CONTRIBUTION NOTE PURCHASE AGREEMENT Between DONEGAL MUTUAL INSURANCE COMPANY and SHEBOYGAN FALLS MUTUAL INSURANCE COMPANY DATED AS OF DECEMBER 27, 2006
Exhibit 10(DD)
Between
DONEGAL MUTUAL INSURANCE COMPANY
and
SHEBOYGAN FALLS MUTUAL INSURANCE COMPANY
DATED AS OF DECEMBER 27, 2006
CONTENTS
Page | ||||||||
RECITALS | 1 | |||||||
I. | DEFINITIONS | 2 | ||||||
1.1 | Definitions | 2 | ||||||
II. | SALE AND PURCHASE OF NOTE | 8 | ||||||
2.1 | Sale and Purchase of Note | 8 | ||||||
2.2 | Payment of Purchase Price and Delivery of Note | 9 | ||||||
2.3 | Closing Date | 9 | ||||||
III. | REPRESENTATIONS AND WARRANTIES OF SHEBOYGAN FALLS | 10 | ||||||
3.1 | Organization and Standing | 10 | ||||||
3.2 | Subsidiaries | 10 | ||||||
3.3 | Authorization | 10 | ||||||
3.4 | Financial Statements; Examinations | 11 | ||||||
3.5 | Material Changes Since December 31, 2005 | 12 | ||||||
3.6 | Availability of Assets and Legality of Use | 12 | ||||||
3.7 | Title to Property | 12 | ||||||
3.8 | Books and Records | 12 | ||||||
3.9 | Accounts Receivable | 13 | ||||||
3.10 | Compliance with Legal Requirements; Governmental Authorizations | 13 | ||||||
3.11 | Real Property and Leases | 14 | ||||||
3.12 | Insurance | 14 | ||||||
3.13 | Conduct of Business | 15 | ||||||
3.14 | No Undisclosed Material Liabilities | 16 | ||||||
3.15 | No Defaults or Litigation | 16 | ||||||
3.16 | Tax Liabilities | 16 | ||||||
3.17 | Contracts | 16 | ||||||
3.18 | Employee Agreements | 17 | ||||||
3.19 | Employee Relations | 18 | ||||||
3.20 | Employee Retirement Income Security Act | 18 | ||||||
3.21 | Conflicts; Sensitive Payments | 19 | ||||||
3.22 | Corporate Name | 19 | ||||||
3.23 | Trademarks and Proprietary Rights | 19 | ||||||
3.24 | Environmental Matters | 19 | ||||||
3.25 | Insurance Issued by Sheboygan Falls | 20 | ||||||
3.26 | Health and Safety Matters | 21 | ||||||
3.27 | No Omissions | 21 | ||||||
3.28 | Finders | 22 | ||||||
3.29 | Representations and Warranties to Be True on the Closing Date | 22 |
(i)
Page | ||||||||
IV. | REPRESENTATIONS AND WARRANTIES OF DONEGAL MUTUAL | 22 | ||||||
4.1 | Organization and Standing | 22 | ||||||
4.2 | Authorization | 22 | ||||||
4.3 | Consents and Approvals of Government Agencies | 23 | ||||||
4.4 | Transferability | 23 | ||||||
4.5 | No Omissions | 24 | ||||||
4.6 | Finders | 24 | ||||||
4.7 | Representations and Warranties to be True on the Closing Date | 24 | ||||||
V. | CERTAIN COVENANTS | 24 | ||||||
5.1 | Investigation of Sheboygan Falls and Donegal Mutual | 24 | ||||||
5.2 | Confidential Nature of Information | 25 | ||||||
5.3 | Preserve Accuracy of Representations and Warranties | 25 | ||||||
5.4 | Maintain Sheboygan Falls As a Going Concern | 26 | ||||||
5.5 | Make No Material Change in Sheboygan Falls | 26 | ||||||
5.6 | No Public Announcement | 27 | ||||||
5.7 | Required Filings | 27 | ||||||
5.8 | No Solicitation | 27 | ||||||
5.9 | Future Actions Regarding Sheboygan Falls | 28 | ||||||
5.10 | Affirmative Covenants of Sheboygan Falls | 31 | ||||||
5.11 | Negative Covenants of Sheboygan Falls | 32 | ||||||
VI. | CONDITIONS | 33 | ||||||
6.1 | Conditions to Each Party’s Obligations | 33 | ||||||
6.2 | Conditions to Obligations of Donegal Mutual | 33 | ||||||
6.3 | Conditions to Obligations of Sheboygan Falls | 35 | ||||||
VII. | TERMINATION | 37 | ||||||
7.1 | Termination | 37 | ||||||
7.2 | Effect of Termination | 38 | ||||||
VIII. | AMENDMENT, WAIVER AND INDEMNIFICATION | 38 | ||||||
8.1 | Amendment | 38 | ||||||
8.2 | Extension; Waiver | 38 | ||||||
8.3 | Survival of Obligations | 39 | ||||||
8.4 | Indemnification | 39 | ||||||
IX. | MISCELLANEOUS | 41 | ||||||
9.1 | Notices | 41 | ||||||
9.2 | Expenses | 42 | ||||||
9.3 | Governing Law | 43 | ||||||
9.4 | Successors and Assigns | 43 | ||||||
9.5 | Partial Invalidity | 43 | ||||||
9.6 | Execution in Counterparts | 43 |
(ii)
Page | ||||||||
9.7 | Titles and Headings | 43 | ||||||
9.8 | Entire Agreement; Statements as Representations | 43 | ||||||
9.9 | Specific Performance | 43 | ||||||
SIGNATURES | 44 |
APPENDICES:
APPENDIX A
|
— | Form of Contribution Note | X-0 | |||
XXXXXXXX X
|
— | Form of Services Agreement | B-1 | |||
APPENDIX C
|
— | Form of Amended and Restated Bylaws of Sheboygan Falls Mutual Insurance Company | X-0 | |||
XXXXXXXX X-0
|
— | Form of Employment Agreement for Xxx X. Xxxxxx | X-0 | |||
XXXXXXXX X-0
|
— | Form of Employment Agreement for Executive Officers of Sheboygan Falls other than Xxx X. Xxxxxx | D-2 | |||
APPENDIX E
|
— | Form of Technology License Agreement. | E-1 | |||
APPENDIX F
|
— | Form of Retrocessional Reinsurance Agreement | F-1 |
(iii)
THIS CONTRIBUTION NOTE PURCHASE AGREEMENT (this “Agreement”) made as of this 27th
day of December, 2006 between DONEGAL MUTUAL INSURANCE COMPANY, a Pennsylvania mutual fire
insurance company (“Donegal Mutual”) and SHEBOYGAN FALLS MUTUAL INSURANCE COMPANY, a Wisconsin
mutual fire and casualty insurance company (“Sheboygan Falls”).
WITNESSETH:
WHEREAS, Sheboygan Falls proposes to issue a contribution note (the “Note”), the repayment of
which would be subordinated to the claims of policyholders of Sheboygan Falls and otherwise be in
compliance with applicable provisions of the Wisconsin Insurance Code and the regulations of the
Commissioner of Insurance of the State of Wisconsin, in the principal amount of Three Million Five
Hundred Thousand Dollars ($3,500,000) in substantially the form of Appendix A;
WHEREAS, Donegal Mutual proposes to purchase the Note;
WHEREAS, Donegal Mutual and Sheboygan Falls propose that Sheboygan Falls will (i) make certain
changes in the composition of the Board of Directors of Sheboygan Falls in connection with the
transactions contemplated by this Agreement, (ii) adopt Amended and Restated Bylaws in
substantially the form of Appendix C and (iii) enter into employment agreements with four of its
executive officers in substantially the form of Appendices D-1 and D-2;
WHEREAS, Donegal Mutual and Sheboygan Falls propose that Donegal Mutual and Sheboygan Falls
enter into: (i) a Services Agreement in substantially the form of Appendix B whereby Donegal
Mutual will provide the services specified therein to Sheboygan Falls in accordance with the terms
of such Agreement, (ii) a Technology License Agreement in substantially the form of Appendix E
whereby Donegal Mutual will license certain of its computer applications and systems to Sheboygan
Falls in accordance with the terms of such Agreement and (iii) a Retrocessional Reinsurance
Agreement in substantially the form of Appendix F, whereby Sheboygan Falls will cede all of its
business to Donegal Mutual and Donegal Mutual will retrocede all of such business to Sheboygan
Falls in accordance with the terms of such Agreement;
WHEREAS, the Board of Directors of Donegal Mutual has approved this Agreement, the Services
Agreement, the Technology License Agreement and the Retrocessional Reinsurance Agreement by
resolutions duly adopted; and
WHEREAS, the Board of Directors of Sheboygan Falls has approved this Agreement, the Note, the
Services Agreement, the Technology License Agreement, the Retrocessional
Reinsurance Agreement, the Amended and Restated Bylaws and the Employment Agreements by
resolutions duly adopted;
NOW, THEREFORE, in consideration of the mutual covenants set forth herein and intending to be
legally bound hereby, Donegal Mutual and Sheboygan Falls agree as follows:
ARTICLE I
DEFINITIONS
1.1 Definitions. When used in this Agreement, the following words or phrases have the
following meanings:
“Affiliate” shall mean a Person that directly, or indirectly through one or more
intermediaries, controls, is controlled by or is under common control with another Person or
beneficially owns or has the power to vote or direct the vote of 10% or more of any class of voting
stock or of any form of voting equity interest of such other Person in the case of a Person that is
not a corporation. For purposes of this definition, “control”, including the terms “controlling”
and “controlled”, means the power to direct or cause the direction of the management and policies
of a Person, directly or indirectly, whether through the ownership of securities or partnership or
other ownership interests, by contract or otherwise.
“Agreement” shall have the meaning ascribed to it in the preamble.
“Ancillary Documents” shall mean the Note, the Services Agreement, the Employment Agreements,
the Technology License Agreement and the Retrocessional Reinsurance Agreement.
“Amended and Restated Bylaws” shall mean the Amended and Restated Bylaws of Sheboygan Falls in
substantially the form of Appendix C.
“Annual Statements” shall mean the annual statements of condition and affairs filed pursuant
to the Wisconsin Insurance Code.
“Assets” shall mean all rights, titles, franchises and interests in and to every species of
property, real, personal and mixed, tangible and intangible, and things in action relating thereto,
including, without limitation, cash and cash equivalents, securities, including, without
limitation, exempted securities under the Securities Act of 1933, as amended (the “Securities
Act”), receivables, recoverables from reinsurance and otherwise, deposits and advances, loans,
agents balances, real property, together with buildings, structures and the improvements thereon,
fixtures contained therein and appurtenances thereto and easements
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and other rights relating
thereto, machinery, equipment, furniture, fixtures, leasehold improvements, vehicles and other
assets or property, leases, licenses, permits, approvals,
authorizations, joint venture agreements, contracts or commitments, whether written or oral,
policy forms, training materials, underwriting manuals, lists of policyholders and agents,
processes, trade secrets, know-how, computer software, computer programs and source codes,
protected formulae, all other Intellectual Property, research, goodwill, prepaid expenses, books of
account, records, files, invoices, data, rights, claims and privileges and any other assets
whatsoever.
“Closing” and “Closing Date” shall have the respective meanings set forth in Section 2.3.
“Code” shall mean the Internal Revenue Code of 1986, as amended.
“Commissioner of Insurance” shall mean the Commissioner of Insurance of the State of
Wisconsin.
“Condition” shall mean, as to a Person, the financial condition, business, results of
operations, prospects, liabilities and/or properties or other Assets of such Person.
“Contract” shall mean a contract, indenture, bond, note, mortgage, deed of trust, lease,
agreement or commitment, whether written or oral, including, without limitation, an Insurance
Contract.
“Disclosure Schedule” or “Schedule” shall mean the Schedules attached to this Agreement.
“Donegal Mutual” shall have the meaning ascribed to it in the preamble.
“Donegal Mutual Adverse Effect” shall mean a material adverse effect on the Condition of
Donegal Mutual, taken as a whole, other than resulting from general economic or financial
conditions that do not affect Donegal Mutual uniquely.
“Donegal Mutual Property” shall mean any property on which Donegal Mutual holds a Lien or any
facility that is owned by Donegal Mutual or in the management of which Donegal Mutual actively
participates.
“Employment Agreements” shall mean the Employment Agreements to be entered into between
Sheboygan Falls and Xxx X. Xxxxxx in substantially the form of Xxxxxxxx X-0 and between Sheboygan
Falls and each of Xxxxxxxx X. Xxxxxx, Xxxxxx X. Xxxxxxx and Xxxxxx X. Xxxxxx in substantially the
form of Appendix D-2.
“Employee Welfare Plan” shall have the meaning set forth in Section 3(1) of ERISA.
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“Environmental Claim” shall mean any written notice by a Person alleging actual or potential
Liability, including, without limitation, potential Liability for any investigatory cost, cleanup
cost, governmental response cost, natural resources damage, property damage,
personal injury or penalty, arising out of, based on or resulting from (a) the presence,
transport, disposal, discharge or release, of any Hazardous Materials at any location, whether or
not owned by Sheboygan Falls, as the case may be, or (b) circumstances forming the basis of any
violation or alleged violation of any Environmental Law.
“Environmental Law” shall mean all federal, state, local and foreign Laws relating to
pollution or protection of human health or the environment, including, without limitation, ambient
air, surface water, ground water, land surface or subsurface strata, including, without limitation,
Laws relating to emissions, discharges, releases or threatened releases, or the presence of
Hazardous Materials, or otherwise relating to the manufacture, processing, distribution, use,
existence, treatment, storage, disposal, transport, recycling, reporting or handling of Hazardous
Materials.
“ERISA” shall mean the Employee Retirement Income Security Act of 1974, as amended, and the
rules and regulations promulgated thereunder.
“ERISA Affiliate” shall mean, with respect to Sheboygan Falls, any trade or business that
together with Sheboygan Falls would be deemed a “single employer” within the meaning of Section
4001(a)(14) of ERISA.
“Existing Confidentiality Agreements” shall mean the Confidentiality Agreements between
Sheboygan Falls and Donegal Mutual dated as of January 11, 2006 and October 31, 2006.
“Governmental Entity” shall mean a court, legislature, governmental agency, commission or
administrative or regulatory authority or instrumentality, domestic or foreign.
