EXHIBIT 2
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EXECUTION COPY
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SUBSCRIPTION AGREEMENT
This Agreement (this "Agreement") is made as of October 24, 2001 by
and between Arch Capital Group Ltd., a company organized under the laws of
Bermuda (the "Company"), and each of the Purchasers named below (each, a
"Purchaser" and, collectively, the "Purchasers"), in connection with the
purchase by each Purchaser of the Securities (as defined below). Certain terms
are defined in Schedule A hereto.
WHEREAS, the Company has entered into employment arrangements with
Xxxx Xxxxxx, Xxxxxx Xxxxx and Xxxx Grandisson, true and correct copies of which
have been provided to the Purchasers.
For good and valid consideration, the receipt of which is hereby
acknowledged, the Company and each of the Purchasers agree as follows:
A. SUBSCRIPTION AND PURCHASE OF SECURITIES
1. Agreement to Purchase. Subject to satisfaction of the conditions
set forth in Section C below, each Purchaser, severally and not jointly, hereby
irrevocably subscribes for and agrees to purchase, for the aggregate purchase
price set forth below the name of such Purchaser on the signature page hereto
(such Purchaser's "Total Purchase Price"), series A convertible preference
shares (the "Preference Shares") and class A warrants (such warrants issued
hereunder, the "Warrants," and together with the Preference Shares, the
"Securities") of the Company. The Preference Shares will have the rights and
privileges set forth in the form of Certificate of Designations attached hereto
as Exhibit I (the "Certificate"). The Preference Shares will be convertible, on
the terms and conditions set forth in the Certificate, into Common Shares (such
shares, the "Conversion Shares") or, in the circumstance set forth in Section E
hereof, common shares of Newco. The form of the Warrants is attached hereto as
Exhibit II. The Warrants will be exercisable, on the terms and conditions
thereof, for Common Shares (such shares, the "Warrant Shares").
2. Number of Securities Purchased. The number of Preference Shares
to be purchased by each Purchaser shall be equal to such Purchaser's Total
Purchase Price divided by the Estimated Per Share Price. Such number is subject
to adjustment as provided in Section B hereof.
The number of Warrants to be purchased by each Purchaser shall be
equal to (a) the Adjusted Warrant Amount times (b) the number of Common Shares
issuable as of the date hereof upon exercise of all class A warrants outstanding
on the date hereof (which is 2,531,079) divided by (c) the number of Common
Shares outstanding as of June 30, 2001
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(which is 12,863,079). If the transactions contemplated by this Agreement, or
options granted to management concurrently herewith, trigger an antidilution
adjustment under existing class A warrants, the number of Warrants purchased by
each Purchaser hereunder shall be adjusted upward to reflect the greater number
of shares issuable upon exercise of outstanding class A warrants as a result of
such antidilution adjustment.
3. Closing Date. Subject to the terms and conditions hereof, the
purchase and sale of the Securities shall occur at 10:00 a.m. (Eastern time) on
the third business day after the date on which the condition set forth in
Section C.1(a) is satisfied (such date and time, the "Closing Date").
4. Deliveries. As of the close of business on the business day
immediately preceding the Closing Date, the Company shall advise the Purchasers
of the Estimated Per Share Price. On the Closing Date, (a) each Purchaser shall
pay its Total Purchase Price by wire transfer of immediately available funds to
the account of the Company designated by the Company and (b) the Company shall
deliver to such Purchaser certificates for the Securities purchased by such
Purchaser, registered in the name of such Purchaser or its designee.
B. POST-CLOSING ADJUSTMENTS
1. Audit Adjustment.
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(a) As soon as practicable after the Closing Date, the Company shall
engage (i) PricewaterhouseCoopers (the "Public Accountants") to audit the
Company's consolidated balance sheet as of June 30, 2001, (ii) an independent
actuary selected by the Transaction Committee and the Purchasers (the
"Independent Actuary") to review the reserves for claims and claims expenses on
such balance sheet, and (iii) an independent pricing service selected by the
Transaction Committee and the Purchasers (the "Pricing Service") to determine
the estimated fair value as of the Closing Date of the Company's investments in
marketable securities included on such balance sheet. The audit shall be
performed on the same basis as the preparation of the unaudited balance sheet
and, in particular, the $4.3 million liability associated with an anticipated
but incomplete reinsurance transaction shall either remain or be deemed to
remain on the audited balance sheet as a liability. The Pricing Service, the
Public Accountants and the Independent Actuary are referred to as the
"Independent Advisors."
(b) The Company shall provide the Independent Advisors with full
access to its books and records for the purposes of such audit and reviews. The
Independent Advisors shall keep the Transaction Committee and the Purchasers
informed as to the progress of such audit and reviews, and the Transaction
Committee and the Purchasers shall have the right
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to participate and comment upon such audit and reviews. Any reviews pursuant to
paragraph (d) below shall also be subject to the provisions of this paragraph.
(c) Within 60 days after the Closing Date (or as soon thereafter as
practicable), the Independent Advisors shall deliver the following to the Board
of Directors and the Purchasers (the "Initial Determinations"):
(i) The Public Accountants shall deliver the Company's
consolidated balance sheet as of June 30, 2001 and an unqualified report
thereto (the "Audited Balance Sheet").
(ii) The Independent Actuary shall deliver a report on the
reserves for claims and claims expenses on the Audited Balance Sheet (the
"Reserve Report").
(iii) The Pricing Service shall deliver a report of its
determinations of estimated fair value as of the business day immediately
preceding the Closing Date of the marketable securities in the Company's
investment portfolio included in the Audited Balance Sheet (the "Portfolio
Review"). In determining such estimated fair value, the Pricing Service
shall use the Xxxx to Market Procedures.
(iv) The Public Accountants shall calculate the Per Share Price
including, without limitation, the amount set forth in clause (a)(i) of the
definition of Per Share Price, and report the amounts to the Board of
Directors and the Purchasers (the "Per Share Calculation").
(d) After receipt of the Initial Determinations, the Transaction
Committee and the Purchasers shall have the right to make a full review of the
Initial Determinations including, but not limited to, access by such
professionals as Purchasers may deem necessary, to all of the workpapers and
reports prepared by the Independent Advisors in connection with such Initial
Determinations. The Transaction Committee may object to the Initial
Determinations or one or more components thereof by giving written notice to the
Purchasers, and the Purchasers (acting collectively) may object to the Initial
Determinations or one or more components thereof by giving written notice to the
Transaction Committee, in each case, within 30 days of the date on which the
Initial Determinations are delivered. Any such notice shall state the basis of
the objections in reasonable detail. The Transaction Committee and the
Purchasers shall then endeavor in good faith to resolve the dispute as soon as
possible. If the dispute is not resolved within 10 days after receipt of the
objection, within five days thereafter the Transaction Committee and the
Purchasers shall mutually agree on (i) a firm of independent accountants to
review the Audited Balance Sheet or the Per Share Calculation, (ii) an
independent actuary to review the Reserve Report and/or (iii) an independent
pricing service to review the Portfolio Review, who shall complete such reviews
within 30 days of appointment.
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Based upon such independent reviews, the independent accountants referred to in
the preceding sentence shall select either the per share calculation recommended
by the Transaction Committee or that recommended by the Purchasers, whichever is
closer to the independent review, and the per share calculation so selected
shall be dispositive. If the Initial Determination (if not reviewed) or such
review requires an adjustment to the Audited Balance Sheet, the Audited Balance
Sheet as so adjusted shall be deemed to be the "Audited Balance Sheet"
hereunder.
(e) If the Per Share Price is greater than the Estimated Per Share
Price, within five business days after the last date on which the Initial
Determinations may be objected to or after the date that all reviews following
any such objection have been completed (the "Applicable Date"), each Purchaser
shall either (i) pay to the Company an amount (the "Aggregate Amount") in cash
equal to the difference between the Per Share Price and the Estimated Per Share
Price times the number of Preference Shares purchased by such Purchaser or (ii)
surrender to the Company a number of Preference Shares equal to the Aggregate
Amount divided by the greater of (A) the Per Share Price or (B) the Fair Market
Value of a Preference Share as of the Applicable Date. The Purchasers shall make
such payment by wire transfer of immediately available funds to the account of
the Company designated by the Company.
(f) If the Estimated Per Share Price is greater than the Per Share
Price, within five business days after the Applicable Date, the Company shall
issue and deliver to each Purchaser one or more certificates registered in the
name of such Purchaser (or its designee) representing that number of Preference
Shares equal to (i) the difference between the Estimated Per Share Price and the
Per Share Price times (ii) the number of Preference Shares purchased by such
Purchaser on the Closing Date divided by (iii) the Per Share Price.
2. Adjustment for Vesting of Class B Warrants. In the event that the
Company's class B warrants vest (or become exercisable) for any reason, then,
within five business days of such vesting or the Applicable Date (whichever is
later), the Company shall issue and deliver to each Purchaser one or more
certificates registered in the name of such Purchaser (or its designee)
representing that number of Preference Shares equal to the difference between
(i) such Purchaser's Total Purchase Price divided by an amount equal to the
difference between the Per Share Price and $1.50 and (ii) such Purchaser's Total
Purchase Price divided by the Per Share Price. If the transactions contemplated
by this Agreement, or options granted to management concurrently herewith,
trigger an antidilution adjustment under existing class B warrants, the number
of Preference Shares issued to the Purchasers in lieu of class B warrants shall
be adjusted upward to reflect the greater number of shares issuable upon
exercise of outstanding class B warrants as a result of such antidilution
adjustment.
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3. Final Adjustment.
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(a) The Adjustment Basket, as defined on Schedule B, shall be
determined as soon as practicable after the second anniversary of the Closing
Date or such earlier date as the Purchasers request and the Transaction
Committee agrees, which agreement will not be unreasonably withheld (the "Test
Date"). The Company shall engage its independent public accountants to prepare
and deliver a report to the Transaction Committee and the Purchasers setting
forth in reasonable detail the calculation of the Adjustment Basket (the
"Adjustment Basket Report").
(b) The Company shall provide such independent public accountants
with full access to its books and records for the purposes of preparing the
Adjustment Basket Report. Such accountants shall keep the Transaction Committee
and the Purchasers informed as to the progress of the Adjustment Basket Report,
and the Transaction Committee and the Purchasers shall have the right to
participate and comment upon the Adjustment Basket Report. Any reviews pursuant
to paragraph (c) below shall also be subject to the provisions of this
paragraph.
(c) After receipt of the Adjustment Basket Report, the Transaction
Committee and the Purchasers shall have the right to make a full review of the
Adjustment Basket Report including, but not limited to, access by such
professionals as Purchasers may deem necessary to all of the workpapers and
reports prepared by the independent public accountants in connection with such
Adjustment Basket Report. The Transaction Committee may object to the Adjustment
Basket Report by giving written notice to the Purchasers, and the Purchasers
(acting collectively) may object to the Adjustment Basket Report by giving
written notice to the Transaction Committee, in each case, within 30 days of the
date on which the Adjustment Basket Report is delivered. Any such notice shall
state the basis of the objections in reasonable detail. The Transaction
Committee and the Purchasers shall then endeavor in good faith to resolve the
dispute as soon as possible. If the dispute is not resolved within 10 days after
receipt of the objection, within five days thereafter, the Transaction Committee
and the Purchasers shall mutually agree on a firm of independent accountants, an
independent actuary and/or an independent pricing service to review the
Adjustment Basket Report or one or more components thereof, who shall complete
such reviews within 30 days of appointment. Based upon such independent reviews,
the independent accountants referred to in the preceding sentence shall select
either the adjusted basket report recommended by the Transaction Committee or
that recommended by the Purchasers, whichever is closer to the independent
review, and the adjusted basket report so selected shall be dispositive.
