record date for shareholders entitled to vote on the
adoption of the Merger Agreement is earlier than the date of the
special meeting and the expected effective time of the Merger.
If you transfer your shares of Company common stock after the
record date but before the special meeting or the effective time
of the Merger, you will, unless special arrangements are made,
retain your right to vote at the special meeting but you no
longer will have the right to receive the Merger Consideration.
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What do I
do if I receive more than one proxy or set of voting
instructions?
If you hold shares of Company common stock in more than one
account, you may receive more than one proxy or set of voting
instructions relating to the special meeting. These should each
be voted or returned separately in accordance with the
instructions provided in this proxy statement in order to ensure
that all of your shares of Company common stock are voted.
Who will
solicit and pay the cost of soliciting proxies?
The Company has
engaged
to assist in the solicitation of proxies for the special
meeting. The Company estimates that it will
pay
a fee of approximately $ plus
reasonable
out-of-pocket
expenses relating to the solicitation. The Company will
reimburse
for reasonable
out-of-pocket
expenses and will
indemnify
and its affiliates against certain claims, liabilities, losses,
damages and expenses. The Company may also reimburse brokers,
banks and other custodians, nominees and fiduciaries
representing beneficial owners of shares of Company common stock
for their expenses in forwarding soliciting materials to
beneficial owners of Company common stock and in obtaining
voting instructions from those owners. Our directors, officers
and employees may also solicit proxies by telephone, by
facsimile, by mail, on the internet or in person. They will not
be paid any additional amounts for soliciting proxies.
How does
the Board of Directors recommend that I vote my
shares?
The board of directors recommends that you vote
FOR the approval of the proposal to adopt the
Merger Agreement, FOR approval of the
non-binding advisory proposal regarding golden
parachute compensation and FOR approval
of the proposal to adjourn the special meeting, if necessary or
appropriate, to solicit additional proxies.
How will
documents be delivered to me if I share an address with other
shareholders?
Some brokers and other nominees may participate in the practice
of householding proxy statements and annual reports
to shareholders. This means that only one copy of our proxy
statement may have been sent to multiple shareholders in your
household. The Company will promptly deliver a separate copy of
either document to you if you contact us at the following
address: Attention Investor Relations, Penn Millers Holding
Corporation, 72 North Franklin Street, Wilkes-Barre,
Pennsylvania
18701-1301;
or telephone number:
(800) 233-8347.
Who can
answer my questions?
If you have additional questions about the Merger, need
assistance in submitting your proxy or voting your shares of
Company common stock, or need additional copies of this proxy
statement or the enclosed proxy card, please
call ,
our proxy solicitor, toll-free
at .
If you are a participant or beneficiary under the ESOP and have
questions about voting the shares that are allocated to your
account under the ESOP, please contact the trustee at the phone
number provided in the ESOP voting instructions.
14
THE
SPECIAL MEETING
We are furnishing this proxy statement to you, as a
shareholder of Penn Millers as part of the solicitation of
proxies by our board of directors for use at the special meeting
of shareholders.
Date,
Time and Place of the Special Meeting
The special meeting will be held at our corporate headquarters
at 72 North Franklin Street, Wilkes-Barre, Pennsylvania
18701-1301,
on ,
2011,
at :00 a.m.,
local time.
Purpose
of the Special Meeting
At the special meeting, you will be asked to consider and vote
on the following proposals:
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to adopt the Merger Agreement, a copy of which is attached as
Annex A to this proxy statement;
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to approve, on a non-binding advisory basis, the golden
parachute compensation that may be payable to the
Companys named executive officers in connection with the
Merger; and
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to approve one or more adjournments of the special meeting, if
necessary or appropriate, to permit further solicitation of
proxies if there are not sufficient votes at the time of the
special meeting, or at any adjournment of that meeting, to adopt
the Merger Agreement.
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Record
Date and Voting Power
The Company has fixed the close of business
on ,
2011 as the record date for the determination of shareholders
entitled to notice of, and to vote at, the special meeting. At
the close of business on the record
date, shares
of our common stock were outstanding and entitled to receive
notice of, and vote at, the special meeting. On the record date,
there
were
holders of record of the Companys outstanding common
stock. Common stock is our only outstanding class of stock.
Shareholders of record on the record date will be entitled to
one vote per share of our common stock on any matter that
properly comes before the special meeting and any adjournment or
postponement of that meeting.
Quorum
Our charter and bylaws and Pennsylvania law require the
presence, in person or by duly executed proxy, of the holders of
a majority of the voting power of shares of our common stock
outstanding and entitled to vote at the special meeting to
constitute a quorum. Withheld votes, abstentions and broker
non-votes are counted as present for the purpose of determining
whether a quorum is present. If a quorum is not present and if
the adjournment proposal has the necessary majority, we expect
to adjourn the special meeting to solicit additional proxies and
intend to vote any proxies we have received at the time of the
special meeting in favor of an adjournment.
Vote
Required
Approval of the proposals regarding adoption of the Merger
Agreement, golden parachute compensation and
adjournment of the special meeting, if necessary or appropriate,
requires the approval of a majority of the votes properly cast
upon each of these proposals. For the proposal to adopt the
Merger Agreement, the non-binding advisory proposal regarding
golden parachute compensation and the proposal to
adjourn the special meeting, if necessary or appropriate, you
may vote FOR, AGAINST or
ABSTAIN. For purposes of these proposals, if
you fail to submit a proxy or to vote in person at the special
meeting, or if you have given a proxy and vote
ABSTAIN, the shares of Company common stock
will not be counted in respect of, and will not have an effect
on, the proposals.
Abstentions
and Broker Non-Votes
For purposes only of determining the presence or absence of a
quorum for the transaction of business at the special meeting,
broker non-votes will be counted as present at the
special meeting. Broker non-votes are shares held by
brokers or nominees as to which (1) voting instructions
have not been received from the beneficial owners or the persons
entitled to vote those shares, and (2) the broker or
nominee does not have discretionary voting power. The proposal
to adopt the Merger Agreement, the proposal to approve the
non-binding advisory proposal regarding golden
parachute compensation, and the proposal to adjourn the
special
15
meeting, if necessary or appropriate, to solicit additional
proxies are not matters on which brokerage firms may vote in
their discretion on behalf of their clients. As a result, absent
specific instructions from the beneficial owner of such shares
of Company common stock, banks, brokerage firms or other
nominees are not empowered to vote those shares of Company
common stock on non-routine matters. We urge you to return
the enclosed proxy card marked to indicate your vote, to vote
your shares through the Internet or by telephone or to give your
broker proper voting instructions. To adopt the Merger
Agreement, the adjournment proposal and the proposal regarding
golden parachute compensation, a majority of the
outstanding shares of our common stock present or represented at
the special meeting and properly cast on each proposal must vote
in favor of each proposal. Broker non-votes and
abstentions will have no effect on the outcome of these
proposals.
Proxies
and Voting
Shareholders may vote their shares by attending the special
meeting and voting their shares in person or by completing,
signing and dating the enclosed proxy card and promptly
returning it to us as soon as possible. If you prefer, you can
vote by telephone or via the Internet by following the relevant
instructions described on the enclosed proxy card or voting
instruction form received from any broker, bank or other nominee
that may hold shares of our common stock on your behalf. If you
sign and send in your proxy card and do not mark it to show how
you want to vote, or if you submit a proxy by telephone or via
the Internet without providing instructions, we will count your
proxy as a vote in favor of the adoption of the Merger Agreement
and in favor of any proposal to adjourn the special meeting to
solicit additional proxies.
Shareholders who have questions or requests for assistance in
completing and submitting proxy cards should
contact ,
our proxy solicitor,
at
or by phone
at .
Shareholders who hold their shares of Company common stock in
street name, meaning in the name of a bank, broker
or other person who is the record holder, must either direct the
record holder of their shares of our common stock how to vote
their shares or obtain a proxy from the record holder to vote
their shares at the special meeting.
Some banks, brokers and other nominee record holders may be
participating in the practice of householding proxy
statements and annual reports. This means that if a household
participates in the householding program, it will receive an
envelope containing one set of proxy materials and a separate
proxy card for each shareholder account in the household. Please
vote all proxy cards enclosed in such a package. The Company
will promptly deliver a separate copy of the proxy statement or
proxy card to you if you contact it at the following address or
telephone number: Investor Relations, Penn Millers Holding
Corporation, 72 North Franklin Street, Wilkes-Barre,
Pennsylvania
18701-1301;
telephone:
(800) 233-8347.
If you want to receive separate copies of proxy statements in
the future, or if you are receiving multiple copies and would
like to receive only one copy per household, you should contact
your bank, broker, or other nominee record holder, or you may
contact the Company at the address or telephone number above.
If your shares of Company common stock are held under the ESOP,
the voting card with instructions from the ESOP trustee that was
mailed to you explains how to vote the shares allocated to your
account.
Participation in householding will not affect or apply to any of
your other shareholder mailings such as dividend checks,
Forms 1099, or account statements. Householding saves money
by reducing printing and postage costs and it is environmentally
friendly. It also creates less paper for participating
shareholders to manage. If you are a beneficial holder, you can
request information about householding from your broker, bank or
other nominee.
Revocability
of Proxies
If you have not submitted a proxy through your broker or other
nominee, you may revoke your proxy at any time before it is
voted at the special meeting by:
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delivering to our Secretary at the address listed below a
written notice of revocation bearing a later date than the proxy;
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duly completing, signing, dating and delivering to our Secretary
at the address listed below, a new proxy card, dated later than
the first proxy card, which will automatically replace any
earlier dated proxy card that you returned;
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properly casting a new vote through the Internet or by telephone
at any time before the closure of the Internet voting facilities
and the telephone voting facilities; or
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attending the special meeting and voting in person.
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Attendance at the special meeting will not, in and of itself,
constitute revocation of a proxy.
If your shares are held in street name, you should
follow the voting instruction form provided by your broker or
other nominee regarding revocation of proxies. If the holder of
record of your shares is your broker, bank or other nominee and
you wish to vote at the special meeting, you must bring a legal
proxy from your broker, bank or other nominee authorizing you to
vote those shares.
You should send any notice of revocation of your proxy card to:
Penn Millers Holding Corporation, 72 North Franklin Street,
Wilkes-Barre, Pennsylvania
18701-1301
Attention: Michael O. Banks, Secretary.
If your shares of Company common stock are held under the ESOP,
the voting card with instructions from the ESOP trustee that was
mailed to you explains how to revoke your direction to the
trustee about voting the shares allocated to your account.
Solicitation
of Proxies and Expenses
In addition to solicitation by mail, our directors, officers and
employees may solicit proxies by telephone, other electronic
means or in person. These people will not receive any additional
compensation for their services, but we will reimburse them for
their
out-of-pocket
expenses. We will reimburse banks, brokers, nominees, custodians
and fiduciaries for their reasonable expenses in forwarding
copies of this proxy statement to the beneficial owners of
shares of our common stock and in obtaining voting instructions
from those owners. We will pay all expenses of filing, printing
and mailing this proxy statement.
We have
retained , ,
telephone ,
to assist in the solicitation of proxies by mail, telephone or
other electronic means, or in person, for a fee of approximately
$ plus reasonable
out-of-pocket
expenses relating to the solicitation. All costs of soliciting
proxies will be borne by the Company.
Adjournments
and Recesses
Although it is not currently expected, the special meeting may
be adjourned or recessed, including for the purpose of
soliciting additional proxies, if there are insufficient votes
at the time of the special meeting to approve the proposal to
adopt the Merger Agreement or if a quorum is not present at the
special meeting. Other than an announcement to be made at the
special meeting of the time, date and place of an adjourned
meeting, an adjournment generally may be made without notice.
Any adjournment or recess of the special meeting for the purpose
of soliciting additional proxies will allow the Companys
shareholders who have already sent in their proxies to revoke
them at any time prior to their use at the special meeting as
adjourned or recessed.
Other
Business
We are not currently aware of any business to be acted upon at
the special meeting other than the matters discussed in this
proxy statement. If other matters do properly come before the
special meeting, or at any adjournment of the special meeting,
we intend that shares of our common stock represented by
properly submitted proxies will be voted by and at the
discretion of the persons named as proxies on the proxy card.
The grant of a proxy will confer discretionary authority on the
persons named as proxies on the proxy card to vote in accordance
with their best judgment on other matters that are properly
presented at the special meeting.
17
Questions
and Additional Information
If you have more questions about the Merger or how to submit
your proxy, or if you need additional copies of this proxy
statement or the enclosed proxy card or voting instructions,
please
call ,
our proxy solicitor, toll-free
at .
18
THE
MERGER
The following is a description of the material aspects of the
background and history behind the Merger. This description may
not contain all of the information that is important to you. You
are encouraged to carefully read this entire proxy statement,
including the Merger Agreement attached hereto as Annex A,
for a more complete understanding of the Merger.
The
Parties to the Merger
Penn Millers Holding Corporation (Penn Millers or
the Company) is a Pennsylvania corporation
headquartered in Wilkes-Barre, Pennsylvania. The Company was
originally organized in 1887 and is engaged in the provision of
commercial property and casualty insurance products. The
Companys headquarters are located at 72 North Franklin
Street, Wilkes-Barre, Pennsylvania
18701-1301
and telephone:
(800) 233-8347.
ACE American Insurance Company (ACE) is a
Pennsylvania domestic stock property and casualty insurance
company and a wholly-owned indirect subsidiary of ACE Limited, a
global insurance and reinsurance organization, providing a range
of insurance and reinsurance products. ACE American offers an
extensive array of property, casualty, risk-management, and
accident and health insurance products and services.
ACE American Insurance Company
436 Walnut Street
Philadelphia, Pennsylvania 19106
Telephone:
(215) 640-1000
Panther Acquisition Corp. (the Merger Sub) is a
Pennsylvania corporation that was formed by ACE solely for the
purpose of entering in the Merger Agreement and completing the
transactions contemplated by the Merger Agreement. Upon the
completion of the Merger, the Merger Sub will cease to exist and
the Company will continue as the surviving corporation of the
Merger, which we refer to as the surviving corporation.
Panther Acquisition Corp.
c/o ACE
American Insurance Company
436 Walnut Street
Philadelphia, Pennsylvania 19106
Telephone:
(215) 640-1000
Background
of the Merger
The Companys board of directors and senior management
regularly review and consider business alternatives to protect
and/or
enhance shareholder value, including strategic alternatives and
opportunities for organic growth. The Company considers
strategic options in light of the totality of the circumstances,
including current and anticipated business trends, regulatory
conditions, and the rating environment expected to impact it and
the insurance industry.
In 2008, the Companys management did not achieve the goals
that had been set for it in the annual operating plan. In 2009,
the goals were substantially achieved. In 2010, the goals were
not achieved.
At the regularly scheduled meeting of the board of directors on
January 26, 2011, management presented the proposed annual
business plan for 2011. Management told the board that
management did not view the Solutions product of the
Commercial Business unit as a good long-term strategic fit for
the Company since the product has been unprofitable and the
sophistication of automation and predictive modeling favors
large companies. The independent members of the Companys
board of directors expressed concern about the projected
performance numbers. The independent directors centered their
strategy discussion on the challenges resulting from the
Companys relative lack of scale, the
difficulties of the prolonged soft market, which
inhibits price increases for the Companys products, and
the disproportionate expense of being a small public
19
company. It was recognized that there should be a sense of
urgency regarding the strategic challenges facing the Company.
Management continued this discussion over the next few months.
At its regularly scheduled meeting on March 23, 2011, the
board met with members of senior management, including the
Companys Chief Executive Officer, Chief Financial Officer,
and Senior Vice President. At that meeting, the Companys
Chief Executive Officer and Chief Financial Officer led a
discussion regarding whether, and to what extent, the Company
might undertake mergers and acquisitions. The discussion
centered primarily on the Companys $20 million in
excess capital above what it is expected to use for organic
growth at such time. Management suggested that the Company
consider either returning capital to its shareholders or making
a strategic acquisition, further informing the board that it had
already contacted two potential acquisition targets. The board
reviewed long-range projections for the Companys business
performance. Independent directors expressed concern about the
adequacy of the projected performance and its implications for
shareholder value and, in addition, questioned whether in light
of that projected performance, it truly made sense for the
Company to remain independent. The board authorized management
to proceed with its plan to continue exploring strategic merger
and acquisition opportunities and began reviewing additional
specific strategic alternatives to deliver shareholder value.
The board asked management to prepare an overview of certain
strategic opportunities for the boards review. The board
specifically directed management to evaluate, from a shareholder
perspective, the alternative of the Companys remaining
independent in comparison with the alternative of linking up
with a strategic partner. The meeting concluded with an
executive session from which management was excluded.
On April 21, 2011, the Companys Chief Executive
Officer and Chief Financial Officer attended their regular
annual meeting with the analysts who were principally
responsible for dealing with the Company on behalf of
A.M. Best Company. The analysts informed the Companys
management that they believed it was most likely that the A-
rating of Penn Millers Insurance Company (PMIC), the
Companys principal insurance subsidiary, be affirmed but
that a negative outlook would be assigned. The
analysts made it clear that their concerns rested with the
Companys historical profitability relative to a peer group
comprised of many larger insurance companies. They agreed that
many of the challenges were due to the small size of the Company.
On April 29, 2011, the Lion Fund, L.P., Biglari Capital
Corp., Biglari Holdings, Inc. and Sardar Biglari (collectively,
the Biglari interests) filed a Schedule 13D
with the Securities and Exchange Commission disclosing the
purchase of 416,598 shares of Company common stock,
representing approximately an 8% ownership position. The
Schedule 13D indicated that the Biglari interests intended
to evaluate their investment and might communicate with
management and the board regarding the Companys business
and future plans as well as acquire or dispose of additional
shares. Management reviewed publicly available information about
the Biglari interests and observed a track record that had
included making at least one hostile offer for corporate control
of a company at a price only marginally above market. In the
first week of May 2011, the board held a telephone conference to
discuss this investment and its implications to the Company and
its consideration of strategic alternatives. The board took note
of the fact that no representative of the Biglari interests had
made any effort to contact the Company. In the totality of the
circumstances, the judgment of the board was that the actual and
potential activities of the Biglari interests, in themselves,
represented a serious threat to the best interests of other
shareholders, and therefore added urgency to the internal
evaluation of strategic alternatives.
On May 6, 2011, the Companys board held a telephonic
meeting, attended by a representative of the law firm Ballard
Spahr LLP (Ballard). With particular concern about
the position taken by A.M. Best, and also taking into
account the actions of the Biglari interests, the board of
directors discussed whether or not to engage Ballard as special
counsel to the Companys independent directors to assist
and advise with respect to the assessment of the Companys
strategic alternatives.
On May 9, 2011, the board held a special telephonic
meeting, attended by the Companys Chief Financial Officer
and a representative of Ballard. During that meeting, the
independent directors asked for details about Ballards
expertise and experience in advising boards of directors on
strategic alternative reviews and posed questions calling for
legal advice and discussion of legal issues. Following the
initial portion of the meeting,
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management provided a presentation to the board on strategic
planning, the industrys environment and financial
projections under alternative business scenarios. The board of
directors also decided to retain Ballard as special counsel to
the independent directors and to begin seeking a financial
advisor. Ballard represents and counsels ACE in certain
financial guarantee bond litigation, none of which is related to
the Merger, for which Ballard receives customary fees and
appropriate conflict waivers were obtained. None of the lawyers
who provide such services to ACE were involved in representing
the board of directors and the special committee in connection
with the Merger. The independent directors considered a number
of financial advisors and decided to interview two firms in
person as candidates.
On May 10, 2011, the board held a meeting at the
Companys headquarters in Wilkes-Barre, Pennsylvania,
attended by the Companys Chief Financial Officer and a
representative of Ballard. During that meeting, the board
interviewed a financial advisor candidate. The board also
discussed, among other matters, Biglaris stock ownership
position in the Company, the Companys A.M. Best
rating and long-range strategic alternatives. The meeting
concluded with an executive session from which management was
excluded.
The following day, on May 11, 2011, the board reconvened at
the Companys headquarters with the Companys Chief
Financial Officer and representatives of Ballard. The board also
interviewed Willis Capital Markets & Advisory to act
as financial advisor. At this meeting, the board also authorized
the formation of a Special Committee, consisting entirely of
independent directors, to oversee the consideration of strategic
alternatives.
By mid-May 2011, the board of directors had completed
interviewing financial advisors for the independent directors on
the review of strategic alternatives, and the independent
directors retained Willis Capital Markets & Advisory
in addition to Ballard. The board also appointed a special
committee of independent directors (the Special
Committee), consisting of Heather M. Acker, F. Kenneth
Ackerman, Jr., Dorrance Belin, John M. Coleman and Donald
A. Pizer, chaired by Mr. Coleman, to work with the
advisors. The meeting concluded with an executive session from
which management was excluded.
On May 19, 2011, the Special Committee held its first
meeting, attended by the Companys Chief Executive Officer
and representatives of both Ballard and Willis Capital
Markets & Advisory. The Special Committee discussed
the A.M. Best analysts indication that they believed
that PMICs A- rating would most likely be assigned a
negative outlook, the impact that would result from a negative
outlook, and the risk and likely consequences of a downgrade,
including destruction of shareholder value.
On May 21, 2011, the Special Committee held another
telephonic meeting, attended by the Companys Chief
Executive Officer and a representative of Ballard. The
Companys Chief Executive Officer described
managements recent contacts with A.M. Best. He also
reported to the Special Committee on Willis Capital
Markets & Advisorys progress in considering
strategic alternatives and developing a list of potential
buyers; 27 companies were on an initial list.
On May 23, 2011, the board held a telephonic meeting,
attended by representatives of Ballard, to discuss the Special
Committees recent activities and the charter of the
Special Committee, which contained the duties and
responsibilities of the Special Committee. The board discussed
the initial list of potential buyers that could be contacted in
the event the board determined to commence a third-party
solicitation process. The board authorized management to
disclose to A.M. Best, under assurances of confidentiality,
the nature and status of the ongoing strategic review.
On May 23, 2011, management provided representatives of
A.M. Best with additional confidential information on the
Companys business plan, price increases obtained in the
commercial book of business year to date and updated financial
projections through 2013. Management also disclosed, in
confidence, the strategic alternative review process and the
likelihood that the Company would be sold to a larger
organization with an interest in our specialty expertise in
agribusiness. On the basis of that information, management
requested that A.M. Best affirm the Companys A-
rating with a stable outlook.
On May 27, 2011, the Special Committee held a telephonic
meeting, attended by the Companys Chief Executive Officer
and representatives of Ballard and Willis Capital
Markets & Advisory. The Companys Chief Executive
Officer reported that A.M. Bests committee intended
to consider PMICs rating on either June 2 or
21
June 3. The Special Committee again reviewed the decision
to pursue strategic alternatives. The board also reviewed with
management and Willis Capital Markets & Advisory a
list of 30 potential buyers that could be contacted in
connection with the Companys third-party solicitation
process.
On May 27, 2011, the board also held a meeting where it
learned that, with knowledge of the ongoing review of strategic
alternatives and serious consideration of a sale of the Company,
A.M. Best affirmed the A- rating with a stable
outlook for PMIC. While the Company has a very strong
capital position to support the A- rating, in the judgment of
the board the fact that A.M. Best had been informed of the
pending review of strategic alternatives and that there was a
substantial likelihood that the Company would be sold to a
financially stronger buyer had been material in
A.M. Bests decision to maintain the stable outlook.