“Hazardous Materials” shall mean any (i) “hazardous substance,” “pollutants,” or “containment”
as defined in Sections 101(14) and (33) of the United States Comprehensive Environmental Response,
Compensation and Liability Act, as amended (“CERCLA”) or the regulations issued pursuant to Section
102 of CERCLA, including any element, compound, mixture, solution or substance that is or may be
designated pursuant to Section 102 of CERCLA; (ii) substance that is or may be designated pursuant
to Section 311(b)(2)(A) of the Federal Water Pollution Control Act, as amended (“FWCPA”); (iii)
hazardous waste having the characteristics identified under or listed pursuant to Section 3001 of
the Resource Conservation and Recovery Act, as amended (“RCRA”) or having the characteristics that
may subsequently be considered under RCRA to constitute a hazardous waste; (iv) substance
containing petroleum, as that term is defined in Section 9001(8) of RCRA; (v) toxic pollutant that
is or may be listed under Section 307(a) of FWCPA; (vi) hazardous air pollutant that is or may be
listed under Section 112 of the Clean Air Act, as amended; (vii) imminently
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hazardous chemical
substance or mixture with respect to which action has been or may be taken pursuant to Section 7 of
the Toxic Substance Control Act, as amended; (viii) source, special nuclear or by-product material
as defined by the Atomic Energy Act of 1954, as
amended; (ix) asbestos-containing material, or urea formaldehyde or material that contains it;
(x) waste oil and other petroleum products and (xi) any other toxic materials, contaminants or
hazardous substances or wastes pursuant to any Environmental Law.
“Health and Safety Requirements” shall mean all federal, state, local and foreign statutes,
regulations, ordinances and other provisions having the force and effect of Law, all judicial and
administrative orders and determinations, all contractual obligations and all common law concerning
public health and safety, worker health and safety, including without limitation those relating to
the presence, use, production, generation, handling, transportation, treatment, storage, disposal,
labeling, testing, processing, discharge, release, threatened release, control or cleanup of any
hazardous materials, substances or wastes, chemical substances or mixtures, pesticides, pollutants,
contaminants, toxic chemicals, petroleum products or byproducts, asbestos, polychlorinated
biphenyls or noise, each as amended and as now or hereafter in effect.
“Insurance Contract” shall mean any Contract of insurance including, without limitation,
reinsurance contracts issued by Sheboygan Falls.
“Insurance License” shall mean a License granted by a Governmental Entity to transact an
insurance or reinsurance business.
“Intellectual Property” shall mean (i) all inventions whether patentable or unpatentable and
whether or not reduced to practice, all improvements thereof and all patents, applications and
patent disclosures, together with all reissuance, continuations, continuations-in-part, revisions,
extensions and reexaminations thereof; (ii) all trademarks, service marks, trade dress, logos,
trade names and corporate names, together with all translations, adaptations, derivations and
applications, registrations and renewals in connection therewith; (iii) all copyrightable works,
all copyrights and all applications, registrations and renewals in connection therewith; (iv) all
mask works and all applications, registrations and renewals thereof; (v) all trade secrets and
confidential business information including ideas, research and development, know-how, formulas,
data, designs, drawings, specifications, policy forms, training materials, underwriting manuals,
pricing and cost information and business and marketing plans and proposals; (vi) all computer
software including data and related documentation; (vii) all other proprietary rights and (vii) all
copies and tangible embodiments thereof in whatever form or medium.
“Investment Assets” shall mean bonds, notes, debentures, mortgage loans, collateral loans and
all other instruments of indebtedness, stocks, partnership interests and other equity interests,
real estate and leasehold and other interests therein, certificates issued by or
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interests in
trusts, cash on hand and on deposit, personal property and interests therein and all other Assets
acquired for investment purposes.
“IRS” shall mean the Internal Revenue Service.
“Knowledge” shall mean the knowledge of the relevant Person, after due inquiry by its
appropriate officer or officers.
“Law” shall mean a law, ordinance, rule or regulation enacted or promulgated, or an Order
issued or rendered, by any Governmental Entity.
“Liability” shall mean a liability, obligation, claim or cause of action of any kind or nature
whatsoever, whether absolute, accrued, contingent or other and whether known or unknown, including,
without limitation, any liability, obligation, claim or cause of action arising as a result of an
Insurance Contract.
“License” shall mean a license, certificate of authority, permit or other authorization to
transact an activity or business issued or granted by a Governmental Entity.
“Lien” shall mean a lien, mortgage, deed to secure debt, pledge, security interest, lease,
sublease, charge, levy or other encumbrance of any kind.
“Losses” shall mean losses, claims, damages, costs, expenses, Liabilities and judgments,
including, without limitation, court costs and attorneys’ and expert witness fees.
“Note” shall mean the Contribution Note to be issued by Sheboygan Falls to Donegal Mutual in
substantially the form of Appendix A.
“OCI” shall mean the Office of the Commissioner of Insurance of the State of Wisconsin.
“Officers’ Certificate” shall mean, with respect to any Person, a certificate executed by the
Chief Executive Officer, the President or an appropriate Vice President of such Person, as attested
by the Secretary or an Assistant Secretary of such Person.
“Ordinary Course of Business” shall mean an action taken by a Person if: (i) such action is
consistent with the past practices of such Person and is taken in the ordinary course of the normal
day-to-day operations of such Person; (ii) such action is not required to be authorized by the
board of directors of such Person or by any Person or group of Persons exercising similar authority
or by a parent company and (iii) such action is similar in nature and magnitude to actions
customarily taken, without any authorization by the board of directors or by any Person or group of
Persons exercising similar authority or by a parent company, in the ordinary course of the normal
day-to-day operations of other Persons that are in the same line of business as such Person.
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“Order” shall mean an order, writ, ruling, judgment, injunction or decree of, or any
stipulation to or agreement with, any arbitrator, mediator or Governmental Entity.
“PBGC” shall mean the Pension Benefit Guaranty Corporation or any successor entity.
“Permits” shall have the meaning set forth in Section 3.10(d).
“Permitted Liens” shall mean as to Sheboygan Falls, (i) all Liens approved in writing by
Donegal Mutual, (ii) statutory Liens arising out of operation of Law with respect to a Liability
incurred in the Ordinary Course of Business of Sheboygan Falls and that is not delinquent and can
be paid without interest or penalty and (iii) such Liens and other imperfections of title that do
not materially detract from the value or impair the use of the property subject thereto.
“Person” shall mean an individual, corporation, partnership, association, joint stock company,
Governmental Entity, business trust, unincorporated organization or other legal entity.
“Proceedings” shall mean actions, suits, hearings, claims and other similar proceedings.
“Quarterly Statements” shall mean the quarterly statements of condition and affairs filed
pursuant to state insurance Laws.
“Reorganization Proposal” shall have the meaning set forth in Section 5.8.
“Required Filings and Approvals” shall mean the filing of this Agreement with and the approval
of such by the Commissioner of Insurance, and such other applications, registrations, declarations,
filings, authorizations, Orders, consents and approvals as may be required to be made or obtained
prior to consummation of the transactions contemplated hereby under the Laws of any jurisdiction.
“Retrocessional Reinsurance Agreement” shall mean the Retrocessional Reinsurance Agreement
between Donegal Mutual and Sheboygan Falls in substantially the form of Appendix F.
“SAP” shall mean statutory accounting practices as prescribed or permitted by the Commissioner
of Insurance and the National Association of Insurance Commissioners subject, in the case of
unaudited interim financial statements, to normal year-end adjustments and the absence of
footnotes.
“Xxxxxxx” shall mean Xxxxxxx Xxxxxx Xxxxxx, Inc.
“Services Agreement” shall mean the Services Agreement between Donegal Mutual and Sheboygan
Falls in substantially the form of Appendix B.
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“Sheboygan Falls” shall have the meaning ascribed to it in the preamble.
“Sheboygan Falls Adverse Effect” shall mean a material adverse effect on the Condition of
Sheboygan Falls, taken as a whole, other than resulting from general economic or financial
conditions that do not affect Sheboygan Falls uniquely.
“Sheboygan Falls Financial Statements” shall have the meaning set forth in Section 3.4.
“Sheboygan Falls Property” shall mean any property on which Sheboygan Falls holds a Lien or
any facility that is owned by Sheboygan Falls or in the management of which Sheboygan Falls
actively participates.
“Subsidiary” of a Person means any Person with respect to whom such specified Person, directly
or indirectly, beneficially owns 50% or more of the equity interests in, or holds the voting
control of 50% or more of the equity interests in, such Person.
“Taxes” shall mean all income, gross income, gross receipts, premium, sales, use, transfer,
franchise, profits, withholding, payroll, employment, excise, severance, property and windfall
profits taxes, and all other taxes, assessments or similar charges of any kind whatsoever thereon
or applicable thereto, together with any interest and any penalties, additions to tax or additional
amounts, in each case imposed by any taxing authority, domestic or foreign, upon Sheboygan Falls,
including, without limitation, all such amounts imposed as a result of being a member of an
affiliated or combined group.
“Tax Returns” or “Returns” shall mean all tax returns, declarations, reports, estimates,
information returns and statements required to be filed under federal, state, local or foreign
Laws.
“Technology License Agreement” shall mean the Technology License Agreement between Donegal
Mutual and Sheboygan Falls in substantially the form of Appendix E.
“Wisconsin Insurance Code” shall mean Chapters 611 and 617 of the Wisconsin Insurance Code, as
amended, and the regulations promulgated thereunder.
ARTICLE II
SALE AND PURCHASE OF NOTE
2.1 Sale and Purchase of Note. Upon the terms, conditions, representations and
warranties herein set forth, Sheboygan Falls hereby agrees to sell the Note to Donegal Mutual and
Donegal Mutual hereby agrees to purchase the Note from Sheboygan Falls.
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2.2 Payment of Purchase Price and Delivery of Note. The purchase price of the Note
shall be Three Million Five Hundred Thousand Dollars ($3,500,000). The entire
purchase price of the Note is to be paid in cash by Donegal Mutual to Sheboygan Falls on the
Closing Date against delivery of the Note.
2.3 Closing Date.
(a) Subject to the fulfillment of the conditions precedent specified in Article VI, the
transactions contemplated by this Agreement shall be consummated (the “Closing”) at 10:00 a.m. on
the second business day following the date on which all of the conditions set forth in Article VI
shall have been fulfilled (the “Closing Date”). Unless otherwise mutually agreed by Donegal Mutual
and Sheboygan Falls, the Closing shall be held at the offices of Xxxxx & Xxxxxxx LLP, 000 Xxxx
Xxxxxx, Xxxxxxx, Xxxxxxxxx 00000.
(b) At the Closing, Sheboygan Falls shall deliver to Donegal Mutual (i) copies of each
resolution adopted by the Board of Directors of Sheboygan Falls approving and adopting this
Agreement, the Note, the Services Agreement, the Employment Agreements, the Technology License
Agreement, the Retrocessional Reinsurance Agreement and the Amended and Restated Bylaws and
authorizing the consummation of the transactions contemplated hereby and thereby, certified by the
Secretary of Sheboygan Falls that each such resolution is then in full force and effect and without
amendment; (ii) any Officers’ Certificates specified in Section 6.2 duly executed by Sheboygan
Falls; (iii) the Services Agreement duly executed by Sheboygan Falls; (iv) the Technology License
Agreement duly executed by Sheboygan Falls; (v) the Retrocessional Reinsurance Agreement duly
executed by Sheboygan Falls; (vi) the Note duly executed by Sheboygan Falls; (vii) duly executed
copies of the resignations of four current members of the Board of Directors of Sheboygan Falls
designated by Sheboygan Falls and evidence of the election of six designees of Donegal Mutual to
Sheboygan Falls’ Board of Directors as specified in Section 6.2(d); (viii) evidence of the
termination of any severance or similar agreement required by Section 6.2(e) and (ix) duly executed
copies of the Employment Agreements as specified in Section 6.2(e).
(c) At the Closing, Donegal Mutual shall deliver to Sheboygan Falls (i) copies of each
resolution adopted by the Board of Directors of Donegal Mutual approving and adopting this
Agreement, the Services Agreement, the Technology License Agreement and the Retrocessional
Reinsurance Agreement and authorizing the consummation of the transactions contemplated hereby and
thereby, certified by the Secretary of Donegal Mutual that each such resolution is then in full
force and effect and without amendment; (ii) the Services Agreement duly executed by Donegal
Mutual; (iii) the Technology License Agreement duly executed by Donegal Mutual; (iv) the
Retrocessional Reinsurance Agreement duly executed by Donegal Mutual and (v) any Officers’
Certificate specified in Section 6.3 duly executed by Donegal Mutual.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SHEBOYGAN FALLS
As an inducement to Donegal Mutual to enter into this Agreement and to consummate the
transactions contemplated herein, Sheboygan Falls represents and warrants to Donegal Mutual and
agrees as follows:
3.1 Organization and Standing.
(a) Sheboygan Falls is a mutual fire and casualty insurance company duly organized, validly
existing and in good standing under the laws of the State of Wisconsin. Sheboygan Falls is not
admitted to transact an insurance business as a foreign insurance company in any state.
(b) Sheboygan Falls has the corporate power and authority and other authorizations necessary
or required in order for it to own or lease and operate the Sheboygan Falls Property and to carry
on its business as now conducted.
3.2 Subsidiaries. Sheboygan Falls has no subsidiaries.
3.3 Authorization. Sheboygan Falls has the requisite corporate power and authority to
execute and deliver this Agreement and the Ancillary Documents, and to adopt the Amended and
Restated Bylaws and to consummate the transactions contemplated hereby and thereby. The execution
and delivery of this Agreement, the Note, the Services Agreement, the Employment Agreements, the
Technology License Agreement and the Retrocessional Reinsurance Agreement, the consummation of the
transactions contemplated hereby and thereby and the adoption of the Amended and Restated Bylaws
(which Amended and Restated Bylaws are subject to the approval of the OCI) have been duly approved
and authorized by the Board of Directors of Sheboygan Falls. No other corporate proceedings on the
part of Sheboygan Falls are necessary to authorize this Agreement, the Note, the Services
Agreement, the Employment Agreements, the Technology License Agreement and the Retrocessional
Reinsurance Agreement and the transactions contemplated hereby and thereby and the adoption of the
Amended and Restated Bylaws. This Agreement, and the Ancillary Documents, when executed and
delivered by Sheboygan Falls and assuming the due execution thereof by the other parties thereto,
will constitute the valid, legal and binding agreements of Sheboygan Falls enforceable in
accordance with their respective terms, except that (i) such enforcement may be subject to
bankruptcy, rehabilitation, liquidation, conservation, dissolution, insolvency, reorganization,
moratorium or other similar Laws now or hereafter in effect relating to creditors’ rights generally
and (ii) the remedy of specific performance and injunctive and other forms of equitable relief may
be subject to equitable defenses and to the discretion of the court before which any Proceeding
therefor may be brought. Neither the execution nor the delivery of this Agreement or the Ancillary
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Documents or the adoption of the Amended and Restated Bylaws nor the consummation of the
transactions contemplated hereby or thereby, nor compliance with nor fulfillment of the terms and
provisions hereof or thereof, will (i) conflict with or result in a breach of the terms, conditions
or provisions of or constitute a default under the Restated Articles of Incorporation or the
Amended and Restated Bylaws of Sheboygan Falls, or any instrument, agreement, mortgage, judgment,
Order, award, decree or other restriction to which Sheboygan Falls is a party; (ii) give any party
to or with rights under any such instrument, agreement, mortgage, judgment, Order, award, decree or
other restriction the right to terminate, modify or otherwise change the rights or obligations of
Sheboygan Falls under such instrument, agreement, mortgage, judgment, Order, award, decree or other
restriction or (iii) require the approval, consent or authorization of or any filing with or
notification to any federal, state or local court or Governmental Entity, except (y) the Required
Filings and Approvals and (z) any approval, consent or authorization the failure of which to obtain
would not, individually or in the aggregate, have a Sheboygan Falls Adverse Effect.