(d) If the Adjustment Basket is less than zero, within five business
days after the last date on which the Adjustment Basket Report may be objected
to or the date on which all reviews following any such objection have been
completed (the "Second Applicable
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Date"), the Company shall issue and deliver to each Purchaser one or more
certificates registered in the name of such Purchaser (or its designee)
representing that number of Preference Shares equal to the difference between NF
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where:
N = number of Preference Shares purchased by such Purchaser (after
giving effect to any adjustment pursuant to Section B.1);
P = Per Share Price;
B = absolute value of the Adjustment Basket; and
NF = such Purchaser's Total Purchase Price divided by [P - B/12.86
million].
(e) If the Adjustment Basket is greater than zero, the Company at
the direction of the Transaction Committee may use cash in an amount equal to B
to repurchase Common Shares (other than any Conversion Shares or Warrant Shares)
without regard to the restriction on repurchases set forth in Article VI of the
Shareholders Agreement.
(f) In addition to paragraph (e), if the Adjustment Basket is less
than zero and in the event that the class B warrants vest, then, on the Second
Applicable Date, the Company shall also issue and deliver to each Purchaser (as
a further adjustment for the vesting of the class B warrants) a number of
Preference Shares equal to the difference between (A) such Purchaser's Total
Purchase Price divided by an amount equal to [P - $1.50 - B/12.86 million] and
(B) the Purchaser's Total Purchase Price divided by an amount equal to (P -
$1.50).
(g) On the fourth anniversary of the Closing Date, there shall be a
calculation of a further Adjustment Basket, taking into account ONLY the
following: (i) the matters listed in clause (c) of the definition of Non-Core
Assets, to the extent not previously included in the first Adjustment Basket and
(ii) any actual losses arising out of any breach of the representations set
forth in Section D.3.h or D.3.k discovered after the second anniversary of the
Closing.
C. CONDITIONS PRECEDENT TO SALE OF SECURITIES ON THE CLOSING DATE
1. Mutual Conditions. The obligation of the Company to sell, and of
each Purchaser to buy, the Securities on the Closing Date, is subject to the
satisfaction, or waiver by the parties hereto, of the following conditions:
(a) If required, the waiting period under the U.S. Xxxx-Xxxxx-Xxxxxx
Antitrust Improvements Act of 1976, as amended (the "HSR Act"), shall have
expired or been terminated early.
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(b) There shall not be in effect an order or injunction of a court
of competent jurisdiction prohibiting the consummation of the sale and purchase
of the Securities hereunder that are to be purchased on the Closing Date.
2. Conditions of the Company. The obligation of the Company to sell
the Securities on the Closing Date is subject to the satisfaction, or waiver by
the Company, of the following conditions:
(a) The representations and warranties made by each Purchaser in
this Agreement shall be true and accurate in all material respects as of the
Closing Date.
(b) Each Purchaser shall have complied with and performed all
agreements and covenants to be complied with or performed by it in all material
respects at or prior to the Closing Date.
3. Conditions of the Purchasers. The obligation of each Purchaser to
buy on the Closing Date the Securities set forth below the name of such
Purchaser on the signature page hereof is subject to the satisfaction, or waiver
by such Purchaser, of the following conditions:
(a) The representations and warranties made by the Company in this
Agreement shall be true and accurate as of the Closing Date (except that
representations and warranties made as of another date shall be true and
accurate as of such other date), except in each case as would not have a
Material Adverse Effect.
(b) The Company shall have complied with and performed all of its
agreements and covenants to be complied with or performed in all material
respects at or prior to the Closing Date.
(c) Such Purchaser shall have received (i) a legal opinion of
Xxxxxxx Xxxx & Xxxxxxx, Bermuda counsel to the Company, covering such matters
under Bermuda law as are customary for transactions of this type and (ii) a
legal opinion of Xxxxxx Xxxxxx & Xxxxxxx, United States counsel to the Company,
regarding enforceability of this Agreement and the validity of the private
placement exemption with respect to the sale and purchase of the Securities
hereunder. Such opinions may be subject to such limitations and qualifications
as are customary for legal opinions in transactions of this type.
(d) Such Purchaser shall have received copies of such letters of
resignation from the Board of Directors and certified resolutions of the Board
of Directors electing such directors to fill the resulting vacancies in
accordance with the Company's Bye-laws, all effective with the consummation of
the purchase and sale of Securities hereunder so that the mem-
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bers of the Board of Directors immediately following the Closing Date shall be
as contemplated by Section 3.1(b) of the Shareholders Agreement.
(e) The Company shall have executed and delivered a shareholders
agreement substantially in the form attached as Exhibit IV hereto (the
"Shareholders Agreement").
(f) The Company's Board shall have taken all such action as is
necessary to exempt Purchasers from paragraphs 78 and 79(3) of the Company's
Bye-laws.
D. REPRESENTATIONS, WARRANTIES AND AGREEMENTS
1. Purchaser Acknowledgments. Each Purchaser, severally and not
jointly, understands, acknowledges and hereby covenants and agrees with the
Company as follows:
(a) Subject to the terms and conditions of this Agreement, such
Purchaser's agreement to purchase Securities hereunder is and shall be
irrevocable.
(b) The offering and sale of the Securities is intended to be exempt
from registration under the United States Securities Act of 1933, as amended
(the "Act"), by virtue of Section 4(2) of the Act. The Securities, the
Conversion Shares and the Warrant Shares have not been registered under the Act.
Except to the extent set forth in the Shareholders Agreement, the Company is
under no obligation to register the Securities, the Conversion Shares or the
Warrant Shares or to assist such Purchaser in complying with any exemption from
registration.
(c) There is no existing public or other market for the Securities,
and it is not expected that any such market will develop. There can be no
assurance that such Purchaser will be able to sell or dispose of its Securities.
Without limiting the generality of the foregoing, in order not to jeopardize the
offering's exempt status under the Act, a transferee of such Securities may,
among other things, be required to fulfill the investor suitability requirements
thereunder.
(d) All certificates issued for the Securities, the Conversion
Shares and the Warrant Shares will bear the following legend:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE OFFERED
OR SOLD EXCEPT PURSUANT TO (1) AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, OR (2)
AN APPLICABLE EXEMPTION FROM REGISTRATION
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THEREUNDER. ANY SALE PURSUANT TO CLAUSE (2) OF THE PRECEDING
SENTENCE MUST BE ACCOMPANIED BY AN OPINION OF WACHTELL, LIPTON,
XXXXX & XXXX, OR SUCH OTHER COUNSEL AS IS REASONABLY SATISFACTORY TO
ARCH CAPITAL GROUP LTD., TO THE EFFECT THAT SUCH EXEMPTION FROM
REGISTRATION IS AVAILABLE IN CONNECTION WITH SUCH SALE."
(e) Prior to the earlier of the Shareholders Meeting (as defined
below) and the four month anniversary of the Closing Date, the Securities,
Conversion Shares and the Warrant Shares may not be sold, transferred or
otherwise disposed of, directly or indirectly, without approval of the
Transaction Committee.
(f) The Purchasers shall not transfer, in one transaction, or a
series of related transactions, to a single Person or group, Common Shares,
and/or securities convertible into Common Shares, representing in excess of
either 51% of the votes then entitled to be cast in the election of directors,
or 51% of the then outstanding Common Shares (taking into account Common Shares
issuable upon conversion of the Preference Shares) without making available to
all holders of Common Shares the right to participate in such transaction on the
same or substantially the same terms as the Purchasers (giving effect to the
securities being transferred).
2. Purchaser Representations. Each Purchaser, severally and not
jointly, hereby represents and warrants and covenants to the Company as follows:
(a) The Securities to be purchased by such Purchaser are being
purchased for such Purchaser's own account, and not with a view to distribution,
assignment or resale to others or to fractionalization in whole or in part. No
other person has or will have a direct or indirect beneficial interest in such
Securities or any component thereof.
(b) The financial situation of such Purchaser is such that it can
afford to bear the economic risk of holding the Securities for an indefinite
period, and such Purchaser can afford to suffer the complete loss of its
investment in the Securities. Such Purchaser has (i) knowledge and experience in
financial and business matters such that it is capable of evaluating the risks
of the investment in the Securities and (ii) carefully reviewed the terms and
provisions of this Agreement and has evaluated the restrictions and obligations
contained herein.
(c) This Agreement has been duly authorized, executed and delivered
by such Purchaser and, assuming due execution and delivery by each other party
hereto, consti-
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tutes a valid and binding obligation of such Purchaser enforceable in accordance
with its terms.
(d) Such Purchaser shall hold the Securities subject to, and shall
have voting rights with respect thereto as specified in, the Company's Bye-laws
and the Certificate in effect from time to time and shall not assign, sell,
hypothecate or otherwise transfer the Securities, the Conversion Shares or the
Warrant Shares other than in accordance with applicable law and the provisions
with respect thereto in such documents.
(e) Such Purchaser covenants and agrees to make available to the
Company and the appropriate insurance regulatory governmental authorities all
information concerning such Purchaser required to be furnished to such
governmental authorities in connection with obtaining requisite approvals, and
further covenants and agrees to make all filings, and seek to acquire all
consents, required by such governmental authorities.
(f) The execution, delivery and performance by such Purchaser of
this Agreement and the consummation of the transactions contemplated hereby do
not and will not (i) violate any provision of the organizational documents of
such Purchaser, (ii) assuming compliance with the matters referred to in Section
C.1.a, violate any provision of any applicable law, statute, ordinance, rule,
regulation, judgment, injunction, order or decree or (iii) violate or result in
a default under any agreement or other instrument binding upon such Purchaser or
any of its Subsidiaries, except in each case as would not reasonably be expected
to have, individually or in the aggregate, a Material Adverse Effect (as defined
below) on such Purchaser.
(g) Such Purchaser has, or will have prior to the Closing Date,
sufficient cash or other sources of immediately available funds to enable it to
make payment of the purchase price for the Securities as required hereunder and
all related fees and expenses.
3. Representations and Warranties of the Company. Except as set
forth in the disclosure letter delivered to the Purchasers by the Company dated
as of the date hereof (the "Company Disclosure Letter"), or in the Company
Reports filed since December 31, 2000 but prior to the date hereof, the Company
hereby represents and warrants to each of the Purchasers that:
(a) Organization, Good Standing and Qualification. (i) Each of the
Company and its Subsidiaries is a corporation or other entity duly organized,
validly existing and, if applicable, in good standing under the laws of its
respective jurisdiction of organization and has all requisite corporate or
similar power and authority to own, operate and lease its properties and assets
and to carry on its business as presently conducted and is duly qualified to do
business and is in good standing as a foreign corporation or other entity in
each jurisdiction
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where the ownership, operation or leasing of its assets or properties or conduct
of its business requires such qualification except for failures to be so
qualified, or to be so in good standing, which would not have a Material Adverse
Effect. The Company has made available to Parent a complete and correct copy of
the Company's certificate of incorporation, memorandum of association and
Bye-laws, each as amended to date, which are in full force and effect.
(ii) The Company does not have any Subsidiaries which (A)
individually constitute or, if aggregated and treated as one Subsidiary,
would constitute a "Significant Subsidiary" within the meaning of Rule
1-02(w) of Regulation S-X under the Exchange Act, (B) have unlimited
liability share capital or other equity or similar interests of unlimited
liability, or (C) conduct material insurance, fund management,
broker-dealer, banking or consumer finance operations. Section 3.2(a)(ii)
of the Company Disclosure Letter (X) lists the jurisdiction of organization
of each of the Company's Subsidiaries, (Y) in the case of the Company's
Subsidiaries that conduct insurance operations (collectively, the "Company
Insurance Companies"), lists, as of June 30, 2001, the U.S. jurisdictions
where the Company Insurance Companies are domiciled or "commercially
domiciled" and licensed to do an insurance business for insurance
regulatory purposes, and (Z) indicates which Subsidiaries in which the
Company's interest therein includes unlimited share capital or other equity
or similar interests of unlimited liability. Each of the Company and each
of its Subsidiaries holds all material licenses or authorizations required
or necessary to conduct its business as currently conducted.