In light of that, the board again discussed with management and
Willis Capital Markets & Advisory the process for
compiling a list of potential parties to contact, which included
30 potential buyers. The board suggested some additional
candidates for consideration and also discussed the timeline for
a potential sale process.
Also in May 2011, the board received a monthly report indicating
that the Companys revenues were estimated to be below
managements business plan. In addition, the Company
experienced heavy catastrophic losses in that month.
On June 2, 2011, the Special Committee held a telephonic
meeting, attended by the Companys Chief Executive Officer
and representatives of Ballard and Willis Capital
Markets & Advisory. The Companys Chief Executive
Officer reported on A.M. Bests May 31, 2011
press release, which reaffirmed PMICs A- rating with a
stable outlook. The Special Committee discussed the continuing
risk of a negative outlook or downgrade, concluding
that the risk was substantial, and also further discussed
strategic alternatives.
On June 3, 2011, the board held a telephonic meeting,
attended by representatives of Ballard and Willis Capital
Markets & Advisory, to discuss A.M. Bests
rating action and the ongoing review of strategic alternatives.
On June 8, 2011, the board held a meeting at the
Companys headquarters, attended by the Companys
Chief Financial Officer and representatives of Ballard and
Willis Capital Markets & Advisory. Willis Capital
Markets & Advisory discussed with the board certain
strategic alternatives available to the Company. The board
discussed and evaluated (i) the status quo
alternative of remaining independent and its impact on
shareholder value, (ii) options other than remaining
independent or selling the Company, such as restructuring the
Company or selling a minority interest in the Company,
(iii) what price levels would make it attractive to sell
the Company; and (iv) whether to authorize Willis Capital
Markets & Advisory to begin contacting potential
buyers to determine what value might be realized for the
Companys shareholders in a potential strategic
transaction. Management and Willis Capital Markets &
Advisory suggested that the board consider pursuing a sale of
the Company, assuming an acceptable price per share could be
realized. The boards Compensation Committee also met to
discuss the financial impact resulting from a possible change of
control on compensation of officers, employees and directors.
After discussion, the board authorized Willis Capital
Markets & Advisory to contact third parties to gauge
their interest in an acquisition of the Company. The meeting
concluded with an executive session from which management was
excluded.
On June 17, 2011, the Special Committee held a telephonic
meeting, attended by the Companys Chief Executive Officer
and representatives of Ballard and Willis Capital
Markets & Advisory. Willis Capital Markets &
Advisory informed the Special Committee that, in accordance with
the directives of the board, 49 potential buyers had been
contacted, five nondisclosure agreements (NDAs) had
been signed, five other companies were negotiating NDAs and it
was waiting to hear from 22 of the potential buyers. In
accordance with the directives of the board, Willis Capital
Markets & Advisory planned to distribute a
confidential information memoranda on behalf of the Company
describing the Companys business and prospects to the
potential buyers that had signed NDAs. Willis Capital
Markets & Advisory advised the board that the list of
potential buyers consisted of both strategic and financial
buyers.
On June 28, 2011, the Special Committee held a telephonic
meeting, attended by the Companys Chief Executive Officer
and representatives of Ballard and Willis Capital
Markets & Advisory. Willis Capital Markets &
Advisory informed the Special Committee that 19 NDAs had been
signed by potential buyers.
22
Willis Capital Markets & Advisory also reviewed with
the Special Committee a draft of the bid instruction letter for
the potentially interested parties. The bid letter included a
request that initial indications of interest be submitted by
July 19, 2011, after which the board would decide which
potential buyers to invite to participate in the second round.
On July 1, 2011, the Special Committee held a telephonic
meeting, attended by the Companys Chief Executive Officer
and representatives of Ballard and Willis Capital
Markets & Advisory. Willis Capital Markets &
Advisory reviewed with the Special Committee the potential
buyers that had been contacted and the Special Committee
discussed each of the potential partners, which included
strategic and financial buyers.
On July 21, 2011, the Special Committee held a telephonic
meeting, attended by the Companys Chief Executive Office
and representatives of Ballard and Willis Capital
Markets & Advisory. Willis Capital Markets &
Advisory informed the Special Committee that the list of
potential partners had been expanded to 56, of which 27 received
a Confidential Information Memorandum. On behalf of the Company,
Willis Capital Markets & Advisory received six initial
indications of interest by the July 19, 2011 deadline, with
valuations ranging from $15.95 to $22 per share. The Special
Committee discussed these valuations and reviewed significant
geopolitical and industry developments since May 11, 2011,
when the Special Committee and Willis Capital
Markets & Advisory had initially discussed a possible
sale, and also reviewed certain of the challenges that the
Company faced before Biglari began acquiring its stake in the
Company, such as the risk of a negative outlook
and/or
downgrade in the Companys A.M. Best rating, the lack
of fundamental improvement in the market faced by the industry
and that the Companys second quarter catastrophic losses
have been significant. This discussion reaffirmed the Special
Committees conclusion that pursuing a sale appeared to be
the best alternative to prevent destruction of shareholder value
and serve the best interests of the Company and its
shareholders. The Special Committee also reviewed each of the
six potential buyers who had progressed to this stage and their
respective indications of interest, and decided, after
consultation with Willis Capital Markets & Advisory,
to invite five bidders to participate in the second round. In
addition, Willis Capital Markets & Advisory informed
the Special Committee that another potential buyer had indicated
an interest in acquiring the Company and signed the necessary
agreement to obtain a Confidential Information Memorandum. The
meeting concluded with an executive session from which
management was excluded.
On July 25, 2011, the board held a meeting at the
Companys headquarters in Wilkes-Barre, Pennsylvania,
attended by the Companys Chief Financial Officer and
representatives of Ballard and Willis Capital
Markets & Advisory. Willis Capital Markets &
Advisory presented an outline of the sale process and the six
preliminary indications of interest that had been received by
the July 19, 2011 deadline. The board extensively discussed
each of the six potential buyers who had provided formal
preliminary indications of interest as well as the additional
company that had indicated an interest in acquiring the Company.
The board also discussed a potential third- party solicitation
process timeline, which included sending a draft of the merger
agreement to five of the potential buyers the following week and
management meetings with parties invited to the second round.
The meeting concluded with an executive session from which
management was excluded.
On July 30, 2011, the Special Committee held a telephonic
meeting, attended by the Companys Chief Executive Officer
and representatives of both Willis Capital Markets &
Advisory and Ballard. The purpose of the meeting was to discuss
managements meetings with the potential buyers and to
discuss managements presentations to potential buyers,
which were scheduled to occur between August 2, 2011 and
August 11, 2011.
On August 5, 2011, the Special Committee held a telephonic
meeting, attended by the Companys Chief Executive Officer
and representatives of Willis Capital Markets &
Advisory and Ballard. At that meeting, the Special Committee
discussed managements presentations to potential buyers to
date and also set August 25, 2011 as the final bid
deadline. In addition, the Special Committee authorized
circulation of a draft merger agreement to all potential buyers.
The meeting concluded with an executive session from which
management was excluded.
On August 10, 2011, the Special Committee met by telephone.
The meeting was also, attended by the Companys Chief
Executive officer as well as representatives of both Willis
Capital Markets & Advisory and Ballard. Among other
topics, the Special Committee discussed the remaining potential
buyers. Willis Capital
23
Markets & Advisory suggested that the Company consider
issuing a public statement, in light of recent geopolitical
events and associated extreme volatility in the securities
markets and taking into account that although a public
announcement would be likely to generate uncertainty among
employees and other constituents, by this advanced point in the
process it appeared reasonably likely that the Company would be
able to minimize those disruptions. Management added that
although there did not appear to have been any leaks so far, the
increasing frequency of meetings by management with prospective
buyers might increase speculation and rumors in the community
and it would be desirable to take steps to prevent the
possibility of speculative trading in the Companys stock
based upon information not equally available to all
shareholders. A press release at this point would also alert any
third party that might have an interest in the Company and could
thereby serve as yet another cross-check on the completeness of
the process of shopping the Company. The Special Committee
approved recommending to the board of directors the text of a
proposed public statement disclosing the process of reviewing
potential strategic opportunities.
On August 10, 2011, the board held a telephonic meeting
with representatives of Ballard and Willis Capital
Markets & Advisory. Among other things, the board
approved a public statement disclosing the process of reviewing
potential strategic opportunities. The meeting concluded with an
executive session from which management was excluded.
On August 12, 2011, the Company reported its second quarter
results ended June 30, 2011. The Company was adversely
impacted by unprecedented catastrophe losses in the second
quarter of 2011 that accounted for approximately 40 loss ratio
points of its 101.1% second quarter loss ratio. For the three
months ended June 30, 2011, PMIC reported a net loss of
$4.4 million. For the six months ended June 30, 2011,
PMIC reported a net loss of $2.5 million.
On August 15, 2011, a press release describing the
strategic alternatives review was released.
On August 17, 2011, the Special Committee held a telephonic
meeting, attended by the Companys Chief Executive Officer
and representatives of Ballard and Willis Capital
Markets & Advisory. The Special Committee discussed
Willis Capital Markets & Advisorys contacts with
the remaining four potential buyers and received updates on each
of those candidates (prior to this meeting, two potential buyers
indicated that they were no longer interested in acquiring the
Company). Management also reported on contacts with
A.M. Best and the Pennsylvania Department of Insurance,
which preceded the August 15, 2011 press release. The
meeting concluded with an executive session from which
management was excluded.
On August 19, 2011, the Special Committee held a telephonic
meeting, attended by the Companys Chief Executive Officer
and representatives of Willis Capital Markets &
Advisory and Ballard. The Companys Chief Executive Officer
and Willis Capital Markets & Advisory informed the
Special Committee that management presentations for all four of
the current potential buyers had been completed and some of the
potential buyers were conducting a due diligence review of the
Company. The meeting concluded with an executive session from
which management was excluded.
On August 20, 2011, the Special Committee held a telephonic
meeting with the Companys Chief Executive Officer and
representatives of both Willis Capital Markets &
Advisory and Ballard to discuss the current potential buyers as
well as to consider again whether the Company should remain
independent. Management presented a plan for remaining
independent, which called for significant restructuring and
expense reductions with significant staff reductions. After
discussing managements presentation, the Special Committee
concluded that the proposed plan would not provide significant
meaningful value and, on the contrary, could put shareholder
value materially at risk. The meeting concluded with an
executive session from which management was excluded.
On August 24, 2011, the Special Committee held a telephonic
meeting with the Companys Chief Executive Officer and
representatives of Ballard and Willis Capital
Markets & Advisory. The Special Committee discussed
each of the potential buyers. The Special Committee also
discussed the Companys exposure to the then-approaching
Hurricane Irene, which could negatively affect third quarter
earnings and, potentially, the value of the bids. The Special
Committee also discussed alternatives to a strategic
transaction, which would involve remaining independent with
significant restructuring and expense and employee
24
reductions if a satisfactory strategic transaction opportunity
did not occur. The meeting concluded with an executive session
from which management was excluded.
On August 25, 2011, ACE provided a cash offer of $20.00 per
share. The next day, on August 26, 2011, Bidder B
provided a cash offer in the range of $18.50-$19.00 per share,
subject to completion of the bidders review of the
Companys reserves. On August 26, 2011, the Special
Committee met by telephone to discuss the current bids and the
advantages and disadvantages of pursuing a strategic opportunity
with ACE or Bidder B. The Special Committee also discussed
the possibility of a substantial change to the Companys
book value as a result of recent storm activity. The meeting
concluded with an executive session from which management was
excluded.
On August 26, 2011, Bidder C provided a cash offer of
$20.75 per share, subject to an additional
30-day due
diligence period. The next day, on August 27, 2011, the
Special Committee held a telephonic meeting with the
Companys Chief Executive Officer and representatives of
Willis Capital Markets & Advisory and Ballard to
discuss the bids that had been delivered by ACE, Bidder B
and Bidder C. Willis Capital Markets & Advisory
advised the Special Committee that the total package of the
offer presented by ACE could be superior to the other two offers
if ACE could be persuaded to move above its $20.00 offer. The
offer by Bidder B was significantly lower than the ACE
offer and Willis Capital Markets & Advisory explained
to the Special Committee why it was judged unlikely that
Bidder B would revise its bid to offer more value to our
shareholders than ACEs bid. Those reasons included the
fact that Bidder Bs current proposal to acquire the
Company would have provided less value to shareholders than its
initial indication of interest and statements made by the
leadership of Bidder B to management and Willis Capital
Markets & Advisory in meetings and telephone calls
during the Companys review of strategic alternatives. In
those statements, Bidder Bs chief executive officer
and the chief of Bidder Bs relevant business unit
emphasized Bidder Bs unwillingness to pay more than
book value for the Company. Willis Capital Markets &
Advisory advised the Special Committee that while the offer from
Bidder C was the highest from a financial point of view,
Bidder C had not completed due diligence regarding
underwriting, claims, finance and human resources; the bid
itself was conditioned upon a much longer period of additional
due diligence than would be required for ACE; and the proposal
by Bidder C carried with it additional uncertainties and
risks, including the fact that Bidder C has only an A-
rating from A.M. Best (in contrast with a strong A+ rating
of ACE); Bidder Cs relatively high debt leverage and
its need to borrow funds externally to consummate a transaction
with the Company (in contrast to ACEs ability to fund the
transaction); and the relatively high likelihood that the
financial performance of the Company in the third quarter could
result in a reduction in the offer price. In totality, these
uncertainties and risks presented a risk of a reduction in the
offer price and/or failed execution that the Special Committee
judged to be materially greater than those associated with the
ACE bid. The meeting concluded with an executive session from
which management was excluded.
On August 29, 2011, the board met along with
representatives of both the Companys management, Ballard
and Willis Capital Markets & Advisory, to discuss the
Companys strategic challenges and alternatives, such as
remaining independent or a potential sale, as well as the
advantages and disadvantages of each of the bids that had been
offered by ACE and Bidders B and C. The board also discussed
Hurricane Irenes impact on the Company and the number of
claims that had been made so far. Willis Capital
Markets & Advisory presented a report that discussed
all potentially interested buyers to the board. The meeting
concluded with an executive session from which management was
excluded.
Based on the range of the bids received, Willis Capital
Markets & Advisory suggested that ACE increase its
offer to $21.00 per share and ACE agreed to do so, which
represented a 30% premium to the current price of the
Companys common stock. Willis Capital Markets &
Advisory then recommended that the board negotiate with ACE in
order to determine if a deal could be consummated on terms
agreeable to both parties. Willis Capital Markets &
Advisory reported that ACE had a compelling rationale for
pursuing a strategic relationship with the Company, ACE had
completed far more due diligence than either Bidder B or
Bidder C and remained enthusiastic and committed to the
potential transaction, ACE had a large market capitalization,
and ACE did not need any external financing to complete the
transaction. In addition, ACEs agribusiness was
complementary to the Companys operations and vice versa
and a partnership with ACE could potentially grow the
Companys franchises. Moreover, ACE anticipated maintaining
the Companys Wilkes-Barre location. As part of its bid,
ACE requested that the Company negotiate with ACE on an
exclusive basis for four weeks.
25
Willis Capital Markets & Advisory recommended sharply
curtailing that period and the Company indicated that it would
consider entering into an exclusivity agreement with ACE through
September 6, 2011. The board also instructed Ballard to
discuss and attempt to negotiate the exclusivity agreement and
the Agreement with ACEs counsel and instructed all
advisors and management to continue communicating with ACE
regarding due diligence matters. ACE subsequently agreed to
increase its proposed purchase price to $21.00 per share, which
represented a 30% premium to the current price of the
Companys common stock. On August 29, 2011, the
Company entered into an exclusivity agreement with ACE, which
expired on September 6, 2011. During the period from
August 29, 2011 through September 6, 2011, ACE
continued to conduct due diligence on the Company and the
Company provided ACE with certain due diligence materials
requested by ACE, including updated financial projections for
the Companys 2011 fiscal year.
On September 1, 2011, the board held a meeting at the
Companys headquarters in Wilkes-Barre, Pennsylvania.
Representatives of Willis Capital Markets & Advisory
and Ballard were in attendance. Among other things, the board
discussed the recent interactions with Bidders B and C. The
board was informed that Bidder B had contacted Willis
Capital Markets & Advisory and expressed
disappointment, but that Bidder B did not provide a higher
offer. The board also was informed that Bidder C still
required additional time to complete its review of the Company,
and the board again discussed the execution risks associated
with Bidder Cs proposal. Willis Capital
Markets & Advisory also informed the board that ACE
had indicated that it remained enthusiastic about pursuing a
strategic opportunity with the Company and the board further
discussed the benefits of a partnership with ACE. The board also
discussed the timeline for announcing a transaction. In
addition, the board discussed the second quarter financial
results, including the Companys losses as a result of
storm activity, including those relating to Hurricane Irene. The
meeting concluded with an executive session from which
management was excluded.
On September 4, 2011, the Special Committee held a
telephonic meeting with representatives of Ballard and Willis
Capital Markets & Advisory to discuss the status of
negotiations with ACE and due diligence efforts, among other
issues.
On September 4 and 5, 2011, Willis Capital Markets &
Advisory had several conversations with representatives of ACE
during which ACEs representatives reported that ACE
intended to reduce the value of its $21.00 offer because of
losses incurred from Hurricane Irene, unaccrued costs associated
with settling the Companys pension obligation, and
additional Company expenses incurred as a result of the proposed
transaction.
On September 5, 2011, the board held a telephonic meeting,
attended by representatives of Willis Capital
Markets & Advisory and Ballard. Willis Capital
Markets & Advisory updated the board on the ACE price
developments. The board asked Willis Capital Markets &
Advisory to respond to ACEs recent request to reduce the
price and to indicate that the request is unacceptable to the
board. The meeting concluded with an executive session from
which management was excluded. Following such meeting,
representatives of Willis Capital Markets & Advisory
contacted representatives of ACE to express the boards
views.
On September 6, 2011, a representative of ACE contacted
Willis Capital Markets & Advisory, indicating that ACE
would deliver a revised offer letter to Willis Capital
Markets & Advisory on behalf of the Company later in
the day. Later that day, the board held a meeting with
representatives of Willis Capital Markets & Advisory
and Ballard to discuss updates and strategies regarding
negotiations with ACE. During such meeting, Willis Capital
Markets & Advisory received a letter from ACE
proposing an offer of $20.45 per share, expiring the next day.
The meeting concluded with an executive session from which
management was excluded. The Special Committee met later that
day to further discuss ACEs revised offer. Following the
meeting, the Special Committee requested that Willis Capital
Markets & Advisory advise ACE that the board would be
prepared to enter into a definitive agreement with ACE at $20.75
per share. In accordance with the Special Committees
directives, Willis Capital Markets & Advisory relayed
the information to ACE.
Later on September 6, 2011, the board held another
telephone meeting with representatives of Willis Capital
Markets & Advisory and Ballard. It was communicated to
the board that representatives of Willis Capital
Markets & Advisory would indicate to ACE that the
board would be prepared to enter into a definitive
26
agreement with ACE at $20.75 per share, which Willis Capital
Markets & Advisory conveyed following such meeting.
The meeting concluded with an executive session from which
management was excluded.
On September 7, 2011, a representative of ACE contacted
representatives of Willis Capital Markets & Advisory
with ACEs last and final offer of $20.50 per share with
expiration the same day.
Later on September 7, 2011, the Special Committee met to
discuss ACEs final offer of $20.50 per share. The Special
Committee consulted Willis Capital Markets & Advisory
and Ballard and discussed the possibility of rejecting the final
offer and reopening negotiations with other bidders. The Special
Committee determined that the likelihood of obtaining a better
offer from another bidder was insufficient to justify subjecting
shareholders and other constituents to the risks attendant to
rejecting ACEs proposal and unanimously decided to
recommend accepting ACEs final offer.
Later the same day, the board held a meeting, attended by
representatives of management, Ballard and Willis Capital
Markets & Advisory. At this meeting, Ballard reviewed
with the board the terms of the merger agreement as well as the
fiduciary obligations of the board in connection with a
potential sale of the Company. The board also reviewed the
third-party solicitation process conducted by the Company in
which a total of 56 potential buyers were contacted, 27 NDAs
were signed and seven initial indications of interest and three
final proposals were received. Also at this meeting, Willis
Capital Markets & Advisory reviewed with the board of
directors its financial analysis of $20.50 per share cash
consideration and rendered to the board of directors its oral
opinion, confirmed by delivery of a written opinion dated
September 7, 2011, to the effect that, as of that date and
based upon and subject to the factors, qualifications,
limitations and assumptions stated in the written opinion, the
$20.50 per share cash consideration to be received in the merger
by holders of the Companys common stock was fair, from a
financial point of view, to such holders. Willis Capital
Markets & Advisory explained in detail the reasons for
its opinion. After discussion, the board determined that
accepting ACEs offer and pursuing the proposed transaction
with ACE was in the best interests of the Company and the
Companys shareholders. The meeting concluded with an
executive session from which management was excluded.
On the evening of September 7, 2011, the Company, ACE and
Merger Sub executed the merger agreement and, on
September 8, 2011, the Company announced that it had
entered into a merger agreement with ACE. The following day, on
September 9, 2011, A.M. Best announced that it had
placed under review with positive implications the financial
strength rating of A- and issuer credit ratings of
A− of Penn Millers Insurance Group, which
includes Penn Millers.
Reasons
for the Merger and Recommendation of Penn Millers Board of
Directors
The
Companys Reasons for the Merger
In a meeting held on September 7, 2011, the Companys
board of directors considered the terms of the Merger Agreement
and the transactions contemplated and determined them to be in
the best interests of the Company and its shareholders. Having
considered, among other things, the professional advice of its
expert independent advisors, the board of directors believes
that the Merger will maximize value and minimize risks for the
Companys shareholders, that it is in the best interests of
the Company and its shareholders, and that it is a more
attractive option for the Companys shareholders than any
other reasonably available option, including continuing to
operate the Company on an independent, stand-alone basis. In
evaluating the Merger, the Companys board of directors
consulted with management, as well as independent legal and
financial advisors, regularly met with the independent
directors advisors in sessions that excluded all members
of management, and considered the totality of the circumstances,
including the following:
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The Companys Business and Prospects. The
board of directors considered, on a historical and prospective
basis, the Companys business, financial condition, results
of operations and book value, including trends in the insurance
industry, underwriting performance, and return on equity. The
board of directors also considered the market price, trading
float, and volatility of the Companys common
stock. The board of directors considered all of these factors in
light of what it judged to be a high likelihood of destruction
of shareholder value if A.M. Best were to downgrade or
impose a negative
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outlook on the Company because of its small size, an event
as to which the board believed there was substantial near-term
risk.
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The Challenges Facing the Company in Achieving the Goals of
its Business Plans. The board of directors
considered the fact that management had not achieved the goals
it had set for itself in its business plans for two of the
preceding three years. The board acknowledged that portions of
those shortfalls had been the results of factors beyond
managements control including the extended
recession in the United States, aggressive pricing by
competitors, and elevated catastrophic losses but
decided, based on the totality of managements track
record, that it was important to discount managements
projections for execution risk.