3.4 Financial Statements; Examinations.
(a) Sheboygan Falls has furnished to Donegal Mutual the balance sheets of Sheboygan Falls as
of December 31, 2003, 2004 and 2005 and the related statements of operations and of changes in
financial position for the periods then ended, together with appropriate notes to such financial
statements (collectively, the “Sheboygan Falls Financial Statements”). Sheboygan Falls will
furnish to Donegal Mutual, if available prior to Closing, the balance sheet of Sheboygan Falls as
of December 31, 2006 and the related statements of operations and of changes in financial position
for the period then ended, together with appropriate notes to such financial statements, which
shall also constitute “Sheboygan Falls Financial Statements.” The Sheboygan Falls Financial
Statements are accompanied by the reports thereon by Xxxxxxx & Associates, LLC, independent
certified public accountants. The Sheboygan Falls Financial Statements are correct and complete in
all material respects and fairly present the financial position of Sheboygan Falls as at the
respective dates thereof, the results of its operations and the changes in its financial position
for the respective periods covered thereby and have been prepared in conformity with SAP
consistently applied throughout all periods.
(b) Each of the Annual Statements for 2003, 2004 and 2005 and, if available, for 2006 was or
will be in compliance in all material respects with applicable Law when filed.
(c) The most recently completed report of examination of Sheboygan Falls conducted by the OCI
was for the period set forth in Schedule 3.4(C), and a complete and correct copy of such report is
attached to Schedule 3.4(C).
(d) Since the dates of all examinations referred to in Schedule 3.4(C), Sheboygan Falls has
not been the subject of further examination by any insurance
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Governmental Entity, and Sheboygan Falls is not currently undergoing examination by any
insurance Governmental Entity.
(e) Schedule 3.4(E) sets forth a correct and complete list of all (i) accounts, borrowing
resolutions and deposit boxes maintained by Sheboygan Falls at any bank or other financial
institution, (ii) the names of the persons authorized to sign or otherwise act with respect thereto
and (iii) powers of attorney for Sheboygan Falls with respect thereto.
3.5 Material Changes Since December 31, 2005. Since December 31, 2005, the business
of Sheboygan Falls has been operated only in the ordinary course and, whether or not in the
Ordinary Course of Business of Sheboygan Falls, other than as disclosed in this Agreement or the
Schedules referred to herein, there has not been, occurred or arisen (i) any material adverse
change in the Condition of Sheboygan Falls from that shown on the balance sheet of Sheboygan Falls
as of December 31, 2005 referred to in Section 3.4; (ii) any damage or destruction in the nature of
a casualty loss, whether covered by insurance or not, to any Asset that is material to the
financial condition, operations or business of Sheboygan Falls; (iii) any material increase in any
employee benefit plan listed in Section 3.18; (iv) any amendment or termination of any agreement,
or cancellation or reduction of any debt owing to Sheboygan Falls or waiver or relinquishment of
any right of material value to Sheboygan Falls or (v) any other event, condition or state of facts
of any character that would constitute a Sheboygan Falls Adverse Effect.
3.6 Availability of Assets and Legality of Use. The Assets owned or leased by
Sheboygan Falls constitute all of the Assets that are being used in its business, and such Assets,
to the Knowledge of Sheboygan Falls, are in good and serviceable condition, normal wear and tear
excepted, and suitable and adequate for the uses for which intended and such Assets and their uses
conform in all material respects to all applicable Laws. Such Assets will be sufficient for the
continued conduct of Sheboygan Falls’ business immediately after the Closing in substantially the
same manner as Sheboygan Falls’ business was conducted immediately prior to the Closing.
3.7 Title to Property. Sheboygan Falls has good and marketable title to all of its
Assets, including the Assets reflected on the December 31, 2005 balance sheet referred to in
Section 3.4 and all of the Assets thereafter acquired by it, except to the extent that such Assets
have thereafter been disposed of for fair value in the Ordinary Course of Business of Sheboygan
Falls.
3.8 Books and Records. The books of account, minute books and other records of
Sheboygan Falls, all of which have been made available to Donegal Mutual, are complete and correct
and have been maintained in accordance with sound business practices and the requirements of the
Wisconsin Insurance Code and any other applicable Laws, including the maintenance of an adequate
system of internal controls. Since January 1, 2001, the minute books of Sheboygan Falls contain
accurate and complete records of all meetings held of, and
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corporate action taken by, the policyholders, the Board of Directors and committees of the
Board of Directors of Sheboygan Falls, and no meeting of any such policyholders, Board of Directors
or committees thereof has been held for which minutes have not been prepared and are not contained
in such minute books. At the Closing, all of the aforementioned books and records will be in the
possession of Sheboygan Falls.
3.9 Accounts Receivable. All accounts receivable reflected on the December 31, 2005
balance sheet referred to in Section 3.4 and all accounts receivable arising subsequent to such
date and prior to the date hereof, not collected at the date hereof, have arisen from bona fide
transactions in the Ordinary Course of Business of Sheboygan Falls. To the Knowledge of Sheboygan
Falls, none of such receivables is subject to counterclaims or set-offs or is in dispute and all of
such accounts are good and collectible in the Ordinary Course of Business at the aggregate recorded
amounts thereof, subject in each case to the allowance for possible losses shown on such balance
sheet. All accounts receivable existing on the Closing Date will be good and collectible in the
Ordinary Course of Business at the aggregate recorded amounts thereof, net of any applicable
allowance for doubtful accounts, which allowance will be determined on a basis consistent with the
basis used in determining the allowance for doubtful accounts reflected in the December 31, 2005
balance sheet referred to in Section 3.4.
3.10 Compliance with Legal Requirements; Governmental Authorizations. Schedule 3.10
contains a complete and accurate list and copy of its license to transact insurance in Wisconsin
and each other material license, permit and other authorization held by Sheboygan Falls in the
operation of its business. Except as set forth in Schedule 3.10:
(a) To the Knowledge of Sheboygan Falls, Sheboygan Falls is, and at all times since January 1,
2001 has been, in compliance in all material respects with the Wisconsin Insurance Law, and all
other Laws that are applicable to it or to the conduct or operation of its business or the
ownership or use of any of its Assets.
(b) To the Knowledge of Sheboygan Falls, no event has occurred or circumstance exists that
with or without notice or lapse of time (i) may constitute or result in a violation by Sheboygan
Falls of, or a failure on the part of Sheboygan Falls to comply with, any Law in any material
respect or (ii) may give rise to any material obligation on the part of Sheboygan Falls to
undertake, or to bear all or any portion of the cost of, any remedial action of any nature.
(c) Sheboygan Falls has not received, at any time since January 1, 2001, any oral or written
notice or other communication from any Governmental Entity or any other Person regarding (i) any
actual, alleged, possible or potential violation of, or failure to comply with, any Law in any
material respect or (ii) any actual, alleged, possible or potential material obligation that may
give rise on the part of Sheboygan Falls to undertake, or to bear all or any portion of the cost
of, any material remedial action of any nature.
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(d) Sheboygan Falls possesses all material licenses, permits and other authorizations
necessary to own or lease and operate its properties and to conduct its business as now conducted
and each of Sheboygan Falls’ agents is duly licensed as such. All of such licenses, permits and
authorizations of Sheboygan Falls and such agents’ appointments are hereinafter collectively called
the “Permits.” All Permits are in full force and effect and will continue in effect after the date
hereof and the Closing Date without the consent, approval or act of, or the making of any filing
with, any Governmental Entity other than the Required Filings and Approvals. To the Knowledge of
Sheboygan Falls, Sheboygan Falls is, and at all times since January 1, 2001 has been, in material
compliance with all terms and requirements of each Permit. Neither Sheboygan Falls nor, to the
Knowledge of Sheboygan Falls, any of Sheboygan Falls’ agents is in material violation of the terms
of any Permit, and Sheboygan Falls has not received notice of any violation or claimed violation
thereunder. All applications required to have been filed for the renewal of any and all Permits
have been duly filed on a timely basis with the appropriate Governmental Entity, and all other
filings required to have been made with such Governmental Entities with respect to the Permits have
been duly made on a timely basis.
3.11 Real Property and Leases. Except as described on Schedule 3.11(A), Sheboygan
Falls does not own any real property, nor is Sheboygan Falls a party to any lease or agreement
under which Sheboygan Falls is lessee or sublessee of, or holds or operates, any real property
owned by any third party. All of such leases and agreements are in full force and effect and
constitute legal, valid and binding obligations of Sheboygan Falls, and, to the Knowledge of
Sheboygan Falls, the other parties thereto. Sheboygan Falls is not in default in any material
respect under any such lease or agreement nor has any event occurred that, with the passage of time
or giving of notice or both would constitute such a default and Sheboygan Falls will not take any
action or fail to take required action between the date hereof and the Closing Date that would
permit any such default or event to occur. None of such leases and agreements requires the consent
of any party thereto in order to undertake or consummate the transactions contemplated by this
Agreement.
3.12 Insurance. Sheboygan Falls maintains policies of fire and casualty, product and
other liability and other forms of insurance in such amounts and against such risks and losses as
are adequate and reasonable for its business as currently conducted and properties and are
sufficient for compliance with all Laws applicable to Sheboygan Falls. All such policies are
valid, duly issued and enforceable in accordance with their respective terms and conditions.
Attached as Schedule 3.12 is a list and an accurate description of all policies of insurance that
are or were owned, held or maintained by or for the benefit of Sheboygan Falls or under which
Sheboygan Falls is or was a named insured from January 1, 2001 to the date hereof, including policy
numbers, nature of coverage, limits, deductibles, carriers, premiums and effective and termination
dates, under which Sheboygan Falls has any remaining coverage. To the Knowledge of Sheboygan
Falls, Sheboygan Falls has complied with each of such policies and has not failed to give any
notice or present any known claim thereunder.
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Xxxxxxxxx Xxxxx will keep such insurance in full force and effect through the Closing Date.
Sheboygan Falls has not received, and, to the Knowledge of Sheboygan Falls, no event or omission
has occurred that may cause it to receive, notice that any such policies will be cancelled or will
be reduced in amount or scope. True and complete copies of all such policies have been delivered
to Donegal Mutual.
3.13 Conduct of Business.
(a) Schedule 3.13 lists all claims arising in other than the Ordinary Course of Business of
Sheboygan Falls that are pending or, to the Knowledge of Sheboygan Falls, threatened against
Sheboygan Falls and correctly sets forth the data reflected therein, including the insurance
carrier to which the claim has been reported. No insurance carrier listed therein has denied
coverage of any claim listed opposite its name or accepted investigation of any such loss or
defense of any such claim under a reservation of rights.
(b) The aggregate actuarial reserves and other actuarial amounts held in respect of
Liabilities with respect to Insurance Contracts of Sheboygan Falls as established or reflected in
the December 31, 2005 Annual Statement of Sheboygan Falls and in the Sheboygan Falls Financial
Statements as of December 31, 2005: (i) were or will be determined in accordance with sound
actuarial standards consistently applied, (ii) were or will be fairly stated in accordance with
sound actuarial principles, (iii) were or will be based on actuarial assumptions that are in
accordance with those specified in the related Insurance Contracts, (iv) met or will meet the
requirements of the insurance Laws of the applicable jurisdiction in all material respects and (v)
to the Knowledge of Sheboygan Falls, were or will be adequate to cover the total amount of all
reasonably anticipated matured and unmatured Liabilities of Sheboygan Falls under all outstanding
Insurance Contracts pursuant to which Sheboygan Falls has any Liability. For purposes of clause
(v) above, (x) the adequacy of reserves shall be determined only on the basis of facts and
circumstances known based on procedures consistently applied by Sheboygan Falls in connection with
assessing the adequacy of reserves from time to time by Sheboygan Falls as at the date hereof and
(y) the fact that reserves covered by any such representation may be subsequently adjusted at times
and under circumstances consistent with Sheboygan Falls’ ordinary practice of periodically
reassessing the adequacy of its reserves shall not be used to support any claim regarding the
accuracy of such representation.
(c) All of Sheboygan Falls’ outstanding insurance coverage is, to the extent required by
applicable Law, on forms and at rates approved by the insurance regulatory authority of the
jurisdiction where issued or has been filed with and not objected to by such authority within the
period provided for objection. To the Knowledge of Sheboygan Falls, Sheboygan Falls has not
exceeded any authority granted to it by any party to bind it in connection with Sheboygan Falls’
business.
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3.14 No Undisclosed Material Liabilities. Sheboygan Falls is not subject to any
material Liability, including, to Sheboygan Falls’ Knowledge, unasserted claims, absolute or
contingent, that is not shown or that is in excess of amounts shown or reserved for in the December
31, 2005 balance sheet referred to in Section 3.4, other than Liabilities of the same nature as
those set forth in such balance sheet and reasonably incurred in the Ordinary Course of Business of
Sheboygan Falls after December 31, 2005 or as otherwise disclosed in the Disclosure Schedules.
3.15 No Defaults or Litigation. Sheboygan Falls is not in default in any material
respect under any Contract to which it is a party. There are no lawsuits, proceedings, claims or
governmental investigations pending or, to the Knowledge of Sheboygan Falls, threatened against
Sheboygan Falls or against the properties or business thereof that might, individually or in the
aggregate, have a Sheboygan Falls Adverse Effect and Sheboygan Falls has no Knowledge of any
factual basis for any such lawsuit, proceeding, claim or investigation and there is no action,
suit, proceeding or investigation pending, threatened or contemplated that questions the legality,
validity or propriety of the transactions contemplated by this Agreement.