(iii) As of the date hereof, the Company does not own (other
than (A) in a bona fide fiduciary capacity or in satisfaction of a debt
previously contracted, (B) in the ordinary course of its insurance, annuity
or asset management business, (C) in customer accounts held or maintained
in the ordinary course, or (D) in any general account or otherwise in the
ordinary course to offset insurance liabilities) beneficially, directly or
indirectly, (X) any material equity securities or similar material
interests of any Person other than its Subsidiaries, or (Y) any interest in
any general partnership, unlimited company or other Person with share
capital or other equity or similar interests of unlimited liability, or any
general partnership interest in a limited partnership.
(b) Capital Structure. (i) The authorized stock of the Company
consists of 200,000,000 Common Shares, of which 12,868,158 Common Shares
(including shares of restricted stock issued pursuant to Company Stock Plans)
were issued and outstanding as of the close of business on September 30, 2001,
and 50,000,000 preference shares, par value $0.01 per share, of which no shares
are issued or outstanding as of the date hereof. All of the issued and
outstanding Common Shares have been duly authorized and are validly issued,
fully paid and nonassessable. Since September 30, 2001, the Company has issued
no Common Shares,
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or securities convertible or exchangeable into Common Shares. As of the date
hereof, the Company has no commitments (including contingent or conditional
commitments) to issue or deliver Common Shares or preference shares.
(ii) All of the outstanding capital stock of, or other voting
securities or ownership interests in, each Subsidiary, to the extent owned
by the Company, is owned by the Company, directly or indirectly, free and
clear of any mortgage, lien, pledge, charge, security interest or
encumbrance in respect of such property or asset and free of any other
limitation or restriction (including any restriction on the right to vote,
sell or otherwise dispose of such capital stock or other voting securities
or ownership interests, except as set forth in the Company's Bye-laws).
Except as contemplated by this Agreement, there are no outstanding (A)
securities of the Company or any of its Subsidiaries convertible into or
exchangeable for shares of capital stock or other voting securities or
ownership interests in any Subsidiary or (B) options or other rights to
acquire from the Company or any of its Subsidiaries, or other obligation of
the Company or any of its Subsidiaries to issue, any capital stock or other
voting securities or ownership interests in, or any securities convertible
into or exchangeable for any capital stock or other voting securities of or
ownership interests in, any Subsidiary (the items in clauses (A) and (B)
being referred to collectively with the capital stock of the subsidiaries
as the "Subsidiary Securities"). There are no outstanding obligations of
the Company or any of its Subsidiaries to repurchase, redeem or otherwise
acquire any of the Subsidiary Securities.
(iii) Except as set forth above (A) there is no share capital or
other voting securities of the Company authorized, reserved, issued or
outstanding, (B) neither the Company nor any of its Subsidiaries is party
to any agreement creating preemptive or other outstanding rights,
subscriptions, options, warrants, stock appreciation rights, redemption
rights, repurchase rights, convertible securities or other agreements,
arrangements or commitments of any character relating to, or the value of
which is determined by reference to, the issued or unissued share capital
or other ownership interest of the Company or any of its Subsidiaries, and
(C) neither the Company nor any of its Subsidiaries is party to any
agreement creating any other securities or obligations convertible or
exchangeable into or exercisable for, or giving any Person a right to
subscribe for or acquire, any securities of the Company or its
Subsidiaries, and no securities or obligations evidencing such rights are
authorized, issued or outstanding. Neither the Company nor any of its
Subsidiaries has outstanding any bonds, debentures, notes or other similar
obligations.
(iv) The Preference Shares have been duly authorized and
reserved for issuance, and, when issued in accordance with the terms of
this Agreement, will be
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validly issued, fully paid and non-assessable. The Conversion Shares have
been duly authorized and reserved for issuance, and when issued in exchange
for the Preference Shares in accordance with the terms of the certificate,
will be validly issued, fully paid and non-assessable.
(v) The Warrants have been duly authorized, and, when executed
and delivered in accordance with the terms of this Agreement, will
constitute legal, valid and binding obligations of the Company, enforceable
against the Company in accordance with their terms. The Warrant Shares have
been duly authorized and reserved for issuance, and, when issued upon
exercise of the Warrants in accordance with the terms thereof, will be
validly issued, fully paid and non-assessable.
(c) Corporate Authority; Approval. The Company has all necessary
corporate power and authority to execute and deliver this Agreement and to
perform its obligations hereunder and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement by the
Company, and the consummation by the Company of the transactions contemplated
hereby, have been duly and validly authorized by all necessary corporate action,
and no other corporate proceedings (other than Requisite Shareholder Approval
following the issuance of the Securities) on the part of the Company are
necessary to authorize this Agreement or to consummate the transactions so
contemplated. The Board of Directors has unanimously determined, as of the date
of this Agreement, that it is advisable and in the best interest of the
Company's shareholders for the Company to enter into this Agreement and to
consummate the transactions contemplated hereby upon the terms and subject to
the conditions of this Agreement and, as of the date of this Agreement, has
recommended that the Bye-Law Amendment and the issuance of the Conversion Shares
and Warrant Shares to the Purchasers in accordance with the terms hereof be
approved by the shareholders of the Company. This Agreement has been duly and
validly executed and delivered by the Company and, assuming the due
authorization, execution and delivery by each other party hereto, constitutes a
legal, valid and binding obligation of the Company, enforceable against the
Company in accordance with its terms. The Company has received the opinion of
its financial advisor, Credit Suisse First Boston Corporation ("CSFB"), to the
effect that, as of the date hereof, the consideration to be received by the
Company for the issuance and sale of the Securities is fair, from a financial
point of view, to the Company, a true and correct copy of which will be
furnished to Parent.
(d) Governmental Filings; No Violations. (i) Other than the reports,
filings, registrations, consents, approvals, permits, authorizations,
applications, expiry of waiting periods and/or notices under the HSR Act, no
notices, reports or other filings are required to be made by the Company or any
of its Subsidiaries with, nor are any material consents, registrations,
approvals, permits applications, expiry of waiting periods or authorizations
required
-14-
to be obtained by the Company or any of its Subsidiaries from, any U.S. or
non-U.S. governmental or regulatory authority, agency, commission, tribunal,
body or other governmental, quasi-governmental, regulatory or self-regulatory
entity, including, without limitation, any state insurance department or
insurance or consumer finance regulatory agency, in each case, of competent
jurisdiction (each a "Governmental Entity"), in connection with the execution
and delivery of this Agreement by the Company and the issuance of the Preference
Shares and Warrants contemplated hereby.
(ii) The execution, delivery and performance of this Agreement
by the Company do not, and the consummation by the Company of transactions
contemplated hereby will not, constitute or result in (A) a breach or
violation of, or a default under, the certificate of incorporation,
memorandum of association or Bye-laws of the Company or the comparable
governing instruments of any of its Subsidiaries, (B) a breach or violation
of, or a default under, or the creation or acceleration of any obligations
or the creation of a material lien, pledge, security interest or other
encumbrance on the assets of the Company or any of its Subsidiaries (with
or without notice, lapse of time or both) pursuant to, or the creation or
acceleration of any right of termination under, any material agreement,
lease, contract, license, note, mortgage, indenture, arrangement or other
obligation, whether written or oral ("Contracts" and individually, a
"Contract"), binding upon the Company or any of its Subsidiaries or any of
their respective assets, or (C) any material and adverse change in the
rights or obligations of the Company or any of its Subsidiaries under any
material Contract.
(e) Company Reports; Financial Statements; Undisclosed Liabilities;
Statutory Statements. (i) Each registration statement, report, proxy statement
or information statement prepared by the Company or its Subsidiaries since
December 31, 1999, including the Company's Annual Report on Form 10-K for the
year ended December 31, 2000 (the "Company Form 10-K"), each in the form
(including exhibits, annexes and any amendments thereto) filed with the SEC
(collectively, including any such reports filed with the SEC subsequent to the
date hereof, the "Company Reports"), as of their respective dates, as amended
prior to the date hereof or as supplemented by Company Reports filed prior to
the date hereof, did not, and any Company Reports filed with the SEC subsequent
to the date hereof will not, contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements made therein, in light of the circumstances in which they were
made, not misleading. Each of the consolidated balance sheets included in or
incorporated by reference into the Company Reports (including the related notes
and schedules) fairly presents, or will fairly present, in all material respects
the consolidated financial position of the Company and its Subsidiaries as of
its date, and each of the consolidated statements of income and of changes in
shareholders' equity and cash flows included in or incorporated by reference
into the Company Reports (including any related notes and
-15-
schedules) fairly presents, or will fairly present, in all material respects the
results of operations, retained earnings and changes in financial position, as
the case may be, of the Company and its Subsidiaries for the periods set forth
therein (subject, in the case of unaudited statements, to notes and normal
year-end audit adjustments that were not, or are not reasonably expected to be,
material in amount or effect), in each case in accordance with U.S. generally
accepted accounting principles ("GAAP") (except in the case of unaudited
statements, as permitted by Form 10-Q) consistently applied during the periods
involved, except as may be noted therein or in the notes thereto.
(ii) Except for those liabilities that are fully reflected or
reserved against on the consolidated balance sheet of the Company included
in the Company's Quarterly Report on Form 10-Q for the period ended June
30, 2001 or liabilities described in the notes thereto (or liabilities for
which neither accrual nor footnote disclosure is required pursuant to
GAAP), neither the Company nor any of its Subsidiaries has incurred any
material liability of any nature whatsoever (whether absolute, accrued,
contingent or otherwise and whether due or to become due), other than
liabilities incurred in connection with the negotiation, execution,
delivery and performance of this Agreement and the transactions
contemplated hereby.
(iii) Since December 31, 1999, the Company and each of its
Subsidiaries has timely filed all material periodic statements, together
with all exhibits, interrogatories, notes, schedules and any actuarial
opinions, affirmations or certifications or other supporting documents in
connection therewith, required to be filed with or submitted to any
Governmental Entity on forms prescribed or permitted thereby (collectively,
the "Company Regulatory Reports"). The financial statements included in the
Company Regulatory Reports, including the notes thereto, were prepared in
conformity in all material respects with applicable statutory accounting
practices prescribed or permitted by the applicable Governmental Entity
consistently applied for the periods covered thereby and present fairly, in
all material respects, the statutory financial position of the Company or
such Subsidiary as at the respective dates thereof and the results of
operations thereof for the respective periods then ended. The Company
Regulatory Reports complied in all material respects with all applicable
Laws when filed, and no material deficiency has been asserted with respect
to any Company Regulatory Report by any Governmental Entity.
(iv) Except as set forth in the Company's proxy statement with
respect to the annual meeting of Company shareholders in 2001, neither the
Company nor any of its Subsidiaries is a party to any Contract with any
officer or director of the Company or any Person in which any such officer
or director holds 5% or more of eq-
-16-
uity interests which would be required to be disclosed under Item 404 of
Regulation S-K promulgated by the SEC.
(f) Absence of Certain Changes. (i) Since December 31, 2000 (A) the
Company and its Subsidiaries have conducted their respective businesses only in
the ordinary course, consistent with past practice, and (B) there has not been
(1) any Material Adverse Effect with respect to the Company or any development
or combination of developments, that, individually or in the aggregate, has had
or is reasonably likely to have a Material Adverse Effect with respect to the
Company; (2) any material change by the Company in accounting principles,
practices or methods other than as required by GAAP or applicable Law; (3) any
declaration, setting aside or payment of any dividend or other distribution in
respect of the share capital of the Company; (4) any split in share capital,
combination, recapitalization, redenomination of share capital or other similar
transaction or issuance or authorization of any issuance of any other securities
in respect of, in lieu of or in substitution for share capital of the Company;
(5) any material addition, or any development involving a prospective material
addition, to the Company's consolidated reserves for future policy benefits or
other policy claims and benefits; or (6) any material change in the accounting,
actuarial, investment, reserving, underwriting or claims administration
policies, practices, procedures, methods, assumptions or principles of the
Company or any Subsidiary of the Company except as required by GAAP or
applicable Law.
(ii) The Company has no Knowledge that any material rating
presently held by the Company or any of its Subsidiaries is likely to
modified, qualified, lowered or placed under surveillance for a possible
downgrade for any reason.