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The Challenges Facing the Company as a Smaller Independent
Company. The board of directors also considered
the risks and benefits associated with the Companys
efforts and plans to conduct its business as an independent,
stand-alone company as compared to the risks and benefits
associated with the Merger. The board considered that in
operating as a relatively small, stand-alone public company, the
Company faces high cost ratios (including, for example,
relatively high costs of reinsurance and the costs of operating
as a public company), impaired net profits, and continuing, and
sometimes conflicting, pressures from customers, agents,
competitors, regulatory agencies, financial analysts and
independent rating agencies. The Companys market
capitalization is among the lowest of its peer group and in the
judgment of the board of directors, but for the possibility that
the Company is sold in the near term, its stock would return to
trading at a substantial discount to peer companies. The
Companys lack of scale and relatively high cost structure
limit the Companys ability to weather market downturns or
to grow significantly without engaging in a merger or
acquisition transaction. The Company expects that this merger
will enable its shareholders not only to realize a significant
premium that is not likely to be achieved within a reasonable
period of time as a stand-alone company, but also to avoid
considerable near-term risks of destruction of shareholder value.
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The Impact of Difficult Economic
Conditions. The independent directors considered
the Companys prospects as an independent public company in
light of current difficult economic conditions in the United
States. The board of directors considered that economic
conditions, among other factors, have resulted in declines and
losses in the insurance industry and that the longstanding
so-called soft market may continue, which would
impede the Companys growth. The board of directors
concluded that there were significant risks associated with
deferring the decision to sell the Company, particularly in
light of the current outlook for the economy and its impact on
the market price of the Companys common stock if the
possibility of prompt sale of the Company were taken off the
table. In particular, the board considered the current volatile
state of the economy and general uncertainty surrounding
forecasted economic conditions, in the short-term and in the
long-term, both globally and within the insurance industry.
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The Thorough, Disciplined Process Followed in Evaluating
Strategic Alternatives and Shopping the Company and the Low
Likelihood that a Third Party Would Propose an Acquisition at a
Higher Price. The board of directors oversaw a
meticulously designed process of reviewing strategic
alternatives advised by individuals from Willis Capital
Markets & Advisory and Ballard each of whom was a
highly experienced and respected specialist in mergers and
acquisitions, including transactions in the insurance industry,
and a management team with considerable experience and expertise
in the industry. The board of directors considered the
third-party solicitation process conducted by the Company with
the assistance of management and advisors, which included
contacting more than 50 potential buyers over a period of months
and publicly announcing the existence of the process weeks
before it was brought to a conclusion. The board of directors,
which itself includes individuals with pertinent knowledge and
experience, repeatedly took time to discuss which third parties
would most likely be both interested in acquiring the Company
and qualified to do so from a financial, strategic, and
knowledge standpoint, including parties that had made
non-binding acquisition proposals to the Company, and ultimately
concluded that the likelihood that any of those third parties
would make an all-cash offer on better terms than those offered
and agreed to by ACE and with lower execution risk than the ACE
proposal was remote. The board took into account that although a
significant number of prospective financial
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buyers (i.e., private equity firms and other entities that
currently have no insurance assets that would offer synergies to
increase available value) were contacted and some received the
Companys confidential information memoranda, no financial
buyers were invited to the second round of the process given
their less competitive bids. The board also took into account
that no credible partner candidate emerged over the period of
more than three weeks that elapsed between the public
announcement of the process and the boards consideration
of the transaction with ACE. Nor has any such candidate
materialized to date. The board frequently solicited the advice
of both Willis Capital Markets & Advisory and Ballard
on the fairness and adequacy of the process being followed. The
board was advised by both Willis Capital Markets &
Advisory and Ballard at every stage, including during
consideration of ACEs final offer, that the process that
the board had followed had been thorough and disciplined.
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The Ability of the Board of Directors to Change its
Recommendation and Terminate the Merger Agreement and that the
Break-Up
Fee and Other Deal Protection Measures Were Not
Preclusive. The board of directors considered the
fact that the merger agreement allows the Company to respond to
unsolicited takeover proposals, to change or withdraw its
recommendation to the Companys shareholders with respect
to the adoption of the Merger Agreement and to terminate the
Merger Agreement to enter into an alternative agreement relating
to a superior proposal, subject, in certain situations, to the
payment to ACE of a 3.5% ($3.75 million)
break-up
termination fee. The board considered the provisions in the
Merger Agreement, including the non-solicitation provision, and
determined in its reasonable judgment that such provisions would
not preclude other interested third parties from submitting a
competing offer for the Company. In particular, the board of
directors considered the size of the
break-up
fee and determined that, at 3.5% of the aggregate value of the
transaction, it was reasonable in light of the benefits of the
Merger and would not, in the boards reasonable judgment,
preclude other interested third parties from making a competing
offer for the Company.
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The High Likelihood that the Transaction with ACE will be
Completed. The board of directors considered
ACEs particularly strong financial condition, the
extensive amount of due diligence performed by ACE and the
relatively limited conditions to the closing of the Merger,
including the facts that the Merger Agreement does not contain
any financing contingency and that the ACE proposal will be
funded with internally generated cash, and determined that, in
its judgment and assuming adoption of the Merger Agreement by
the Companys shareholders, there is a high likelihood that
the proposed transaction with ACE will be completed.
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Shareholder Approval. The board of directors
considered the fact that the merger is subject to the approval
of the Companys shareholders, who therefore have the
option to reject the merger by voting against the proposal to
adopt the Merger Agreement, as further described in this proxy
statement. The board also took into account that a large
majority of the Companys stock is owned by institutional
and other highly sophisticated investors, many of whom acquired
their shares in the initial public offering.
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The Reputation and Business Practices of
ACE. The board of directors recognized that
relative to other potential purchasers of the Company, ACE has a
corporate culture and business practices highly compatible with
those of the Company, which will make a successful merger and
business transaction more likely. Moreover, the board of
directors recognized that ACEs existing agribusiness
insurance operation is complementary to the Companys
operations, and vice versa, and a partnership with ACE could
potentially grow the Companys franchises.
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ACEs Intentions for the Operations of the
Company. Prior to approving the Merger Agreement,
ACE communicated its intention to keep the Companys
Wilkes-Barre business location operational.
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The Terms of the Merger Agreement. The board
of directors considered all of the terms and conditions of the
Merger Agreement, including, among other things, the
representations, warranties, covenants and agreements of the
parties, the conditions to closing, the form of the Merger
Consideration and the structure of the termination rights, and
the fact that the Merger Agreement was negotiated between two
parties in an arms-length negotiation.
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29
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The Opinion and Professional Advice of Willis Capital
Markets & Advisory. The board of
directors considered the opinion, dated September 7, 2011,
of Willis Capital Markets & Advisory, contained in
Annex B to this proxy statement, to the
Companys board of directors, as well as the advice given
to the board by Willis Capital Markets & Advisory
throughout the process and in the September 7 meeting.
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The Professional Advice of Both Ballard and Willis Capital
Markets & Advisory Regarding the Design and Execution
of the Process. The board of directors considered
the advice given to the board by Ballard and Willis Capital
Markets & Advisory at every stage of the process
regarding the design and execution of the process of review of
strategic alternatives. Those firms repeatedly advised the board
that the process followed had been thorough and rigorous.
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The board of directors also considered a variety of risks and
other potentially negative factors concerning the Merger and the
Merger Agreement, including the following:
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The risks and costs to the Company if the Merger does not close,
including the diversion of management and employee attention and
the effect on business and customer relationships;
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The fact that certain of the Companys officers and
directors may have interests in the Merger that are different
from, or in addition to, the interests of the Companys
shareholders, weighed against the facts that each of the
Companys independent directors beneficially owns
significantly more shares resulting from the investment of his
or her own funds than from awards by the Company, and that all
independent directors cease to receive director compensation or
benefits of any kind upon closing of the Merger;
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The amount of time it could take to complete the Merger,
including the fact that the consummation of the Merger is
subject to shareholder, governmental and regulatory approvals
and the lack of assurance that such approvals will be received
prior to December 31, 2011 (as such date may be extended)
or at all;
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That an all-cash transaction will be taxable to the
Companys shareholders that are U.S. persons for
U.S. federal income tax purposes; and
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The fact that a termination fee is payable to ACE under
specified circumstances, including in the event that the board
of directors decides to terminate the Merger Agreement to accept
a superior proposal.
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Recommendation
of Penn Millers Board of Directors
The board of directors unanimously recommends that you vote
FOR the adoption of the Merger Agreement,
FOR the approval of the nonbinding advisory proposal
regarding golden parachute compensation and
FOR approval of the proposal to adjourn the Special
Meeting, if necessary or appropriate, to solicit additional
proxies.
In considering the board of directors recommendation with
respect to the Merger Agreement, the holders of our common stock
should note that our executive officers may have interests in
the Merger that may differ from or be in addition to those of
our shareholders, and that members of the board of directors
received fees for their services in attending special board and
committee meetings to periodically review and oversee the
progress of the negotiations of the Merger Agreement by
management. Our independent directors also received grants of
stock options as a portion of the compensation for their service
on the board of directors. The board of directors was aware of
these potential interests as they considered the Merger and the
Merger Agreement. For more information, see The
Merger Interests of Our Executive Officers and
Directors in the Merger beginning on
page .
Opinion
of the Financial Advisor to the Independent Directors
The Company engaged Willis Capital Markets & Advisory
to act as the special committees financial advisor in
connection with a possible sale transaction. At a meeting of the
Companys board of directors held on September 7, 2011
to evaluate the Merger, Willis Capital Markets &
Advisory rendered its oral opinion, confirmed by a written
opinion dated September 7, 2011, to the Companys
board of directors to the effect
30
that, as of such date and based upon and subject to the factors,
qualifications, limitations and assumptions stated in its
opinion, the $20.50 per share cash consideration to be received
in the Merger by holders of Company common stock was fair, from
a financial point of view, to such holders. The full text of
Willis Capital Markets & Advisorys written
opinion, which sets forth, among other things, the assumptions
made, factors considered and qualifications and limitations upon
the review undertaken by Willis Capital Markets &
Advisory in rendering its opinion, is attached as Annex B
and is incorporated by reference in its entirety into this proxy
statement. This summary is qualified in its entirety by
reference to the full text of such opinion. Willis Capital
Markets & Advisorys opinion was provided for the
information of the Companys board of directors (in its
capacity as such) in its evaluation of the Merger Consideration
from a financial point of view and did not address any other
aspect of the Merger. Other than advising the Special Committee
and the board in the review of strategic alternatives, Willis
Capital Markets & Advisory expressed no view as to,
and its opinion did not address, the relative merits of the
Merger as compared to alternative business or financial
strategies that might be available to the Company, the effect of
any other transaction in which the Company might engage or the
Companys underlying business decision to engage in the
Merger. The opinion does not constitute a recommendation to any
holders of Company common stock as to how such holder should act
or vote in connection with the Merger or otherwise.
The terms of the Merger were determined through negotiations
between ACE and the Company and the decision by the Company to
enter into the Merger was solely that of the Companys
board of directors. Willis Capital Markets &
Advisorys opinion and financial analyses were only one of
the many factors considered by the board of directors in its
evaluation of the Merger and should not be viewed as
determinative of the views of the Companys board of
directors or management with respect to the Merger or the
consideration payable in the Merger. Willis Capital
Markets & Advisory did not recommend any specific form
or amount of consideration to the Company or that any specific
form or amount of consideration constituted the only appropriate
consideration for the Merger.
In connection with rendering its opinion, Willis Capital
Markets & Advisory reviewed, among other things:
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the Merger Agreement;
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certain publicly available financial statements and other
information of the Company, including the Companys annual
reports to shareholders and annual reports on
Form 10-K
for the fiscal years ended December 31, 2009 and 2010 and
quarterly reports on
Form 10-Q
for the periods ended March 31, 2011 and June 30, 2011;
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certain non-public financial and operating information relating
to the Company furnished to Willis Capital Markets &
Advisory by the Companys management, including certain
financial projections relating to the Company that were prepared
by the Companys management;
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the stock price trading history of Company common stock;
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a comparison of certain financial information of the Company
with similar information for other companies that Willis Capital
Markets & Advisory deemed relevant;
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a comparison of the financial terms of the Merger to the
financial terms, to the extent publicly available, of certain
other transactions that Willis Capital Markets &
Advisory deemed relevant; and
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the results of the Companys efforts, with Willis Capital
Markets & Advisorys assistance, to solicit
indications of interest from third parties with respect to a
possible acquisition of the Company.
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In addition, Willis Capital Markets & Advisory had
discussions regarding certain aspects of the Merger, as well as
past and current operations, financial projections, current
financial condition and prospects of the Company, including
strategic alternatives available to the Company, with certain
members of the Companys senior management and board and
performed such analyses and examinations and considered such
other factors that Willis Capital Markets & Advisory
deemed appropriate. In rendering its opinion, Willis Capital
Markets & Advisory assumed and relied upon, without
independent verification, the accuracy and completeness of all
financial and other information publicly available or provided
to or otherwise reviewed by or
31
discussed with Willis Capital Markets & Advisory and
further relied upon the assurances of the Companys
management that it was not aware of any facts or circumstances
that would make such information inaccurate or misleading. With
respect to the financial projections of the Company utilized in
its financial analyses, Willis Capital Markets &
Advisory assumed, upon the Companys advice, that such
projections were reasonably prepared on bases reflecting the
best currently available estimates and good faith judgments of
the future operating and financial performance of the Company.
Willis Capital Markets & Advisory expressed no view as
to any such financial projections or the assumptions on which
they were based.
In arriving at its opinion, Willis Capital Markets &
Advisory also assumed, upon the Companys advice, that the
representations and warranties of each party contained in the
Merger Agreement would be true and correct, that each party
would perform all of the covenants and agreements required to be
performed by it under the Merger Agreement and that all
conditions to the consummation of the Merger would be satisfied
without waiver or modification. Willis Capital
Markets & Advisory further assumed, upon the
Companys advice, that all governmental, regulatory or
other consents, approvals or releases necessary for the
consummation of the Merger would be obtained without any delay,
limitation, restriction or condition that would have an adverse
effect on the Company or the Merger.
Willis Capital Markets & Advisory is not an actuary
and its services did not include any actuarial determination or
evaluation or any attempt to evaluate actuarial assumptions,
allowances for losses or premium rates for liability insurance
and, accordingly, Willis Capital Markets & Advisory
made no analysis of, and expressed no opinion as to, the
adequacy of the Companys reserves for losses and loss
adjustment expenses, such premiums or other matters. Willis
Capital Markets & Advisory did not conduct a physical
inspection of the properties and facilities of the Company and
did not make, or assume any responsibility for making, any
independent valuation or appraisal of the assets or liabilities,
contingent or otherwise, of the Company or any of its
subsidiaries, nor was Willis Capital Markets &
Advisory furnished with any such appraisals, nor did Willis
Capital Markets & Advisory evaluate the solvency or
fair value of the Company or any of its subsidiaries under any
state or federal laws relating to bankruptcy, insolvency or
similar matters. Willis Capital Markets &
Advisorys opinion did not address any terms (other than
the per share Merger Consideration to the extent expressly
specified in its opinion) or other aspects or implications of
the Merger, including, without limitation, the form or structure
of the Merger or any other agreement, arrangement or
understanding to be entered into in connection with or
contemplated by the Merger or otherwise. Willis Capital
Markets & Advisory expressed no view as to, and its
opinion did not address, the fairness, financial or otherwise,
of the amount or nature or any other aspect of any compensation
to any officers, directors, or employees of any party to the
Merger, or any class of such persons, relative to the per share
Merger Consideration or otherwise. Willis Capital
Markets & Advisory also expressed no view or opinion
as to the prices at which Company common stock would trade at
any time.
Willis Capital Markets & Advisorys opinion is
necessarily based on economic, market and other conditions as in
effect on, and the information made available to Willis Capital
Markets & Advisory as of, the date of its opinion.
Subsequent developments may affect its opinion, and Willis
Capital Markets & Advisory does not have any
obligation to update, revise or reaffirm its opinion. As the
board of directors was aware, the credit, financial and stock
markets have been experiencing unusual volatility and Willis
Capital Markets & Advisory expressed no view or
opinion as to any potential effects of such volatility on the
Company or the Merger. Willis Capital Markets &
Advisory is not a legal, regulatory, accounting or tax expert
and assumed the accuracy and completeness of assessments by the
Company and its advisors with respect to legal, regulatory,
accounting and tax matters. Except as described in this summary,
the board of directors imposed no other instructions or
limitations with respect to the investigations made or the
procedures followed by Willis Capital Markets &
Advisory in rendering its opinion.
In connection with rendering its opinion to the board of
directors, Willis Capital Markets & Advisory performed
a variety of financial and comparative analyses which are
summarized below. The following summary is not a complete
description of all analyses performed and factors considered by
Willis Capital Markets & Advisory in connection with
its opinion. The preparation of a Willis Capital
Markets & Advisory opinion is a complex process
involving subjective judgments and is not necessarily
susceptible to partial analysis or summary description. With
respect to the selected public companies and selected precedent
32
transactions analyses summarized below, no company or
transaction used as a comparison was identical to the Company or
the Merger. These analyses necessarily involve complex
considerations and judgments concerning financial and operating
characteristics and other factors that could affect the public
trading or acquisition values of the companies concerned.
Willis Capital Markets & Advisory believes that its
analyses and the summary below must be considered as a whole and
that selecting portions of its analyses and factors or focusing
on information presented in tabular format, without considering
all analyses and factors or the narrative description of the
analyses, could create a misleading or incomplete view of the
processes underlying Willis Capital Markets &
Advisorys analyses and opinion. Willis Capital
Markets & Advisory did not draw, in isolation,
conclusions from or with regard to any one factor or method of
analysis for purposes of its opinion, but rather arrived at its
ultimate opinion based on the results of all analyses undertaken
by it and assessed as a whole.
The estimates of the future performance of the Company in or
underlying Willis Capital Markets & Advisorys
analyses are not necessarily indicative of future results or
values, which may be significantly more or less favorable than
those estimates. In performing its analyses, Willis Capital
Markets & Advisory considered industry performance,
general business and economic conditions and other matters, many
of which were beyond the control of the Company. Estimates of
the financial value of companies do not purport to be appraisals
or necessarily reflect the prices at which companies or
securities actually may be sold or acquired.
The following is a brief summary of the material financial
analyses performed by Willis Capital Markets &
Advisory and reviewed with the board of directors on
September 7, 2011. The financial analyses summarized
below include information presented in tabular format. In order
to fully understand Willis Capital Markets &
Advisorys financial analyses, the tables must be read
together with the text of each summary. The tables alone do not
constitute a complete description of the financial analyses.
Considering the data below without considering the full
narrative description of the financial analyses, including the
methodologies and assumptions underlying the analyses, could
create a misleading or incomplete view of Willis Capital
Markets & Advisorys financial analyses.
Selected Public Companies Analysis. Willis
Capital Markets & Advisory reviewed selected financial
and stock market data of the Company and the following 15
selected publicly traded regional property and casualty
insurance companies:
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AMERISAFE, Inc.
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Eastern Insurance Holdings, Inc.
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EMC Insurance Group Inc.
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Employers Holdings, Inc.
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Donegal Group, Inc.
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Hallmark Financial Services, Inc.
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Hanover Insurance Group, Inc.
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Harleysville Group Inc.
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Meadowbrook Insurance Group, Inc.
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SeaBright Holdings, Inc.
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Selective Insurance Group, Inc.
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State Auto Financial Corporation
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Tower Group, Inc.
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Unico American Corporation
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United Fire & Casualty Company
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33
Willis Capital Markets & Advisory reviewed, among
other things, equity market values, based on closing stock
prices of the selected companies on September 6, 2011, as a
multiple of fully diluted tangible book value per share as of
June 30, 2011 and calendar year 2012 estimated operating
earnings per share, referred to as EPS. Willis Capital
Markets & Advisory then applied selected ranges of
fully diluted tangible book value per share multiples of 0.75x
to 0.90x and EPS multiples of 8.0x to 14.0x derived from the
selected companies to corresponding data of the Company.
Financial data of the selected companies were based on publicly
available research analysts estimates, public filings and
other publicly available information. Financial data of the
Company were based on the Companys public filings and
internal estimates of the Companys management. This
analysis indicated the following approximate implied per share
equity value reference ranges for the Company, as compared to
the per share Merger Consideration:
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Implied Per Share Equity Value
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Reference Ranges for Penn Millers Based on
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Tangible Book Value Per
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Per Share
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Share
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EPS
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Merger Consideration
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$14.00 $17.00
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$
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6.00 $10.00
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$
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20.50
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Discounted Cash Flow Analysis. Willis Capital
Markets & Advisory performed a discounted cash flow
analysis of the Company to calculate the estimated present value
of the dividend cash flows that the Company was forecasted to
generate to maintain a 1.0 ratio of net premiums written to
total equity during the Companys fiscal years ending
December 31, 2011 through 2015 based on internal estimates
of the Companys management. Willis Capital
Markets & Advisory calculated terminal values for the
Company by applying terminal value multiples of 0.75x to 0.90x
to the Companys 2015 estimated tangible book value. The
present values of the dividend cash flows and terminal values
were then calculated using discount rates ranging from 11.0% to
13.0%. This analysis indicated the following approximate implied
per share equity value reference range for the Company, as
compared to the per share Merger Consideration:
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Implied Per Share Equity Value
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Per Share
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Reference Range for Penn Millers
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Merger Consideration
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$13.00 $16.00
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$
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20.50
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34
Selected Precedent Transactions
Analysis. Willis Capital Markets &
Advisory reviewed publicly available financial information for
the following 13 selected transactions announced between
January 1, 2009 and September 6, 2011 involving
regional property and casualty insurance companies:
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Announcement Date
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Acquiror
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Target
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5/23/2011
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Doctors Company
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FPIC Insurance Group, Inc.
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4/21/2011
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CNA Financial Corporation
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CNA Surety Corporation
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4/15/2011
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Auto Club Insurance Association
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Fremont Michigan InsuraCorp., Inc.
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11/30/2010
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United Fire & Casualty Company
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Mercer Insurance Group, Inc.
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11/18/2010
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QBE Insurance Group Limited
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RenaissanceRe Holdings Ltd. (U.S. operations)
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10/28/2010
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Fairfax Financial Holdings Limited
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First Mercury Financial Corporation
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8/31/2010
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ProAssurance Corporation
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American Physicians Service Group, Inc.
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7/15/2010
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ProSight Specialty Insurance Holdings, Inc.
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NYMAGIC, INC.
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7/7/2010
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Doctors Company
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American Physicians Capital, Inc.
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7/1/2010
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First Mercury Financial Group
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Valiant Insurance Company
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6/9/2010
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Old Republic International Corporation
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PMA Capital Corporation
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4/26/2010
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National Interstate Corporation
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Vanliner Insurance Company
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6/21/2009
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Tower Group, Inc.
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Specialty Underwriters Alliance, Inc.
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Willis Capital Markets & Advisory reviewed, among
other things, purchase prices paid in the selected transactions
as a multiple of tangible book value per share as of the most
recent completed quarter prior to announcement of the relevant
transaction and estimated next 12 months EPS. Willis
Capital Markets & Advisory then applied selected
ranges of tangible book value per share multiples of 1.00x to
1.20x and estimated EPS multiples of 12.0x to 17.0x derived from
the selected transactions to the Companys fully diluted
tangible book value per share as of June 30, 2011 and
calendar year 2012 estimated EPS. Financial data of the selected
transactions were based on publicly available information at the
time of announcement of the relevant transaction. Financial data
of the Company was based on the Companys public filings
and internal estimates of the Companys management. This
analysis indicated the following approximate implied per share
equity value reference ranges for the Company, as compared to
the per share Merger Consideration:
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Implied Per Share Equity Value
|
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Reference Ranges for Penn Millers Based on
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Per Share
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Tangible Book Value Per Share
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EPS
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Merger Consideration
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$19.00 $23.00
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$
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9.00 - $12.00
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$
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20.50
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Premiums Paid Analysis. Willis Capital
Markets & Advisory reviewed publicly available
financial information for the following 15 selected transactions
announced between January 1, 2008 and September 6,
35
2011 involving publicly traded property and casualty insurance
companies with transaction values of between $50 million
and $550 million:
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Announcement Date
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Acquiror
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Target
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5/23/2011
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Doctors Company
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FPIC Insurance Group, Inc.