3.16 Tax Liabilities. The amounts reflected as liabilities for Taxes on the December
31, 2005 balance sheet referred to in Section 3.4 are sufficient for the payment of all Taxes of
Sheboygan Falls accrued for or applicable to the period ended on such balance sheet date and all
years and periods prior thereto. All Tax Returns that are required to be filed by or in respect of
Sheboygan Falls up to and including the date hereof have been filed and all Taxes, including any
interest and penalties thereon, which have become due pursuant to such Returns or pursuant to any
assessment have been paid and no extension of the time for filing of any such return is presently
in effect. All such Returns that have been filed or will be filed by or in respect of Sheboygan
Falls for any period ending on or before the Closing Date are or will be true and correct. There
exists no proposed assessment against Sheboygan Falls. No consent to the application of Section
341(f)(2) of the Code has been filed with respect to any Sheboygan Falls Property. Sheboygan Falls
has withheld and paid all Taxes required to have been withheld and paid in connection with amounts
paid or owing to any employee, independent contractor or other third party. No claim has ever been
made by a Governmental Entity in a jurisdiction where Sheboygan Falls does not file Tax Returns
that it is or may be subject to taxation by that jurisdiction. Sheboygan Falls has delivered to
Donegal Mutual correct and complete copies of all federal, state and local Tax Returns, examination
reports and statements of deficiencies assessed against or agreed to by Sheboygan Falls since
January 1, 2001. The federal Tax Returns for Sheboygan Falls have never been examined by the IRS,
and the applicable statute of limitations relating thereto has expired for the tax year ended
December 31, 2002 and all prior periods.
3.17 Contracts. Sheboygan Falls is not a party to (i) any contract for the purchase
or sale of real property to or from any third party; (ii) any contract for the lease or sublease of
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personal property from or to any third party that provides for annual rentals in excess of
$25,000, or any group of contracts for the lease or sublease of similar kinds of personal property
from or to third parties that provides in the aggregate for annual rentals in excess of $25,000;
(iii) any contract for the purchase or sale of equipment, computer software, lists of clients,
insurance carriers or agents or similar information, commodities, merchandise, supplies, other
materials or personal property or for the furnishing or receipt of services that calls for
performance over a period of more than 60 days and involves more than the sum of $25,000; (iv) any
license agreement involving the use of copyrights, franchises, licenses, trademarks, or information
owned by Sheboygan Falls or others; (v) any broker’s representative, sales, agency or advertising
contract that is not terminable on notice of 30 days or less; (vi) any contract involving the
borrowing or lending of money or the guarantee of the obligations of officers, directors, employees
or others or (vii) any other contract, whether or not made in the Ordinary Course of Business of
Sheboygan Falls that is material to the business or Assets of Sheboygan Falls. No outstanding
purchase commitment by Sheboygan Falls is in excess of its ordinary business requirements or at a
price in excess of market price at the date thereof. None of such contracts and agreements will
expire or be terminated or be subject to any modification of terms or conditions by reason of the
consummation of the transactions contemplated by this Agreement. With respect to its contracts
with insurance agents, none of the agents who is party to any such agreement has terminated,
threatened to terminate or given any notice, written or oral, of an intention to terminate its
agreement with Sheboygan Falls or to substantially reduce the volume of business placed with or
through Sheboygan Falls, and Sheboygan Falls has no Knowledge of any condition or state of facts or
circumstances that would cause any such termination or reduction in the foreseeable future.
Sheboygan Falls is not in default in any material respect under the terms of any such contract nor
is it in default in the payment of any insurance premiums due to insurance carriers nor any
principal of or interest on any indebtedness for borrowed money nor has any event occurred that,
with the passage of time or giving of notice, or both, would constitute such a default by Sheboygan
Falls and, to the Knowledge of Sheboygan Falls, no other party to any such contract is in default
in any material respect thereunder nor has any such event occurred with respect to such party.
Without the prior written consent of Donegal Mutual, Sheboygan Falls will not make any changes or
modifications in any of the foregoing, nor incur any further obligations or commitments, nor make
any further additions to its properties, except in each case in the Ordinary Course of Business of
Sheboygan Falls and as contemplated by this Agreement.
3.18 Employee Agreements. Listed on Schedule 3.18 are all plans, contracts and
arrangements, oral or written, including but not limited to, union contracts, employee benefit
plans, deferred compensation agreements, split dollar agreements, employment agreements, consulting
agreements, confidentiality agreements, non-competition agreements or other agreements with any of
Sheboygan Falls’ employees, whereunder Sheboygan Falls has any obligation, other than obligations
to make current wage or salary payments terminable on
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notice of 30 days or less, to or on behalf of its officers, employees or their beneficiaries
or whereunder any of such persons owes money to Sheboygan Falls.
3.19 Employee Relations. Sheboygan Falls has not engaged in any unfair labor
practice, unlawful employment practice or unlawful discriminatory practice in the conduct of its
business. To the Knowledge of Sheboygan Falls, Sheboygan Falls has complied in all material
respects with all applicable Laws relating to wages, hours and collective bargaining and has
withheld all amounts required by agreement to be withheld from the wages or salaries of employees.
Sheboygan Falls is not a party to or affected by or threatened with, or to the Knowledge of
Sheboygan Falls in danger of, being a party to or affected by, any labor dispute that materially
interferes or would materially interfere with the conduct of its business. There is set forth in
Schedule 3.19 the name and total annual compensation, including bonuses, payable to each of the
officers, directors and employees of Sheboygan Falls whose total annual compensation, including
bonuses, during the year ended December 31, 2005 exceeded the sum of $75,000. Since December 31,
2005, there has been no material increase in the compensation payable to any of such officers,
directors or employees, except as set forth in Schedule 3.19.
3.20 Employee Retirement Income Security Act.
(a) Schedule 3.18 contains a list of any “employee benefit plan” within the meaning of Section
3(3) of ERISA established or maintained by Sheboygan Falls or to which Sheboygan Falls has made any
contribution. Sheboygan Falls is not required, and was not required within the immediately
preceding five years, to make any contribution to any “multiemployer plan” within the meaning of
Section 3(37) of ERISA. Sheboygan Falls has no liability in respect of any employee benefit plan
established or maintained or to which contributions are or were made by it to the PBGC or to any
beneficiary of such plans. All required reports and descriptions, including Form 5500 Annual
Reports, summary annual reports, PBGC-1’s and summary plan descriptions, have been timely filed and
distributed appropriately with respect to each such employee benefit plan. The requirements of
COBRA have been met with respect to each such employee benefit plan that is an Employee Welfare
Plan.
(b) (i) No employee pension benefit plan, as defined in Section 3(2) of ERISA, maintained or
contributed to by Sheboygan Falls or in respect of which Sheboygan Falls is considered an
“employer” under Section 414 of the Code, has incurred any “accumulated funding deficiency,” as
defined in Section 412 of the Code, whether or not waived, or has incurred any liability to PBGC
and (ii) to the Knowledge of Sheboygan Falls, Sheboygan Falls has not breached any of the
responsibilities, obligations or duties imposed on it by ERISA with respect to any employee pension
benefit plan maintained by it, which breach has given rise to, or will in the future give rise to,
an obligation to pay money. To the Knowledge of Sheboygan Falls, neither Sheboygan Falls nor any
of its affiliates or, to the Knowledge of Sheboygan Falls, any “party in interest,” as defined in
Section 3(14) of ERISA,
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in respect of any such plan has engaged in any non-exempted prohibited transaction described
in Sections 406 and 408 of ERISA or Section 4975 of the Code. No reportable event, as defined in
Section 4043 of ERISA, has occurred with respect to any employee pension benefit plan maintained or
contributed to by Sheboygan Falls or in respect of which Sheboygan Falls is an employer under
Section 414 of the Code and none of such plans has been terminated by the plan administrator
thereof or by the PBGC. To the Knowledge of Sheboygan Falls, none of Sheboygan Falls or its
affiliates has incurred any liability for non-compliance with ERISA or any regulations thereunder.
The original or a complete and correct copy of each plan listed in Schedule 3.18 has been delivered
to Donegal Mutual.
3.21 Conflicts; Sensitive Payments. To the Knowledge of Sheboygan Falls, there are
(i) since January 1, 2001, no material situations involving the interests of Sheboygan Falls or, to
the Knowledge of Sheboygan Falls, any officer or director of Sheboygan Falls, that may be generally
characterized as a “conflict of interest,” including, but not limited to, the leasing of property
to or from Sheboygan Falls or direct or indirect interests in the business of competitors,
suppliers or customers of Sheboygan Falls and (ii) no situations involving illegal payments or
payments of doubtful legality from corporate funds of Sheboygan Falls since January 1, 2001 to
governmental officials or others that may be generally characterized as a “sensitive payment.”
3.22 Corporate Name. Sheboygan Falls owns and possesses all rights to the use of the
name Sheboygan Falls Mutual Insurance Company in the operation of Sheboygan Falls’ present business
or any other business similar to or competitive with that being conducted by Sheboygan Falls,
including, but not limited to, the right to use such name in advertising.
3.23 Trademarks and Proprietary Rights. Sheboygan Falls is legally entitled to use
all trademarks, trade names, copyrights, processes and other technical know-how and other
proprietary rights now used in the conduct of its business and has not received any notice of
conflict with the asserted rights of others.
3.24 Environmental Matters.
(a) Sheboygan Falls is, and, to the Knowledge of Sheboygan Falls, all Sheboygan Falls
Properties including, with respect to any Sheboygan Falls Property, all owners or operators
thereof, are, and at all times have been in substantial compliance with all applicable
Environmental Laws. Sheboygan Falls has not received any communication, written or oral, that
alleges that Sheboygan Falls or any Sheboygan Falls Property including, with respect to any
Sheboygan Falls Property, any owner or operator thereof, is not in such compliance, and, to the
Knowledge of Sheboygan Falls, there are no circumstances that may prevent or interfere with such
compliance in the future.
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(b) There is no Environmental Claim pending against Sheboygan Falls or any Sheboygan Falls
Property or, to the Knowledge of Sheboygan Falls, threatened against Sheboygan Falls or any
Sheboygan Falls Property, or any Person whose Liability for any Environmental Claims Sheboygan
Falls has or may have retained or assumed either contractually or by operation of Law, except for
Environmental Claims that, individually or in the aggregate, would not have a Sheboygan Falls
Adverse Effect.
(c) There are no past or present actions, activities, circumstances, conditions, events or
incidents, including, without limitation, the release, emission, discharge, disposal or presence of
any Hazardous Materials, that, to the Knowledge of Sheboygan Falls, could form the basis of any
Environmental Claim against Sheboygan Falls, any Sheboygan Falls Property or any Person whose
Liability for any Environmental Claim Sheboygan Falls has or may have retained or assumed either
contractually or by operation of Law.
(d) There are no Hazardous Materials present on or in any Sheboygan Falls Property, including
Hazardous Materials contained in barrels, above or underground storage tanks, landfills, land
deposits, dumps, equipment, whether movable or fixed, or other containers, either temporary or
permanent, and deposited or located in land, water, sumps or any other part of Sheboygan Falls
Property or such adjoining property, or incorporated into any structure therein or thereon.
(e) Without in any way limiting the generality of the foregoing, to the Knowledge of Sheboygan
Falls, (i) there are no underground storage tanks and currently or formerly located on any
Sheboygan Falls Property, (ii) there is no friable asbestos contained in or forming part of any
building or structure owned or leased by Sheboygan Falls and (iii) no polychlorinated biphenyls are
used or stored at or on any Sheboygan Falls Property.
3.25 Insurance Issued by Sheboygan Falls.
(a) Sheboygan Falls has provided a list of all forms of Insurance Contracts used by Sheboygan
Falls as of November 1, 2006 to Donegal Mutual, and has made available to Donegal Mutual copies of
all forms of Insurance Contracts used by Sheboygan Falls as of November 1, 2006 that are not
standard Insurance Services Office forms. Since November 1, 2006, no forms of Insurance Contracts
written by Sheboygan Falls have been amended and no sales of any new forms of Insurance Contracts
have been commenced, other than changes to forms, which changes are not, in the aggregate,
material.
(b) To the Knowledge of Sheboygan Falls, all benefits payable on or prior to the date as of
which this representation is made by Sheboygan Falls under Insurance Contracts have in all material
respects been paid, or provision for payment thereof has been made, in accordance with the terms of
the Insurance Contracts under which they arose, such payments were not delinquent and were paid, or
if provision has been made will be paid, without fines or penalties, except for fines or penalties that do not exceed $10,000,
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individually, or $25,000, in the aggregate, and except for such benefits for which Sheboygan Falls
reasonably believes there is a reasonable basis to contest payment and is taking such action.
(c) To the Knowledge of Sheboygan Falls, all outstanding Insurance Contracts of Sheboygan
Falls were issued in conformity with underwriting standards that conform in all material respects
to industry accepted practices and, with respect to Insurance Contracts reinsured in whole or in
part, conform in all material respects to the standards required pursuant to the terms of the
related reinsurance, coinsurance or other similar Contracts.
(d) To the Knowledge of Sheboygan Falls, (i) all amounts recoverable under reinsurance,
coinsurance or other similar Contracts including, without limitation, amounts based on paid and
unpaid Losses are fully collectible; (ii) each insurance agent or broker, at the time such agent or
broker wrote, sold or produced business for Sheboygan Falls, was duly licensed as an insurance
agent or broker for the type of business written, sold or produced by such insurance agent or
broker in the particular jurisdiction in which such agent or broker wrote, sold or produced such
business for Sheboygan Falls, except for such failures to be so licensed that would not, in the
aggregate, have a Sheboygan Falls Adverse Effect and (iii) no such insurance agent or broker has
violated or has taken any action that with notice or lapse of time or both, would have violated any
Law except for such violations as would not have a Sheboygan Falls Adverse Effect.
(e) Sheboygan Falls has no outstanding Liability under assumed reinsurance agreements of any
nature.
3.26 Health and Safety Matters.
(a) To the Knowledge of Sheboygan Falls, Sheboygan Falls has complied and is in compliance
with all Health and Safety Requirements.
(b) Without limiting the generality of the foregoing, Sheboygan Falls has obtained and
complied with, and is in compliance with, all Permits, licenses and other authorizations that are
required pursuant to the Health and Safety Requirements for the occupation of its facilities and
the operation of its business.
(c) Sheboygan Falls has not received any written or oral notice, report or other information
regarding any actual or alleged violation of Health and Safety Requirements, or any Liabilities or
potential Liabilities, including any investigatory, remedial or corrective obligations, relating to
Sheboygan Falls or its facilities arising under Health and Safety Requirements.