(g) Litigation. Except to the extent provided as of December 31,
2000 in appropriately identified reserves, there are no material civil, criminal
or administrative actions, suits, claims, hearings, investigations, inquiries,
arbitrations, mediations or proceedings ("Actions") pending or, to the Knowledge
of the Company, threatened in writing against the Company or any of its
Subsidiaries.
(h) Employee Benefits; Labor. (i) For purposes of this Agreement,
the term (A) "Plan" shall mean any "employee benefit plan," within the meaning
of Section 3(3) of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), whether or not subject to ERISA, and any employment,
consulting, termination, severance, retention, change-in-control, deferred or
incentive compensation, commission, stock option or other equity-based, vacation
or other fringe-benefit plan, program, policy, arrangement, agreement or
commitment, and (B) "Company Plan" shall mean each material Plan which is
sponsored or contributed to by the Company or any of its Subsidiaries, to which
the Company or any such Subsidiary has any obligation to contribute, or with
respect to which the Company or any such Subsidiary is a party or otherwise has
any material liability.
-17-
(ii) With respect to each Company Plan listed on the Company
Disclosure Letter, the Company will deliver or make available to the
Purchasers, no later than seven days after the date hereof, a true, correct
and complete copy of: (A) each Company Plan, trust agreement, and insurance
contract and other funding vehicle related thereto; (B) the most recent
Annual Report (Form 5500 Series) and accompanying schedule, if any; (C) the
current summary plan description and any material modifications thereto, if
any (in each case, whether or not required to be furnished under ERISA);
(D) the most recent annual financial report, if any; (E) the most recent
actuarial report, if any; and (F) the most recent determination letter from
the U.S. Internal Revenue Service (the "IRS") if any. Since June 30, 2001,
there have been no amendments to any Company Plan adopted or approved, nor
has the Company or any of its Subsidiaries undertaken to make any such
amendments or to adopt or approve any new Company Plan that is not
reflected in the Company Plan document.
(iii) Each Company Plan has been operated and administered and
is in compliance with its terms and all applicable Laws in all material
respects, and there are no actions, suits, claims or governmental audits
(other than routine claims for benefits in the ordinary course) pending or,
to the Knowledge of the Company, threatened with respect to any Company
Plan or the assets thereof that, if adversely determined, would,
individually or in the aggregate, result in any material liability or
obligation of the Company or any of its Subsidiaries.
(iv) No Company Plan is (A) a multiemployer plan within the
meaning of Section 4001(a)(3) of ERISA, or (B) a multiple employer plan
within the meaning of Section 4063 or 4064 of ERISA. No Company Plan has an
"accumulated funding deficiency" (within the meaning of Section 302 of
ERISA or Section 412 of the Code), whether or not waived.
(v) Each Company Plan that is intended to qualify under Section
401(a) and/or 401(k) of the Code has received a favorable determination
letter from the IRS that it is so qualified and, to the Knowledge of the
Company, nothing has occurred or been done or omitted to be done since the
date of such letter that has adversely affected or will adversely affect
such qualified status. The Company and its Subsidiaries have timely paid
all contributions, premiums and expenses payable to or in respect of each
Company Plan under the terms thereof and in accordance with all applicable
Laws, except where any failure to pay such amounts has not and will not,
individually or in the aggregate, resulted or result in any material
liability or obligation of the Company or its Subsidiaries.
(vi) Neither the Company nor any of its Subsidiaries has
incurred or will incur, either directly or indirectly (including as a
result of an indemnification obli-
-18-
gation), any material liability under or pursuant to any provision of Title
I or IV of ERISA or the penalty, excise tax or joint and several liability
provisions of the Code relating to Plans, and, to the Knowledge of the
Company, no event, transaction or condition has occurred, exists or is
expected to occur that would reasonably be expected to result in any such
material liability to the Company or any of its Subsidiaries or, after the
Effective Time, to the Purchasers.
(vii) Neither the execution and delivery of this Agreement, nor
the consummation of the transactions contemplated hereby, either alone or
in combination with any other event (whether contingent or otherwise) will
(A) entitle any current or former employee, consultant or director of the
Company or any of its Subsidiaries to any increased or modified benefit or
payment; (B) increase the amount of compensation or benefits due to any
such employee, consultant or director; (C) accelerate the vesting, payment
or funding of any compensation, stock-based, incentive or other benefit;
(D) result in any "parachute payment" under Section 280G of the Code
(whether or not such payment is considered to be reasonable compensation
for services rendered); (E) cause any compensation to fail to be deductible
under Section 162(m) or any other provision of the Code or any similar Law;
(F) otherwise result in any payment in the nature of severance or
termination pay; or (G) limit or prohibit (except to the extent required by
applicable Law) the ability to amend, merge, terminate or receive a
reversion of assets from any Company Plan or related trust.
(viii) The Company and its Subsidiaries have no liability for
life, health, medical or other welfare benefits to former employees or
beneficiaries or dependents thereof, except for health continuation
coverage as required by Section 4980B of the Code or Part 6 of Title I of
ERISA and at no expense to the Company and its Subsidiaries.
(ix) No labor organization or group of employees of the Company
or any of its Subsidiaries has made a pending demand for recognition or
certification, and there are no representation or certification
proceedings, or petitions seeking a representation proceeding, presently
pending, or threatened to be brought or filed, with the National Labor
Relations Board or any other labor relations tribunal or authority. There
are no organizing activities, strikes, work stoppages, slowdowns, lockouts,
material arbitrations or material grievances, or other material labor
disputes pending or threatened against or involving the Company or any of
its Subsidiaries. Each of the Company and its Subsidiaries is in compliance
with all applicable laws in all material respects and collective bargaining
agreements respecting employment and employment practices, terms and
conditions of employment, wages and hours and occupational safety and
health.
-19-
(i) Compliance with Laws; Permits. (i) The businesses of the Company
and each of its Subsidiaries have been (since December 31, 1999), and are being,
conducted in compliance in all material respects with all applicable federal,
state, local or non-U.S. laws, statutes, ordinances, rules, regulations
(including, without limitation, the rules of any applicable self-regulatory
organization recognized by the SEC), rulings, written interpretations,
judgments, orders, injunctions, decrees, arbitration awards, agency
requirements, licenses or permits of any Governmental Entity of competent
jurisdiction, including all regulations regulating the business and products of
insurance and all applicable orders and directives of insurance regulatory
authorities (including federal authorities with respect to variable insurance
and annuity products) and orders resulting from market conduct examinations of
insurance regulatory authorities (including federal authorities with respect to
variable insurance and annuity products) (collectively, "Laws"). Except as set
forth in the Company Reports filed prior to the date hereof and for regulatory
examinations or reviews conducted in the ordinary course, no material
investigation or review by any Governmental Entity with respect to the Company
or any of its Subsidiaries is as of the date hereof pending or, to the Knowledge
of the Company, threatened.
(ii) No material change is required in the Company's or any of
its Subsidiaries' processes, properties, practices or procedures in
connection with any such Laws, and the Company has not received any written
notice or communication of any material noncompliance with any such Laws
that has not been cured as of the date hereof. Notwithstanding the
generality of the foregoing, the Company and each of its Subsidiaries have
in place policies and procedures with respect to themselves and their
insurance agents, third-party administrators, brokers, broker/dealers,
distributors and agents intended to assure that their sales processes and
practices are consistent in all material respects with applicable Law
governing such practices and processes, and, where there has been any
material deviation therefrom, such deviation has been cured, resolved or
settled through agreements with applicable Governmental Entities or are
barred by all applicable statutes of limitations or other equitable
principles. To the Knowledge of the Company, all employees of the Company
and its Subsidiaries with management responsibility with respect to any
business line, and all officers and directors thereof required to be
registered with or licensed under applicable Laws, are so licensed and in
good standing with the applicable Governmental Entity.
(j) Takeover Statutes. There are applicable to the transactions
contemplated by this Agreement no restrictive provision of any other applicable
"fair price," "moratorium," "control share acquisition," "interested
shareholder" or other similar anti-takeover statute or regulation (each a
"Takeover Statute").
-20-
(k) Taxes. (i) All material Tax Returns required to be filed by, or
with respect to, the Company or any Subsidiary have been timely filed (taking
into account extensions) and are correct and complete in all material respects.
(ii) The Company and each of its Subsidiaries has timely paid
all Taxes due and payable by it or for which it may be liable (other than
Taxes that are being contested in good faith and for which adequate
reserves are reflected in accordance with GAAP on the Company's
consolidated balance sheet filed with the Company Form 10-K).
(iii) The Company and each Subsidiary have made adequate
provision in accordance with GAAP on the Company's consolidated balance
sheet filed with the most recent Company Reports for all Taxes payable for
which no Tax Return has yet been filed.
(iv) Neither the Company nor any Subsidiary is doing business or
maintains a taxable presence in a jurisdiction (a "Non-resident
Jurisdiction") in which it does not file income Tax Returns (or does file
Tax Returns in the manner contemplated by Treasury Regulation
ss.1.882-4(a)(3)(iv) or any comparable provision of applicable law), and no
claim has been made in writing by any taxing authority in a Non-resident
Jurisdiction that the Company or any of its Subsidiaries are or may be
subject to taxation by that jurisdiction.
(v) No material deficiencies for any Taxes have been proposed,
asserted or assessed, in each case in writing, by any taxing authority
against the Company or any of its Subsidiaries that are not adequately
reserved for in accordance with GAAP on the Company's consolidated balance
sheet filed with the Company Form 10-K.
(vi) Within the past three years neither the Company nor any of
its Subsidiaries have been a "distributing corporation" or a "controlled
corporation" in a distribution intended to qualify under Section 355(a) of
the Internal Revenue Code of 1986, as amended (the "Code").
(vii) No material amounts of Tax could reasonably be expected to
be imposed on the Company or any Subsidiary as a result of the
reorganization contemplated by the September 26, 2000 proxy
statement/prospectus of Arch Capital Group Ltd. or any related internal
restructuring.
-21-
(viii) No agreements relating to the allocation or sharing of
Taxes exist between the Company and/or any of its Subsidiaries, on the one
hand, and a third party, on the other hand.
(ix) All material Taxes required to be withheld from any
compensation, dividend or other payment by or on behalf of the Company or
any Subsidiary have been withheld, and such withheld Taxes have been duly
and timely paid to the proper taxing authorities.
(x) Based on the advice of its tax advisors, the Company does
not believe that the Company or any of its Subsidiaries presently is a
"personal holding company" within the meaning of Section 542(a) of the
Code, a "foreign personal holding company" within the meaning of Section
552(a) of the Code, a "controlled foreign corporation" within the meaning
of Section 957 of the Code or a "foreign investment company" within the
meaning of Section 1246 of the Code. Based on the advice of its tax
advisors, the Company does not believe that the Company presently is, or,
at the end of the taxable year that includes the Closing Date, will be, a
"passive foreign investment company" within the meaning of Section 1297 of
the Code.
(xi) The Company has not had and does not expect to have a
disallowance of any deductions under Section 162(m) of the Code for
employee remuneration of any amount paid or payable by the Company or any
Subsidiary. "Taxes," with respect to any person means, (A) any and all
taxes, charges, fees, levies or other assessments, including all net
income, gross income, gross receipts, excise, stamp, real or personal
property, ad valorem, withholding, social security, unemployment, use,
license, net worth, payroll, franchise, severance, transfer, recording,
employment, premium, windfall profits, environmental, customs duties,
capital stock, profits, sales, registration, value added, alternative or
add-on minimum, estimated or other taxes, assessments or charges imposed by
any taxing authority and any interest, penalties, or additions to tax
attributable thereto; (B) any joint or several liability of such person
with any other person for the payment of any amounts of the type described
in clause (A) of this definition, and (C) any liability of such person for
the payment of any amounts of the type described in clause (A) as a result
of any express or implied obligation to indemnify any other person. "Tax
Returns" means any return, report, form or similar statement required to be
filed with respect to any Tax (including any attached schedules), including
any information return, claim for refund, amended return or declaration of
estimated Tax.