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4/15/2011
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Auto Club Insurance Association
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Fremont Michigan InsuraCorp., Inc.
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11/30/2010
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United Fire & Casualty Company
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Mercer Insurance Group, Inc.
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10/28/2010
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Fairfax Financial Holdings Limited
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First Mercury Financial Corporation
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8/31/2010
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ProAssurance Corporation
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American Physicians Service Group, Inc.
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7/15/2010
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ProSight Specialty Insurance Holdings, Inc.
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NYMAGIC, INC.
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7/7/2010
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Doctors Company
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American Physicians Capital, Inc.
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6/9/2010
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Old Republic International Corporation
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PMA Capital Corporation
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6/21/2009
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Tower Group, Inc.
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Specialty Underwriters Alliance, Inc.
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8/4/2008
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Tower Group, Inc.
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CastlePoint Holdings, Ltd.
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6/27/2008
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Allied World Assurance Company Holdings, Ltd.
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Darwin Professional Underwriters, Inc.
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3/13/2008
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Palisades Safety and Insurance Association
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National Atlantic Holdings Corporation
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2/20/2008
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Meadowbrook Insurance Group, Inc.
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ProCentury Corporation
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1/10/2008
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Employers Holdings, Inc.
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AmCOMP Incorporated
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1/3/2008
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QBE Insurance Group Limited
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North Pointe Holdings Corporation
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Willis Capital Markets & Advisory reviewed the implied
premiums paid in the selected transactions relative to the
closing stock price of the target company as reported one day,
one month and three months before the approximate date on which
the public became aware of the possibility of such transactions.
Willis Capital Markets & Advisory then applied a
selected range of premia of 25% to 40% derived from the selected
transactions to the Companys closing share price prior to
the Companys announcement of its review of strategic
alternatives on August 15, 2011 and
30-day
average closing share price as of September 6, 2011. This
analysis indicated the following approximate implied per share
equity value reference range for the Company, as compared to the
per share Merger Consideration:
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|
Implied Per Share Equity Value
|
|
Per Share
|
|
Reference Range for Penn Millers
|
|
Merger Consideration
|
|
|
$18.00 $22.00
|
|
$
|
20.50
|
|
Miscellaneous
Willis Capital Markets & Advisory is acting as
exclusive financial advisor to the independent directors in
connection with the Merger, for which the Company has agreed to
pay Willis Capital Markets & Advisory an aggregate fee
currently estimated to be approximately $858,000, $250,000 of
which was payable in connection with the delivery of its opinion
and the remainder of which is contingent upon consummation of
the Merger. The Company also has agreed to reimburse Willis
Capital Markets & Advisorys expenses, including
the fees and disbursements of counsel, and to indemnify Willis
Capital Markets & Advisory and certain related persons
against certain liabilities, including liabilities arising under
the federal securities laws, arising out of Willis
36
Capital Markets & Advisorys engagement. In
addition, Willis Capital Markets & Advisory and its
affiliates in the past provided, currently are providing and in
the future may provide investment banking and financial advisory
services to ACE and its affiliates unrelated to the Merger and
would expect to receive compensation for such services.
Specifically, in the past two years, Willis Capital
Markets & Advisory acted as financial advisor to ACE
in connection with certain potential acquisition and financing
transactions. In addition, certain affiliates of Willis Capital
Markets & Advisory have business relationships with
ACE and its affiliates and have provided insurance-related
services to ACE and its affiliates during the past two years,
for which such affiliates received customary compensation.
The special committee selected Willis Capital
Markets & Advisory as its exclusive financial advisor
in connection with the Merger because of its substantial
experience in similar transactions and the property and casualty
insurance industry. Willis Capital Markets & Advisory
is regularly engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions.
Projections
and Information
The Company does not, as a matter of course, publicly disclose
projections of future revenues, earnings or other results.
However, in connection with the evaluation of a possible
transaction, we provided projections to our directors and their
advisors, as well as to ACE and other potential buyers in
connection with their due diligence review of the Company, which
contained certain non-public financial forecasts that were
prepared by our management. In addition, ACE was provided
updated projections reflecting the actual results of the
Companys second quarter as well as preliminary results for
July and August 2011, including the impact of Hurricane Irene.
A summary of the financial forecasts included in the projections
has been included below. This summary is not being included in
this document to influence your decision whether to vote for or
against the proposal to adopt the Merger Agreement, but is being
included because these financial forecasts were made available
to our directors and their advisors, as well as to prospective
bidders. This summary reflects the updated projections for 2011
that were provided to ACE. The inclusion of this information
should not be regarded as an indication that our directors or
their advisors, or any other person, considered, or now
considers, such financial forecasts to be material or to be
necessarily predictive of actual future results, and these
forecasts should not be relied upon as such. Our
managements internal financial forecasts, upon which the
summary financial forecasts included below were based, are
subjective in many respects. There can be no assurance that
these financial forecasts will be realized or that actual
results will not be significantly higher or lower than
forecasted. In two of the past three years managements
projections have not been achieved.
In addition, the financial forecasts were not prepared with a
view toward public disclosure or toward complying with generally
accepted accounting principles, which we refer to as GAAP, the
published guidelines of the SEC regarding projections or the use
of non-GAAP financial measures or the guidelines established by
the American Institute of Certified Public Accountants for
preparation and presentation of prospective financial
information. Neither our independent registered public
accounting firm, nor any other independent accountants, have
audited, compiled, examined or performed any procedures with
respect to the financial forecasts contained herein, nor have
they expressed any opinion or any other form of assurance on
such information or its achievability.
These financial forecasts were based on numerous variables and
assumptions that are inherently uncertain and may be beyond our
control. We believe the assumptions that our management used as
a basis for this projected financial information were reasonable
at the time our management prepared these financial forecasts,
given the information our management had at the time. Important
factors that may affect actual results and cause these financial
forecasts not to be achieved include, but are not limited to,
risks and uncertainties relating to our business (including its
ability to achieve strategic goals, objectives and targets over
the applicable periods), premium rate levels, loss cost trends,
the frequency and severity of weather related catastrophic
events, reinsurance costs, investment yields, capital adequacy,
industry performance, general business and economic conditions,
the regulatory environment and other factors described in or
referenced under Cautionary Statement Concerning
Forward-Looking Information beginning on
page of this proxy statement and also
described in the Risk Factors sections of our annual
report on
Form 10-K
for the year
37
ended December 31, 2010 and the quarterly reports on
Form 10-Q
thereafter. No one has made or makes any representation to any
shareholder regarding the information included in the financial
forecasts set forth below. We have made no representation to ACE
or Merger Sub in the Merger Agreement concerning these financial
forecasts.
Readers are cautioned not to rely on the forecasted financial
information. We have not updated and do not intend to update or
otherwise revise the financial forecasts to reflect
circumstances existing after the date when made or to reflect
the occurrence of future events, even in the event that any or
all of the assumptions on which such forecasts were based are
shown to be in error.
The following is a summary of the financial forecasts for the
Company prepared by our management and provided to our directors
and their advisors, as well as to ACE. For reference, the
following summary also includes our historical performance for
fiscal years 2008, 2009 and 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010-2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compounded
|
|
|
|
Historical
|
|
|
Projected
|
|
|
Annual
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
Growth Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
Net Premium Earned
|
|
$
|
78.7
|
|
|
$
|
75.4
|
|
|
$
|
68.1
|
|
|
$
|
69.4
|
|
|
$
|
77.8
|
|
|
$
|
87.3
|
|
|
$
|
103.1
|
|
|
$
|
122.5
|
|
|
|
12.5
|
%
|
(Loss) income from continuing operations
|
|
$
|
(4.5
|
)
|
|
$
|
3.4
|
|
|
$
|
(3.5
|
)
|
|
$
|
(2.4
|
)
|
|
$
|
8.3
|
|
|
$
|
5.0
|
|
|
$
|
7.5
|
|
|
$
|
11.4
|
|
|
|
NM
|
|
Shareholders Equity
|
|
$
|
50.8
|
|
|
$
|
100.0
|
|
|
$
|
93.0
|
|
|
$
|
93.3
|
|
|
$
|
103.0
|
|
|
$
|
109.5
|
|
|
$
|
118.6
|
|
|
$
|
131.8
|
|
|
|
7.2
|
%
|
Loss and loss adjustment expense ratio
|
|
|
72.9
|
%
|
|
|
70.0
|
%
|
|
|
78.8
|
%
|
|
|
78.5
|
%
|
|
|
65.8
|
%
|
|
|
65.8
|
%
|
|
|
64.7
|
%
|
|
|
62.7
|
%
|
|
|
|
|
Underwriting expense ratio
|
|
|
33.7
|
%
|
|
|
33.7
|
%
|
|
|
35.0
|
%
|
|
|
35.9
|
%
|
|
|
34.9
|
%
|
|
|
33.7
|
%
|
|
|
32.1
|
%
|
|
|
30.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio
|
|
|
106.6
|
%
|
|
|
103.7
|
%
|
|
|
113.8
|
%
|
|
|
114.4
|
%
|
|
|
100.7
|
%
|
|
|
99.5
|
%
|
|
|
96.8
|
%
|
|
|
93.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys business strategies are described in the
Our Business Strategies section of our annual report
on
Form 10-K
for the year ended December 31, 2010 and the quarterly
reports on
form 10-Q
thereafter. The financial projections provided above incorporate
those strategies and the following key assumptions:
|
|
|
|
|
Direct premiums written increase 93% from 2010 to 2015 from
growth in the state expansion plans in agribusiness segment, the
development of profitable niche offerings with the Commercial
business segments Penn Edge product and some premium price
increases.
|
|
|
|
The loss ratio improves from 78.8% in 2010 to 62.7% in 2015 from:
|
|
|
|
|
|
Significant improvement in the Commercial Business
segments Solutions loss ratio through underwriting actions
that will reduce the loss experience,
|
|
|
|
The development of profitable niches in the commercial business
segments Penn Edge product,
|
|
|
|
Catastrophic losses returning to the more recent historical
level that had been experienced over the last 5 years,
|
|
|
|
Modest annual premium price increases for 2011 to 2015, and
|
|
|
|
Loss ratio projections and loss reserves continue to be
adequately established.
|
|
|
|
|
|
The Companys support departments and functions
information technology, accounting and finance, human resources,
and management are able to support the increased
revenue growth without increasing their costs significantly,
improving the economies of scale and lowering the underwriting
expense ratio from 35.0% in 2010 to 30.8% in 2015.
|
The board recognized the risks associated with these strategies,
the financial projections and the assumptions provided above,
including:
|
|
|
|
|
the fact that management had not achieved the goals it had set
for itself in its business plans for two of the preceding three
years. The board concluded that portions of those shortfalls had
been the results of
|
38
|
|
|
|
|
factors beyond managements control including
the extended recession in the United States, aggressive pricing
by competitors, and elevated catastrophic losses but
decided, based on the totality of the track record, that it was
important to discount managements projections for
execution risk;
|
|
|
|
|
|
the soft underwriting market may not improve or it could
deteriorate further;
|
|
|
|
the significant organic growth plans for agribusiness may not be
achieved;
|
|
|
|
the Company may not be successful in developing additional
profitable niche markets with the Penn Edge product;
|
|
|
|
the profitability of Solutions may not improve;
|
|
|
|
catastrophic losses could continue to be unusually high;
|
|
|
|
the current low interest rate environment may persist or even
decline more, further reducing investment income; and
|
|
|
|
after five years, the share price could continue to trade in its
historical range of between 70% to 80% of book value per share.
Based upon the financial projections provided above, in 2015 the
book value per share is projected to be $26.37. If the share
price trades in a range of 70% to 80% of the projected 2015 book
value per share, the share price range at that point in time
would be between $18.46 and $21.10.
|
The board also considered that Willis Capital
Markets & Advisory had calculated that the implied per
share valuation of these financial projections was a range of
$13.00 to $16.00, based upon their discounted cash flow analysis
of the projections, subject to the conditions and assumptions
described under the caption The Merger-Opinion of the
Financial Advisor to the Independent Directors.
Delisting
and Deregistration of Penn Millers Common Stock
If the Merger is completed, our common stock will be delisted
from the NASDAQ Global Market and deregistered under the
Exchange Act. Therefore, the provisions of the Exchange Act
would no longer apply to the Company, including the requirement
that we furnish a proxy or information statement to our
shareholders in connection with meetings of our shareholders. We
will also no longer be required to file periodic reports with
the SEC.
Effects
on Penn Millers if the Merger is not Completed
If Company shareholders do not adopt the Merger Agreement, or if
the Merger is not completed for any other reason, our
shareholders will not receive any payment for their shares in
connection with the Merger. Instead, we will remain an
independent public company and our common stock will continue to
be listed and traded on the NASDAQ Global Market. In addition,
if the Merger is not completed, we expect that management will
make significant changes in the business including expense and
workforce reduction and that our shareholders will continue to
be subject to the same or greater risks and opportunities as
they currently are, including, among other things, the nature of
the general insurance industry, economic, regulatory and market
conditions. Accordingly, if the Merger is not consummated, there
can be no assurance as to the effect of these risks and
opportunities on the future value of your shares. From time to
time, our board of directors will evaluate and review, among
other things, the business operations, properties and
capitalization of the Company and make such changes as are
deemed appropriate and continue to seek to identify strategic
alternatives to enhance shareholder value. If our shareholders
do not adopt the Merger Agreement, or if the Merger is not
consummated for any other reason, there can be no assurance that
any other transaction acceptable to the Company will be offered,
or that our business, prospects or results of operations will
not be adversely impacted. In addition, if the Merger Agreement
is terminated, depending upon the circumstances under which such
termination occurs, we may be obligated to pay ACE a termination
fee as described in The Merger Agreement
Termination Fees and Expenses.
39
Interests
of Our Executive Officers and Directors in the Merger
In considering the recommendation of our board of directors with
respect to the Merger Agreement, you should be aware that the
Companys executive officers have interests in the Merger
that may be different from, or in addition to, the interests of
our shareholders generally, as more fully described below. These
interests include, among others: (i) accelerated vesting of
stock options and restricted stock; (ii) cash payments
payable to executive officers of the Company pursuant to change
of control severance arrangements between the Company and such
executive officers; (iii) accelerated vesting of plan
accounts under the ESOP and allocation of ESOP earnings after
repayment of the ESOP loan; (iv) accelerated vesting of the
entire amount credited to each participant in the Companys
deferred compensation plan; and (v) continued
indemnification and directors and officers liability
insurance applicable to the period prior to completion of the
Merger.
In addition, our independent directors represent the
shareholders and are themselves shareholders who purchased their
shares with their own funds. The independent directors also
received grants of stock options from the Company in
all cases such options represent fewer shares than each such
director purchased as a portion of the compensation
for their services. In connection with the Merger, the
independent directors stock options will be accelerated,
and such directors will also receive continued indemnification
and directors liability insurance applicable to the period
prior to the completion of the Merger. Our board of directors
and the special committee were aware of these interests and
considered them, among other matters, in reaching the
determination that the terms and conditions of the Merger and
the Merger Agreement were fair to and in the best interests of
the Company and its shareholders and in making their
recommendations regarding approval and adoption of the Merger
and the Merger Agreement as described in The
Merger Reasons for the Merger; Recommendation of the
Penn Millers Board of Directors beginning on
page .
For the purposes of all the agreements and plans to which the
Company is a party described below that contain a change of
control provision, the completion of the transactions
contemplated by the Merger Agreement will constitute a change of
control. Please see the section of this proxy statement titled
The Merger Golden Parachute
Compensation beginning on page for
additional information with respect to the compensation that our
named executive officers may receive in connection with the
Merger.
Treatment
of Stock Options
In connection with the Merger and in accordance with the terms
of the Companys stock incentive plans, each option to
purchase shares of Company common stock outstanding at the
effective time of the Merger will become fully vested, to the
extent not already fully vested, and canceled at the effective
time of the Merger and will represent solely the right to
receive from ACE in consideration of each such option, at the
effective time of the Merger or as soon as practicable
thereafter (but in any event not later than three business days
following the effective time of the Merger), a cash payment
equal to the product of (i) the number of shares of Company
common stock subject to such option immediately prior to the
effective time of the Merger, multiplied by (ii) the
excess, if any, of the Merger Consideration of $20.50 per share
of the Company common stock over the exercise price per share of
the Company common stock subject to such option, without
interest and less any applicable withholding taxes.
The following table sets forth, as of September 15, 2011,
for each person who has served as a director or executive
officer of the Company since the beginning of our last fiscal
year and who currently holds stock options: (a) the
aggregate number of shares of Company common stock subject to
vested stock options and the value of such vested stock options,
on a pre-tax basis, at the per share Merger Consideration;
(b) the aggregate number of unvested stock options that
will vest in connection with the Merger, assuming the director
or executive officer remains employed by, or continues serving
as a director of, the Company through the effective time of the
Merger, and the value of those unvested stock options, on a
pre-tax basis (i.e., before application of any required
withholding taxes), at the per share Merger Consideration;
(c) the aggregate number of shares of Company common stock
subject to vested and unvested stock options for each
individual, assuming the director or executive officer remains
employed by, or continues serving as a director of, the
40
Company at the effective time of the Merger; and (d) the
aggregate pre-tax amount of consideration that we expect to pay
to all such individuals with respect to their stock options in
connection with the Merger:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested Stock
|
|
|
|
|
|
|
Options
|
|
Unvested Stock Options
|
|
Aggregate Stock Options
|
|
|
Shares
|
|
Value ($)
|
|
Shares
|
|
Value ($)
|
|
Shares
|
|
Value ($)
|
|
Executive Officers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Douglas A. Gaudet
|
|
|
6,068
|
|
|
|
34,406
|
|
|
|
24,268
|
|
|
|
137,600
|
|
|
|
30,336
|
|
|
|
172,006
|
|
Michael O. Banks
|
|
|
2,598
|
|
|
|
14,731
|
|
|
|
10,391
|
|
|
|
58,917
|
|
|
|
12,989
|
|
|
|
73,648
|
|
Keith A. Fry
|
|
|
1,533
|
|
|
|
8,692
|
|
|
|
6,130
|
|
|
|
34,757
|
|
|
|
7,663
|
|
|
|
43,449
|
|
Kevin D. Higgins
|
|
|
1,464
|
|
|
|
8,301
|
|
|
|
5,854
|
|
|
|
33,192
|
|
|
|
7,318
|
|
|
|
41,493
|
|
Harold W. Roberts
|
|
|
1,680
|
|
|
|
9,526
|
|
|
|
6,720
|
|
|
|
38,102
|
|
|
|
8,400
|
|
|
|
47,628
|
|
Jonathan C. Couch
|
|
|
967
|
|
|
|
5,483
|
|
|
|
3,864
|
|
|
|
21,909
|
|
|
|
4,831
|
|
|
|
27,392
|
|
Joseph J. Survilla
|
|
|
984
|
|
|
|
5,579
|
|
|
|
3,936
|
|
|
|
22,317
|
|
|
|
4,920
|
|
|
|
27,896
|
|
Non-Employee Directors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Heather M. Acker
|
|
|
300
|
|
|
|
1,701
|
|
|
|
2,700
|
|
|
|
11,304
|
|
|
|
3,000
|
|
|
|
13,005
|
|
F. Kenneth Ackerman, Jr.
|
|
|
300
|
|
|
|
1,701
|
|
|
|
2,700
|
|
|
|
11,304
|
|
|
|
3,000
|
|
|
|
13,005
|
|
E. Lee Beard
|
|
|
0
|
|
|
|
0
|
|
|
|
2,000
|
|
|
|
6,000
|
|
|
|
2,000
|
|
|
|
6,000
|
|
Dorrance R. Belin
|
|
|
300
|
|
|
|
1,701
|
|
|
|
2,700
|
|
|
|
11,304
|
|
|
|
3,000
|
|
|
|
13,005
|
|
John L. Churnetski
|
|
|
300
|
|
|
|
1,701
|
|
|
|
2,700
|
|
|
|
11,304
|
|
|
|
3,000
|
|
|
|
13,005
|
|
John M. Coleman
|
|
|
300
|
|
|
|
1,701
|
|
|
|
2,700
|
|
|
|
11,304
|
|
|
|
3,000
|
|
|
|
13,005
|
|
Kim E. Michelstein
|
|
|
300
|
|
|
|
1,701
|
|
|
|
2,700
|
|
|
|
11,304
|
|
|
|
3,000
|
|
|
|
13,005
|
|
Robert A. Nearing, Jr.
|
|
|
300
|
|
|
|
1,701
|
|
|
|
2,700
|
|
|
|
11,304
|
|
|
|
3,000
|
|
|
|
13,005
|
|
Donald A. Pizer
|
|
|
300
|
|
|
|
1,701
|
|
|
|
2,700
|
|
|
|
11,304
|
|
|
|
3,000
|
|
|
|
13,005
|
|
James M. Revie(1)
|
|
|
1,500
|
|
|
|
8,505
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1,500
|
|
|
|
8,505
|
|
All Executive Officers and Directors as a Group
|
|
|
19,194
|
|
|
|
108,831
|
|
|
|
84,763
|
|
|
|
443,226
|
|
|
|
103,957
|
|
|
|
552,057
|
|
|
|
|
(1) |
|
Mr. Revie retired from the Companys board of
directors effective April 4, 2011. |
Treatment
of Restricted Shares
In connection with the Merger and in accordance with the
restricted share agreements granted under the Companys
stock incentive plans, each share of restricted stock granted
subject to time-based, performance or other vesting or lapse
restrictions that is outstanding and subject to such
restrictions immediately prior to the effective time of the
Merger will automatically vest, and the Companys
reacquisition right with respect thereto shall lapse, and the
holder thereof will, subject to compliance with the applicable
exchange procedures, be entitled to receive the Merger
Consideration of $20.50 with respect to each such share, without
interest and less any applicable withholding taxes.
The following table sets forth, as of September 15, 2011,
for each person who has served as an executive officer of the
Company since the beginning of our last fiscal year and who
currently holds restricted shares.
41
None of our directors currently hold any restricted shares. In
addition, none of our executive officers or directors currently
hold any restricted stock units.
|
|
|
|
|
|
|
|
|
|
|
Aggregate Number of
|
|
|
|
|
Restricted Shares
|
|
Value of
|
|
|
Subject to Continued
|
|
Restricted
|
|
|
Service
|
|
Shares ($)
|
|
Douglas A. Gaudet
|
|
|
52,473
|
|
|
|
1,075,697
|
|
Michael O. Banks
|
|
|
19,050
|
|
|
|
390,525
|
|
Keith A. Fry
|
|
|
1,264
|
|
|
|
25,912
|
|
Kevin D. Higgins
|
|
|
16,044
|
|
|
|
328,902
|
|
Harold W. Roberts
|
|
|
14,479
|
|
|
|
296,820
|
|
Jonathan C. Couch
|
|
|
1,264
|
|
|
|
25,912
|
|
Joseph J. Survilla
|
|
|
1,264
|
|
|
|
25,912
|
|
All Executive Officers as a Group
|
|
|
105,838
|
|
|
|
2,169,680
|
|
Severance
and Change of Control Benefits
We have entered into employment agreements with all of our
executive officers, which in the case of our named executive
officers, Messrs. Gaudet, Banks and Roberts, provide that
in the event of both a change of control of the Company (such as
the completion of the Merger) and a termination of the named
executive officers employment by the Company without
cause or resignation for good reason,
each as defined in his applicable agreement, such named
executive officer would receive a lump sum severance payment
equal to his current annual base salary and the continuation of
his base salary for a period of one year, and in the case of
Messrs. Gaudet and Banks, a lump sum cash payment equal to two
times his target annual bonus. Each such named executive officer
will also be entitled to employer-provided health care benefits
for two years following his termination date. The remaining
executive officers, Messrs. Higgins, Fry, Couch and
Survilla, would receive a lump sum severance payment equal to
six months or one year of their current annual base salary and
the continuation of their base salary for a period of six months
or one year (in each case, depending on the terms of the
executive officers employment agreement) in the event of
both a change of control of the Company (such as the completion
of the Merger) and a termination of the executive officers
employment by the Company without cause or
resignation for good reason. Each such executive
officer will also be entitled to employer-provided health care
benefits for a period of one or two years (depending on the
applicable employment agreement) following his termination date.