3.27 No Omissions. None of the representations or warranties of Sheboygan Falls
contained herein, none of the information contained in the Schedules referred to in this
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Article III and none of the other information or documents furnished to Donegal Mutual or its
representatives by Sheboygan Falls in connection with this Agreement is false or misleading in any
material respect or omits to state a fact herein or therein necessary to make the statements herein
or therein not misleading in any material respect. To the Knowledge of Sheboygan Falls, there is
no fact that adversely affects, or in the future is reasonably likely to affect adversely, the
business or Assets of Sheboygan Falls in any material respect that has not been disclosed in
writing to Donegal Mutual.
3.28 Finders. Sheboygan Falls has not paid or become obligated to pay any fee or
commission to any broker, finder or intermediary. Notwithstanding the foregoing, Sheboygan Falls
shall be responsible for the payment of all fees and expenses payable for or on account of the
transactions provided for in this Agreement based on actions taken or agreements entered into by
Sheboygan Falls. Sheboygan Falls does not have any agreement or obligation whatsoever with
entities other than Donegal Mutual regarding any proposed affiliation or acquisition of Sheboygan
Falls by any such entity and is not engaged in any negotiations with any such entity for any such
affiliation or acquisition.
3.29 Representations and Warranties to Be True on the Closing Date. All of the
representations and warranties set forth in this Article III shall be true and correct on the
Closing Date.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF DONEGAL MUTUAL
Donegal Mutual represents and warrants to Sheboygan Falls as follows:
4.1 Organization and Standing.
(a) Donegal Mutual is a fire casualty insurance company duly organized, validly existing and
in good standing under the Laws of the Commonwealth of Pennsylvania and has the requisite corporate
power and authority to conduct its business as it is currently being conducted. Donegal Mutual is
duly qualified to do business and is in good standing in the respective jurisdictions where the
character of its Assets owned or leased or the nature of its business makes such qualification
necessary.
(b) Copies of the Articles of Incorporation and By-laws of Donegal Mutual have heretofore been
delivered or made available to Sheboygan Falls, and all such copies are accurate and complete as of
the date hereof.
4.2 Authorization. Donegal Mutual has the requisite corporate power and authority to
execute and deliver this Agreement, the Services Agreement, the Technology License Agreement and
the Retrocessional Reinsurance Agreement and to consummate the
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transactions contemplated hereby and thereby. The execution and delivery of this Agreement,
the Services Agreement, the Technology License Agreement and the Retrocessional Reinsurance
Agreement and the consummation of the transactions contemplated hereby and thereby have been duly
approved and authorized by the Board of Directors of Donegal Mutual. No other corporate
proceedings on the part of Donegal Mutual are necessary to authorize this Agreement, the Services
Agreement, the Technology License Agreement and the Retrocessional Reinsurance Agreement and the
transactions contemplated hereby and thereby. This Agreement and the Services Agreement, the
Technology License Agreement and the Retrocessional Reinsurance Agreement when executed and
delivered by Donegal Mutual and assuming the due execution thereof by the other parties thereto,
will constitute the valid, legal and binding obligations of Donegal Mutual enforceable against
Donegal Mutual in accordance with their respective terms, except that (i) such enforcement may be
subject to bankruptcy, rehabilitation, liquidation, conservation, dissolution, insolvency,
reorganization, moratorium or other similar Laws now or hereafter in effect relating to creditors’
rights generally and (ii) the remedy of specific performance and injunctive and other forms of
equitable relief may be subject to equitable defenses and to the discretion of the court before
which any Proceeding therefor may be brought.
4.3 Consents and Approvals of Government Agencies. Other than Required Filings and
Approvals, no consent, approval, Order or authorization of, or registration, application,
declaration or filing with any Person is required with respect to Donegal Mutual in connection with
the execution and delivery of this Agreement, the Services Agreement, the Technology License
Agreement and the Retrocessional Reinsurance Agreement and the consummation of the transactions
contemplated hereby, nor compliance with nor fulfillment of the terms and provisions hereof and
thereof, will (i) conflict with or result in a breach of the terms, conditions or provisions of or
constitute a default under the Amended Articles of Incorporation or the Amended and Restated
By-laws of Donegal Mutual, or any instrument, agreement, mortgage, judgment, Order, award, decree
or other restriction to which Donegal Mutual is party; (ii) give any party to or with rights under
any such instrument, agreement, mortgage, judgment, Order, award, decree or other restriction or
(iii) require the approval, consent or authorization of or any filing with or notification to any
federal, state or local court, Governmental Entity, except (y) the Required Filings and Approvals
and (z) any approval, consent or authorization the failure of which to obtain would not,
individually or in the aggregate, have a Donegal Mutual Adverse Effect.
4.4 Transferability. The Note will be acquired by Donegal Mutual for its own account
and not with a view to, and not in connection with, a public distribution or resale thereof and
will not be transferred except in a transaction registered or exempt from registration under the
Securities Act. It is understood that Donegal Mutual’s investments are at all times within its
control and direction.
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4.5 No Omissions. None of the representations or warranties of Donegal Mutual
contained herein, and none of the other information or documents furnished to Sheboygan Falls or
its representatives by Donegal Mutual in connection with this Agreement is false or misleading in
any material respect or omits to state a fact herein or therein necessary to make the statements
herein or therein not misleading in any material respect. To the Knowledge of Donegal Mutual,
there is no fact that adversely affects, or in the future is reasonably likely to affect adversely,
the business or Assets of Donegal Mutual that has not been disclosed in writing to Sheboygan Falls.
4.6 Finders. Donegal Mutual has not paid or become obligated to pay any fee or
commission to any broker, finder or intermediary on account of the transactions provided for in
this Agreement, except for Xxxxxxx. Donegal Mutual shall be responsible for the payment of all
fees and expenses payable for or on account of the transactions provided for in this Agreement and
other such fees based on actions taken or agreements entered into by Donegal Mutual.
4.7 Representations and Warranties to Be True on the Closing Date. All of the
representations and warranties set forth in this Article IV shall be true and correct on the
Closing Date.
ARTICLE V
CERTAIN COVENANTS
The parties covenant and agree to take the following action between the date hereof and the
Closing Date:
5.1 Investigation of Sheboygan Falls and Donegal Mutual.
(a) Sheboygan Falls shall afford to the officers, employees and authorized representatives,
including, without limitation, independent public accountants and attorneys, of Donegal Mutual such
reasonable access upon reasonable prior notice during normal working hours to the offices,
properties, personnel, business and financial and other records of Sheboygan Falls as Donegal
Mutual shall deem necessary or desirable, and shall furnish to Donegal Mutual or its authorized
representatives such additional documents and financial and operating and other data as Donegal
Mutual shall reasonably require, including all such documents, information and data as shall be
necessary in order to enable Donegal Mutual or its representatives to verify to their satisfaction
the accuracy of the Sheboygan Falls Financial Statements and the representations and warranties
contained in Article III of this Agreement. No investigation made by Donegal Mutual or its
representatives shall affect the representations and warranties of Sheboygan Falls hereunder or the
liability of Sheboygan Falls with respect thereto.
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(b) Donegal Mutual shall afford to the officers, employees and authorized representatives,
including, without limitation, independent public accountants and attorneys, of Sheboygan Falls
such reasonable access upon reasonable prior notice during normal working hours to the offices,
properties, personnel, business and financial and other records of Donegal Mutual as Sheboygan
Falls shall deem necessary or desirable, and shall furnish to Sheboygan Falls or its authorized
representatives such additional documents and financial and operating and other data as Sheboygan
Falls shall reasonably require, including all such documents, information and data as shall be
necessary in order to enable Sheboygan Falls or its representatives to verify to their satisfaction
the accuracy of the representations and warranties contained in Article IV of this Agreement. No
investigation made by Sheboygan Falls or its representatives shall affect the representations and
warranties of Donegal Mutual hereunder or the liability of Donegal Mutual with respect thereto.
5.2 Confidential Nature of Information. Donegal Mutual and Sheboygan Falls agree
that, in the event that the transactions contemplated herein shall not be consummated, each will
treat in confidence all documents, materials and other information that it shall have obtained
during the course of the negotiations leading to this Agreement, the investigation of the other
party hereto and the preparation of this Agreement and other documents relating to this Agreement
with the exception of any filings made by Donegal Mutual or Sheboygan Falls with the OCI
(collectively, the “Confidential Information”), and shall return to the other party all copies of
the Confidential Information that have been furnished in connection therewith. In the event that a
party hereto becomes legally compelled to disclose any of the Confidential Information, it shall
provide the other party with reasonable notice so that it may seek a protective order or other
appropriate remedy or waive compliance with the provisions of this Section 5.2. In the event that
such protective order or other remedy is not obtained or that the other party waives compliance
with the provisions of this Section 5.2, the first party will furnish only that portion of the
Confidential Information that it is advised by opinion of counsel, which counsel shall be
reasonably acceptable to the other party, is legally required and will endeavor to obtain assurance
that confidential treatment will be accorded the Confidential Information so furnished. Donegal
Mutual and Sheboygan Falls agree and acknowledge that a breach of the provisions of this Section
5.2 may cause the other party to suffer irreparable damage that could not be adequately remedied by
an action at law. Accordingly, each party agrees that the other party shall have the right to seek
specific performance of the provisions of this Section 5.2 to enjoin a breach or attempted breach
of the provisions of this Section 5.2, such right being in addition to all other rights and
remedies that are available to each party at law, in equity or otherwise. The foregoing shall be
in addition to the rights and obligations under the Existing Confidentiality Agreements.
5.3 Preserve Accuracy of Representations and Warranties.
(a) Sheboygan Falls shall refrain from taking any action that would render any representation
or warranty contained in Article III of this Agreement inaccurate as of the
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Closing Date. Sheboygan Falls will promptly notify Donegal Mutual of any lawsuits, claims,
proceedings or investigations that, to the Knowledge of Sheboygan Falls, may be threatened,
brought, asserted or commenced against Sheboygan Falls, its officers or its directors (i) involving
in any way the transactions contemplated by this Agreement or (ii) that would, if determined
adversely, have a Sheboygan Falls Adverse Effect.
(b) Donegal Mutual shall refrain from taking any action that would render any representation
or warranty contained in Article IV of this Agreement inaccurate as of the Closing Date. Donegal
Mutual will promptly notify Sheboygan Falls of any lawsuits, claims, proceedings or investigations
that, to the Knowledge of Donegal Mutual, may be threatened, brought, asserted or commenced against
Donegal Mutual, its officers or its directors (i) involving in any way the transactions
contemplated by this Agreement or (ii) that would, if determined adversely, have a Donegal Mutual
Adverse Effect.
5.4 Maintain Sheboygan Falls As a Going Concern. Except as otherwise specifically
provided herein, Sheboygan Falls shall conduct its business in accordance with past practices and
use its best efforts to maintain its business organization intact, keep available the services of
Sheboygan Falls’ officers, employees and agents and preserve the good will of its insurance
underwriters, employees, clients and others having business relations with it. Sheboygan Falls
shall provide Donegal Mutual promptly with interim monthly financial information and any other
management reports, as and when they shall become available, confer with Donegal Mutual concerning
operational matters of a material nature and otherwise report periodically to Donegal Mutual
concerning the status of the business, operations and financial condition of Sheboygan Falls.
5.5 Make No Material Change in Sheboygan Falls. Prior to the Closing Date, Sheboygan
Falls shall not, without the prior written approval of Donegal Mutual, (i) make any material change
in the business or operations of Sheboygan Falls except as set forth in this Agreement; (ii) make
any material change in the accounting policies applied in the preparation of the financial
statements referred to in Section 3.4; (iii) make any material change in the compensation of
officers, directors or key employees of Sheboygan Falls other than in the Ordinary Course of
Business of Sheboygan Falls; (iv) enter into any contract, license, franchise or commitment other
than in the Ordinary Course of Business of Sheboygan Falls or waive any rights of substantial
value; (v) make any donation to any charitable, civic, educational or other eleemosynary
institution in excess of donations made in comparable past periods, (vi) make any reduction in any
loss expense reserve or incurred but not reported reserve prior to the Closing Date; (vii) make any
change in the levels, procedures or methods employed in the setting or changing of case basis loss
reserves; (viii) make any reduction in net case basis loss reserves not consistent with the levels,
procedures or methods employed by Sheboygan Falls in the setting or changing of case basis loss
reserves as in effect on the date hereof and, in any event, within 10 days following any reduction
in Sheboygan Falls’ net case basis loss reserve in any one claim file in excess of
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$25,000, except for a reduction occurring because a payment has been made on the reserve or
because the claim has been settled and the case closed, and, in any case, Sheboygan Falls shall
provide Donegal Mutual with a written explanation of such reduction in reasonable detail certified
by Sheboygan Falls’ President or (ix) enter into any other transaction affecting in any material
respect the business of Sheboygan Falls other than in the Ordinary Course of Business of Sheboygan
Falls and in conformity with the past practices of Sheboygan Falls or as contemplated by this
Agreement.
5.6 No Public Announcement. Neither Sheboygan Falls nor Donegal Mutual shall, without
the approval of the other, make any press release or other public announcement or filing concerning
the transactions contemplated by this Agreement, except as and to the extent that any such party
shall so determine is required by law, in which case the other party shall be advised thereof and
given a reasonable opportunity to comment thereon.
5.7 Required Filings. As promptly as practical after the date of this Agreement,
Sheboygan Falls and Donegal Mutual shall promptly commence and make all Required Filings with the
appropriate Governmental Entity required by Law to be made by any of them in order to consummate
the transactions contemplated by this Agreement. Between the date of this Agreement and the
Closing Date, Sheboygan Falls shall cooperate with Donegal Mutual with respect to all Required
Filings that Donegal Mutual elects to make or is required by law to make in connection with the
transactions contemplated by this Agreement.
5.8 No Solicitation. Sheboygan Falls shall not, nor shall it authorize or permit any
of its officers, directors or employees or any investment banker, financial advisor, attorney,
accountant, actuary or other Person retained by it or on its behalf to: (a) solicit or encourage,
including, without limitation, by way of furnishing information, or take any action to facilitate
or pursue, any inquiries or the making of any proposal that constitutes, or may reasonably be
expected to lead to, any Reorganization Proposal or (b) agree to, approve or endorse any
Reorganization Proposal; provided, however, that nothing contained in this Section 5.8 shall
prohibit the Board of Directors of Sheboygan Falls from furnishing information to, or entering into
discussions or negotiations with, any person or entity that made an unsolicited bona fide proposal
to acquire Sheboygan Falls pursuant to a Reorganization Proposal if and only to the extent that,
(A) the Board of Directors of Sheboygan Falls determines in good faith that such action is required
to comply with its fiduciary duties to its members imposed by Law, (B) prior to furnishing such
information to, or entering into discussions or negotiations with, such person or entity, Sheboygan
Falls provides written notice to Donegal Mutual to the effect that it is furnishing information to,
or entering into discussions or negotiations with, such person or entity and (C) Sheboygan Falls
continues to keep Donegal Mutual informed of the status of any such discussions or negotiations.