(l) Intellectual Property. Each of the Company and its Subsidiaries
owns, or is licensed or otherwise possesses legally enforceable rights to use,
all patents, trademarks, trade names, service marks, copyrights, and any
applications therefor, technology, know-how,
-22-
computer software programs or applications, and tangible or intangible
proprietary information or materials, including trade secrets (collectively,
"Intellectual Property") that are used in, and material to, the business of the
Company and its Subsidiaries as currently conducted, and any such patents,
trademarks, trade names, service marks and copyrights held by the Company and/or
its Subsidiaries are valid and subsisting except, in any such case, as would not
have a Material Adverse Effect.
(m) Brokers and Finders. Neither the Company nor any of its
officers, directors or employees has employed any broker or finder or incurred
any liability for any brokerage fees, commissions or finders' fees in connection
with the transactions contemplated by this Agreement based upon arrangements
made by or on behalf of the Company or any of its Subsidiaries, except that the
Company has employed CSFB as its financial advisor pursuant to a written
agreement, a true and accurate copy of which has previously been provided to the
Purchasers.
(n) Insurance Business. (i) All actuarial reports with respect to
the Company or any Company Insurance Company relied upon by the Company or any
Company Insurance Company or Governmental Entity since December 31, 1999, and
all attachments, addenda, supplements and modifications thereto (the "Company
Actuarial Analyses"), were prepared using appropriate modeling and other
procedures accurately applied, if relevant, and in conformity with generally
accepted actuarial standards consistently applied, and the projections contained
therein were properly prepared in accordance with the assumptions stated
therein. The information and data furnished by the Company or any Company
Insurance Company to its independent actuaries in connection with the
preparation of the Company Actuarial Analyses were accurate in all material
respects.
(ii) The Company Insurance Companies are in compliance in all
material respects with the underwriting guidelines applicable thereto.
(iii) Except as would not, individually or in the aggregate, be
reasonably likely to result in a material liability to the Company, (A)
each separate account maintained by a Company Insurance Company (a
"Separate Account") is duly and validly established and maintained under
the laws of its state of formation and is either exempt from registration
under the 1940 Act or is duly registered as an investment company under the
1940 Act, and (B) each such Separate Account is operated and all of its
operations conducted, and each contract issued by a Company Insurance
Company under which Separate Account assets are held has been duly and
validly issued, offered and sold, in compliance with all applicable Laws.
(o) Material Contracts. (i) Other than contracts or amendments
thereto that have been disclosed in or have been filed as an Exhibit to a
Company Report filed prior to
-23-
the date hereof, neither the Company nor any of its Subsidiaries is a party to
or otherwise bound by any Material Contract. "Material Contract" means, with
respect to any Person, any Contract that is material to the business, financial
position or results of operations of such Person and its Subsidiaries, taken as
a whole, including (A) any employment, severance, termination, consulting or
retirement contract with an officer or member of senior management, and (B) any
material Contract relating to the borrowing of money or the guarantee of any
such obligation.
(ii) All of the Company's Material Contracts are in full force
and effect. True and complete copies of all such Material Contracts not
filed as exhibits to the Company Reports prior to the date hereof have been
delivered or made available by the Company to Purchasers. Neither the
Company nor any of its Subsidiaries nor, to the Knowledge of the Company,
any other party is in breach of or in default under any such Material
Contract. Neither the Company nor any of its Subsidiaries is party to any
(A) Contract containing any provision or covenant limiting in any material
respect the ability of the Company or any of its Subsidiaries to (1) sell
any products or services to any other Person, (2) engage in any line of
business, or (3) compete with any Person, or (B) except for employment
agreements disclosed pursuant to another Section of this Agreement or as
provided in the certificate of incorporation, memorandum of association,
Bye-laws or other constituent documents of the Company or any of its
Subsidiaries, any Contract providing for indemnification of directors or
executive officers of the Company in their capacity as such except as would
not have a Material Adverse Effect.
(p) Risk Management; Derivatives. (i) The Company and its
Subsidiaries have in place risk management policies and procedures sufficient in
scope and operation to protect against risks of the type and in amounts
reasonably expected to be incurred by Persons of similar size and in similar
lines of business as the Company and its Subsidiaries.
(ii) The adoption of Statement of Financial Accounting Standards
No. 133 will not have a material and adverse impact on the Company's
consolidated results of operations or financial position.
(iii) All material derivative instruments, including, without
limitation, swaps, caps, floors and option agreements, whether entered into
for the Company's own account, or for the account of one or more of its
Subsidiaries or their customers, were entered into (A) only for purposes of
mitigating identified risk or as a means of managing the Company's
long-term debt objectives, (B) in accordance with prudent practices and in
all material respects with all applicable laws, rules, regulations and
regulatory policies, and (C) with counterparties believed by the Company to
be financially responsible at the time; and each of them constitutes the
valid and legally
-24-
binding obligation of the Company or one of its Subsidiaries, enforceable
in accordance with its terms, and are in full force and effect. Neither the
Company nor its Subsidiaries, nor to the Company's Knowledge any other
party thereto, is in breach of any of its material obligations under any
such agreement or arrangement.
(q) Aviation Treaties. The Company Disclosure Letter sets forth a
list of all reinsurance treaties relating to aviation insurance written by the
Company or its Subsidiaries with respect to which the Company or any Subsidiary
of the Company may be claimed against, together with a description of the
material terms of such treaties (the "Aviation Treaties"). The information set
forth in such schedule, as of the date hereof, fairly and accurately describes
the Aviation Treaties and reasonably estimates, as of the date hereof, any
liabilities that the Company or any of its Subsidiaries could reasonably be
expected to incur in connection therewith.
4. Covenants. The Company and the Purchasers (severally and not
jointly) hereby covenant and agree as follows:
(a) Conduct of the Company. The Company agrees that from the date
hereof until the Closing Date, (i) except as set forth in the Disclosure Letter
or as otherwise expressly permitted or required by Sections D.4.b, D.4.e, D.4.h
or Section E of this Agreement, or (ii) except with the prior written consent of
the Purchasers (which consent shall not be unreasonably withheld or delayed),
the Company and its Subsidiaries may conduct insurance and reinsurance
businesses and operations and, in the ordinary course consistent with past
practice, its other businesses and operations, and shall use their reasonable
efforts to preserve intact their business organizations and material
relationships with third parties and to keep available the services of their
present officers and employees. Without limiting the generality of the
foregoing, from the date hereof until the Closing Date, except as set forth in
the Disclosure Letter or as expressly permitted or required by Sections D.4.b,
D.4.e, D.4.h or Section E of this Agreement, without the prior written consent
of the Purchasers:
(A) the Company will not amend, or propose to amend, its
Certificate of Incorporation, memorandum of association, bye-laws or
other organizational documents;
(B) the Company will not, and will not permit any of its
Subsidiaries to, merge or consolidate with any other person;
(C) the Company will not split, combine, subdivide, redeem or
reclassify its shares or declare, set aside, make, or pay any
dividend or other distribution (whether in cash, stock or property
or any combination thereof) in respect of its share capital and
other equity interests;
-25-
(D) the Company will not, directly or indirectly, redeem,
repurchase or otherwise acquire or offer to redeem, repurchase, or
otherwise acquire, any of its securities;
(E) the Company will not (i) issue, deliver or sell, or
authorize the issuance, delivery or sale of, any of its shares, or
any securities convertible into or exercisable for, or any rights,
warrants or options to acquire, any of its shares, grant any
additional options to purchase Common Shares, or grant to any person
any right to acquire any shares of the Company or any right, the
value of which is based on the value of Common Shares, other than
the issuance of Common Shares upon the exercise of share options
outstanding on the date hereof in accordance with their present
terms, (ii) enter into any agreement restricting the transfer of, or
affecting the rights of holders of, the Company's securities, (iii)
grant any preemptive or antidilutive rights with respect to any of
the Company's securities, (iv) grant any registration rights with
respect to the Company's securities, or (v) amend in any term of any
outstanding securities of the Company or any of its Subsidiaries;
(F) the Company will not acquire any assets or properties for
cash or otherwise for an amount in excess of $500,000, in the
aggregate;
(G) the Company will not, and will not permit any of its
Subsidiaries to, acquire (whether pursuant to merger, stock or asset
purchase, joint venture or otherwise) in one transaction or series
of related transactions any equity interest in, or all or
substantially all of the assets of, any person or any business or
division of any person;
(H) the Company will not, and will not permit any of its
Subsidiaries to, incur indebtedness for borrowed money, guarantee
any indebtedness, issue or sell any debt securities or warrants or
rights to acquire any debt securities of the Company or any of its
Subsidiaries or guarantee any debt securities of others
(collectively "Debt") in excess of $500,000, or prepay or refinance
any indebtedness for Borrower's money;
(I) the Company will not, and will not permit any of its
Subsidiaries to, sell, lease, license or otherwise dispose of, any
material amount of assets, securities or property, except pursuant
to existing contracts or commitments;
(J) the Company will not (i) change its tax or financial
accounting policies, practices or methods except as required by
accounting principles gen-
-26-
erally accepted in the U.S., or by the rules and regulations of the
SEC or (ii) make any tax election, file any tax return or settle any
tax contest or other matter, in each case, other than in a manner
consistent with past practice;
(K) the First American portion of the Core Insurance Operations
shall not bind any gross or net insurance risk without the approval
of Messrs. Ingrey, Xxxxx or Grandisson;
(L) the Company will not replace the independent auditors of the
Company;
(M) the Company will not increase by 5% or more the annual base
compensation of any officer or key employee of the Company, or enter
into or make any material change in any severance contract or
arrangement with any such officer or key employee;
(N) the Company will not consummate a complete liquidation or
dissolution of the Company, a merger or consolidation (i) in which
the Company or any Subsidiary is a constituent corporation, or (ii)
with respect to which the Common Shares would have the right to vote
under applicable law, a sale of all or substantially all of the
Company's assets, or any similar business combination;
(O) the Company will not approve the annual plan, annual capital
expenditure budget or the five-year plan of the Company and its
Subsidiaries, taken as a whole;
(P) the Company will not remove the Chief Executive Officer or
Chairman of the Company, or appoint a new Chief Executive Officer or
Chairman of the Company;
(Q) the Company will not, and shall cause its Subsidiaries to
not, engage in any transaction with any officer, director, or
affiliate of any officer or director, of the Company;
(R) the Company will not (i) establish, enter into or amend any
collective bargaining agreement, Plan or Company Plan, including,
without limitation, any severance plan, agreement or arrangement,
(ii) increase the compensation payable or to become payable or the
benefits provided to its current or former directors, officers,
employees, consultants or service providers or (iii) accelerate the
vesting or payment of the compensation payable or the
-27-
benefits provided to any current or former director, officer,
employee, consultant or service provider, in each case other than as
required by applicable Law or any existing Company Plan; or
(S) the Company will not, and will not permit any of its
Subsidiaries to, agree or commit to do any of the foregoing.
Nothing in this Section D.4 shall grant to any Purchaser any right
of consent (to the extent that such right would result in such Purchaser being
deemed to "control" an insurance subsidiary of the Company that is domiciled in
the United States where the exercise of such control would otherwise require the
prior approval of such state).
(b) Shareholders Meeting. The Company will cause a meeting of its
shareholders (the "Shareholders Meeting") to be duly called and held as soon as
reasonably practicable after the Closing Date for the purpose of voting on (i)
the adoption of an amendment (the "Bye-Law Amendment") of the Company's bye-law
45 and 75 in the form of Exhibit III hereto, and (ii) the issuance of such
number of Conversion Shares that, together with the total number of Warrant
Shares issuable upon exercise of the Warrants, is in excess of the amount that
is permitted to be issued without shareholder approval under Rule 4350(i)(1)(D)
of the Nasdaq Stock Market. The parties agree and acknowledge that Xxxxxx
Xxxxxxxx will serve as Chairman of the Board of Directors so long as he is a
director and is willing to serve in such capacity.