In addition, the executive officers will be entitled to pro-rata
payment under the Companys Success Sharing Program based
on actual performance, and immediate and full vesting of all
outstanding equity awards (with performance-based awards paid at
target levels), and Messrs. Gaudet, Banks, Roberts, Higgins
and Fry will be entitled to receive a lump sum payment equal to
two times their annual stipend. Executive officers may also be
entitled to pro-rata cash payment under the Companys Open
Market Share Purchase Incentive Plan paid at target levels
pursuant to the terms of the Open Market Share Purchase
Incentive Plan. Each of the executive officers will also be
entitled to receive outplacement services up to a cost of
$10,000, or $25,000 in the case of Mr. Gaudet. In the event that
the excise tax imposed by Section 4999 of the Code applies
to any payment otherwise required to be made to the executives
pursuant to the terms of their employment agreements, then the
total amount paid to such executives will be reduced to the
extent necessary so that no portion of the amount is subject to
the excise tax imposed by Section 4999 of the Code, unless
the executive would receive an aggregate greater amount on an
after tax basis if such amount was not so reduced.
42
With respect to a Merger, the aggregate amount that could become
payable to our executive officers under these severance
agreements would be approximately $8.3 million. Details
regarding the severance amounts as of September 15, 2011
for each of our executive officers are shown below.
|
|
|
|
|
|
|
Change in Control
|
|
|
Followed by
|
|
|
Termination
|
|
|
Without Cause or
|
|
|
Resignation for
|
|
|
Good Reason(1)
|
Name
|
|
($)
|
|
Douglas A. Gaudet
|
|
|
2,934,960
|
|
Michael O. Banks
|
|
|
1,581,069
|
|
Harold W. Roberts
|
|
|
1,242,805
|
|
Keith A. Fry
|
|
|
533,798
|
|
Kevin D. Higgins
|
|
|
1,103,685
|
|
Jonathan C. Couch
|
|
|
381,277
|
|
Joseph J. Survilla
|
|
|
482,198
|
|
Total
|
|
|
8,259,792
|
|
|
|
|
(1) |
|
The terms Cause, Good Reason and
Change in Control are defined in each
executives employment agreement. The amounts listed above
for each executive officer also include (i) the value of
shares allocated to the executive officers account under
the ESOP that will vest upon the ESOPs termination, which
will be triggered by the consummation of the Merger; and
(ii) the estimated amount of the Suspense Account
Allocation (as defined below) to be allocated to each executive
officers account under the ESOP. |
Indemnification
of Directors and Officers; Insurance
If the proposed Merger is consummated, each of our
Companys pre-Merger directors and officers will be
indemnified and held harmless following the effective time of
the Merger to the full extent permitted by law from any claims
arising by virtue of his or her service as a director or
officer, including in connection with the negotiation, execution
and performance of the Merger Agreement. Each of these
indemnified persons will be entitled to the advancement of
expenses in defense of any claim, provided that such expenses
shall be repaid if a court should determine in a final and
non-appealable order that indemnification was prohibited by law.
ACE will be required to obtain directors and officers liability
insurance providing coverage for such 6-year period, provided
the annual premium for such coverage does not exceed 250% of the
last annual premium paid before the effective time of the Merger.
Employee
Stock Ownership Plan
The Company sponsors the ESOP, in which executive officers are
eligible to participate. Effective as of the effective time of
the Merger, each share of our common stock held by the ESOP
trustee immediately prior to the effective time will be
converted into the right to receive $20.50 per share in cash,
without interest, in the same manner as shares of our common
stock that are not held by the ESOP trustee. Payments received
by the ESOP trustee for the allocated shares held under the ESOP
will be allocated to participants ESOP accounts based on
the number of shares allocated to their respective ESOP accounts
immediately prior to the effective time.
In connection with the formation of the ESOP, the Company made a
loan to the ESOP, the proceeds of which were used to purchase
shares of the Companys common stock. Shares owned by the
ESOP that have not been allocated to the accounts of ESOP
participants are pledged as collateral for the ESOP loan.
Pursuant to the terms of the ESOP, the ESOP will terminate
automatically upon the consummation of the Merger. The Company
will file with the Internal Revenue Service (IRS) an
application for a determination that the ESOP is qualified upon
termination. Upon the termination of the ESOP, any unvested
benefits thereunder shall immediately vest. Upon the receipt of
a favorable determination letter for termination of the ESOP
from the IRS, the account balances in the ESOP will be
distributed to participants and beneficiaries in accordance
with
43
applicable law and the ESOP. In connection with the termination
of the ESOP, and prior to any final distribution to
participants, the ESOP trustee will utilize funds in the ESOP
suspense account resulting from the exchange of unallocated
shares for the Merger Consideration to repay the outstanding
loan to the ESOP, and any remaining amounts in the ESOP suspense
account will be allocated to the accounts of ESOP participants
and beneficiaries in accordance with applicable law and the
ESOP. As of September 15, 2011, the ESOP held approximately
476,999 unallocated shares of common stock in the suspense
account as collateral for the ESOP loan and the outstanding
principal balance of the loan to the ESOP was approximately
$4,874,034. The total amount to be allocated to the accounts of
the eligible ESOP participants and beneficiaries as earnings
after repayment of the ESOP loan is estimated to be
approximately $4,454,706 with such amount calculated using the
following assumptions: (i) the Merger had been consummated
on September 15, 2011, (ii) the ESOP had terminated
immediately upon such consummation, (iii) a Company
contribution to the ESOP and a principal and interest payment on
the ESOP loan of $470,930 had been made for the period
January 1, 2011 through September 15, 2011, (iv)
38,100 shares were allocated to participant accounts by reason
of the Company contribution, and (v) shares forfeited by
terminated unvested participants were allocated to remaining
participants accounts in accordance with the terms of the
ESOP. Such total estimated amount shall be referred to herein as
the Suspense Account Allocation. The actual amount
to be allocated to the accounts of eligible ESOP participants
and beneficiaries will depend on the actual effective time of
the Merger, which automatically causes the ESOP to terminate
pursuant to its own terms on such date, and certain other
factors, including the amount of any Company contribution for
the period from January 1, 2011, through the effective time
of the Merger (or, if the closing occurs after December 31,
2011, the December 31 annual Company contribution plus an
additional Company contribution for the period from
January 1, 2012 through the effective time of the Merger)
and the amount of the outstanding principal balance on the ESOP
loan and accrued interest thereon as of the effective time of
the Merger.
Intent to
Vote in Favor of the Merger
As of the record date, the directors and executive officers of
the Company beneficially owned and were entitled to vote, in the
aggregate, shares
of Company common stock,
representing % of the outstanding
shares of Company common stock on the record date. The directors
and executive officers have informed the Company that they
currently intend to vote all of their shares of Company common
stock FOR the proposal to adopt the Merger
Agreement, FOR approval of the non-binding
advisory proposal regarding golden parachute
compensation and FOR the proposal to adjourn
the special meeting, if necessary or appropriate, to solicit
additional proxies.
Golden
Parachute Compensation
Golden
Parachute Compensation Table
The following table sets forth the information required by
Item 402(t) of
Regulation S-K
regarding the compensation for each of our named executive
officers that is based on or otherwise relates to the Merger,
assuming the following:
|
|
|
|
|
the price per share of common stock of the Company is $20.50;
|
|
|
|
the Merger closed on September 15, 2011, which is the
latest practicable date prior to the filing of this proxy
statement;
|
|
|
|
the named executive officers of the Company were terminated
without cause immediately following a change in control on
September 15, 2011, which is the latest practicable date
prior to the filing of this proxy statement;
|
|
|
|
a Company contribution to the ESOP and a principal and interest
payment on the ESOP loan of $470,930 had been made for the
period January 1, 2011 through September 15, 2011;
|
|
|
|
38,100 shares were allocated to participant accounts as a result
of such Company contribution, of which a number of such shares
would be allocated to the named executive officers
accounts in the ESOP in accordance with the terms of the ESOP;
|
44
|
|
|
|
|
shares forfeited by terminated unvested participants were
allocated to remaining participants accounts, including
the accounts of the named executive officers, in accordance with
the terms of the ESOP; and
|
|
|
|
the named executive officers would receive full payment of their
parachute compensation without application of any reduction
described above under The Merger Interests
of Our Executive Officers and Directors in the
Merger Severance and Change of Control
Benefits.
|
Golden
Parachute Compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension/
|
|
Perquisites/
|
|
Tax
|
|
|
|
|
|
|
Cash
|
|
Equity
|
|
NQDC
|
|
Benefits
|
|
Reimbursement
|
|
Other
|
|
Total
|
Name
|
|
($)(1)
|
|
($)(2)
|
|
($)(3)
|
|
($)(4)
|
|
($)
|
|
($)(5)
|
|
($)
|
|
Douglas A. Gaudet(6)
|
|
|
1,318,799
|
|
|
|
1,247,703
|
|
|
|
41,271
|
|
|
|
45,040
|
|
|
|
0
|
|
|
|
282,147
|
|
|
|
2,934,960
|
|
Michael O. Banks(7)
|
|
|
811,967
|
|
|
|
464,173
|
|
|
|
24,137
|
|
|
|
30,040
|
|
|
|
0
|
|
|
|
250,752
|
|
|
|
1,581,069
|
|
Harold W. Roberts(8)
|
|
|
476,215
|
|
|
|
344,448
|
|
|
|
20,327
|
|
|
|
30,040
|
|
|
|
0
|
|
|
|
371,775
|
|
|
|
1,242,805
|
|
|
|
|
(1) |
|
Consists of the aggregate cash severance payments that will be
made to each named executive officer after a termination without
cause or for good reason within 24 months of a change in
control. |
|
(2) |
|
Consists of the aggregate payments to be made in respect of
unvested options and unvested restricted stock that will vest at
the effective time of the Merger and the cancellation of vested
options at the effective time of the Merger. The amounts
included in this column are single-trigger
arrangements, that is, eligibility to receive this payment is
conditioned solely on the occurrence of a change in control. |
|
(3) |
|
Consists of the accelerated vesting of unvested balances in the
Companys Nonqualified Deferred Compensation Plan that will
occur upon a change in control. The amounts included in this
column are single-trigger arrangements, that is,
eligibility to receive this payment is conditioned solely on the
occurrence of a change in control. |
|
(4) |
|
Consists of the aggregate payments that will be made for
(i) continuation of employer provided healthcare benefits
for two years and (ii) outplacement services. Such benefits
are payable only after a termination without cause or for good
reason within 24 months after a change in control. |
|
(5) |
|
Consists of the following: (i) the value of shares
allocated to the named executive officers account under
the ESOP that will vest upon the ESOPs termination, which
will be triggered by the consummation of the Merger; and
(ii) the estimated amount of the Suspense Account
Allocation (as defined above) to be allocated to each named
executive officers account under the ESOP. The amounts
included in this column are single-trigger
arrangements, that is, eligibility to receive this payment is
conditioned solely on the occurrence of a change in control. |
|
(6) |
|
For Mr. Gaudet, the cash column consists of (i) a cash
severance amount equal to $703,788, (ii) a target incentive
award of $316,704, which is equal to two times his target annual
bonus, (iii) a prorated target incentive award of $262,307,
under the Companys Open Market Share Purchase Incentive
Plan and (iv) a payment relating to his annual stipend in
an amount equal to $36,000. The equity column consists of
payments to be made with regard to (a) unvested options in
an amount equal to $137,600, (b) unvested restricted stock
in an amount equal to $1,075,697, and (c) the cancellation
of already vested options in an amount equal to $34,406. The
perquisites and benefits column consists of outplacement
services of $25,000 and the continuation of employer provided
healthcare benefits approximately valued at $20,400. |
|
(7) |
|
For Mr. Banks, the cash column consists of (i) a cash
severance amount equal to $484,374, (ii) a target incentive
award of $184,920, which is equal to two times his target annual
bonus, (iii) a prorated target incentive award of $112,673,
under the Companys Open Market Share Purchase Incentive
Plan and (iv) a payment relating to his annual stipend in
an amount equal to $30,000. The equity column consists of
payments to be made with regard to (a) unvested options in
an amount equal to $58,917, (b) unvested restricted stock
in an amount equal to $390,525, and (c) the cancellation of
already vested options in an amount equal to $14,371. The
perquisites and benefits column consists of outplacement
services of $10,000 and the continuation of employer provided
healthcare benefits approximately valued at $20,400. |
45
|
|
|
(8) |
|
For Mr. Roberts, the cash column consists of (i) a
cash severance amount equal to $383,560, (ii) a prorated
target incentive award of $72,655, under the Companys Open
Market Share Purchase Incentive Plan and (iii) a payment
relating to his annual stipend in an amount equal to $20,000.
The equity column consists of payments to be made with regard to
(a) unvested options in an amount equal to $38,102,
(b) unvested restricted stock in an amount equal to
$296,819, and (c) the cancellation of already vested
options in an amount equal to $9,526. The perquisites and
benefits column consists of outplacement services of $10,000 and
the continuation of employer provided healthcare benefits
approximately valued at $20,400. |
Any changes in the assumptions or estimates above would affect
the amounts shown in the table. In addition, a portion of the
amounts shown in the Other column is expected to become vested
in the ordinary course prior to the actual date the Merger would
be completed, and the pro rata target bonuses for 2011 included
in the Cash column are expected to be higher based on the actual
date that the Merger is closed.
Narrative
to Golden Parachute Compensation Table
The payment of severance benefits, and the continuation of
employee benefits, is made pursuant to the arrangements
discussed in the section of this proxy statement titled
The Merger Interests of Our Executive
Officers and Directors in the Merger Severance and
Change of Control Severance Benefits.
As described in The Merger Interests of Our
Executive Officers and Directors in the Merger
Treatment of Stock Options, The
Merger Interests of Our Executive Officers and
Directors in the Merger Treatment of Restricted
Shares, in connection with the Merger, the vesting of
all outstanding stock options and restricted stock awards will
accelerate in full so that such stock options and awards will
become fully vested, to the extent not already fully vested,
immediately prior to the completion of the Merger. Once vested,
each stock option outstanding at the effective time of the
Merger will be canceled and converted into the right to receive
a cash payment equal to the product of (i) the number of
shares of our common stock subject to such option immediately
prior to the effective time of the Merger, multiplied by
(ii) the excess, if any, of the Merger Consideration of
$20.50 per share of our common stock over the exercise price per
share of our common stock subject to such option, without
interest and less any applicable withholding taxes. Once vested,
each outstanding share of restricted stock will be canceled and
converted into the right to receive the Merger Consideration of
$20.50 with respect to each such share, without interest and
less any applicable withholding taxes.
All payments that are made to the named executive officers
pursuant to their employment agreements following a termination
of employment are subject to the signing of an effective release
of claims against the Company and to continued compliance with
applicable restrictive covenants, including non-competition and
non-solicitation covenants for a period of twenty-four months
and a covenant not to disclose confidential information. In the
event the named executive officer violates a restrictive
covenant, the named executive officer must repay the Company the
amount of the payments that he received pursuant to the
employment agreement following termination. Additionally, as
discussed above, in the event that the excise tax imposed by
Section 4999 of the Code applies to any payment otherwise
required to be made to the named executive officers pursuant to
the terms of their employment agreements, then the total amount
paid to such named executive officers will be reduced to the
extent necessary so that no portion of the amount is subject to
the excise tax imposed by Section 4999 of the Code, unless
the named executive officer would receive an aggregate greater
amount on an after tax basis if such amount was not so reduced.
Other
Considerations
If the proposed Merger is consummated, we expect that none of
the Companys current directors will become directors of
the surviving corporation after the Merger is completed. Neither
the Company nor ACE has made any loans to our current directors
and executive officers.
46
No
Dissenters Rights
Under the Pennsylvania Business Corporation Law, holders of
Company common stock do not have appraisal or dissenters
rights with respect to the Merger or the other transactions
described in this proxy statement. If the Merger Agreement is
adopted by the Companys shareholders and the Merger is
completed, shareholders who voted against the adoption of the
Merger will be treated the same as shareholders who voted for
adoption of the Merger, and their shares will canceled and
automatically converted into the right to receive the Merger
Consideration.
Material
U.S. Federal Income Tax Consequences of the Merger
The following summary is a general discussion of the material
U.S. federal income tax consequences to our shareholders,
other than ACE, whose common stock is converted into cash in the
Merger. This summary is based on the current provisions of the
Code, applicable Treasury Regulations, judicial authority and
administrative rulings, all of which are subject to change,
possibly with retroactive fact or different interpretations. Any
such change could alter the tax consequences to our shareholders
as described herein. As a result, we cannot assure you that the
tax consequences described herein will not be challenged by the
IRS, or will be sustained by a court if challenged by the IRS.
No ruling from the IRS has been or will be sought with respect
to any aspect of the transactions described herein. This summary
is for the general information of our shareholders, other than
ACE, only, does not address the tax consequences for the holders
of options on our common stock and does not purport to be a
complete analysis of all potential tax effects of the Merger.
For example, it does not consider the effect of any applicable
state, local, foreign, estate or gift tax laws, or of any
non-income tax laws. In addition, this discussion does not
address the tax consequences of transactions effectuated prior
to or after the Merger (whether or not such transactions occur
in connection with the Merger), including, without limitation,
any exercise of a stock option or the acquisition or disposition
of Company shares other than pursuant to the Merger. In
addition, it does not address all aspects of U.S. federal
income taxation that may affect shareholders in light of their
particular circumstances, including: (i) shareholders that
are insurance companies; (ii) shareholders that are
tax-exempt organizations; (iii) shareholders that are
financial institutions (such as banks, thrifts or insurance
companies), regulated investment companies, real estate
investment trusts, brokers or dealers in securities or traders
in securities electing
mark-to-market
treatment; (iv) shareholders that hold their common stock
as part of a hedge, straddle or conversion transaction;
(v) shareholders that are liable for the U.S. federal
alternative minimum tax; (vi) shareholders that are
partnerships or any other entity classified as a partnership for
U.S. federal income tax purposes; (vii) shareholders
that are subchapter S corporations, controlled foreign
corporations or passive foreign investment companies for
U.S. federal income tax purposes, (viii) shareholders
that are retirement plans or other tax-exempt entities, or that
hold our common stock in tax-deferred or tax-advantaged
accounts; (ix) shareholders that acquired our common stock
pursuant to the exercise of a stock option or otherwise as
compensation; and (x) shareholders that do not use the
U.S. dollar as their functional currency for
U.S. federal income tax purposes.
The following summary assumes that shareholders hold their
common stock as a capital asset under
Section 1221 of the Code (generally, property held for
investment). For purposes of this discussion, a U.S. person
is defined as a beneficial owner of Company common stock that is:
|
|
|
|
|
a natural person that is a citizen or resident of the United
States for U.S. federal income tax purposes;
|
|
|
|
a corporation, including any entity treated as a corporation for
U.S. federal income tax purposes, created or organized in
or under the laws of the United States, any state thereof or the
District of Columbia;
|
|
|
|
an estate the income of which is subject to U.S. federal
income taxation regardless of its source;
|
|
|
|
a trust, if its administration is subject to the primary
supervision of a U.S. court and one or more
U.S. persons have the authority to control all substantial
decisions of the trust; or
|
47
|
|
|
|
|
a trust that was in existence on August 20, 1996 and was
treated as a domestic trust on August 19, 1996 and that has
made a valid election under applicable Treasury Regulations to
be treated as a U.S. person.
|
For purposes of this discussion, a
non-U.S. person
is a beneficial owner of Company common stock that is not a
U.S. person or a partnership (or an entity treated as a
partnership for U.S. federal income tax purposes). As noted
above, this discussion does not address the tax consequences of
the Merger to partnerships or other pass-through entities
holding our common stock, and such persons should consult their
own tax advisors.
ALL COMPANY SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX
ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE
MERGER, INCLUDING THE APPLICABLE U.S. FEDERAL, STATE, LOCAL
AND FOREIGN TAX CONSEQUENCES, AND AS TO ANY TAX REPORTING
REQUIREMENTS OF THE MERGER AND RELATED TRANSACTIONS IN LIGHT OF
THEIR RESPECTIVE TAX SITUATIONS.
Treatment
of Holders of Common Stock
The conversion of shares of Company common stock into cash
pursuant to the Merger will be a taxable transaction for
U.S. federal income tax purposes except with respect to
shares that are held under the ESOP. A U.S. holder
generally will recognize gain or loss for U.S. federal
income tax purposes equal to the difference, if any, between the
amount of cash received pursuant to the Merger (determined
before the deduction of any applicable withholding taxes) and
such U.S. holders adjusted tax basis in the shares
converted into cash pursuant to the Merger. A
U.S. holders adjusted tax basis will generally equal
the price the U.S. holder paid for such shares. Such gain
or loss generally will be capital gain or loss, and will be
long-term capital gain or loss if the holders holding
period for such shares exceeds one year as of the date of the
Merger. Long-term capital gains for certain non-corporate
U.S. holders, including individuals, are generally eligible
for a reduced rate of federal income taxation. The deductibility
of capital losses is subject to limitations. If a
U.S. holder acquired different blocks of Company common
stock at different times or different prices, such
U.S. holder generally must determine its tax basis, holding
period, and gain or loss separately with respect to each block
of Company common stock.
A U.S. holder may, under certain circumstances, be subject
to information reporting and backup withholding at the
applicable rate (currently, 28%) with respect to the cash
received pursuant to the Merger, unless such holder properly
establishes an exemption or provides its correct tax
identification number and otherwise complies with the applicable
requirements of the backup withholding rules. Backup withholding
is not an additional tax. Any amounts withheld under the backup
withholding rules can be refunded or credited against a
payees U.S. federal income tax liability, if any,
provided that such U.S. holder furnishes the required
information to the IRS in a timely manner. All U.S. holders
surrendering shares of Company common stock pursuant to the
Merger should complete and sign, under penalty of perjury, the
IRS
Form W-9
included as part of the Letter of Transmittal and return it to
the exchange agent to provide the information, including such
holders taxpayer identification number, and certifications
necessary to avoid backup withholding (unless an applicable
exemption exists and is proved in a manner satisfactory to us
and the exchange agent). Corporations are not subject to backup
withholding.
Non-U.S.