Nothing in this Section 5.8 shall (x) permit Sheboygan Falls to terminate this Agreement, except as
specifically provided in Article VII, (y) permit Sheboygan Falls to enter into any agreement with
respect to a Reorganization Proposal during the term of this
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Agreement or (z) affect any other obligation of Sheboygan Falls under this Agreement.
Sheboygan Falls shall promptly advise Donegal Mutual orally and in writing of any such inquiries or
proposals however preliminary and whether written or oral, and shall communicate the full and
complete details of any such inquiry or proposal including, without limitation, the identity of all
Persons involved. As used in this Agreement, “Reorganization Proposal” shall mean any proposal
for, or to discuss, a merger, consolidation, sale of all or substantially all of the Assets,
demutualization, bulk or assumption reinsurance arrangement or other reorganization, arrangement or
business combination involving Sheboygan Falls or any proposal or offer for, or to discuss, the
acquisition in any manner of control of a substantial portion of the Assets of or business
conducted by Sheboygan Falls other than the transactions contemplated by this Agreement.
5.9 Future Actions Regarding Sheboygan Falls. Donegal Mutual and Sheboygan Falls
agree that the following undertakings with respect to certain future action relating to Sheboygan
Falls were important inducements to the decision of Sheboygan Falls and Donegal Mutual to enter
into this Agreement.
(a) Donegal Mutual and Sheboygan Falls have agreed that until the later to occur of (i)
repayment of the principal amount and all accrued but unpaid interest on the Note and (ii) the
termination of the Technology License Agreement in accordance with its terms, Sheboygan Falls shall
use its best efforts to assure that the Board of Directors of Sheboygan Falls shall consist of ten
members, four of whom shall be designees of Sheboygan Falls and six of whom shall be designees of
Donegal Mutual. In furtherance of this undertaking, Donegal Mutual agrees, for a period of not
less than five years from the Closing Date, to cause its designees on the Sheboygan Falls’ Board of
Directors to nominate for election as successors to the initial Sheboygan Falls’ designees persons
who are residents of the Greater Sheboygan Falls, Wisconsin metropolitan area. Following the later
to occur of (i) five years from the Closing Date or (ii) the date on which Sheboygan Falls shall
have become a wholly owned subsidiary of Donegal Mutual or Donegal Group Inc. (“DGI”), Donegal
Mutual agrees, and agrees to cause DGI to agree, to maintain an appropriate Wisconsin presence on
the Board of Directors of the converted Sheboygan Falls.
(b) For a period of five years from the Closing Date, Donegal Mutual will not take any action
to relocate or close the existing facilities of Sheboygan Falls in Sheboygan Falls, Wisconsin. For
a period commencing on the fifth anniversary of the Closing Date and ending on the tenth
anniversary of the Closing Date, Donegal Mutual agrees not to take any action to relocate or close
the existing facilities of Sheboygan Falls in Sheboygan Falls, Wisconsin unless such relocation or
closure is approved by the affirmative vote of eight members of the Board of Directors of Sheboygan
Falls.
(c) Donegal Mutual agrees to use commercially reasonable efforts to maintain continued
employment of underwriting, claims and marketing personnel at
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Sheboygan Fall’s home office, with the levels of employment commensurate with the Wisconsin
premium volume of Sheboygan Falls and Donegal Mutual.
(d) Donegal Mutual agrees not to cause the termination of the existing executive bonus plan
unless a management bonus plan is adopted in its place that provides for potential bonuses that are
equal to or greater than the potential bonuses under the existing Sheboygan Falls executive bonus
plan.
(e) Unless and until the demutualization of Sheboygan Falls occurs, Donegal Mutual agrees to
take no action to cause the termination of any of the existing employee benefit plans maintained by
Sheboygan Falls. Notwithstanding the foregoing, Donegal Mutual and Sheboygan Falls agree to
evaluate the termination or freezing of Sheboygan Fall’s defined benefit pension plan pursuant to
which all employees of Sheboygan Falls would become fully vested in all funded benefits under
Sheboygan Fall’s defined benefit pension plan and the adoption, in lieu thereof, of a 401(k) plan
to which Sheboygan Falls would make contributions on behalf of its employees. To the extent
Sheboygan Falls shall terminate any other Sheboygan Falls employee benefit plan, Sheboygan Falls
shall adopt a successor plan under which the employees of Sheboygan Falls shall be entitled to
substantially comparable benefits under such new plans.
(f) For as long as the Services Agreement remains in effect, Donegal Mutual agrees that:
(i) Sheboygan Falls will be a major writing company in Wisconsin for the Donegal Insurance
Group;
(ii) Donegal Mutual will assist Sheboygan Falls in offering an expanded line of personal and
commercial coverages;
(iii) Donegal Mutual will assist Sheboygan Falls in soliciting agency appointments; and
(iv) The current book of business written by Sheboygan Falls will be retained by Sheboygan
Falls and will not be transferred to Donegal Mutual, except as contemplated by the Retrocessional
Reinsurance Agreement.
(g) Donegal Mutual agrees to work with Sheboygan Falls to identify the most cost-effective
reinsurance for Sheboygan Falls; provided, however, that this provision shall not obligate Donegal
Mutual to accept any reinsurance from Sheboygan Falls other than pursuant to the Retrocessional
Reinsurance Agreement.
(h) Donegal Mutual and Sheboygan Falls agree to establish, within 30 days from the date of the
Closing, a technology transition team consisting of employees of Donegal Mutual and employees of
Sheboygan Falls to facilitate the commencement of a
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transition, within six months from the date of the Closing, from Sheboygan Fall’s current
computer systems to Donegal Mutual’s computer systems. Upon completion of such transition, and
subject to the terms of the Technology License Agreement, Donegal Mutual will make its technology,
including its WritePro automated personal lines underwriting and policy issuance system, available
to Sheboygan Falls. In connection therewith, Donegal Mutual and Sheboygan Falls agree as follows:
(i) Sheboygan Falls shall reimburse Donegal Mutual for the direct costs, including salary and
benefits, of Donegal Mutual’s employees performing systems analysis, programming and product
development services in the process of converting Sheboygan Falls’ information systems to Donegal
Mutual’s information systems. Employees of Donegal Mutual performing such services will maintain a
record of time spent working on the system conversion project, and costs will be charged to
Sheboygan Falls on a monthly basis based upon the employees’ actual hourly rate and a factor
representing Donegal Mutual’s average benefits cost as a percentage of salaries expense with no
additional overhead charge to Sheboygan Falls. Donegal Mutual agrees that the costs of its
services in assisting in the conversion of Sheboygan Falls’ information systems to Donegal Mutual’s
information systems will not exceed $100,000. Such costs exclude any licensing fees or other
direct charges from third party vendors Donegal Mutual will be required to pay under license
agreements relating to Donegal Mutual’s information systems in order to include Sheboygan Falls
under such license agreements and Sheboygan Falls shall reimburse Donegal Mutual for all such
license fees or other direct charges from third party vendors in addition to the costs of Donegal
Mutual’s services as provided in the immediately preceding sentence.
(ii) Upon the conversion of Sheboygan Falls’ information systems to Donegal Mutual’s
information systems, calculation and settlement of allocations and reimbursements for information
services provided by Donegal Mutual on behalf of Sheboygan Falls shall be performed as follows:
(A) Sheboygan Falls shall be included in the calculations currently performed to determine the
allocation of Donegal Mutual’s information systems costs among the companies that currently receive
information services from Donegal Mutual. Donegal Mutual’s estimated purchase price and
development costs of computer hardware and software systems required to provide such services are
divided by the number of years those systems are reasonably expected to serve the respective
information services requirements of Donegal Mutual and its affiliates. Such estimated annual cost
is then allocated to the respective companies based upon their proportionate net written premiums
in the year prior to the establishment of the allocation amounts. Donegal Mutual agrees that the
percentage allocation to Sheboygan Falls shall not exceed 1.0% of Sheboygan Falls’ net premiums
written for a period of two years following the first allocation billing.
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(B) Sheboygan Falls shall reimburse Donegal Mutual for the amounts so allocated on a monthly
basis. Monthly allocations will be charged beginning in the month following the date of the first
issuance of a Sheboygan Falls policy on Donegal Mutual’s information systems.
5.10 Affirmative Covenants of Sheboygan Falls. Beginning with the date, if any, while
the Note shall be outstanding on which the designees of Donegal Mutual cease to constitute a
majority of the members of the Board of Directors of Sheboygan Falls, Sheboygan Falls shall:
(a) Furnish to Donegal Mutual:
(i) within 45 days after the close of each of the first three quarters of each of Sheboygan
Falls’ fiscal years, a balance sheet of Sheboygan Falls as of the end of such quarter and a
statement of operations for the period commencing at the end of the previous fiscal year and ending
with the end of such quarter, each certified by the Chief Financial Officer of Sheboygan Falls;
(ii) within 60 days after the close of each fiscal year of Sheboygan Falls commencing in 2008,
a balance sheet of Sheboygan Falls as of the end of such fiscal year and a statement of operations
of Sheboygan Falls for such fiscal year accompanied by the unqualified opinion with respect thereto
of KPMG LLP or other independent public accountants of recognized national standing;
(iii) promptly upon their becoming available, all regular and periodic financial and other
reports that Sheboygan Falls shall file with any regulatory authority having jurisdiction over it
or its operations;
(iv) immediately upon receipt, a copy of all written communications and a written summary of
all material oral communications specifically addressed to Sheboygan Falls, and not to
Wisconsin-domiciled insurers in general, shall receive from any regulatory agency having
jurisdiction over it or its operations;
(v) such other information respecting the financial condition and operations of Sheboygan
Falls as Donegal Mutual may from time to time reasonably request; and
(vi) immediate notice of the institution of any litigation, administrative proceeding or
governmental investigation, other than routine litigation ordinarily incident to Sheboygan Falls’
insurance business or the entry of any judgment, decree or Order against or involving Sheboygan
Falls that might result in a Sheboygan Falls Adverse Effect or affect the enforceability of the
Note or Sheboygan Falls’ ability to obtain approval of the Commissioner of Insurance to make
payments of principal of, or accrued interest on, the Note;
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(b) Preserve and keep in full force and effect its existence as a mutual fire and casualty
insurance company under the Laws of the State of Wisconsin and its admission to transact an
insurance business in Wisconsin; and
(c) At any reasonable time and from time to time, permit Donegal Mutual or any agents or
representatives thereof to examine and make copies of and take abstracts from the records and books
of account of, and visit the properties of, Sheboygan Falls during regular business hours and upon
five days prior notice to Sheboygan Falls, and to discuss the affairs, finances and accounts of
Sheboygan Falls with Sheboygan Falls’ officers.
5.11 Negative Covenants of Sheboygan Falls. Beginning with the date, if any, while
the Note shall be outstanding on which the designees of Donegal Mutual cease to constitute a
majority of the members of the Board, Sheboygan Falls shall not, without the prior written consent
of Donegal Mutual:
(a) Create, incur, assume, guarantee, suffer to exist or in any other manner become liable for
any indebtedness except for (i) the indebtedness evidenced by the Note, (ii) indebtedness existing
on such date and reflected in Sheboygan Falls’ financial statements for the quarter ended
immediately preceding this Section 5.11 becoming effective and (iii) indebtedness for borrowed
money or for the deferred purchase price of property incurred in connection with the acquisition of
real or personal property not to exceed $250,000 in aggregate principal amount at any time
outstanding and any extension, refunding or renewal of any such indebtedness referred to in this
clause (iii) not resulting in an increase in the principal amount thereof;
(b) Merge or consolidate with or into, reinsure, or sell, assign, lease or otherwise dispose
of, whether in one transaction or in a series of transactions, all or substantially all of its
Assets, whether now owned or hereafter acquired, to any Person, except in the ordinary course of
business and for consideration that is at least equal to the fair value of the Assets being sold or
otherwise disposed of as determined by the Board of Directors of Sheboygan Falls acting in good
faith;
(c) Return any capital to its members as such or make any distribution of its Assets to its
members as such, except workers’ compensation dividends paid in the Ordinary Course of Business;
(d) Prepay any indebtedness to any Person unless after giving effect to such prepayment
Sheboygan Falls has surplus, exclusive of the then outstanding principal balance of the Note, in an
amount not less than 300% of the then outstanding principal balance of the Note;
(e) Enter into or permit any Reorganization Proposal; or
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(f) Voluntarily dissolve, liquidate or wind up Sheboygan Falls’ affairs or file for bankruptcy
or reorganization or any similar proceedings.
ARTICLE VI
CONDITIONS
6.1 Conditions to Each Party’s Obligations. The respective obligations of each party
to effect the purchase and sale of the Note and their other respective obligations under this
Agreement shall be subject to the fulfillment at or prior to the Closing Date of the following
conditions:
(a) All Required Filings and Approvals required to be obtained prior to the Closing Date
solely for this Agreement, the Ancillary Documents and the Amended and Restated Bylaws and the
election of designees of Donegal Mutual as a majority of the members of the Board of Directors of
Sheboygan Falls shall have been obtained and not rescinded or adversely modified or limited as set
forth in the proviso below or, if merely required to be filed, such filings shall have been made
and accepted, and all waiting periods prescribed by applicable Law shall have expired or been
terminated in accordance with applicable Law; provided that such approvals shall not contain any
conditions or limitations that compel or seek to compel Sheboygan Falls to dispose of all or any
portion of the business or Assets of Sheboygan Falls or impose or seek to impose any limitation on
the ability of Sheboygan Falls to conduct its business or own its Assets after the Closing Date in
substantially the same manner as Sheboygan Falls may presently conduct its business or own its
Assets;
(b) No Order entered or Law promulgated or enacted by any Governmental Entity shall be in
effect that would prevent the consummation of the purchase or sale of the Note or the other
transactions contemplated hereby and no Proceeding brought by a Governmental Entity shall have been
commenced and be pending that seeks to restrain, prevent or materially delay or restructure the
transactions contemplated hereby or that otherwise questions the validity or legality of any such
transaction; and
(c) There shall be no pending or threatened litigation initiated by a private party seeking to
restrain, prevent, rescind or change the terms of this Agreement or the sale of the Note or to
obtain damages in connection with this Agreement or the consummation thereof or with the sale of
the Note that, in the reasonable opinion of Sheboygan Falls, makes it inadvisable to proceed with
this Agreement or with the sale of the Note.