(c) Proxy Statement. (i) Promptly after the Closing Date, the
Company shall prepare and file with the SEC the proxy statement (the "Proxy
Statement") relating to the Shareholders Meeting. The Company shall mail the
Proxy Statement to its shareholders as promptly as practicable after the Closing
Date and, if necessary, after the Proxy Statement shall have been so mailed,
promptly circulate amended, supplemental or supplemented proxy material, and, if
required in connection therewith, resolicit proxies. The parties acknowledge and
agree that no shareholder approval is required prior to the Closing Date in
connection with the sale and purchase of the Securities and the consummation of
the transactions contemplated hereby.
(ii) The Company will advise the Purchasers and the Transaction
Committee, promptly after it receives notice thereof, of the time when any
supplement or amendment has been filed or any request by the SEC for
amendment of the Proxy Statement or comments thereon and responses thereto
or requests by the SEC for additional information. If at any time the
Company or the Purchasers, respectively, discover any information relating
to the Company or the Purchasers, or any of their respective affiliates,
officers or directors, that should be set forth in an amendment or
supplement to the Proxy Statement so that the document will not include any
mis-
-28-
statement of a material fact or omit to state any material fact necessary
to make the statements therein, in the light of the circumstances under
which they were made, not misleading, then the party that discovers any
misleading information shall promptly notify the other parties hereto and
an appropriate amendment or supplement describing the information shall be
promptly filed with the SEC and, to the extent required by law or
regulation, disseminated to the Company's shareholders.
(d) Government Filings. The Company and the Purchasers shall
cooperate with one another in (i) determining whether any other action by or in
respect of, or filing with, any federal, state or local court, administrative or
regulatory agency or commission or other governmental authority or agency,
domestic or foreign (each, a "Governmental Entity") is required in connection
with the consummation of the transactions contemplated hereby or the
effectiveness of the Bye-Law Amendment and (ii) seeking any consents, approvals
or waivers, taking any actions, or making any filings, furnishing information
required in connection therewith and seeking promptly to obtain any consents,
approvals or waivers. The Company and the Purchasers agree, if required, to make
an appropriate filing of a Notification and Report Form pursuant to the HSR Act
with respect to the transactions contemplated hereby as promptly as practicable
and to supply as promptly as practicable any additional information and
documentary material that may be requested pursuant to the HSR Act and to take
all other actions necessary to cause the expiration or termination of the
applicable waiting period under the HSR Act as soon as practicable.
(e) Dispositions; Pending Acquisitions. Prior to the Closing, the
Company shall endeavor in good faith, subject to prevailing market conditions,
to (i) sell, and cause its Subsidiaries to sell, all marketable securities,
publicly traded equity securities, non-investment grade debt securities and
illiquid securities owned by it (other than shares of any Subsidiary) and (ii)
invest the proceeds from such sales prior to Closing Date in short-term, liquid,
investment grade debt securities, and after the Closing Date, as determined by
Board of Directors. The Company shall also use its commercially reasonable
efforts to consummate the acquisition of Rock River.
(f) Public Announcements. Upon the execution of this Agreement, the
Company and the Purchasers will consult with each other with respect to the
issuance of a press release to be released by the Company with respect to this
Agreement and the transactions contemplated hereby, which release shall require
the prior approval of the Purchasers. Prior to the Closing Date, except as
otherwise agreed to by the parties, the parties shall not issue any report,
statement or press release or otherwise make any public statements with respect
to this Agreement, except as in the reasonable judgment of the party may be
required by law, any national stock exchange or the Nasdaq Stock Market or in
connection with the obligations of a publicly-held company. The Company and the
Purchasers will consult with each
-29-
other with respect to the issuance of a press release on or after the Closing
Date with respect to the consummation of the transactions contemplated by this
Agreement, which release shall require the prior approval of the Purchasers.
(g) Access; Information. From the date hereof until the Closing Date
and subject to applicable law, the Company shall (i) give to each Purchaser, its
counsel, financial advisors, auditors and other authorized representatives
reasonable access to the offices, properties, books and records of such party,
(ii) provide access to each Purchaser, its counsel, financial advisors, auditors
and other authorized representatives to such financial and operating data and
other information as such persons may reasonably request and (iii) instruct its
employees, counsel, financial advisors, auditors and other authorized
representatives to cooperate with the Purchasers in its investigation. Any
investigation pursuant to this Section shall be conducted in such manner as not
to interfere unreasonably with the conduct of the business of the Company.
Unless otherwise required by law, each Purchaser will hold, and will cause its
respective officers, employees, counsel, financial advisors, auditors and other
authorized representatives to hold, any nonpublic information obtained in any
such investigation or otherwise, when conducted before or after the date hereof,
in confidence and shall not use for its own benefit in a manner adverse to the
Company, and shall take reasonable steps to prevent disclosure of, any
confidential information that it receives, and shall use at least the same
degree of care to avoid disclosure of such information as it uses with respect
to its own confidential information; provided, however, that no Purchaser shall
have any obligations hereunder with respect to information which (A) is known by
such Purchaser on a non-confidential basis at the time of disclosure by the
Company, (B) is at the time of disclosure, or becomes thereafter, publicly
available other than pursuant to a breach of this subsection by such Purchaser,
(C) is received from a third party without restriction on further disclosure,
(D) is independently developed by such Purchaser, or (E) is requested or
required to be disclosed by self-regulatory organizations or by applicable law
on request of any Governmental Entity. In the event of clause (E), such
Purchaser will give prior notice to the Company of such disclosure in order to
enable the Company to seek a protective order or other remedy or to waive
compliance with this subsection.
Each Purchaser shall give to the Company and its counsel such
information regarding ownership of the Company, ownership of such Purchaser and
related areas as they reasonably request in connection with preparing disclosure
in filings under the Act or the Exchange Act on issues arising under the
Internal Revenue Code of 1986, as amended, including the rules applicable to
"controlled foreign corporations" thereunder.
The Company shall, to the extent practicable, cause its Subsidiaries
to maintain under separate ledgers the components necessary to calculate the
Adjustment Basket.
-30-
(h) Indemnification; Insurance. (i) To the fullest extent permitted
by law, from and after the Closing Date, all rights to indemnification as of the
date hereof in favor of the directors, officers, employees and agents of the
Company or any of its Subsidiaries with respect to their activities as such
prior to the Closing Date and, with respect to the Transaction Committee also,
after the Closing Date, as provided in the bye-laws or other organizational
documents of the Company and its Subsidiaries in effect on the date hereof, or
otherwise in effect on the date hereof, shall continue in full force and effect
for a period of not less than six years from the Closing Date. The Purchasers
shall not cause the Company to take any action inconsistent with this Section
D.4.h.
(ii) To the extent, if any, not provided by an existing right of
indemnification or other agreement or policy, after the Closing Date, the
Company shall, to the fullest extent permitted by applicable law, indemnify
and hold harmless, each present and former director or officer of the
Company or any of its Subsidiaries (collectively, the "Indemnified
Parties") against all costs and expenses (including reasonable attorneys'
fees), judgments, fines, losses, claims, damages, liabilities and
settlement amounts paid in connection with any claim, action, suit,
proceeding or investigation (whether arising before or after the Closing
Date), whether civil, administrative or investigative, arising out of or
pertaining to any action or omission in their capacity as a director,
officer, employee or agent of the Company or any of its Subsidiaries, in
each case before the Closing Date (including the transactions contemplated
by this Agreement) and, with respect to the Transaction Committee, also
after the Closing Date. In the event of any such costs, expenses,
judgments, fines, losses, claims, damages, liabilities or settlement
amounts (whether or not arising before the Closing Date), (A) the Company
shall pay the reasonable fees and expenses of counsel selected by the
Indemnified Parties, which counsel shall be reasonably satisfactory to the
Company, promptly after statements therefor are received, and otherwise
advance to the Indemnified Parties upon request reimbursement of documented
expenses reasonably incurred, in either case, to the extent not prohibited
by the applicable law and (B) the Company shall cooperate in the defense of
any such matter. In the event any Indemnified Party is required to bring
any action to enforce rights or to collect moneys due under this Agreement
and is successful in such action, the Company shall reimburse such
Indemnified Party for all of its expenses in bringing and pursuing such
action.
(iii) For a period of at least six (6) years after the Closing
Date, the Company shall cause to be maintained in effect the directors' and
officers' liability insurance policies maintained by the Company and its
Subsidiaries or substitute policies with at least the same coverage
containing terms and conditions which are substantially equivalent with
respect to matters occurring prior to the Closing Date, but the
-31-
Company shall not, in any event, be required to pay more than 200% of the
current cost of such coverage.
(iv) In the event the Company or any of its successors or
assigns (A) consolidates with or merges into any other person and shall not
be the continuing or surviving corporation or entity of such consolidation
or merger or (B) transfers all or substantially all of its properties and
assets to any person, then, and in either such case, proper provision shall
be made so that the successors and assigns of the Company, shall assume the
obligations set forth in this Section D.4(h). This Section D.4(h) is
intended to benefit (and shall be enforceable by) the Indemnified Parties
and their respective heirs, executors and personal representatives.
(i) Further Assurances. Subject to the terms and conditions of this
Agreement, each of the parties hereto agrees to use its reasonable best efforts
to take, or cause to be taken, all action, and to do, or cause to be done, all
things necessary or desirable under applicable legal requirements, to consummate
and make effective the transactions contemplated by this Agreement. If at any
time after the Closing Date, any further action is necessary or desirable to
carry out the purposes of this Agreement, the parties hereto shall use their
reasonable best efforts to take or cause to be taken all such necessary or
desirable action and execute, and deliver and file, or cause to be executed,
delivered and filed, all necessary or desirable documentation.
(j) Certain Tax Matters. (i) With respect to each taxable year
during which any Purchaser owns shares of the Company, the Company shall use its
reasonable best efforts to cause the Company and each of its Subsidiaries (A)
not to constitute a "passive foreign investment company" within the meaning of
Section 1297 of the Code, (B) not to satisfy the gross income requirement set
forth in Section 542(a) of the Code, (C) not to satisfy the gross income
requirement set forth in Section 552(a) of the Code, and (D) not to have any
related person insurance income within the meaning of Section 953(c)(2) of the
Code.
(ii) In the event that the Company or any of its Subsidiaries
constitutes a personal holding company, a foreign personal holding company,
a controlled foreign corporation, a foreign investment company or a passive
foreign investment company for U.S. federal income tax purposes with
respect to any taxable year, the Company shall provide, and shall cause its
Subsidiaries to provide, each Purchaser with such information as such
Purchaser may reasonably request to satisfy its legitimate tax, accounting
or other reporting requirements.
-32-
E. RIGHT TO EXCHANGE PREFERENCE SHARES
1. Formation of Newco. The Company shall use best efforts to (a)
form a wholly owned Subsidiary ("Newco") to which the Company shall contribute
100% of its equity interest in Arch Reinsurance Ltd., a Bermuda company ("ARL")
and (b) contribute, or cause the appropriate Subsidiary to contribute, all Core
Insurance Operations other than Arch Reinsurance Company, a Nebraska corporation
("ARC"), in each case, no later than 90 days after the Closing Date (subject, in
the case of direct or indirect contribution of U.S. domiciled insurance
companies, to any necessary regulatory approvals or material third party
approvals). From and after such formation and contribution, the Company shall
not engage in the insurance business other than through Newco, except for (i)
its holding of ARC and (ii) the operations of American Independent Insurance
Holding Company, a Pennsylvania corporation ("AIIH") and Xxxxx & Co., Inc., a
Delaware corporation ("Xxxx"), but only to the extent of the current nature and
scope of such operations of AIIH and Xxxx. The Company shall (1) use its best
efforts to cause Newco to have the benefit of, or obtain independently, the same
insurance authorizations as currently held by ARC, and (2) seek to accomplish
the transactions contemplated by this paragraph in as tax-efficient a manner as
possible.