Holders
Any gain recognized by a
non-U.S. person
that is a shareholder upon the receipt of cash in the Merger or
pursuant to the exercise of dissenters rights generally
will not be subject to U.S. federal income tax unless:
(1) the gain is effectively connected with a trade or
business of the
non-U.S. person
in the United States (and, if required by an applicable income
tax treaty, is attributable to a U.S. permanent
establishment of the
non-U.S. person);
(2) the
non-U.S. person
is an individual who is present in the United States for
183 days or more in the taxable year of the Merger, and
certain other conditions are met; or (3) the Company is or
has been a United States real property holding
corporation for U.S. federal income tax purposes at
any time during the five-year period preceding the Merger or (if
shorter) the period in which the
non-U.S. person
has
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held our common stock and the
non-U.S. person
owned (actually or constructively) more than 5% of Company
common stock at any time during the five-year period preceding
the Merger. The Company does not believe that it is currently a
United States real property holding corporation and does not
believe that it has been a United States real property holding
corporation at any time during the past five years.
An individual
non-U.S. person
whose gain is effectively connected with the conduct of a trade
or business in the United States (as described above in clause
(1)) or whose gain is subject to tax under clause (3) above
will generally be subject to tax on such gain in the same manner
as a U.S. person, as described above. In addition, a
non-U.S. person
that is a corporation may be subject to a
U.S. corporate-level tax of 35%, as well as a branch
profits tax equal to 30% (or lesser rate under an applicable
income tax treaty) on such effectively connected gain. An
individual
non-U.S. person
described in clause (2) above generally will be subject to
a flat 30% tax on any gain, which may be offset by
U.S.-source
capital losses.
A
non-U.S. holder
will be subject to information reporting and, in certain
circumstances, backup withholding (currently, at a rate of 28%)
with respect to the cash received by such holder pursuant to the
Merger, unless such
non-U.S. holder
certifies under penalties of perjury that it is not a United
States person (and the payor does not have actual knowledge or
reason to know that the holder is a United States person as
defined under the Code) or such holder otherwise establishes an
exemption from backup withholding. Backup withholding is not an
additional tax and any amounts withheld under the backup
withholding rules may be refunded or credited against a
non-U.S. holders
U.S. federal income tax liability, if any. In order to
avoid backup withholding, a
non-U.S. holder
should complete and sign an appropriate
Form W-8
which may be obtained from the exchange agent or at
www.irs.gov.
ESOP
Participants
In general, receipt of cash in exchange for the common stock
held in the participants and beneficiaries ESOP
accounts as part of the Merger will not be a taxable transaction
for federal income tax purposes for participants and
beneficiaries in the ESOP. ESOP participants and beneficiaries
will generally not be taxed on amounts held in the ESOP until
such amounts are distributed from the ESOP in accordance with
the terms of the ESOP or following the termination of the ESOP
as described below. Subject to terms of the applicable plans and
the requirements of the Code, ESOP participants may choose to
roll such distributable amounts over to an individual retirement
account (IRA) or another eligible retirement plan. Distributions
that are rolled over are generally not subject to federal
taxation at the time of their distribution from the ESOP. ESOP
participants and beneficiaries will receive additional
information regarding distribution options available from the
ESOP, including information regarding how to roll such amounts
over to an IRA or another eligible retirement plan and
additional information regarding the federal tax consequences of
each distribution option, prior to receiving a distribution from
the ESOP.
THE FOREGOING DISCUSSION OF THE U.S. FEDERAL INCOME TAX
CONSEQUENCES OF THE MERGER IS FOR OUR SHAREHOLDERS GENERAL
INFORMATION ONLY. ACCORDINGLY, OUR SHAREHOLDERS SHOULD CONSULT
THEIR OWN TAX ADVISORS WITH RESPECT TO THE PARTICULAR TAX
CONSEQUENCES TO THEM OF THE MERGER, INCLUDING THE APPLICABLE
U.S. FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES.
Regulatory
Matters
Under the terms of the Merger Agreement, the Merger cannot be
consummated until the waiting period applicable to the
consummation of the Merger under the HSR Act has expired or been
terminated.
Under the HSR Act and the rules promulgated thereunder by the
FTC, the Merger cannot be consummated until each of the Company
and ACE files a notification and report form with the FTC and
the Antitrust Division of the DOJ under the HSR Act and the
applicable waiting period has expired or been terminated. Under
the terms of the Merger Agreement, each of the Company and ACE
will file such a notification and report form by
September 27, 2011 and each requested early termination of
the waiting period. There can be no assurance as to the outcome
of the review.
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At any time before or after consummation of the Merger, and
irrespective of the expiration or termination of the waiting
period under the HSR Act, the Antitrust Division of the DOJ, the
FTC, or a state attorney general could take such action under
the antitrust laws as it deems necessary or desirable in the
public interest, including seeking to enjoin the completion of
the merger or seeking divestiture of substantial assets of the
Company or ACE. Private parties may also bring legal action
under the antitrust laws under certain circumstances.
There can be no assurance that a challenge to the Merger on
antitrust grounds will not be made and, if such a challenge is
made, there can be no assurance as to its result.
The Company has two insurance company subsidiaries domiciled in
the Commonwealth of Pennsylvania. Insurance laws in Pennsylvania
require an acquiring person to obtain approval from the
Insurance Commissioner of Pennsylvania before acquiring control
of an insurance company domiciled in Pennsylvania. Under the
terms of the Merger Agreement, ACE will file an application for
such approval with the Insurance Commissioner of Pennsylvania by
September 27, 2011. There can be no assurance as to the
outcome of such application for approval.
Under the insurance laws of certain states in which the
Companys two insurance company subsidiaries are licensed,
an acquiring person is required to make a pre-acquisition
Form E filing regarding the potential
competitive impact of the acquisition before acquiring control
of an insurance company licensed in those states if the combined
market share as an immediate result of the acquisition would
exceed certain statutorily-specified levels. The Merger cannot
be consummated until the expiration or termination of the
applicable waiting periods under relevant state insurance laws.
Under the terms of the Merger Agreement, ACE will make such
filings by September 27, 2011. There can be no assurance as
to the outcome of the filings.
THE
MERGER AGREEMENT
The following summarizes material provisions of the Merger
Agreement, a copy of which is attached to this proxy statement
as Annex A. This summary does not purport to
be complete and may not contain all of the information about the
Merger Agreement that is important to you. We encourage you to
read carefully the Merger Agreement in its entirety because the
rights and obligations of the parties are governed by the
express terms of the Merger Agreement and not by this summary or
any other information contained in this proxy statement.
The description of the Merger Agreement in this proxy statement
has been included to provide you with information regarding its
terms. The Merger Agreement contains representations and
warranties made by and to the Company and ACE as of specific
dates. The statements embodied in those representations and
warranties were made for purposes of the Merger Agreement
between the parties and are subject to qualifications and
limitations agreed by the parties in connection with negotiating
the terms of the Merger Agreement, including qualifications set
forth on the disclosure schedules to the Merger Agreement. In
addition, certain representations and warranties were made as of
a specified date, may be subject to contractual standards of
materiality different from those generally applicable to
shareholders, or may have been used for the purpose of
allocating risk between the parties rather than establishing
matters as facts. Any specific material facts of which we are
currently aware that materially qualify or contradict the
representations and warranties in the Merger Agreement have been
disclosed in this proxy statement or the Companys Annual
Report on
Form 10-K,
which are available on the Companys web site.
Effective
Time of the Merger
The closing of the Merger will take place on the last business
day of the month during which the satisfaction or waiver of all
conditions to completion of the Merger occurs. As part of the
closing, ACE will file articles of merger with the Secretary of
State of the Commonwealth of Pennsylvania, and the effective
time of the Merger will occur at such time as the articles of
merger are so filed (or such later time as provided in the
articles of merger).
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Structure
of the Merger
At the effective time of the Merger, the Merger Sub will merge
with and into the Company. The Company will survive the Merger,
as the surviving corporation, and continue to exist
after the Merger as a wholly-owned subsidiary of ACE. At the
effective time of the Merger, the Companys articles of
incorporation will be amended and restated in their entirety to
be identical to the articles of incorporation of the Merger Sub
as in effect immediately prior to the effective time of the
Merger, except that the name of the Company, as reflected in the
articles of incorporation, will be Penn Millers Holding
Corporation, until thereafter further amended. At the
effective time of the Merger, the bylaws of the Merger Sub as in
effect immediately prior to the effective time of the Merger
shall be the bylaws of the surviving corporation, until
thereafter amended. The directors of the Merger Sub immediately
prior to the effective time of the Merger shall be the initial
directors of the surviving corporation, each to hold office in
accordance with the articles of incorporation and by-laws of the
surviving corporation, and the officers of the Company
immediately prior to the effective time of the Merger shall be
the initial officers of the surviving corporation, in each case
until their respective successors are duly elected or appointed
and qualified or until the earlier of their death, resignation
or removal.
Effect of
the Merger on Capital Stock
Company
Common Stock
At the effective time of the Merger, each share of capital stock
of the Merger Sub issued and outstanding immediately prior to
the effective time of the Merger will be converted into and
become one validly issued, fully paid and non-assessable share
of common stock, par value $0.01 per share, of the surviving
corporation and will constitute the only shares of capital stock
of the surviving corporation. Any shares of Company common stock
that are owned by the Company as treasury stock or by any
Company subsidiary, and any Company common stock owned by ACE or
Merger Sub, will be automatically canceled and will cease to
exist and no consideration will be delivered in exchange
therefor. Each other share of Company common stock issued and
outstanding immediately prior to the effective time of the
Merger will be canceled and converted into the right to receive
Merger Consideration excluding withholding tax and will no
longer be outstanding and will automatically be canceled and
will cease to exist. Each holder of a certificate or uncertified
book-entry shares, which immediately prior to the effective time
of the Merger represented any Company common stock will cease to
have any rights with respect thereto, except the right to
receive Merger Consideration, without interest, upon surrender
of such certificate or book-entry shares.
Company
Stock Options, Restricted Stock and Restricted Stock
Units
At the effective time of the Merger, each outstanding option to
acquire our common stock, whether or not vested or exercisable,
will become fully vested. Any portion of any option unexercised
by the holder thereof prior to the effective time of the Merger
will be canceled and converted into a right to receive a cash
amount equal to the option consideration. Option consideration
is an amount equal to the excess of Merger Consideration over
the exercise price payable in respect of such share of Company
common stock subject to such Company option and any required
withholding tax. Any Company option for which the exercise price
equals or exceeds the Merger Consideration, shall be canceled
and terminated without the receipt of any option consideration.
Option consideration is subject to any required withholdings and
any amount owed pursuant to the exercise thereof. As of the
effective time of the Merger, each restricted share of Company
common stock granted under the Company Stock Incentive Plan that
is then outstanding will become fully vested without
restrictions and will be treated as a share of Company common
stock. As of the effective time of the Merger, each restricted
stock unit granted under the Company Stock Incentive Plan that
represents the right to receive a share of Company common stock
that is outstanding prior to the effective time of the Merger,
will become fully vested without restrictions and will be
converted into the right to receive the Merger Consideration,
less any required withholding taxes. Option consideration and
the Merger Consideration with respect to the restricted stock
units will be paid in no event later than ten (10) days
after the closing date.
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Employee
Stock Ownership Plan
Merger Consideration with respect to shares of Company common
stock held under the ESOP will be paid to the trustee of the
ESOP.
Company
Stock Incentive Plan
Effective at the effective time of the Merger, the Company Stock
Incentive Plan and all awards thereunder will terminate subject
to the payments described above for options and shares of
restricted stock granted pursuant to the Company Stock Incentive
Plan. All other rights under any provision of any other plan,
program or arrangement for the issuance of any other interest
with respect to the capital stock or other equity interests of
the Company or any Company subsidiary will be canceled without
any liability on the Company or any Company subsidiary.
Exchange
and Payment Procedures
Prior to the effective time of the Merger, the Company will
designate a bank or trust company (reasonably acceptable to ACE)
to act as agent (paying agent) for holders of shares
of Company common stock to receive the funds to which such
holders will become entitled. At or prior to the effective time
of the Merger, ACE will deposit with or cause to be deposited
with the paying agent, cash in an amount sufficient to pay the
aggregate Merger Consideration required to be paid in accordance
with the Merger Agreement. Promptly, and in any event no later
than ten days after the effective time of the Merger, ACE and
the surviving corporation will cause the paying agent to mail to
each holder of record of Company common stock converted into the
right to receive Merger Consideration, a letter of transmittal,
in customary form with customary provisions, containing
instructions specifying that the delivery of the Merger
Consideration will be effected, and risk of loss and title shall
pass, only upon proper delivery of the certificates, or
book-entry transfer of the book-entry shares, to the paying
agent for use in effecting the surrender of the certificates and
book-entry shares in exchange for the Merger Consideration.
Registered shareholders will not be entitled to receive the
Merger Consideration until they surrender or transfer their
stock certificates or book-entry shares, as applicable, to the
paying agent, together with a duly completed and executed letter
of transmittal and any other documents as may be required by the
letter of transmittal. The Merger Consideration may be paid to a
person other than the person in whose name the corresponding
certificate or book-entry shares were registered if the
certificate is properly endorsed or is otherwise in the proper
form for transfer or if such book-entry share may be properly
transferred. In addition, the person requesting such issuance
must have paid any transfer and other taxes required by reason
of the issuance and payment of such consideration to a person
other than the registered holder of such certificate or book
entry shares surrendered or must have established to the
reasonable satisfaction of the paying agent and the surviving
corporation that such tax either has been paid or is not
applicable.
No interest will be paid or will accrue on the cash payable upon
surrender of the certificates or book-entry shares. ACE and the
surviving corporation will be entitled to deduct and withhold
from any amounts otherwise payable pursuant to the Merger
Agreement in respect of shares of Company common stock, an
amount as it is required to deduct and withhold with respect to
the making of such payment under the Code or any law. Any sum
that is withheld will be treated as having been paid to the
holder of the shares of Company common stock in respect of which
such deduction and withholding was made.
At the close of business on the day of the effective time of the
Merger, our stock transfer books will be closed, and thereafter
there will be no further registration of transfers of
outstanding shares of our common stock. From and after the
effective time of the Merger, the holders of shares of Company
common stock outstanding immediately prior to the effective time
of the Merger shall cease to have any rights with respect to
such shares of Company common stock except as otherwise provided
in the Merger Agreement or by applicable law.
Neither the paying agent nor the surviving corporation will be
liable to any holder of Company common stock for any Merger
Consideration delivered to a public official pursuant to any
abandoned property, escheat
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or other similar law. At any time following the twelve
(12) month anniversary of the effective time of the Merger,
the surviving corporation will be entitled to require the paying
agent to deliver to it any funds which had been made available
to the paying agent and not disbursed to holders of shares of
Company common stock and thereafter the holders will be entitled
to look at the surviving corporation only as general creditors
thereof with respect to any Merger Consideration that may be
payable upon due surrender of their certificates.
If you have lost a certificate, or if it has been stolen or
destroyed, upon making an affidavit of fact and, if required by
the surviving corporation, and upon posting of a bond in a
reasonable amount as the surviving corporation may direct, as
indemnity protection against any claim that may be made against
it with respect to that certificate, the paying agent will issue
in exchange for such lost, stolen or destroyed certificate, the
Merger Consideration with respect to the shares of the Company
common stock formerly represented by such certificate.
Representations
and Warranties
We make various representations and warranties in the Merger
Agreement to ACE and the Merger Sub, which may be subject to
important limitations and qualifications set forth in Company
SEC Documents, the Merger Agreement, and the disclosure
schedules thereto. Company SEC Documents means the
Companys Annual Report on
Form 10-K
for the fiscal year ended December 31, 2010, the
Companys Quarterly Reports on
Form 10-Q
for the fiscal quarters ended March 31, 2011 and
June 30, 2011 and the Companys proxy statement on
Schedule 14A filed on March 31, 2011. You should be
aware that it may not be appropriate to judge the accuracy of
such representations and warranties as of the date of this proxy
statement. Our representations and warranties in the Merger
Agreement relate to, among other things:
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our and our subsidiaries organization, good standing and
qualification to do business;
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our and our subsidiaries articles of incorporation and
bylaws and equivalent organizational documents;
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our minute books containing records of shareholder meetings and
board of directors meetings, our stock ledgers and our stock
books listing and describing all issuances, transfers and
cancellations of shares of capital stock;
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our capitalization, including the number of shares of our common
stock, restricted stock, restricted stock units, stock held in
treasury, stock options under the Company Stock Incentive Plan
and stock held under the ESOP;
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our corporate power and authority to enter into the Merger
Agreement and to consummate the transactions contemplated by the
Merger Agreement (including that our board of directors, in
accordance with the PBCL, unanimously adopted the Merger
Agreement, resolved to recommend the approval and adoption of
the Merger Agreement by the Companys shareholders,
directed that the Merger Agreement be submitted to the
Companys shareholders for approval and adoption, approved
the filing of the proxy statement with the SEC, and determined
that the Merger is fair in the best interest of the Company and
its shareholders and approved and declared the advisability of
the Merger Agreement);
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the absence of violations of or conflicts with our and our
subsidiaries governing documents, applicable law,
provisions of the ESOP, agreements with third parties and
material permits as a result of executing, delivering and
performing under the Merger Agreement;
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the required consents and approvals of governmental entities in
connection with the transactions contemplated by the Merger
Agreement;
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our operation of the Company and the Company subsidiaries in
compliance with all applicable laws and the regulations of the
NASDAQ Global Market;
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possession by the Company and the Companys subsidiaries of
material permits, franchises, grants, authorizations, licenses,
orders, approvals, easements, variances, certificates, consents
and other similar authorizations necessary to operate our
business in compliance with applicable legal requirements;
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our SEC filings since September 4, 2009, including any
financial statements and underlying books and records;
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inquiries or interrogatories from the SEC, Financial Industry
Regulatory Authority or any governmental authority;
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system of accounting administered in accordance with GAAP and
the absence of any accounting or auditing violations;
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compliance with the Sarbanes-Oxley Act of 2002;
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compliance with the Foreign Corrupt Practices Act of 1977;
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joint ventures and off balance sheet arrangements;
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the absence of material violations of applicable laws, including
laws related to insurance and breach of fiduciary duties by the
Company or any of its officers, directors, employees or agents
to the board of directors;
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the statutory statements of each Company subsidiary that
conducts the insurance operations of the Company as filed with
the insurance departments of their respective jurisdictions and
prepared in accordance with statutory accounting practices
prescribed or permitted by the insurance regulator in each
applicable jurisdiction and the reserves of each Company that
conducts the insurance operations of the Company;
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the absence of a Material Adverse Effect (as defined below),
actions outside of the ordinary course of business, and certain
other changes, events, circumstances or developments related to
the Company or the Companys subsidiaries since
December 31, 2010;
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legal proceedings, proceedings before any governmental
authority,
cease-and-desist
orders and governmental orders;
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employment agreements, multiemployer plans, compliance with
ERISA, and the Companys and the Company subsidiaries
employee benefit plans and stock option plans;
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the ESOP, any action or audit pending with respect to the ESOP;
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labor and employment matters, collective bargaining, absence of
charges of discrimination and misclassification of employee
issues;
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title to assets, absence of liens;
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tax matters;
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environmental matters and compliance with environmental laws;
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no shareholder rights plan;
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material contracts of the Company or any Company subsidiary;
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technology and intellectual property matters including material
licenses, title to owned intellectual property; open source
software, material computer systems and systems to protect
confidential information;
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insurance policies covering the Company and its subsidiaries,
directors and officers;
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conduct of, and matters related to, the Company subsidiaries
that conduct the insurance operations of the Company and
insurance holding companies, reinsurance, insurance and
reinsurance agreements, including Company financial statements,
actuarial analyses, and insurance pools;
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the shareholder vote necessary to consummate the Merger;
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opinion of Willis Capital Markets & Advisory;
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the accuracy of information supplied for inclusion in this proxy
statement;
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absence of characterization as an investment company;
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the absence of fees or commissions for brokers, finders or
investment bankers (other than Willis Capital
Markets & Advisors);
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no dissenters rights; and
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anti-takeover provisions.
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As used in the Merger Agreement, the term Material Adverse
Effect means any event, circumstance, development, change,
occurrence or state of facts or effect that, (1) alone or
in combination, has had or could be reasonably likely to have a
material adverse effect on the business, assets, properties,
condition (financial or otherwise) or results of operations of
the Company and the Company subsidiaries, taken as a whole,
except to the extent that any such material adverse effect
results, alone or in combination, from:
(i) changes in the U.S. economy in general or in
U.S. financial or securities markets (including credit
markets);
(ii) changes generally affecting the U.S. property and
casualty insurance industry;
(iii) changes in law or applicable accounting regulations,
or principles or interpretations, (whether administrative or
judicial) thereof becoming effective after the date of the
Merger Agreement, including accounting pronouncements by the
SEC, the National Association of Insurance Commissioners or the
Financial Accounting Standards Board;
(iv) any change in the Companys stock price or any
failure, in and of itself, by the Company to meet published
revenue or earnings projections (provided that the underlying
causes of such change or failure shall not be excluded);
(v) changes proximately caused by the announcement of the
execution of the Merger Agreement, including the identity of ACE;
(vi) any actions, suits, claims, hearings, arbitrations or
investigations or other proceedings related to the Merger
Agreement, the Merger or other transactions contemplated thereby
or before any governmental authority;
(vii) acts of war, armed hostilities, sabotage or
terrorism, or any escalation or worsening thereof;
(viii) earthquakes, hurricanes or other natural
disasters; and
(ix) any action taken by ACE or any of its affiliates or by
the Company not at the express written request of ACE or any of
its affiliates;
provided, however, that the exceptions in paragraphs (i), (ii),
(iii), (vii) and (viii) above apply solely to the
extent that they do not have a disproportionate impact on the
Company or the Companys subsidiaries, taken as a whole,
compared to other participants in the property and casualty
insurance industry in the United States; or (2) would
prevent or materially delay the consummation of the Merger or
any of the other transactions contemplated by the Merger
Agreement.
The Merger Agreement also contains various representations and
warranties made by ACE and the Merger Sub to us which may be
subject to important limitations and qualifications set forth in
the Merger Agreement. You should be aware that it may not be
appropriate to judge the accuracy of such representations and
warranties as of the date of this proxy statement. These
representations and warranties relate to, among other things:
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ACE and Merger Subs organization, valid existence and good
standing;
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ACEs ownership of all of the outstanding capital stock of
Merger Sub;
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ACE and Merger Subs corporate power and authority to
execute and deliver the Merger Agreement, to perform their
obligations thereunder and to consummate the transactions
contemplated by the Merger Agreement;
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the absence of any violation of or conflict with ACE and the
Merger Subs governing documents, applicable law or certain
agreements as a result of entering into the Merger Agreement and
consummating the Merger;
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the required consents and approvals of governmental entities in
connection with the transactions contemplated by the Merger
Agreement;
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absence of material legal proceedings;
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sufficient financing to permit the Merger Sub to consummate the
Merger and pay the aggregate Merger Consideration and other
amounts required pursuant to the Merger Agreement;
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the absence of fees or commissions for brokers, finders or
investment bankers; and
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the accuracy of information supplied for inclusion in this proxy
statement.
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The representations and warranties of each of the parties to the
Merger Agreement will expire upon the effective time of the
Merger.
Conduct
of Our Business Pending the Merger
For the period between September 7, 2011, the date of
execution of the Merger Agreement and the effective time of the
Merger, unless such action is required or prohibited by law or
ACE agrees to such action in writing, we have agreed:
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to conduct our business and the business of our subsidiaries
only in the ordinary course of business consistent with past
practice;
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to use commercially reasonable efforts to: (a) preserve
substantially intact our business organization and the business
organization of our subsidiaries and (b) to keep available
the services of our current officers and employees and the
officers and employees of our subsidiaries; and
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to take all steps and do all things necessary to preserve the
protections of our reinsurance agreements.