6.2 Conditions to Obligations of Donegal Mutual. The obligations of Donegal Mutual to
purchase and pay for the Note and to perform its other obligations hereunder to be
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performed on the Closing Date shall, at the option of Donegal Mutual, be subject to the
satisfaction, on or prior to the Closing Date, of the following conditions:
(a) Sheboygan Falls shall have performed or complied in all material respects with all
agreements required to be performed and complied with by it under this Agreement, including the
deliveries required by Section 2.3(b), at or prior to the Closing Date and Donegal Mutual shall
have received an Officer’s Certificate to that effect, dated as of the Closing Date, and signed on
behalf of Sheboygan Falls.
(b) Each of the representations and warranties of Sheboygan Falls contained in this Agreement
that is qualified by materiality shall be true and correct on the Closing Date as though made on
the Closing Date and each of the representations and warranties of Sheboygan Falls that is not so
qualified shall be true and correct in all material respects on the Closing Date as though made on
the Closing Date, other than representations and warranties that address matters only as of a
certain date, which shall be true and correct in all material respects as of such certain date, and
there shall have been delivered to Donegal Mutual an Officer’s Certificate or Certificates to that
effect, dated as of the Closing Date, and signed on behalf of Sheboygan Falls;
(c) Except as set forth in the Disclosure Schedules, there shall have been, between the date
hereof and the Closing Date, (i) no Sheboygan Falls Adverse Effect, (ii) no adverse federal, state
or local legislative or regulatory change affecting in any material respect the services or
business of Sheboygan Falls, (iii) no material damage to any Sheboygan Falls Property or Assets of
Sheboygan Falls by fire, flood, casualty, act of God or the public enemy or other cause, regardless
of insurance coverage for such damage, so as to impair in any material respect the ability of
Sheboygan Falls to render services or continue operations and (iv) no material and adverse
development or proceeding affecting Sheboygan Falls’ Insurance License in Wisconsin. There shall
have been delivered to Donegal Mutual an Officer’s Certificate, dated as of the Closing Date, and
signed on behalf of Sheboygan Falls by its Chief Executive Officer to the effect that (a) between
the date hereof and the Closing Date there has been no such Sheboygan Falls Adverse Effect as
stated in clause (i) hereof, (b) no such material damage as stated in clause (iii) hereof, (c) no
adverse licensing development as stated in clause (iv) hereof and (d) further stating that nothing
has come to the signer’s attention, in the course of his activities on behalf of Sheboygan Falls,
that causes him to believe that during such period there occurred any adverse federal, state or
local legislative or regulatory change affecting in any material respect the services or business
of Sheboygan Falls;
(d) Sheboygan Falls shall have increased the membership of its Board of Directors to ten
persons and Donegal Mutual shall have received the resignations of four directors of Sheboygan
Falls on or prior to the Closing Date and Sheboygan Falls’ Board of Directors shall have appointed
as directors of Sheboygan Falls, with the prior approval of the Commissioner of Insurance pursuant
to Section INS 40.02 of the Wisconsin Administrative
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Code, six qualified persons designated by Donegal Mutual as directors of Sheboygan Falls
effective as of the Closing Date;
(e) Not later than the Closing Date, Xxx X. Xxxxxx shall have entered into an Employment
Agreement with Sheboygan Falls in substantially the form of Xxxxxxxx X-0 and each of Xxxxxxxx X.
Xxxxxx, Xxxxxx X. Xxxxxxx and Xxxxxx X. Xxxxxx shall have entered into an Employment Agreement with
Sheboygan Falls in substantially the form of Xxxxxxxx X-0 and, except as provided in such
Employment Agreements, Sheboygan Falls shall have no other obligation to any of such persons in
respect of his or her employment by Sheboygan Falls or the termination of such employment with the
exception of the Restated Deferred Compensation Agreement as amended November 23, 2005 between
Sheboygan Falls and Xxx X. Xxxxxx and the Restated Split Dollar Agreement as amended November 23,
2005 between Sheboygan Falls and Xxx X. Xxxxxx;
(f) Not later than the third business day prior to the Closing Date:
(i) Sheboygan Falls shall have received renewals effective as of January 1, 2007 of all of the
reinsurance treaties Sheboygan Falls currently has in effect, with the placement and other terms of
such renewals to be acceptable to Donegal Mutual in its reasonable discretion; and
(ii) Sheboygan Falls shall have booked for SAP purposes and reflected in its December 31, 2006
Annual Statement all catastrophe reinsurance reinstatements for loss occurrences and commission
readjustments through December 31, 2006 and there shall not be any catastrophe reinsurance
reinstatements for loss occurrences or commission readjustments not shown on the December 31, 2006
Annual Statement whether arising prior to or after December 31, 2006, that, individually or in the
aggregate, would have a Sheboygan Falls Adverse Effect;
(g) The policyholders surplus of Sheboygan Falls, determined in accordance with SAP, shall be
not less than $5,000,000 as of the last day of the month immediately preceding the month in which
the Closing occurs;
(h) Sheboygan Falls shall not have made any material expenditures through the Closing Date,
except in accordance with its current Board-approved budget; and
(i) Sheboygan Falls shall have delivered to Donegal Mutual a copy of the preliminary report by
the OCI of its recent examination of Sheboygan Falls if Sheboygan Falls shall have received such
preliminary report prior to the Closing Date and, if not, Sheboygan Falls shall have delivered to
Donegal Mutual a written report describing in reasonable detail all issues raised by the OCI during
such examination.
6.3 Conditions to Obligations of Sheboygan Falls. The obligation of Sheboygan Falls
to sell the Note and to perform its other obligations hereunder to be performed on the
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Closing Date shall, at the option of Sheboygan Falls, be subject to the fulfillment on or
prior to the Closing Date, of the following conditions:
(a) Donegal Mutual shall have performed or complied in all material respects with all
obligations and agreements required to be performed and complied with by it under this Agreement,
including the deliveries required by Section 2.3(c), at or prior to the Closing Date and Sheboygan
Falls shall have received an Officers’ Certificate from Donegal Mutual as to the satisfaction of
this condition;
(b) Each of the representations and warranties of Donegal Mutual contained in this Agreement
that is qualified by materiality shall be true and correct on the Closing Date as though made on
the Closing Date and each of the representations and warranties of Donegal Mutual that is not so
qualified shall be true and correct in all material respects on the Closing Date as though made on
the Closing Date, other than representations and warranties that address matters only as of a
certain date and which shall be true and correct in all material respects as of such certain date,
and there shall have been delivered to Sheboygan Falls an Officer’s Certificate or Certificates to
that effect, dated as of the Closing Date, and signed on behalf of Donegal Mutual;
(c) There shall have been, between the date hereof and the Closing Date, (i) no Donegal Mutual
Adverse Effect, (ii) no adverse federal, state or local legislative or regulatory change affecting
in any material respect the services or business of Donegal Mutual, (iii) no material damage to any
Donegal Mutual Property or Assets of Donegal Mutual by fire, flood, casualty, act of God or the
public enemy or other cause, regardless of insurance coverage for such damage, so as to impair in
any material respect to the ability of Donegal Mutual to render services or continue operations and
(iv) no material and adverse development or proceeding affecting Donegal Mutual’s Insurance
Licenses. There shall have been delivered to Sheboygan Falls an Officer’s Certificate, dated as of
the Closing Date, and signed on behalf of Donegal Mutual by its Chief Executive Officer to the
effect (a) that between the date hereof and the Closing Date there has been no such Donegal Mutual
Adverse Effect as stated in clause (i) hereof, (b) no such material damage as stated in clause
(iii) hereof, (c) no adverse licensing development as stated in clause (iv) hereof and (d) further
stating that nothing has come to the signer’s attention, in the courses of his activities on behalf
of Donegal Mutual, that causes him to believe that during such period there occurred any adverse
federal, state or local legislative or regulatory change affecting in any material respect the
services or business of Donegal Mutual; and
(d) At Closing, Donegal Mutual shall have tendered to Sheboygan Falls payment of the purchase
price of the Note as specified in Section 2.2.
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ARTICLE VII
TERMINATION
7.1 Termination. This Agreement may be terminated and the purchase and sale of the
Note and the other transactions contemplated hereby be abandoned at any time prior to the Closing
Date:
(a) by mutual consent of Sheboygan Falls and Donegal Mutual;
(b) by either Sheboygan Falls or Donegal Mutual by one day’s written notice to Donegal Mutual
or Sheboygan Falls, as the case may be, if the Closing shall not have been consummated on or before
April 30, 2007; provided that the right to terminate this Agreement under this Section 7.1(b) shall
not be available to any party whose failure to fulfill any obligation under this Agreement has been
the cause of, or resulted in, the failure of the purchase and sale of the Note to have been
consummated on or before such date;
(c) by either Donegal Mutual or Sheboygan Falls by one day’s written notice to Sheboygan Falls
or Donegal Mutual, as the case may be, if any of the conditions to such party’s obligations to
consummate the transactions contemplated by this Agreement shall have become impossible to satisfy;
or
(d) by Donegal Mutual if (i) Sheboygan Falls is in breach at any time prior to the Closing
Date of any of the representations and warranties made by Sheboygan Falls as though made on and as
of such date, unless the inaccuracies (without giving effect to any materiality or material adverse
effect qualifications or materiality exceptions contained therein) in such representations and
warranties, individually or in the aggregate, have not had and would not reasonably be expected to
result in Sheboygan Falls Adverse Effect as to Sheboygan Falls or (ii) Sheboygan Falls shall not
have performed and complied in all material respects with all covenants required by this Agreement
to be performed or complied with by it on and as of such date, which breach cannot be or has not
been cured, in all material respects within 15 days after the giving of written notice thereof by
Donegal Mutual to Sheboygan Falls.
(e) by Sheboygan Falls if (i) Donegal Mutual is in breach at any time prior to the Closing
Date of any of the representations and warranties made by Donegal Mutual as though made on and as
of such date, unless the inaccuracies (without giving effect to any materiality or material adverse
effect qualifications or materiality exceptions contained therein) in such representations and
warranties, individually or in the aggregate, have not had and would not reasonably be expected to
result in a Donegal Mutual Adverse Effect as to Donegal Mutual or (ii) Donegal Mutual shall not
have performed and complied in all material respects with all covenants required by this Agreement
to be performed or complied with by it on and as of such date, which breach cannot be or has not
been cured, in all
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material respects within 15 days after the giving of written notice thereof by Sheboygan Falls
to Donegal Mutual.
7.2 Effect of Termination. In the event of the termination of this Agreement by
either Sheboygan Falls or Donegal Mutual, as provided in Section 7.1, this Agreement shall
thereafter become void and there shall be no Liability on the part of any party hereto against any
other party hereto, or their respective directors, officers, policyholders or agents, except that
(i) any such termination shall be without prejudice to the rights of any party hereto arising out
of the willful breach by any other party of any covenant or agreement contained in this Agreement,
(ii) Section 5.2 and Article IX shall continue in full force and effect notwithstanding such
termination and (iii) each of the parties hereto shall provide the other party hereto with a copy
of any proposed public announcement regarding the occurrence of such termination and an opportunity
to comment thereon prior to its dissemination.
ARTICLE VIII
AMENDMENT, WAIVER AND INDEMNIFICATION
8.1 Amendment. This Agreement may be amended or modified in whole or in part any time
by an agreement in writing executed in the same manner as this Agreement, provided, however, that
no amendment shall be made that changes the terms of this Agreement in any material respect and
that requires the further approval or proceedings of any insurance Governmental Entity without such
approval having first been obtained or such proceedings having been first completed.
8.2 Extension; Waiver. At any time prior to the Closing Date, either party hereto
may:
(a) extend the time for the performance of any of the obligations or other acts of the other
party hereto,
(b) waive any inaccuracies in the representations and warranties contained herein or in any
document delivered pursuant hereto, and
(c) waive compliance with any of the agreements or conditions contained herein.
Any agreement on the part of a party to any such extension or waiver shall be valid only if set
forth in an instrument in writing signed on behalf of such party by its President. The failure of
any party hereto to enforce at any time any provision of this Agreement shall not be construed to
be a waiver of such provision, nor in any way to affect the validity of this Agreement or any part
hereof or the right of such party hereafter to enforce each and every
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such provision. No waiver of any breach of this Agreement shall be held to constitute a waiver of
any other or subsequent breach.
8.3 Survival of Obligations. All certifications, representations and warranties made
herein by Sheboygan Falls and Donegal Mutual and their obligations to be performed pursuant to the
terms hereof, shall survive the Closing Date hereunder, notwithstanding any notice of any
inaccuracy, breach or failure to perform not waived in writing and notwithstanding the consummation
of the transactions contemplated herein with knowledge of such inaccuracy, breach or failure. All
representations and warranties contained herein shall terminate upon the earlier of (i) repayment
in full of the principal amount of the Note and all accrued but unpaid interest thereon or (ii) 90
days after Donegal Mutual shall have received the audited financial statements of Sheboygan Falls
for the year ending December 31, 2007; provided that (i) the representations and warranties
contained in Section 3.15 shall expire two years after the Closing Date or, with respect to each
claim under Section 3.15 arising before or during such two-year period, upon the earlier to occur
of (x) such claim’s final judicial determination or settlement and satisfaction of any judgment or
full payment of any settlement, as the case may be or (y) such time, if any, as the claim shall be
barred by the applicable statute of limitations or (z) the payment in full of the Note and (ii) the
representations and warranties contained in Section 3.16 shall expire four years after the Closing
Date or with respect to any dispute with the IRS upon the earlier to occur of (x) such dispute’s
final resolution and the payment of all taxes, interests and penalties arising therefrom and (y)
the expiration of the applicable statute of limitations.
8.4 Indemnification.
(a) Each party (the “Indemnifying Person”) agrees to indemnify and hold harmless the other
party and their respective subsidiaries, affiliates, partners, successors and assigns
(collectively, the “Indemnified Persons”) from and against any and all (x) Liabilities, losses,
costs, deficiencies or damages (“Loss”) and (y) reasonable attorneys’ and accountants’ fees and
expenses, court costs and all other reasonable out-of-pocket expenses (“Expense”) incurred by any
Indemnified Person, in each case net of any insurance proceeds received and retained by such
Indemnified Person, in connection with or arising from (i) any breach by the Indemnifying Person of
any of its covenants in, or any failure of the Indemnifying Person to perform any of its
obligations under, this Agreement or (ii) any material breach of any warranty or the material
inaccuracy of any representation of the Indemnifying Person contained or referred to in this
Agreement or in any Officer’s Certificate delivered by or on behalf of the Indemnifying Person
pursuant hereto provided that the liability of the Indemnifying Person shall be limited (the
“Liability Limit”) to an aggregate of Three Million Five Hundred Thousand Dollars ($3,500,000).