2. Capital Structure of Newco. Newco shall be a company organized
under the laws of Bermuda, with a number and kind of authorized and outstanding
capital shares (including shares and warrants identical to the Preference Shares
and Warrants), and a memorandum of association and bye-laws that replicate, as
nearly as possible, those of the Company. All of such outstanding shares shall,
upon such formation and contribution, be held by the Company. Until the latest
of (a) the receipt of Requisite Shareholder Approval, (b) the receipt of
Requisite Regulatory Approval and (c) ninety days following consummation of the
Final Adjustment contemplated by Section B.3. of this Agreement to the extent
that the number and kind of outstanding capital shares of the Company change
from time to time, a corresponding adjustment shall be made by the Company in
the number and kind of outstanding capital shares of Newco.
3. Exchange Right. From and after the occurrence of an Exchange
Trigger Event, the Preference Shares and Warrants may be exchanged, in whole or
in part (provided that Preference Shares representing a minimum of $150 million
in Liquidation Preference shall be required for the initial such exchange), for
preference shares and warrants of Newco bearing identical rights and privileges,
including the right to convert into, or be exercised for, common shares of
Newco. Such right to exchange shall be exercisable upon delivery to the Company
and Newco of an exchange notice, which notice shall specify the number of
Preference Shares and Warrants surrendered for exchange. Once delivered, the
exchange notice shall be irrevocable, subject to the delivery of the required
preference shares and/or warrants of Newco by the Company to the surrendering
holder. Each exchange shall be
-33-
deemed to have been effected at the close of business on the date of receipt by
the Company of the exchange notice, and the person exercising such exchange
right shall be deemed to be the record holder of Newco preference shares and/or
warrants as of the close of business on such date. From and after the exercise
of such exchange right, the Company shall replicate, as nearly as possible, the
rights and benefits, including governance rights and registration rights,
provided for the benefit of Purchasers under this Agreement, the Certificate,
the Shareholders Agreement and as otherwise contemplated under this Agreement
for the benefit of the holders of preference shares and/or warrants of Newco. An
"Exchange Trigger Event" shall mean any one or more of the following: (a)
failure to obtain the Requisite Shareholder Approval (unless such failure was
due to a breach by the Purchaser of a covenant hereunder) within five months of
Closing Date, (b) failure to obtain the Requisite Regulatory Approval within six
months of Closing Date or (c) if the Final Adjustment contemplated by Section
B.3. of this Agreement is less than zero and its absolute value exceeds $250
million.
4. Maintenance of Newco. Until the latest of (a) the receipt of
Requisite Shareholder Approval, (b) the receipt of Requisite Regulatory Approval
and (c) ninety days following the consummation of the Final Adjustment
contemplated by Section B.3. of this Agreement, the Company shall maintain
intact the business, customers and employees of Newco and its operations as
contemplated by Section E.1 and shall not (i) sell, dispose, exchange or
distribute by way of dividend or otherwise any of the capital stock of Newco,
(ii) sell, dispose, or exchange any assets of Newco, except in the ordinary
course of business and to the extent the proceeds are retained in Newco, (iii)
pay any dividend or distribution to the Company, or (iv) permit Newco, or any of
its Subsidiaries to engage in any merger, business combination, consolidation or
other similar transaction except for such transactions between wholly owned
Subsidiaries of Newco.
5. Failure of Regulatory Approval. To the extent approval of any
governmental authority is necessary either (a) for the Company to satisfy its
obligations under Section E.1, or (b) for a holder of Preference Shares or
Warrants to exercise its exchange right under Section E.3, and such approval has
not occurred at the time a holder gives an exchange notice, the Company will
hold Newco, the assets and operations to be contributed in Newco, and ARC in
trust for the benefit of such exchanging holder, and shall use best efforts to
restructure such holdings, if necessary, to obtain such approval, or to provide
the same economic and governance benefit as intended to be provided by the
exchange right for preference shares and warrants of Newco.
6. Modification or Amendment. The original signatories to this
Agreement shall be the sole parties required to agree with the Company to any
modification, amendment or waiver of the provisions of this Section E and no
other holder of Preference Shares shall have such consent rights.
-34-
F. ADDITIONAL PROVISIONS
1. Modification. This Agreement may not be modified, amended or
supplemented except in writing and signed by the party against whom any
modification, amendment or supplement is sought. No term or condition of this
Agreement may be, or will be deemed to have been, waived except in writing by
the party charged with the waiver. A waiver shall operate only as to the
specific term or condition waived and will not constitute a waiver for the
future or act on anything other than that which is specifically waived. Any
modification, amendment, supplement or waiver to be executed by the Company must
be approved by the Transaction Committee.
2. Purchasers' Costs and Expenses. The Company will reimburse the
Purchasers for their costs and expenses in connection with the transactions
contemplated by this Agreement, including, without limitation, (a) the fees and
expenses of the Purchaser's accountants, attorneys and other advisors and (b)
any and all losses, liabilities, claims, damages and any out-of-pocket costs and
expenses incurred in connection with any claims, disputes, proceedings or
litigation arising directly or indirectly out of the transactions contemplated
by this Agreement, provided that any such reimbursed costs and expenses shall
not be reflected in any reduction of Book Value included under "C" in Schedule
B.
3. Notices. Any notice or other communications required or permitted
to be given pursuant to this Agreement shall be in writing and shall be sent by
registered or certified mail, return receipt requested, postage prepaid, by hand
delivery (including courier services), or by facsimile as follows:
if to the Company, to:
Arch Capital Group Ltd.
00 Xxxxxxxxx Xxxx
Xxxxxxxxx, XX 00000
Attention: General Counsel
Facsimile: (000) 000-0000
with copies to:
Xxxxxx Xxxxxx & Xxxxxxx
00 Xxxx Xxxxxx
Xxx Xxxx, XX 00000
Attention: Xxxxxxxx Xxxx, Esq.
Facsimile: (000) 000-0000
-35-
and if to any Purchaser, at its address set forth on the signature pages hereof
or, with respect to the Company and the Purchasers, to such other person or
address as either party shall specify by like notice to the other party. Any
notice or communication shall be deemed given or made (a) when delivered by
hand, (b) when mailed, three business days after being deposited in the mail,
postage prepaid, sent by certified mail, return receipt requested, and (c) when
sent by facsimile, receipt acknowledged.
4. Successors, Assigns. This Agreement and all of the terms and
provisions hereof shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and assigns; provided that this Agreement
is not transferable or assignable by any Purchaser (other than to any Affiliate
of such Purchaser) without the Company's consent. Notwithstanding the foregoing,
a Purchaser shall be free to assign its rights and obligations hereunder with
respect to up to 30% of such Purchaser's Total Purchase Price to any Person
previously discussed with the Company, provided that such assignee becomes a
party hereto, whereupon such assignee shall have the rights of, and be subject
to the obligations of, a "Purchaser" hereunder. Following any assignment
(including from a Purchaser to its Affiliates) the assignor shall have no
further obligations under, and shall have no rights or benefits of any kind
under, the Agreement with respect to the subscription so assigned. Following the
assignment by any of the signatories on pages S-2 to S-5 ( "Warburg Purchaser")
to its Affiliate, such Warburg Purchaser shall have no further obligations
under, and shall have no rights or benefits of any kind under, this Agreement.
5. Transaction Committee. During the period from the date of this
Agreement through the Second Applicable Date, in the event that the Company's
Board of Directors is required to act with respect to (a) an amendment,
modification or waiver of rights under, this Agreement, the Certificate, the
Warrants or the Shareholders Agreement (the "Related Agreements"), (b) the
enforcement of obligations of the Purchasers under the Related Agreements or (c)
approval of actions relating to the disposition of Non-Core Assets, such action
shall be deemed approved by the Board if approved by the Transaction Committee.
6. Governing Law. The validity and effects of this Agreement shall
be governed by and construed and enforced in accordance with the laws of the
State of New York.
7. Survival. The representations and warranties set forth in Section
D.3 of this Agreement shall survive the Closing Date, but the exclusive remedy
shall be through the Adjustment Basket(s) contemplated by Section B.3. of this
Agreement.
8. Entire Agreement. This Agreement constitutes the entire agreement
among the parties hereto and supersedes all prior agreements, understandings and
arrangements, oral or written, among the parties hereto with respect to the
subject matter hereof.
-36-
9. Severability. If any one or more of the provisions contained in
this Agreement shall be held to be invalid, illegal or unenforceable in any
respect, such invalidity, illegality or unenforceability will not affect any
other provision hereof.
10. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be considered an original and all of which
together shall be deemed to be one and the same instrument.
11. Currencies. Unless otherwise specifically indicated, all
payments and currency amounts indicated herein refer to and shall be denominated
in United States Dollars. "Dollars" and "$" shall denote United States Dollars.
[Signature pages follow]
S-1
IN WITNESS WHEREOF, each Purchaser has executed this Agreement as of
the date first above-written.
HFCP IV (BERMUDA), L.P.,
By: H&F Investors IV, LLC,
its General Partner,
By: H&F Investors III, Inc.,
its Manager,
By: /s/ Xxxx X. Xxxxx, Xx.
----------------------------
Name: Xxxx X. Xxxxx, Xx.
Title: Vice President
Amount Subscribed: $250 million
Notices to: HFCP IV (Bermuda), L.P.
c/x Xxxxxxx & Xxxxxxxx LLC
Xxx Xxxxxxxx Xxxxx
Xxxxx 0000
Xxx Xxxxxxxxx, Xxxxxxxxxx 00000
Attention: Xxxxxxx X. Xxxxxx
Telephone: (000) 000-0000
Facsimile: (000) 000-0000
With copies to: Wachtell, Lipton, Xxxxx & Xxxx
00 Xxxx 00xx Xxxxxx
Xxx Xxxx, Xxx Xxxx 00000
Attention: Xxxxxxxx X. Xxxxxxxx
Telephone: (000) 000-0000
Facsimile: (000) 000-0000
S-2
IN WITNESS WHEREOF, each Purchaser has executed this Agreement as of
the date first above-written.
WARBURG PINCUS PRIVATE
EQUITY VIII, L.P.,
By: Warburg, Xxxxxx & Co.,
its General Partner,
By: /s/ Xxxxxxx Xxx
----------------------------
Name: Xxxxxxx Xxx
Title: Partner
Amount Subscribed: $250 million
Notices to: Warburg Pincus Private Equity VIII, L.P.
000 Xxxxxxxxx Xxxxxx
Xxx Xxxx, Xxx Xxxx 00000
Attention: Xxxxxxx Xxx
Telephone: (000) 000-0000
Facsimile: (000) 000-0000
With copies to: Wachtell, Lipton, Xxxxx & Xxxx
00 Xxxx 00xx Xxxxxx
Xxx Xxxx, Xxx Xxxx 00000
Attention: Xxxxxxxx X. Xxxxxxxx
Telephone: (000) 000-0000
Facsimile: (000) 000-0000
S-3
IN WITNESS WHEREOF, each Purchaser has executed this Agreement as of
the date first above-written.
WARBURG PINCUS INTERNATIONAL
PARTNERS, L.P.
By: Warburg, Xxxxxx & Co.,
its General Partner,
By: /s/ Xxxxxxx Xxx
----------------------------
Name: Xxxxxxx Xxx
Title: Partner
Amount Subscribed: $240 million
Notices to: Warburg Pincus International Partners, L.P.
000 Xxxxxxxxx Xxxxxx
Xxx Xxxx, Xxx Xxxx 00000
Attention: Xxxxxxx Xxx
Telephone: (000) 000-0000
Facsimile: (000) 000-0000
With copies to: Wachtell, Lipton, Xxxxx & Xxxx
00 Xxxx 00xx Xxxxxx
Xxx Xxxx, Xxx Xxxx 00000
Attention: Xxxxxxxx X. Xxxxxxxx
Telephone: (000) 000-0000
Facsimile: (000) 000-0000
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IN WITNESS WHEREOF, each Purchaser has executed this Agreement as of
the date first above-written.