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Under the Merger Agreement, we have also agreed that neither we
nor our subsidiaries will take any of the following actions
until the effective time of the Merger unless such action is
required or prohibited by law, is specifically contemplated by
the Merger Agreement or ACE agrees to such action in writing:
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amend our articles of incorporation, by-laws or other
organizational documents;
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issue, sell, pledge, dispose of, grant or encumber, or authorize
any of the foregoing of any shares of any class of capital stock
of the Company or any subsidiary or issue any options, warrants,
convertible securities or other rights of any kind to acquire
the shares of such capital stock or any other ownership interest
of the Company or any Company subsidiary, provided that the
Company may issue Company common stock upon the exercise of
options granted prior to the date the Merger Agreement was
signed under the Company Stock Incentive Plan;
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make, declare, set aside or pay any dividend or other
distribution payable in cash, stock, property or otherwise with
respect to any of its capital stock, except for dividends by any
direct or indirect wholly owned subsidiary to the Company or any
other Company subsidiary;
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reclassify, combine, split, subdivide or redeem or purchase or
otherwise acquire, directly or indirectly, any of its capital
stock, or purchase or redeem or otherwise acquire any shares of
its capital stock or any of the shares of capital stock of its
subsidiaries, any other securities thereof or any rights,
warrants or options to acquire any such shares or other
securities;
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incur or assume any indebtedness for borrowed money in excess of
$25,000, guarantee any such indebtedness in excess of $25,000 or
issue or sell any debt securities or options, warrants, calls or
other rights to acquire any debt securities of the Company or
any Company subsidiary;
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make any investment in any person or loan or advance to any
person other than a Company subsidiary other than investments
made in the ordinary course of business consistent with past
practice and consistent with the Companys investment
guidelines;
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make any capital expenditure or expenditures which involves the
purchase of real property or is in excess of $50,000 in the
aggregate;
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sell, dispose of or otherwise transfer, lease out, or pledge,
mortgage, or otherwise encumber, any of its properties or assets
with a fair market value of equal to or more than $100,000 in
the aggregate, other than in accordance with the Companys
investment guidelines or pursuant to material contracts;
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directly or indirectly acquire any corporation, partnership,
limited liability company, joint venture, other business
organization or any property;
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adopt a plan or agreement of complete or partial liquidation,
dissolution, restructuring, recapitalization or other
reorganization;
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waive or release any right or claim or settle or compromise any
claim, audit, arbitration, suit, investigation, complaint or
other proceeding in excess of the amount of the corresponding
reserve established on the Companys consolidated balance
sheet as reflected in the most recent applicable Company SEC
Documents plus any applicable third party insurance proceeds,
except (A) as required by the express terms of any contract
in effect prior to the execution and delivery of the Merger
Agreement, (B) for any settlements or compromises of
insurance claims or litigation or arbitration arising in the
ordinary course of business or involving total aggregate
payments not in excess of the amount set forth in the Disclosure
Schedule;
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enter into any consent decree, injunction or similar restraint
or form of equitable relief in settlement of any material claim
or audit that would materially restrict the operations of the
business after the effective time of the Merger;
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materially change any of its accounting policies (whether for
financial accounting or tax purposes), except as required by
applicable law, GAAP or regulatory guidelines;
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other than in accordance with its current investment guidelines
or as otherwise required by the terms of the Merger Agreement,
restructure or materially change its investment securities
portfolio through purchases, sales or otherwise, or the manner
in which such portfolio is classified or reported;
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increase or agree to increase the compensation payable or to
become payable or the benefits provided to, grant any retention,
severance or termination pay to or enter into any employment
bonus, change in control or severance agreement with, its
current or former directors, officers or employees, except for
employees paid in the ordinary course of business, initial
compensation and benefits of individuals who are first employed
by the Company or any Company subsidiary after the date of the
Merger Agreement and for bonuses and retention, severance and
termination payments in an aggregate amount not to exceed
$100,000;
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establish, adopt, enter into, terminate or amend any collective
bargaining agreement or any new employee benefit plan, amend or
terminate any existing employee benefit plan, grant any equity
based or incentive compensation awards, enter into or amend any
employment, severance, retention, incentive or similar agreement
or other employment arrangements with any current or former
director, officer or employee of the Company or any Company
subsidiary or hire or terminate the employment, or modify the
contractual relationship of, any officer, employee or
independent contractor of the Company or any Company subsidiary,
other than hirings or terminations of employees, other than
officers, in the ordinary course of business consistent with
past practice;
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take any action, other than in the ordinary course of business
consistent with past practice, with respect to accounting
policies or procedures;
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file or amend any material tax return, make or change any
material tax election or settle or compromise any material tax
liability other than in the ordinary course of business as
required by law;
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amend, modify or consent to the termination of any material
contract or any material rights of the Company or any Company
subsidiary thereunder other than in the ordinary course of
business consistent with past practice or that would constitute
a Material Adverse Effect; or enter into any new agreement which
would have been considered a material contract if it were
entered into at or prior to the date hereof;
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forfeit, abandon, modify, waive, terminate or otherwise change
any of its permits, except as required under applicable law;
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take any action that would reasonably be expected to result in a
reduction of the insurer financial strength ratings of any
subsidiary of the Company that conducts the insurance operations
of the Company;
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offer or sell insurance or reinsurance of any line or class of
business in any new jurisdiction;
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knowingly violate or knowingly fail to perform any obligation or
duty imposed upon the Company or any of the Company subsidiaries
by any applicable law that is material to the business or
operations of the Company or any Company subsidiary;
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take any action that would reasonably be expected to, or omit to
take any action where such omission would reasonably be expected
to, prevent, materially delay or impede the consummation of the
Merger or cause any of its representations and warranties to
become untrue or have a Material Adverse Effect on the
transaction;
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take any action adverse to the interests of ACE with respect to
the Companys reinsurance agreements; and
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enter into any legally binding agreement or otherwise make a
commitment to do any of the foregoing.
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No
Solicitation of Transactions
We have agreed that we will not, and we will not authorize our
subsidiaries or our respective directors, officers,
employees, investment bankers, attorneys, accountants or other
advisors or representatives, directly or indirectly to:
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solicit, initiate or knowingly encourage, or knowingly take any
other action or fail to take any action in a way designed to
facilitate, any inquiries or the making of any proposal or offer
that constitutes, or could reasonably be expected to lead to,
any Takeover Proposal (as defined below);
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furnish any non-public information regarding the Company or any
subsidiaries to any person in connection with or in response to
a Takeover Proposal or an inquiry or indication of interest that
could reasonably be expected to lead to, any Takeover Proposal;
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engage in discussions or negotiations with any person with
respect to any Takeover Proposal;
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approve, endorse or recommend any Takeover Proposal; or
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enter into any letter of intent or similar document or any
agreement contemplating or otherwise relating to any Acquisition
Transaction (as defined below).
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In the Merger Agreement, a Takeover Proposal
generally means any unsolicited, bona fide, written offer,
proposal, inquiry or indication of interest contemplating or
otherwise relating to any Acquisition Transaction.
58
In the Merger Agreement, an Acquisition Transaction
means a transaction or series of transactions involving:
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any merger, consolidation, share exchange, business combination,
issuance of securities, acquisition of securities, tender offer,
exchange offer or other similar transaction (i) in which
the Company or any of its subsidiaries is a constituent
corporation, (ii) in which a person or group
(as defined in the Exchange Act and the rules promulgated
thereunder) of persons directly or indirectly acquires
beneficial or record ownership of securities representing more
than 10% of the outstanding securities of any class of voting
securities of the Company or any of its subsidiaries, or
(iii) in which the Company or any of its subsidiaries
issues or sells securities representing more than 10% of the
outstanding securities of any class of voting securities of the
Company or any of its subsidiaries; or
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other than in the ordinary course of business, any sale, lease,
exchange, transfer, license, acquisition or disposition of any
business or businesses or assets that constitute or account for
10% or more of the consolidated net revenues, net income or
assets of the Company and its subsidiaries.
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Despite the foregoing restrictions, if, following the receipt of
a bona fide written unsolicited Takeover Proposal that the
Company board of directors determines in good faith constitutes
or is reasonably likely to lead to a Superior Proposal (as
defined below) and the board of directors determines in good
faith, after consultation with outside counsel, that a failure
to do so would be inconsistent with its fiduciary duties under
applicable law, the Company may, at any time prior to the
adoption of the Merger Agreement by the Companys
shareholders, request information from the party making such
Takeover Proposal, furnish non-public information with respect
to the Company and the Companys subsidiaries to that party
pursuant to a customary confidentiality agreement (subject to
certain conditions set forth in the Merger Agreement) and
participate in discussions and negotiations with such party
regarding such Takeover Proposal.
Except as expressly permitted, neither the board of directors
nor any committee thereof shall:
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withdraw or modify the Companys recommendation to
shareholders to adopt the Merger Agreement in a manner adverse
to ACE, adopt or propose a resolution to withdraw or modify the
Companys recommendation to shareholders to adopt the
Merger Agreement in a manner adverse to ACE or take any other
action that is or becomes disclosed publicly to indicate that
the board of directors or any committee thereof does not support
the Merger and the Merger Agreement or does not believe that the
Merger and the Merger Agreement are in the best interests of the
Companys shareholders;
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fail to reaffirm, without qualification, the Companys
recommendation to shareholders to adopt the Merger Agreement, or
fail to state publicly, without qualification, that the Merger
and the Merger Agreement are in the best interests of the
Companys shareholders, within five Business Days after ACE
requests in writing that such action be taken;
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fail to announce publicly, within 10 business days after a
tender offer or exchange offer relating to securities of the
Company shall have been commenced, that the board of directors
recommends rejection of such tender or exchange offer;
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fail to issue, within 10 business days after a Takeover Proposal
is publicly announced, a press release announcing its opposition
to such Takeover Proposal;
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approve, endorse or recommend any Takeover Proposal; or
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resolve or propose to take any action described in the five
immediately preceding bullet points (each of the preceding
bullet points constituting, an adverse recommendation
change).
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At any time prior to the adoption of the Merger Agreement by the
Companys shareholders, the board of directors may effect,
or cause the Company to effect, as the case may be, an adverse
recommendation change if:
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after the date of the Merger Agreement, the Company receives an
unsolicited, bona fide, written offer to effect a transaction
which is considered a Superior Proposal and is not withdrawn;
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59
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such offer was not obtained or made as a direct or indirect
result of a breach of the Merger Agreement, the confidentiality
agreement between Company and ACE Group Holdings, Inc., or any
standstill or similar agreement under which the
Company or any of its subsidiaries has any rights or obligations;
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the Company provides ACE the terms and conditions of the offer
and the identity of the person making the offer;
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the board of directors determines in good faith, after
consultation with a financial advisor of nationally recognized
reputation and outside legal counsel, that such offer
constitutes a Superior Proposal;
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the board of directors does not effect, or cause the Company to
effect, an adverse recommendation change within five business
days after ACE receives written notice from the Company
confirming that the board of directors has determined that such
offer is a Superior Proposal and if requested by ACE, engages in
good faith negotiations with ACE to amend the Merger Agreement
so that the offer is no longer a Superior Proposal;
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at the end of such five business day period, such offer has not
been withdrawn and continues to constitute a Superior
Proposal; and
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the board of directors determines in good faith, after obtaining
and taking into account the advice of outside legal counsel,
that, in light of such Superior Proposal, failure to make an
adverse recommendation change would be inconsistent with the
board of directors fiduciary duties under applicable law.
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In the Merger Agreement, a Superior Proposal means
an unsolicited, bona fide written offer made by a third party to
acquire, directly or indirectly, by merger or otherwise, all of
the outstanding shares of Company common stock or all or
substantially all of the assets of the Company and its
subsidiaries, which the board of directors determines in its
reasonable good faith judgment, taking into account, among other
things, all legal, financial, regulatory and other aspects of
the proposal and the person making the proposal and after
consultation with a financial advisor of nationally recognized
reputation and outside legal counsel that the offer
(A) provides a higher value to the shareholders of the
Company than the consideration payable in the Merger,
(B) is not subject to any financing condition or
contingency and (C) is reasonably capable of being
completed, taking into account all financial, legal, regulatory
and other aspects of such proposal.
Access to
Information
From the date of the Merger Agreement until the closing date of
the Merger, we have agreed to (and to cause our subsidiaries and
our officers, directors, employees, auditors and agents and
those of our subsidiaries to: (a) provide to the officers,
employees, agents, advisors, legal counsel, accountants,
consultants and other authorized representatives of ACE and the
Merger Sub and its representatives reasonable access, during
normal business hours to the officers, employees, agents,
properties, offices and other facilities of the Company and its
subsidiaries and to their books and records and (b) furnish
ACE and the Merger Sub such financial, operating and other data
and information as ACE and the Merger Sub through its officers,
employees or agents, may reasonably request.
Public
Announcements
Until the closing date, ACE, the Merger Sub and the Company
agree that they will not issue any public release or
announcement concerning the Merger Agreement without the prior
consent of the other party (which consent shall not be
unreasonably delayed or withheld), except as such release or
announcement may be required by applicable law or the rules or
regulations of any United States or
non-United
States securities exchange, in which case the party required to
make the release or announcement shall use its reasonable best
efforts to allow the other party reasonable time to comment on
such release or announcement in advance of such issuance. Any
formal employee communication programs or announcements by the
Company with respect to the Merger or the employment or benefit
arrangements to be effective following the effective time of the
Merger are subject to prior review and approval by ACE, which
shall not be unreasonably withheld, conditioned or delayed.
60
Shareholders
Meeting
In the Merger Agreement, we have agreed:
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to duly call, give notice of, convene and hold an annual or
special meeting of our shareholders as promptly as practicable
following the execution of the Merger Agreement for the purpose
of considering and taking action on the Merger Agreement and the
Merger, and
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to use our reasonable best efforts to solicit proxies from our
shareholders in favor of adoption of the Merger Agreement.
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Employee
Benefits Matters
Prior to the earlier to occur of (i) November 30, 2011
and (ii) five business days prior to the closing date, the
Company shall prepare in consultation with ACE and provide ACE
with true, complete and accurate financial calculations pursuant
to Section 280G of the Code with respect to parachute
payments.
ACE shall recognize the service of each employee of the Company
or any Company subsidiary prior to the closing date as service
with ACE for the purpose of any waiting period, vesting,
eligibility and benefit entitlement for any compensation or
employee benefit plans of ACE in which such employee
participates, or which are made available by ACE (but excluding
benefit accruals for defined benefit pension plans and excluding
eligibility for retiree medical and other retiree welfare
benefits). The Company shall amend and terminate the Company
401(k) plan prior to the closing date of the Merger. The ESOP
shall terminate automatically pursuant to its terms upon the
consummation of the Merger. The Company agrees to convert its
filing for an initial determination letter for the ESOP into a
filing for a final determination letter for termination of the
ESOP. Upon receipt of a final favorable determination letter
from the IRS, the account balances in the ESOP shall be
distributed to participants and beneficiaries. Prior to closing,
contributions to the ESOP and payments on the ESOP loan shall be
made consistent with past practices on the regularly scheduled
contribution or payment date; provided, however, that the
Company shall make a contribution to, and payment on, the ESOP
loan with respect to the period from January 1, 2011
through the date of the closing (or, if the closing occurs after
December 31, 2011, the period from January 1, 2012
through the date of the closing) but no further contributions
shall be made to the ESOP after closing or with respect to any
period after the closing.
Indemnification
and Insurance
Each of our directors and officers and the directors and
officers of our subsidiaries will be indemnified, defended and
held harmless to the extent such indemnified parties are
indemnified by the Company or the applicable Company subsidiary
pursuant to their respective by laws, articles of incorporation
or other organizational documents, against any and all losses,
claims, damages, costs, expenses, fines, liabilities and
judgments, including amounts paid in settlement arising in whole
or in part out of the fact that such person was or is a director
or officer of the Company or any of its subsidiaries and
pertaining to any action or omission existing or occurring at or
prior to the effective time of the Merger. ACE will amend the
organizational documents of the surviving corporation after the
effective time of the Merger to contain provisions no less
favorable to the indemnified parties with respect to limitation
of liabilities of directors and officers, indemnification and
advancement of expenses than are set forth in the by laws,
articles of incorporation or other organizational documents. ACE
is required to obtain directors and officers liability insurance
providing coverage for a period of six years following the
effective time of the Merger with respect to acts or omissions
occurring prior to the effective time of the Merger that were
committed by such officers and directors in their capacity as
such, provided that ACE shall not be required to expend per year
of coverage more than 250% of the annual amount expended by the
Company and any Company subsidiary as of the date of the Merger
Agreement.
61
Conditions
to the Merger
Conditions
to Each Partys Obligation to Effect the Merger
The obligations of each of the parties to effect the Merger are
subject to the satisfaction or waiver in writing by ACE and the
Company, at or prior to the effective time of the Merger of the
following conditions:
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our shareholders must have approved and adopted the Merger
Agreement;
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any waiting period applicable to the consummation of the Merger
under the HSR Act shall have expired or been terminated and no
action shall have been instituted by the Department of Justice
or Federal Trade Commission challenging or seeking to enjoin the
consummation of the Merger;
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all required insurance regulatory approvals or consents shall
have been received; and
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no governmental authority shall have enacted, issued,
promulgated, enforced or entered any law that has the effect of
making the acquisition of shares of Company common stock by ACE
or the Merger Sub or any affiliate of either of them illegal or
otherwise preventing or prohibiting consummation of the Merger,
and there shall not be instituted or pending any action by any
governmental authority relating to the Merger Agreement.
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Conditions
to Obligations of ACE and the Merger Sub
The obligations of ACE and the Merger Sub to effect the Merger
are subject to the satisfaction or waiver (where permissible),
in their sole discretion, of the following additional conditions:
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the Companys representations and warranties related to
capitalization shall be true and correct, except for de
minimis errors, and all other representations and warranties
of the Company set forth in the Merger Agreement must be true
and correct in all respects (without giving effect to any
limitation as to materiality or Material Adverse Effect) except
where the failure in the aggregate to be true would not have a
Material Adverse Effect, in each case, as of the date of the
Merger Agreement and as of the effective time of the Merger
(except to the extent expressly made as of an earlier date, in
which case as of such earlier date);
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the Company must have performed or complied in all material
respects with all agreements and covenants required by the
Merger Agreement to be performed or complied with by it on or
prior to the effective time of the Merger;
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the Company shall have delivered to ACE a certificate, dated as
of the date of the closing signed by a duly authorized officer
of the Company, certifying the satisfaction of the two
previously stated conditions;
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since the date of the Merger Agreement there shall not have
occurred any effect, event, condition or change that would,
individually or in the aggregate, have a Material Adverse
Effect; and
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none of the regulatory approvals obtained shall contain and no
law shall have been enacted or in effect that contains any
limitation, requirement or condition that would, individually or
in the aggregate, be reasonably expected to (i) materially
impair or interfere with the ability of the Company and its
subsidiaries to conduct their businesses after the effective
time of the Merger substantially in the manner as such
businesses are conducted as of the date of the Merger Agreement,
(ii) result in the sale, lease, license, disposal or
holding separate by ACE of any capital stock of the surviving
corporation after the effective time of the Merger or by the
Company or its subsidiaries of any of their material assets,
rights product lines, licenses business or other operations or
(iii) materially and adversely affect the benefits, taken
as a whole, that ACE would otherwise received from the
transactions contemplated by the Merger Agreement.
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62
Conditions
to Obligations of the Company
Our obligation to effect the Merger is subject to the
satisfaction or waiver (if applicable) by us of the following
additional conditions:
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the representations and warranties of ACE and the Merger Sub set
forth in the financing section of the Merger Agreement must be
true and correct in all respects and all other representations
and warranties of ACE and the Merger Sub contained in the Merger
Agreement shall be true and correct in all respects (without
giving effect to any limitation as to materiality), except as
would not, individually or in the aggregate, be reasonably
likely to have a material adverse effect on the ability of ACE
and the Merger Sub to consummate the Merger as of the effective
time of the Merger (except to the extent expressly made as of an
earlier date, in which case as of such earlier date);
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ACE and Merger Sub must have performed or complied in all
material respects with all agreements and covenants required by
the Merger Agreement to be performed or complied with by it on
or prior to the effective time of the Merger; and
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ACE and Merger Sub shall have delivered to the Company a
certificate, dated as of the date of the closing signed by a
duly authorized officer of ACE and the Merger Sub, certifying
the satisfaction of the conditions of the two conditions
previously stated.
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Termination
Subject to certain exceptions, the Merger Agreement may be
terminated and the Merger may be abandoned at any time prior to
the effective time of the Merger upon written notice from the
terminating party to the non-terminating party, in any of the
following ways:
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by mutual written consent of the Company and ACE;
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by either ACE or the Company if the Merger has not been
consummated by December 31, 2011, unless such date, which
we refer to as the outside date, is extended in
accordance with the Merger Agreement in order to obtain any
necessary insurance regulatory consents or approvals (provided,
that in no event will the Merger Agreement be extended beyond
March 31, 2012), except that this termination right will
not be available to any party whose failure to fulfill any
obligation under the Merger Agreement has been a principal cause
of or resulted in the failure of the Merger to occur on or
before such date;
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by either ACE or the Company if any governmental authority has
issued an order or ruling which has become final and
non-appealable preventing, prohibiting or making illegal the
consummation of the Merger, unless the party seeking to
terminate the Merger Agreement failed to comply in all material
respects with its obligations to prevent such a ruling;
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by either ACE or the Company if (i) the special meeting of
the Companys shareholders (including any adjournments
thereof) has been held and completed and (ii) the
Companys shareholders shall not have adopted the Merger
Agreement, except that the Company may not terminate if it has
not paid ACE all sums due;
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by ACE if (i) the board of directors failed to recommend
that the Companys shareholders vote to adopt the Merger
Agreement, (ii) there was an adverse recommendation change,
(iii) the board of directors approved, endorsed or
recommended any Takeover Proposal, (iv) the Company failed
to include the Companys recommendation to shareholders to
adopt the Merger Agreement in the proxy statement or
(v) the Company, or any of its subsidiaries or any
representative of the Company or any of its subsidiaries,
breached the obligations related to the shareholders
meeting, the proxy statement or non-solicitation of
alternative transactions or (vi) the board of directors or
one of its committees resolves or proposes to take any of the
foregoing actions;
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by ACE if the Company breaches any of its representations,
warranties, covenants or agreements in the Merger Agreement and
such breach would cause the conditions to the obligations of ACE
and Merger
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63
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Sub to consummate the Merger with respect to the accuracy of
representations and warranties of the Company and performance of
covenants and obligations of the Company not to be satisfied and
such breach cannot be cured or is not cured within 30 days
of notice of such breach (or the outside date, if earlier) and
such breach is not waived by ACE; or
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by the Company (i) if ACE or Merger Sub breach any of their
representations, warranties, covenants or agreements in the
Merger Agreement and such breach would cause the conditions to
the obligations of the Company to consummate the Merger with
respect to the accuracy of representations and warranties of ACE
and Merger Sub and performance of covenants and obligations of
ACE and Merger Sub not to be satisfied and such breach cannot be
cured or is not cured within 30 days of notice of such
breach (or the outside date, if earlier) and such breach is not
waived by the Company; or (ii) prior to the Companys
shareholders adopting the Merger Agreement, if it concurrently
enters into a definitive agreement providing for a Superior
Proposal and has followed the procedures and met the obligations
set forth in the Merger Agreement related to such Superior
Proposal and has paid or pays the Termination Fee to ACE (as
defined below).