No claim shall be made for indemnity pursuant to this Section 8.4 until the aggregate amount of
Loss and Expense incurred by all Indemnified Persons is Fifty Thousand Dollars ($50,000),
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but if the aggregate amount of such Loss and Expense exceeds such amount, the Indemnifying Person
shall be liable for all Loss and Expense, including such initial Fifty Thousand Dollars ($50,000)
amount, subject to any applicable Liability Limit. In addition, no claim for indemnity pursuant to
this Section 8.4 shall be made by Donegal Mutual in respect of any Liability to the extent that
such Liability is reflected on the audited balance sheet of Sheboygan Falls as of the Closing Date.
(b) If any Indemnified Person has suffered or incurred any Loss or incurred any Expense, it
shall so notify the Indemnifying Person promptly in writing describing such Loss or Expense, the
amount thereof, if known, and the method of computation of such Loss or Expense, all with
reasonable particularity and containing a reference to the provision of this Agreement or any
Officer’s Certificate delivered pursuant hereto in respect of which such Loss or Expense shall have
occurred. If any action at law or suit in equity is instituted by or against a third party with
respect to which any Indemnified Person intends to claim any liability or expense as Loss or
Expense under this Section 8.4, such Indemnified Person shall promptly notify the Indemnifying
Person of such action or suit. The failure of an Indemnified Person to promptly notify the
Indemnifying Person of a claim as contemplated by the preceding sentence will not relieve the
Indemnifying Person of its obligations under this Section 8.4 except to the extent that the
Indemnifying Person is prejudiced in its defense of such claim as a result of such failure to give
prompt notice.
(c) Subject to paragraph (d) of this Section 8.4, the Indemnified Persons shall have the right
to conduct and control, through counsel of their choosing, any third party claim, action or suit
and may compromise or settle the same, provided that any of the Indemnified Persons shall give the
Indemnifying Person advance notice of any proposed compromise or settlement. The Indemnified
Persons shall permit the Indemnifying Person to participate in the defense of any such action or
suit through counsel chosen by it, provided that the fees and expenses of such counsel shall be
borne by the Indemnifying Person. Any compromise or settlement with respect to a claim for money
damages effected after the Indemnifying Person, by notice to the Indemnified Persons, shall have
disapproved such compromise or settlement, shall discharge the Indemnifying Person from liability
with respect to the subject matter thereof, and no amount in respect thereof shall be claimed as
Loss or Expense under this Section 8.4; provided that if the Indemnifying Person shall disapprove
of a proposed compromise or settlement of a claim the acceptance of which is recommended by counsel
conducting the defense of such claim and the amount of such settlement would exceed an applicable
Liability Limit, the Indemnifying Person shall, notwithstanding such Liability Limit, be liable for
the full amount of any judgment entered in respect of, or later compromise or settlement approved
by the Indemnifying Person of, such claim less the amount by which the proposed compromise or
settlement disapproved by the Indemnifying Person exceeded such Liability Limit.
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(d) If the remedy sought in any action or suit referred to in paragraph (c) of this Section
8.4 is solely money damages and the sum of (i) the amount claimed in such action or suit, (ii) all
amounts previously paid by the Indemnifying Person pursuant to this Section 8.4 and (iii) all
amounts claimed in all pending claims for indemnity under this Section 8.4 does not exceed the
aggregate liability of the Indemnifying Person under this Section 8.4, the Indemnifying Person
shall have 15 business days after receipt of the notice referred to in the last sentence of
paragraph (b) of this Section 8.4 to notify the Indemnified Persons that it elects to conduct and
control such action or suit. If the Indemnifying Person does not give the foregoing notice, the
Indemnified Persons shall have the right to defend, contest, settle or compromise such action or
suit in the exercise of their exclusive discretion and the Indemnifying Person shall, upon request
from any of the Indemnified Persons, promptly pay to such Indemnified Persons in accordance with
the other terms of this Section 8.4 the amount of any Loss resulting from its liability to the
third party claimant and all related Expense. If the Indemnifying Person gives the foregoing
notice, the Indemnifying Person shall have the right to undertake, conduct and control, through
counsel of its own choosing and at its sole expense of the Indemnifying Person, the conduct and
settlement of such action or suit, and the Indemnified Persons shall cooperate with the
Indemnifying Person in connection therewith; provided that (x) the Indemnifying Person shall not
thereby permit to exist any Lien upon any Asset of any Indemnified Person, (y) the Indemnifying
Person shall permit the Indemnified Persons to participate in such conduct or settlement through
counsel chosen by the Indemnified Persons, but the fees and expenses of such counsel shall be borne
by the Indemnified Persons, except as provided in clause (z) hereof and (z) the Indemnifying Person
shall agree promptly to reimburse to the extent required under this Section 8.4 the Indemnified
Persons for the full amount of any Loss resulting from such action or suit and all related Expense
incurred by the Indemnified Persons, except fees and expenses of counsel for the Indemnified
Persons incurred after the assumption of the conduct and control of such action or suit by the
Indemnifying Person. So long as the Indemnifying Person is contesting any such action or suit in
good faith, the Indemnified Persons shall not pay or settle any such action or suit.
Notwithstanding the foregoing, the Indemnified Persons shall have the right to pay or settle any
such action or suit, provided that in such event the Indemnified Persons shall waive any right to
indemnity therefor by the Indemnifying Person and no amount in respect thereof shall be claimed as
Loss or Expense under this Section 8.4.
ARTICLE IX
MISCELLANEOUS
9.1 Notices. All notices or other communications required or permitted hereunder
shall be in writing and shall be given by confirmed facsimile or registered mail, postage prepaid,
addressed as follows:
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if to Donegal Mutual, to:
Donegal Mutual Insurance Company
0000 Xxxxx Xxxx
Xxxxxxxx, Xxxxxxxxxxxx 00000
Attention: Xxxxxx X. Xxxxxxxx, President
Facsimile: 000-000-0000
0000 Xxxxx Xxxx
Xxxxxxxx, Xxxxxxxxxxxx 00000
Attention: Xxxxxx X. Xxxxxxxx, President
Facsimile: 000-000-0000
with a copy to:
Xxxxx Xxxxxx LLP
00 Xxxxx 00xx Xxxxxx
Xxxxxxxxxxxx, Xxxxxxxxxxxx 00000-0000
Attention: Xxxxxxxxx X. Xxxxxx, Esq.
Facsimile: 000-000-0000
00 Xxxxx 00xx Xxxxxx
Xxxxxxxxxxxx, Xxxxxxxxxxxx 00000-0000
Attention: Xxxxxxxxx X. Xxxxxx, Esq.
Facsimile: 000-000-0000
if to Sheboygan Falls, to:
Sheboygan Falls Mutual Insurance Company
000 Xxxxx Xxxxxx
Xxxxxxxxx Xxxxx, XX 00000-0000
Attention: Xxx X. Xxxxxx, President
Facsimile: 000-000-0000
000 Xxxxx Xxxxxx
Xxxxxxxxx Xxxxx, XX 00000-0000
Attention: Xxx X. Xxxxxx, President
Facsimile: 000-000-0000
with a copy to:
Xxxxxxx & X’Xxxxxxx, LLP
00 Xxxx Xxxx Xxxxxx, Xxxxx 000
Xxxxxxx, XX 00000
Attention: Xxxxxx X. X’Xxxxxxx
Facsimile: 000-000-0000
00 Xxxx Xxxx Xxxxxx, Xxxxx 000
Xxxxxxx, XX 00000
Attention: Xxxxxx X. X’Xxxxxxx
Facsimile: 000-000-0000
or to such other address or facsimile number as the Person to whom notice is given may have
previously furnished to the other party in writing in accordance herewith.
9.2 Expenses. Except as otherwise provided herein, each party hereto shall pay its
own expenses including, without limitation, legal and accounting fees and expenses incident to its
negotiation and preparation of this Agreement and to its performance and compliance with the
provisions contained herein. Donegal Mutual shall be solely responsible for the fees and expenses
of Xxxxxxx.
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9.3 Governing Law. This Agreement and the Note shall be governed by and construed in
accordance with the laws of the State of Wisconsin without regard to its rules on conflicts of law.
9.4 Successors and Assigns. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and assigns, provided that the rights
of Sheboygan Falls herein may not be assigned and the rights of Donegal Mutual may be assigned only
(a) to such other business organization that shall succeed to substantially all the assets,
liabilities and business of Donegal Mutual or (b) to a wholly owned subsidiary of Donegal Mutual,
in which event such assignment shall not relieve Donegal Mutual of any of Donegal Mutual’s
obligations to Sheboygan Falls under this Agreement. Nothing in this Agreement, expressed or
implied, is intended to confer upon any other Person any rights or remedies of any nature under or
by reason of this Agreement.
9.5 Partial Invalidity. In case any one or more of the provisions contained herein
shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such
invalidity, illegality or unenforceability shall not affect any other provision of this Agreement,
but this Agreement shall be construed as if such invalid, illegal or unenforceable provision or
provisions had never been contained herein unless the deletion of such provision or provisions
would result in such a material change as to cause completion of the transactions contemplated
herein to be unreasonable or materially and adversely frustrate the objectives of the parties as
expressed in this Agreement.
9.6 Execution in Counterparts. This Agreement may be executed in two counterparts,
both of which shall be considered one and the same agreement, and shall become a binding agreement
when one or more counterparts have been signed by each of the parties and delivered to the other
party.
9.7 Titles and Headings. Titles and headings to Articles and Sections herein are
inserted for convenience of reference only and are not intended to be a part of or to affect the
meaning or interpretation of this Agreement.
9.8 Entire Agreement; Statements as Representations. This Agreement, together with
the Note, the Services Agreement, the Technology License Agreement, the Retrocessional Reinsurance
Agreement, the Amended and Restated Bylaws, the Disclosure Schedules, the Existing Confidentiality
Agreements and any documents delivered pursuant to Articles II and VI, contains the entire
understanding of the parties hereto with regard to the subject matter contained herein. All
statements contained in this Agreement or in any schedule, exhibit, certificate, list or other
document delivered pursuant to this Agreement shall be deemed representations and warranties as
such terms are used in this Agreement.
9.9 Specific Performance. Each of the parties hereto acknowledges and agrees that the
other party hereto would be irreparably damaged in the event any of the provisions of
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this Agreement were not performed in accordance with their specific terms or were otherwise
breached. Accordingly, each of the parties hereto agrees that they each shall be entitled to an
injunction or injunctions to prevent breaches of the provisions of this Agreement and to enforce
specifically this Agreement and the terms and provisions hereof in any action instituted in any
court of the United States or any state thereof having subject matter jurisdiction, in addition to
any other remedy to which Sheboygan Falls or Donegal Mutual may be entitled, at law or in equity.
IN WITNESS WHEREOF, each party hereto has caused this Agreement to be executed on its behalf
as of the date first above written.
DONEGAL MUTUAL INSURANCE COMPANY |
||||
By: | /s/ Xxxxxx X. Xxxxxxxx | |||
Xxxxxx X. Xxxxxxxx, President | ||||
SHEBOYGAN FALLS MUTUAL INSURANCE COMPANY |
||||
By: | /s/ Xxx X. Xxxxxx | |||
Xxx X. Xxxxxx, President | ||||
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AMENDMENT NO. 1 TO CONTRIBUTION NOTE PURCHASE AGREEMENT
THIS AMENDMENT NO. 1 (this “Amendment”) made and entered into as of this 9th day of
May 2007 to the Contribution Note Purchase Agreement (the “Agreement”) made and entered into as of
December 27, 2006 between Donegal Mutual Insurance Company, a Pennsylvania mutual fire insurance
company (“Donegal Mutual”) and Sheboygan Falls Mutual Insurance Company, a Wisconsin mutual fire
and casualty insurance company (“Sheboygan Falls”). All capitalized terms used herein but not
defined herein shall have the respective meanings assigned to them in the Agreement.
WITNESSETH:
WHEREAS, Section 7.1(b) of the Agreement provides that either Donegal Mutual or Sheboygan
Falls may, by one day’s written notice to the other, terminate the Agreement if the Closing shall
not have been consummated on or before April 30, 2007;
WHEREAS, all Required Filings and Approvals to consummation of the Closing have not been
obtained as of the date of this Agreement and it appears unlikely to Donegal Mutual and Sheboygan
Falls that all Required Filings and Approvals will be obtained by April 30, 2007; and
WHEREAS, Donegal Mutual and Sheboygan Falls desire to amend the Agreement to change the date
of April 30, 2007 as set forth in Section 7.1(b) of the Agreement to May 31, 2007 and to ratify and
confirm in all other respects all of the agreements, covenants, representations and warranties and
conditions contained in the Agreement;
NOW, THEREFORE, Donegal Mutual and Sheboygan Falls, in consideration of the agreements,
covenants, representations and warranties and conditions contained in the Agreement and this
Amendment, covenants and agree as follows:
1. Amendment and Restatement of Section 7.1(b) of the Agreement. Section 7.1(b) of
the Agreement is hereby amended and restated so that, as amended and restated, Section 7.1(b) of
the Agreement shall read in its entirety as follows:
“(b) by either Sheboygan Falls or Donegal Mutual by one day’s written notice to
Donegal Mutual or Sheboygan Falls, as the case may be; if the Closing shall not have
been consummated on or before May 31, 2007; provided that the right to terminate this
Agreement under this Section 7.1(b) shall not be available to any party whose failure
to fulfill any obligation under this Agreement has been the cause of, or resulted in,
the failure of the purchase and sale of the Note to have been consummated on or
before such date.”
2. Confirmation and Ratification of Remainder of the Agreement. Except as
specifically provided in Section 1 of this Amendment, all of the agreements, covenants,
representations and warranties and conditions contained in the Agreement are hereby expressly
confirmed and ratified and shall remain in full force and effect.
3. Representations and Warranties.
(a) Donegal Mutual hereby represents and warrants to Sheboygan Falls that this Amendment has
been duly executed and delivered by Donegal Mutual and no further corporate authorization is
required on the part of Donegal Mutual in order to consummate the amendment and restatement of the
Agreement contemplated by this Amendment.
(b) Sheboygan Falls hereby represents and warrants to Donegal Mutual that this Amendment has
been duly executed by Sheboygan Falls and no further corporate authorization is required on the
part of Sheboygan Falls in order to consummate the amendment and restatement of the Agreement
contemplated by this Amendment.
IN WITNESS WHEREOF, each party has caused this Amendment to be executed on its behalf as of
the date first above written.
DONEGAL MUTUAL INSURANCE COMPANY |
||||
By: | /s/ Xxxxxx X. Xxxxxxxx | |||
Xxxxxx X. Xxxxxxxx, President | ||||
SHEBOYGAN FALLS MUTUAL INSURANCE COMPANY |
||||
By: | /s/ Xxx X. Xxxxxx | |||
Xxx X. Xxxxxx, President | ||||
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