WARBURG PINCUS NETHERLANDS
INTERNATIONAL PARTNERS I, C.V.
By: Warburg, Xxxxxx & Co.,
its General Partner,
By: /s/ Xxxxxxx Xxx
----------------------------
Name: Xxxxxxx Xxx
Title: Partner
Amount Subscribed: $6 million
Notices to: Warburg Pincus Netherlands International Partners I, C.V.
000 Xxxxxxxxx Xxxxxx
Xxx Xxxx, Xxx Xxxx 00000
Attention: Xxxxxxx Xxx
Telephone: (000) 000-0000
Facsimile: (000) 000-0000
With copies to: Wachtell, Lipton, Xxxxx & Xxxx
00 Xxxx 00xx Xxxxxx
Xxx Xxxx, Xxx Xxxx 00000
Attention: Xxxxxxxx X. Xxxxxxxx
Telephone: (000) 000-0000
Facsimile: (000) 000-0000
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IN WITNESS WHEREOF, each Purchaser has executed this Agreement as of
the date first above-written.
WARBURG PINCUS NETHERLANDS
INTERNATIONAL PARTNERS II, C.V.
By: Warburg, Xxxxxx & Co.,
its General Partner,
By: /s/ Xxxxxxx Xxx
----------------------------
Name: Xxxxxxx Xxx
Title: Partner
Amount Subscribed: $4 million
Notices to: Warburg Pincus Netherlands International Partners II, C.V.
000 Xxxxxxxxx Xxxxxx
Xxx Xxxx, Xxx Xxxx 00000
Attention: Xxxxxxx Xxx
Telephone: (000) 000-0000
Facsimile: (000) 000-0000
With copies to: Wachtell, Lipton, Xxxxx & Xxxx
00 Xxxx 00xx Xxxxxx
Xxx Xxxx, Xxx Xxxx 00000
Attention: Xxxxxxxx X. Xxxxxxxx
Telephone: (000) 000-0000
Facsimile: (000) 000-0000
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Accepted and agreed to as of the date first above-written.
ARCH CAPITAL GROUP LTD.
By: /s/ Xxxxx Xxxxxxxx
---------------------------------
Name: Xxxxx Xxxxxxxx
Title: Senior Vice President and General Counsel
Schedule A
----------
Certain Definitions
-------------------
"Adjusted Warrant Amount" means, with respect to each Purchaser, (a)
the product of 0.5 times (b) an amount equal to (i) such Purchaser's Total
Purchase Price divided by (ii) the Estimated Per Share Price minus $1.50.
"Affiliate" shall have the same meaning as set forth in the
Shareholder Agreement.
"Common Shares" means the common shares, par value $0.01 per share,
of the Company.
"Core Insurance Operations" shall mean the following assets and
capital:
(i) Arch Reinsurance Ltd., a Bermuda company ("ARL"),
(ii) Arch Capital Group (U.S.) Inc., a Delaware corporation
("ACG(US)"),
(iii) Arch Reinsurance Company, a Nebraska corporation ("ARC"),
(iv) Cross River Insurance Company, a Nebraska corporation (including
funding for Rock River Insurance Company, a Wisconsin corporation
("Rock River")),
(v) Arch Risk Transfer Services Ltd., a Cayman Islands company
(including First American Financial Corporation, a Missouri
corporation),
(vi) capital held at the holding company level, gross of capital to be
invested in unfunded private equity commitments which, when funded,
shall be deemed to be Non-Core Assets, and
(vii) $2.5 million in segregated assets and liabilities in cell
companies.
"Estimated Per Share Price" means (a) the Company's total
shareholders' equity as of June 30, 2001 as set forth on its unaudited
consolidated balance sheet as of such date (which is $271,652,000), adjusted
using the Xxxx to Market Procedures, so that marketable securities in the
Company's investment portfolio are valued at their estimated fair value as of
the business day immediately preceding the Closing Date in accordance with GAAP,
divided by (b) the total number of Common Shares outstanding as of June 30, 2001
(which is 12,863,079).
"Fair Market Value" shall mean (a) with respect to Common Shares,
the average of the high and low daily sales price on the Nasdaq of the Common
Shares for the 20 trading days immediately preceding the date of which Fair
Market Value is to be calculated, and (b) with respect to a security convertible
into or exchangeable for Common Shares, the product of (i) the average of the
high and low daily sales price on the Nasdaq of the Common
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Shares for the 20 trading days immediately preceding the date of which Fair
Market Value is to be calculated, and (ii) the number of Common Shares into
which such security is then convertible or exchangeable.
"GAAP" means accounting principles generally accepted in the United
States applied on a basis consistent with those used in preparation of the
Audited Balance Sheet.
"Knowledge" refers to the actual knowledge of an officer or the
Chairman of the Company.
"Xxxx to Market Procedures" means that the Company will liquidate
all non treasury securities prior to the Closing Date and reinvest the proceeds
in short term U.S. Treasury Securities. All remaining securities held at the
Closing Date will be marked to market based on the closing bid price on the
Closing Date. A purchase price adjustment computed will be made as follows:
Realized gains (losses) in the period from XXX
July 1, 2001 to day before the closing
Plus (minus) the change in unrealized gains
in the period July 1, 2001 to the
Closing Date As follows:
Unrealized gain (loss) at June 30 XXX
net of Unrealized gain (loss)
at closing XXX +XXX (net unrealized)
Market value change XXX
Less Tax effect at 18.5%
Purchase price adjustment XXX
"Material Adverse Effect" on the Company means a material adverse
effect on the properties, assets, liabilities, condition (financial or
otherwise), business, operations or operating earnings of the Company and its
Subsidiaries, taken as a whole, or an effect which is reasonably likely to
prevent or materially delay or materially impair the ability of the Company to
consummate the transactions contemplated by this Agreement, excluding any such
effect resulting from changes in general economic or industry conditions,
announcement of the transaction contemplated hereby or the performance by the
Company of its obligations hereunder.
"Non-Core Assets" shall mean the following:
(a) American Independent Insurance Holding Company, a Pennsylvania
corporation,
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(b) Xxxxx & Co., Inc., a Delaware corporation,
(c) escrow assets under the Folksamerica disposition agreement, net of
the contingent reserve recorded as of June 30, 2001, as adjusted for
18.5% tax benefits and minus all liabilities, contingent or
otherwise, not transferred to the purchaser under such disposition
agreement, including "Excluded Liabilities" under such disposition
agreement,
(d) all non-public securities held by the Company, ACG (US), and ARC
and
(e) all commitments to The Trident Partnership, II and Distribution
Partners, as and when funded.
"Per Share Price" means (a) the Company's total shareholders' equity
as of June 30, 2001 as set forth on the Audited Balance Sheet, adjusted (i) so
that marketable securities in the Company's investment portfolio are valued at
their estimated fair value as of the business day immediately preceding the
Closing Date, using the Xxxx to Market Procedures, as set forth in the Portfolio
Review and (ii) to give effect to those expenses that are described in "C" on
Schedule B that are ascertainable prior to the calculation of the Per Share
Price (whether or not paid prior to Closing) and that would otherwise result in
a decrease of total shareholders' equity of the Company, divided by (b) the
total number of Common Shares outstanding as of June 30, 2001 (which is
12,863,079).
"Person" shall mean any individual, corporation, partnership, trust,
limited liability company, association or other entity or organization,
including a government or political subdivision or an agency or instrumentality
thereof.
"Transaction Committee" means a committee of the Board of Directors
consisting of persons who either (a) were members of the Board of Directors on
October 22, 2001 and/or (b) were designated as members of the Transaction
Committee by a person who was a member of the Board of Directors on October 22,
2001.
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Schedule B
----------
Adjustment Basket
-----------------
The Adjustment Basket shall be equal to A + B - C, where:
A = sum of (Realized Value - Adjusted Closing Book Value) of each
Non-Core Asset.
"Realized Value" means (a) with respect to any Non-Core Asset that
is disposed of on or prior to the Test Date: (i) all cash proceeds
realized from the disposition of such asset from July 1, 2001
through the Test Date (the "Realization Period") to the extent such
proceeds are received by the Company, Newco or a subsidiary of Newco
and would be distributable to the Company, net of all taxes or
withholding that would be payable if such proceeds were so
distributed, plus (ii) the after-tax amount of any dividends or
distributions made from such asset during the Realization Period (to
the extent received by the Company or Newco), minus (iii) taxes
payable (plus actual tax benefits) resulting from such disposition,
minus (iv) earn-outs and other incentive payments actually made, or
committed to, in connection with such disposition (with reasonable
estimates with respect to commitments which are outstanding as of
the Test Date), minus (v) investment banking, brokerage, legal and
consulting fees and other costs actually incurred in connection with
such disposition, minus all contingent liabilities, guarantee and
escrows associated with such disposition; and (b) with respect to
any Non-Core Asset that is not disposed of on or prior to the Test
Date: the appraised value, as determined by a reputable appraisal
firm selected by the Purchasers and the Transaction Committee. Such
appraisal shall take into account, among other things, without
duplication, the illiquid nature of such assets, the size of the
business, the minority nature of the interest and an expected future
20% cost of capital for such business.
"Adjusted Closing Book Value" means, with respect to any Non-Core
Asset that is or is not disposed of on or prior to the Test Date,
its book value, determined in accordance with GAAP, as of June 30,
2001 as set forth in the Audited Balance Sheet, plus, in the case of
Non-Core Assets, a capital charge equal to 15% per annum, compounded
annually, computed from the Closing Date to the Test Date (or in the
case of Non-Core Assets disposed of, the disposition date).
B = Test Date Balances - Closing Date Balances
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"Test Date Balances" means the sum of (a) the Insurance Balances at
the Test Date, calculated on the same basis as the Audited Balance
Sheet, and (b) all related cash collections (including, without
limitation, premiums and reinsurance recoveries) and cash payments
from June 30, 2001 to the Test Date. It is anticipated that cash
flows subject to these provisions will be maintained under separate
general ledger control.
"Closing Date Balances" means the Insurance Balances at June 30,
2001 as set forth on the Audited Balance Sheet, including, without
limitation, the amount set forth in clause (a)(i) of the definition
of Per Share Price.
For the avoidance of doubt, A or B can be either a positive or
negative balance.
"Insurance Balances" means premiums receivable, unpaid claims and
claims expenses recoverable, prepaid reinsurance premiums,
reinsurance balances receivable, deferred policy acquisition costs,
claims and claims expenses, unearned premiums, reinsurance balances
payable, and any other insurance balance (e.g., assets held in
separate accounts, claims payable, aggregate deductible fund,
payables to Bermuda cell and commissions payable) of the Core
Insurance Operations with respect to any policy or contract written
or having an effective date prior to the Closing Date. The Insurance
Balances as contemplated herein are intended to incorporate, among
other things, return and additional premiums, retrospectively rated
contract features, extra-contractual obligations, commissions, fees
and guarantee funds and residual market assessments and other cash
flows associated with in force business as of the Closing Date and
all obligations arising from business that expired prior to Closing.
C = Reductions in Book Value arising from the following (and without
duplication of any expenses included in the calculation of
Realized Value and without duplication of any expenses otherwise
reflected in the determination of the Per Share Price), all costs
and expenses relating to the purchase and sale of Securities and
the transactions provided for hereunder (including, without
limitation, all costs and expenses arising from performance by
the Company of its obligations hereunder, all costs associated
with the purchase price adjustments, all costs of any payments
that become due to any third party as a result of the
transactions hereunder, and all costs relating to litigation
concerning this Agreement), actual losses arising out of breach
of representations of the Company hereunder, the rationalization
of the Company's operations and elimination of overhead
undertaken in connection with this transaction with the approval
of the Transaction Committee, the reduction in book value
resulting from any other expenses (including internal incentive
arrangements), employee
B-2
separation agreements, fee payable by the Company to Credit Suisse
First Boston Corporation or any other investment banking firm or
broker, legal fees payable to counsel engaged by or on behalf of the
Company, and other related breakage costs, in each case in
connection with the transactions hereby.
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