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Termination
Fee and Expenses
The Merger Agreement requires that the Company pay ACE a
termination fee equal to $3,750,000 if:
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ACE terminates the Merger Agreement because (i) the board
of directors failed to recommend that the Companys
shareholders vote to adopt the Merger Agreement, (ii) there
was an adverse recommendation change, (iii) the board of
directors approved, endorsed or recommended any Takeover
Proposal, (iv) the Company failed to include the
Companys recommendation to shareholders to adopt the
Merger Agreement in the proxy statement, (v) the Company,
or any of its subsidiaries or any representative of the Company
or any of its subsidiaries, breached the obligations related to
the shareholders meeting, the proxy statement or
non-solicitation of alternative transactions or
(vi) the board of directors or one of its committees
resolves or proposes to take any of the foregoing actions;
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either the Company or ACE terminates the Merger Agreement
because the Merger has not been consummated by the outside date
or ACE terminates the Merger Agreement because the Company
breaches any of its representations, warranties, covenants or
agreements in the Merger Agreement and such breach would cause
the conditions to the obligations of ACE and Merger Sub to
consummate the Merger with respect to the accuracy of
representations and warranties of the Company and performance of
covenants and agreements of the Company not to be satisfied and
such breach cannot be cured or is not cured within 30 days
of notice of such breach (or the outside date, if earlier) and
on or before the date of such termination a Takeover Proposal
shall have been announced, disclosed or otherwise communicated
to the board of directors and the Company shall have entered
into a definitive agreement with respect to an Acquisition
Transaction or an Acquisition Transaction is consummated within
twelve months of such termination of the Merger Agreement;
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either the Company or ACE terminates the Merger Agreement
because the special meeting of the Companys shareholders
(including any adjournments thereof) shall have been held and
completed and the shareholders shall not have adopted and
approved the Merger Agreement and on or before the date of the
Company shareholders meeting, a Takeover Proposal shall
have been announced, disclosed or otherwise communicated to the
board of directors and (ii) the Company shall have entered
into a definitive agreement with respect to an Acquisition
Transaction or an Acquisition Transaction is consummated within
twelve months of such termination of the Merger
Agreement; or
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if the Merger Agreement is terminated by any party thereto at
any time during which the Merger Agreement was terminable in
circumstances in which ACE would be entitled to the payment of
the termination fee as described in any of the three immediately
preceding bullet points.
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The Merger Agreement provides that, except for the payment of
the termination fee (and certain related amounts) and payment of
the HSR filing (which ACE and the Company shall bear equally),
each party will
64
pay its own expenses incurred in connection with the Merger and
the transactions contemplated by the Merger Agreement, whether
or not the Merger is consummated.
Amendment
and Waiver
The Merger Agreement may be amended by the parties in writing by
action taken by or on behalf of their respective boards of
directors at any time prior to the effective time of the Merger.
Once the Company shareholders shall have adopted the Merger
Agreement, no amendment may be made that by law requires further
approval by our shareholders without obtaining such approval.
Until the effective time of the Merger, the parties may, to the
extent legally allowed:
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extend the time for the performance of any of the obligations or
other acts of the other parties in the Merger Agreement;
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waive any inaccuracies in the representations and warranties
contained in the Merger Agreement; and
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waive compliance with any of the conditions contained in the
Merger Agreement.
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Once the Company shareholders shall have adopted the Merger
Agreement, no waiver may be made that by law requires further
approval by our shareholders without obtaining such approval.
Specific
Performance
The parties agreed that irreparable damage would occur in the
event that any of the provisions of the Merger Agreement were
not performed in accordance with their specific terms on a
timely basis or were otherwise breached, and that the parties,
without the necessity of posting bond or other undertaking,
shall be entitled to an injunction or injunctions to prevent
breaches of the Merger Agreement and to specific performance of
the terms hereof to prevent breaches of the Merger Agreement and
to enforce specifically the terms and provisions of the Merger
Agreement, in addition to any other remedy to which they may be
entitled at law or in equity.
MARKET
PRICE AND DIVIDEND DATA
Our common stock is listed on the NASDAQ Global Market under the
ticker symbol PMIC. This table shows, for the
periods indicated, the high and low sales price per share for
our common stock as reported by the NASDAQ Global Market.
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Common Stock
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High
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Low
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Fiscal Year Ended December 31, 2011
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Third Quarter (through September 15, 2011)
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$
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20.13
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$
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14.25
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Second Quarter
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17.68
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13.78
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First Quarter
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15.34
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13.51
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Year Ended December 31, 2010
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Fourth Quarter
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$
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14.75
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$
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13.21
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Third Quarter
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14.81
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12.00
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Second Quarter
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14.95
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12.63
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First Quarter
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12.15
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10.35
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Year Ended December 31, 2009
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Fourth Quarter
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$
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11.08
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$
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10.00
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Third Quarter
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N/A
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N/A
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Second Quarter
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N/A
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N/A
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First Quarter
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N/A
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N/A
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65
The closing price per share of our common stock on
September 7, 2011 (the last trading day before announcement
of the Merger Agreement) was $16.30. The high and low sales
prices per share for our common stock as reported by the NASDAQ
Global Market on September 15, 2011, the latest practicable
trading day before the printing of this proxy statement were
$20.13 and $20.08, respectively.
As of September 15, 2011, 4,974,414 shares of our
common stock were held of record by shareholders eligible to
vote.
Following the completion of the Merger, our common stock will
not be traded on any public market.
Dividend
Policy
We do not currently pay dividends on our common stock. Payment
of dividends in the future is at the discretion of the board of
directors and will depend on a number of factors including our
operating results, overall financial condition, capital
requirements and general business conditions. We depend
primarily on dividends paid by Penn Millers Insurance Company,
our lead insurance company, to us and proceeds from the initial
public offering that were not contributed to Penn Millers
Insurance Company to provide funds for the payment of dividends.
If Penn Millers Insurance Company chooses to pay dividends to
Penn Millers Holding Corporation, we will receive dividends only
after Penn Millers Insurance Company provides notice to, and
without objection from, the Pennsylvania Insurance Department.
During any twelve-month period, the amount of dividends paid by
Penn Millers Insurance Company to us, without the prior approval
of the Pennsylvania Insurance Department, may not exceed the
greater of 10% of the insurance companys surplus as
regards policyholders as reported on its most recent annual
statement filed with the Pennsylvania Insurance Department or
the insurance companys statutory net income as reported on
such statement.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following tables present certain information regarding the
ownership of our common stock as of September 15, 2011, by:
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all those known by us to be beneficial owners of more than five
percent of our common stock;
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each director;
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each executive officer; and
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all of our directors and executive officers as a group.
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We calculate beneficial ownership by including shares owned in
each directors or executive officers name (or by any
member of his or her immediate family). Also, in calculating the
percentage ownership, we count securities which the director or
executive officer could purchase within 60 days of
September 15, 2011, (such as exercisable stock options that
are listed in a separate column as outstanding securities).
Except as otherwise noted, to our knowledge, the named
individual or their family members have sole voting and
investment power with respect to the securities beneficially
owned by the shareholder. Unless otherwise indicated, the
business address for each listed shareholder is 72 North
Franklin Street, Wilkes-Barre, Pennsylvania
18701-1301.
66
Security
Ownership of Certain Beneficial Owners
The following table sets forth information regarding persons or
entities that, to the knowledge of the Company, own of record or
beneficially, as of September 15, 2011, five percent or
more of the outstanding shares of Company common stock:
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Amount and
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Nature of
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Percent of
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Beneficial
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Common
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Name and Address of Beneficial Owner
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Ownership
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Stock(1)
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Penn Millers Holding Corporation Employee Stock Ownership Plan
Trust(2)
2201 Ridgewood Rd., #180
Wyomissing, PA 19610
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536,139
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10.78
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%
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Castine Capital Management Company(3)
One International Place, Suite 2401
Boston, Massachusetts 02110
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422,951
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8.50
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%
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Sardar Biglari(4)
175 East Houston Street, Suite 1300
San Antonio, Texas 78205
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416,598
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8.37
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%
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Aegis Financial Corp.(5)
1100 North Glebe Road, #1040
Arlington, VA 22201
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329,610
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6.63
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%
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Bradley Louis Radoff(6)
1177 West Loop South
Houston, TX 77027
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255,000
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5.13
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%
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(1) |
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Calculation of percentage is based upon a total of
4,974,414 shares outstanding and entitled to vote at
September 15, 2011. |
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(2) |
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Under the Penn Millers Holding Corporation Employee Stock
Ownership Plan (which we refer to as the ESOP),
shares are allocated to accounts in the name of the individuals
who participate in the ESOP. The voting rights for shares in
each individual participants ESOP account are passed
through to that participant. Because participants can vote
shares in their ESOP accounts, but cannot sell them at this
time, participants in the ESOP have voting power and no
dispositive power over shares allocated to their ESOP accounts.
As of September 15, 2011, 536,139 shares were held in
the ESOPs related trust. Of these 536,139 shares,
59,140 shares were allocated to the accounts of eligible
ESOP participants. The remaining 476,999 shares were held
in an unallocated account in the ESOPs related trust and
will be allocated to eligible ESOP participants in accordance
with the terms of the ESOP. The ESOP trustee will vote the
unallocated shares held under the ESOP, and allocated shares for
which no direction is received, in its sole discretion, subject
to the ESOP trustees fiduciary responsibilities under
applicable law. The number of shares allocated to the account of
each executive officer is disclosed in the footnotes to the
beneficial ownership table which appears below under the heading
Security Ownership of Directors and Officers
and is also included in the total number of shares held by the
ESOP. Because of its role as trustee for the ESOP, National Penn
Investors Trust Company may also be deemed to have dispositive
power over the shares held by the ESOP. |
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(3) |
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Castine Capital Management, LLC shares dispositive and voting
power over 280,009 of its shares with Castine Partners II, LP. |
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(4) |
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Sardar Biglari has sole dispositive and voting power over
416,598 shares owned by Biglari Holdings, which has
208,299 shares with sole dispositive and voting power
through the Lion Fund LLP and 208,299 shares with sole
dispositive and voting power through Biglari Capital Corp. |
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(5) |
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Aegis Financial Corp is an investment advisor that acts through
its principal, Scott L. Barbee, with sole dispositive and voting
power over its shares. |
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(6) |
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Bradley Radoff has sole dispositive and voting power over
255,000 shares. |
67
Security
Ownership of Directors and Officers
The following table sets forth information concerning the number
of shares of Company common stock beneficially owned, as of
September 15, 2011, by each present director (and one
retired director) and nominee for director, each executive
officer and all of the Companys current directors and
executive officers as a group:
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Amount and
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Nature of
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Beneficial
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Percent of
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Name:
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Ownership(1)
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Class(2)
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Directors:
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Heather M. Acker(3)
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8,800
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*
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F. Kenneth Ackerman, Jr.(3)
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11,697
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*
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E. Lee Beard
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5,500
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*
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Dorrance R. Belin(3)
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15,300
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*
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John L. Churnetski(3)
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8,800
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*
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John M. Coleman(3)
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37,300
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*
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Douglas A. Gaudet(4)(5)
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58,031
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1.2
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%
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Kim E. Michelstein(3)
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10,300
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*
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Robert A. Nearing, Jr.(3)
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7,800
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*
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Donald A. Pizer(3)
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6,400
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*
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James M. Revie(6)
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7,500
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*
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Executive Officers:
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Michael O. Banks(5)(7)
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21,545
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*
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Harold W. Roberts(5)(8)
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12,155
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*
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Keith A. Fry(5)(9)
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4,259
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*
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Kevin D. Higgins(5)(10)
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11,661
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*
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Jonathan C. Couch(5)(11)
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5,932
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*
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Joseph J. Survilla(5)(12)
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3,972
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*
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All Directors and Executive Officers as a Group (17 persons)
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236,952
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4.8
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%
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* |
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Less than one percent. |
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(1) |
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Shares beneficially owned means shares over which a person
exercises sole or shared voting or investment power or shares of
which a person has the right to acquire beneficial ownership
within 60 days of September 15, 2011. Unless otherwise
noted, the individuals and group noted above have sole voting
and investment power with respect to shares beneficially owned. |
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(2) |
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Calculation of percentages is based upon 4,974,414 shares
outstanding and entitled to vote on September 15, 2011 plus
shares that may be issued within 60 days of
September 15, 2011 to the applicable individuals and group
noted above having rights to exercise stock options if such
persons or group members exercise such rights within such period. |
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(3) |
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Includes 300 options to purchase shares of our common stock. |
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(4) |
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Includes 6,068 options to purchase shares of our common stock. |
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(5) |
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Includes shares allocated to employee accounts under the ESOP.
Messrs. Gaudet, Banks, Roberts, Fry, Higgins, Couch and
Survilla have earned 2,472, 2,197, 3,258, 304, 2,348, 1,044, and
1,966 shares each, respectively. These shares, a portion of
which are unvested, are eligible to be voted by the holder and
vest over 6 years. These unvested shares will become fully
vested upon the closing of the Merger. |
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(6) |
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Includes 1,500 options to purchase shares of our common stock.
Mr. Revie retired from the Companys board of
directors effective April 4, 2011. |
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(7) |
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Includes 2,598 options to purchase shares of our common stock. |
68
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(8) |
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Includes 1,680 options to purchase shares of our common stock. |
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(9) |
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Includes 1,533 options to purchase shares of our common stock. |
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(10) |
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Includes 1,464 options to purchase shares of our common stock. |
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(11) |
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Includes 967 options to purchase shares of our common stock. |
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(12) |
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Includes 984 options to purchase shares of our common stock. |
ADVISORY
VOTE ON GOLDEN PARACHUTES
Section 14A of the Exchange Act, which was enacted as part
of the Dodd-Frank Wall Street Reform and Consumer Protection Act
of 2010, requires that we provide our shareholders with the
opportunity to vote to approve, on an non-binding, advisory
basis, the golden parachute compensation for our
named executive officers, as disclosed in the section of this
proxy statement entitled The Merger
Interests of Executive Officers and Directors in the
Merger Golden Parachute at
page .
We are asking our shareholders to indicate their approval of the
various change of control payments which our named executive
officers will or may be eligible to receive in connection with
the Merger. These payments are set forth in the table entitled
Golden Parachute Compensation under the
section of this proxy statement entitled The
Merger Interests of Executive Officers and Directors
in the Merger Golden Parachutes and the
accompanying footnotes. The various plans and arrangements
pursuant to which these compensation payments may be made have
previously formed part of the Companys overall
compensation program for its named executive officers, which
have been disclosed to our shareholders as part of the
Compensation Discussion and Analysis and related sections of our
annual proxy statements. These historical arrangements were
adopted and approved by the Compensation Committee of our board
of directors, which is comprised solely of non-management
directors, and are believed to be reasonable and competitive
with the arrangements being offered by other
U.S.-based,
insurance product providers of similar size.
Accordingly, we are seeking approval of the following resolution
at the special meeting:
RESOLVED FURTHER, that the shareholders of the Company
approve, on a non-binding, advisory basis, the golden parachute
compensation which may be paid to the Companys named
executive officers in connection with the Merger.
Shareholders should note that this non-binding proposal
regarding golden parachute compensation is merely an advisory
vote that will not be binding on the Company or ACE, their
boards of directors or the compensation committees of the
Company or ACE. Further, the underlying plans and arrangements
are contractual in nature and not, by their terms, subject to
shareholder approval. Accordingly, regardless of the outcome of
the advisory vote, if the Merger is consummated our named
executive officers will be eligible to receive the various
change of control payments in accordance with the terms or
conditions applicable to those payments.
Approval of the non-binding proposal regarding certain
Merger-related executive compensation arrangements requires an
affirmative vote of a majority of the shares of our common stock
present in person or represented by proxy at the special meeting
and entitled to vote, assuming a quorum is present. For the
non-binding proposal regarding certain Merger-related executive
compensation arrangements, you may vote FOR,
AGAINST or ABSTAIN.
Abstentions and properly executed broker non-votes, if any,
will be counted as present for the purpose of determining
whether a quorum is present at the special meeting, but will
have the same effect as a vote against the adoption of the
non-binding proposal. The failure to instruct your bank, broker
or other nominee how to vote your shares will not have any
effect on the non-binding proposal regarding certain
Merger-related executive compensation arrangements. No proxy
that is specifically marked against adoption of the Merger
Agreement will be voted FOR the non-binding
proposal, unless it is specifically marked
FOR the non-binding proposal.
69
ADJOURNMENT
OF THE SPECIAL MEETING
We are submitting a proposal for consideration at the special
meeting to authorize the named proxies to approve one or more
adjournments of the special meeting if there are not sufficient
votes to adopt the Merger Agreement at the time of the special
meeting. Even though a quorum may be present at the special
meeting, it is possible that we may not have received sufficient
votes to adopt the Merger Agreement by the time of the special
meeting. In that event, we would need to adjourn the special
meeting in order to solicit additional proxies. The adjournment
proposal relates only to an adjournment of the special meeting
for purposes of soliciting additional proxies to obtain the
requisite shareholders approval to adopt the Merger Agreement.
Any other adjournment of the special meeting (e.g., an
adjournment required because of the absence of a quorum) would
be voted upon pursuant to the discretionary authority granted by
the proxy.
The proposal to approve one or more adjournments of the special
meeting requires the affirmative vote of holders of a majority
of the shares of Company common stock voting on the proposal.
Our board of directors unanimously recommends that you vote
FOR the adjournment of the special meeting,
if necessary, for the purpose of soliciting additional proxies
to vote in favor of adopting the Merger Agreement.
If the special meeting is adjourned to a different date, time,
or place, we are not required to give notice of the new date,
time, or place if this information is announced at the special
meeting before adjournment or unless our board fixes a new
record date for the special meeting.
The adjournment proposal relates only to an adjournment of the
special meeting occurring for purposes of soliciting additional
proxies for adoption of the Merger Agreement proposal in the
event that there are insufficient votes to approve that
proposal. Our board of directors retains full authority to the
extent set forth in our bylaws and Pennsylvania law to postpone
the special meeting before it is convened, without the consent
of any of our shareholders.
OTHER
MATTERS
Other
Matters for Action at the Special Meeting
As of the date of this proxy statement, our board of directors
knows of no matters that will be presented for consideration at
the special meeting other than as described in this proxy
statement.
Shareholder
Proposals
If the Merger is consummated, we will not have public
shareholders and there will be no public participation in any
future meeting of shareholders of the Company. However, if the
Merger is not consummated, we expect to hold our 2012 annual
meeting of shareholders in 2012. The Company currently
anticipates that, in such event, the 2012 annual meeting of
shareholders will be held during the period
from ,
2012
to ,
2012, although the Company reserves the right to delay its
annual meeting as may be permitted under applicable law.
Proposals of shareholders intended to be presented at the 2012
Annual Meeting of Shareholders pursuant to
Rule 14a-8
under the Exchange Act must be received by the Company no later
than 5:00 p.m., Eastern Time, on December 7, 2011, in
order to be considered for inclusion in the Companys proxy
materials for that meeting. The Company suggests that proponents
submit their proposals via registered or certified mail.
Proposals should be addressed to our Corporate Secretary, 72
North Franklin Street P.O. Box P, Wilkes-Barre,
Pennsylvania
18773-0016.
Our bylaws require advance notice of business to be brought
before a shareholders meeting, including nominations of
persons for election as directors. To be timely, notice to our
Corporate Secretary must be received at our principal executive
office no less than 90 days prior to, and not more than
150 days before, the date of the annual meeting; provided,
however, that in the event that less than 21 days
notice or prior public disclosure of the date of the meeting is
given or made to shareholders, notice by the shareholders to be
timely must be received no later than the close of business on
the 7th day following the day on which notice of the date
of the annual meeting was mailed or such public disclosure was
made. The Companys by-laws also specify requirements
relating to the content of the notice which stockholders must
provide to the Secretary of
70
the Company for any matter, including a stockholder nomination
for director, to be properly presented at a stockholder meeting.
The bylaws, which have certain other related requirements, are
posted on our website at www.pennmillers.com.
Where You
Can Find More Information
We file annual, quarterly and current reports, proxy statements
and other information with the SEC. You may read and copy any
reports, statements or other information that we file with the
SEC at the SEC public reference room at the following location:
Public Reference Room, 100 F Street, N.E.,
Room 1580, Washington, D.C. 20549. Please call the SEC
at
1-800-SEC-0330
for further information on the public reference room. These SEC
filings are also available to the public from commercial
document retrieval services and at the website maintained by the
SEC at www.sec.gov. Reports, proxy statements and other
information concerning us may also be inspected at the offices
of the NASDAQ Stock Market at 1735 K Street, N.W.,
Washington, D.C. 20006.
Statements contained in this proxy statement, or in any document
incorporated by reference in this proxy statement regarding the
contents of any contract or other document, are not necessarily
complete and each such statement is qualified in its entirety by
reference to that contract or other document filed as an exhibit
with the SEC. The SEC allows us to incorporate by
reference into this proxy statement documents we file with
the SEC. This means that we can disclose important information
to you by referring you to those documents. The information
incorporated by reference is considered to be a part of this
proxy statement, and later information that we file with the SEC
will update and supersede that information. We incorporate by
reference the documents listed below and any documents filed by
us pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Exchange Act (in each case, other than those documents or the
portions of those documents not deemed to be filed) after the
date of this proxy statement and before the date of the special
meeting.
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Annual Report on
Form 10-K
for the fiscal year ended December 31, 2010 (filed with the
SEC on March 28, 2011);
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Quarterly Reports on
Form 10-Q
for the fiscal quarters ended June 30, 2011, (filed with
the SEC on August 12, 2011);
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Current Reports on
Form 8-K
filed with the SEC on August 15, 2011 and September 9,
2011; and
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Definitive Proxy Statement for our 2011 annual meeting of
shareholders filed with the SEC on March 31, 2011.
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Any person, including any beneficial owner of shares of Company
common stock, to whom this proxy statement is delivered may
request copies of proxy statements and any of the documents
incorporated by reference in this document or other information
concerning us by written or telephonic request directed to our
Corporate Secretary at the Companys address, which is Penn
Millers Holding Corporation, 72 North Franklin Street
P.O. Box P, Wilkes-Barre, Pennsylvania
18773-0016,
telephone
(800) 233-8347;
or from our proxy
solicitor,
(toll-free
at );
or from the SEC through the SEC website at the address provided
above. Documents incorporated by reference are available without
charge, excluding any exhibits to those documents unless the
exhibit is specifically incorporated by reference into those
documents.
* * *
Whether or not you plan to attend the special meeting, please
vote over the Internet, by telephone or by marking, signing,
dating and promptly returning the enclosed proxy in the envelope
provided.
You should rely only on the information contained in this proxy
statement. We have not authorized anyone to provide you with
information that is different from what is contained in this
proxy statement. This proxy statement is
dated ,
2011. You should not assume that the information contained in
this proxy statement is accurate as of any date other than that
date.
This proxy statement does not constitute the solicitation of
a proxy in any jurisdiction to or from any person to whom it is
not lawful to make any solicitation in that jurisdiction. The
delivery of this
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proxy statement should not create an implication that there
has been no change in the affairs of the Company since the date
of this proxy statement or that the information herein is
correct as of any later date.
By Order of the Board of Directors,
Michael O. Banks
Executive Vice President, Chief Financial Officer &
Corporate Secretary
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