SHAREHOLDER AND REGISTRATION RIGHTS AGREEMENT
THIS SHAREHOLDER AND REGISTRATION RIGHTS AGREEMENT (this
"Agreement") is made and entered into as of December 31, 1996, by and among Fort
Washington Holdings, Inc., a Pennsylvania corporation ("Fort Washington"), PIC
Insurance Group, Inc., a Pennsylvania stock insurance company ("PIC"), Xxxxxxx
X. Xxxxxxxx ("Xxxxxxxx") and Xxxxxxx X. XxXxxxxx, Xx. ("XxXxxxxx" and,
collectively with Fort Washington, PIC and Xxxxxxxx, the "Shareholders") and
Front Royal, Inc., a North Carolina corporation (the "Company").
RECITALS
WHEREAS, the Company, PIC and Trirock Limited Partnership are
parties to a Stock Purchase Agreement, dated as of December 6, 1996 (the
"Purchase Agreement"), pursuant to which, among other things, the Company is
acquiring all of the outstanding capital stock of Rockwood Casualty Insurance
Company;
WHEREAS, pursuant to the Purchase Agreement, the Company will issue
to PIC 155,000 shares of the newly created Series A Convertible Preferred Stock,
par value $100 per share, of the Company having an aggregate stated value of
$15,500,000 (the "Preferred Stock");
WHEREAS, pursuant to a Purchase and Sale Agreement, dated as of
December 31, 1996 between PIC and Fort Washington (the "Purchase and Sale
Agreement"), PIC will sell and transfer to Fort Washington the Preferred Stock;
WHEREAS, under the terms of the Purchase and Sale Agreement, Fort
Washington is issuing to PIC a promissory note secured by a pledge of the
Preferred Stock;
WHEREAS, pursuant to Non-Competition and Non-Solicitation Agreements
entered into concurrently herewith between the Company and each of Xxxxxxxx and
XxXxxxxx, who are the holders of all of the outstanding capital stock of Fort
Washington, the Company will issue to each of Xxxxxxxx and XxXxxxxx a Class A
Common Stock Purchase Warrant (collectively, the "Warrants") to acquire up to
200,000 shares of the Company's Class A Common Stock, no par value (the "Class A
Common Stock");
WHEREAS, the parties hereto desire that the holders of Preferred
Stock be entitled to certain preemptive rights and registration rights, that the
voting rights of the Preferred Stock be limited in certain respects, and the
holders of each of the Warrants be entitled to certain registration rights;
WHEREAS, the parties hereto desire that the Company be entitled to a
right of first refusal to acquire the Preferred Stock, Warrants and shares of
Class A Common Stock issuable upon conversion or exercise thereof, as the case
may be;
NOW, THEREFORE, in consideration of the agreements contained herein
and for other valuable consideration, the receipt and adequacy of which is
hereby acknowledged, the parties hereto hereby agree as follows:
1. Board Representation. As set forth in the Articles of Amendment to the
Articles of Incorporation of Front Royal authorizing the Preferred Stock, the
holders of record of the Preferred Stock shall have the right, by the vote of a
majority of the then outstanding shares thereof, to nominate and elect one
director to the Board of Directors of the Company (the "Board"). The Company,
PIC and Fort Washington (each on its own behalf and on behalf of any subsequent
holder or holders of Preferred Stock subject to the terms and conditions of this
Agreement) agree that such director initially shall be Xxxxxxxx. If the holders
of the Preferred Stock subsequently vote to nominate or elect a director other
than Xxxxxxxx, or if Xxxxxxxx is no longer able or willing to serve as a
director of the Company, the holders of the outstanding shares of Preferred
Stock shall have the right to call a special meeting of the shareholders of the
Company for the purpose of electing thereat, and the Board shall nominate, such
person as is designated by the vote of a majority of such holders, to serve as a
director, subject to the approval of a majority of the holders of each of the
Class A Common Stock and the Class B Common Stock of the Company, no par value,
voting as a single class, which approval shall not unreasonably be withheld. The
rights set forth in this paragraph 1 shall automatically cease to exist, and
shall not subsequently be reinstated, if at any time after the date hereof less
than 50,000 shares of Preferred Stock shall be outstanding.
2. Right of First Refusal. No Shareholder may sell, transfer, pledge or
otherwise encumber, assign, give, or otherwise dispose of (collectively,
"Transfer") any of the Securities (as defined in paragraph 2(d) below) now or
hereafter owned by it other than (i) upon compliance with the provisions of
paragraphs (a), (b) and (c) below, or (ii) in a "Permitted Transfer" (as defined
in Section 2(f), below).
(a) If a Shareholder receives a bona fide written cash offer (an
"Offer") for the purchase of any or all of its Securities that it desires
to accept, then it (in such capacity, the "Selling Shareholder") shall
deliver a written notice (the "Option Notice") to the Company, and shall
attach thereto a copy of the Offer. The Option Notice shall set forth the
identity of the proposed transferee, the identity of the Securities to
which such Offer applies (the "Offered Securities"), the purchase price to
be paid for such Offered Securities, evidence of the proposed transferee's
financial ability to pay the purchase price for such Offered Securities,
and a brief description of any other material terms of the proposed
Transfer not contained in the Offer. The Company shall have an irrevocable
option, exercisable by written notice (an "Option Election Notice")
delivered to the Selling Shareholder prior to the thirtieth (30th) day
following receipt of the Option Notice (the "Option Expiration Date"), to
purchase, at the price and on the terms set forth in the Option Notice, all
or any portion of the Offered Securities.
(b) If the Company delivers an Option Election Notice to the Selling
Shareholder on or prior to the Option Expiration Date, the closing of the
Transfer of the Offered Securities by the Selling Shareholder to the
Company shall occur within fifteen (15) days of the date of the Option
Election Notice (or on such other date as the Selling Shareholder and the
Company may agree) (the "Closing Expiration Date"). At such closing, the
Selling Shareholder shall deliver to the Company the certificates, Warrants
or other instruments representing the Offered Securities, together with all
instruments and evidences of transfer as the Company may reasonably
request, and the Company shall deliver to the Selling Shareholder the
purchase price to be paid on account of the Offered Securities as set forth
in the Option Notice.
(c) If the Selling Shareholder shall have delivered an Option Notice
in accordance with paragraph 2(a) above and the Company shall either have
failed to deliver an Option
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Election Notice on or prior to the Option Expiration Date or shall have
delivered such Option Election Notice but thereafter failed to close on the
Transfer of the Offered Securities on or prior to the Closing Expiration
Date and such failure was solely the fault of the Company, then the Selling
Shareholder shall have the right, for a period of thirty (30) days after,
(i) if the Company shall have failed to deliver a Company Election Notice
pursuant to paragraph 2(a) above, the Option Expiration Date, or (ii) if
the Company shall have delivered a Company Election Notice on or prior to
the Option Expiration Date but thereafter failed to close on the Transfer
of the Offered Securities on or prior to the Closing Expiration Date (and
such failure was solely the fault of the Company), the Closing Expiration
Date, to sell all (but not less than all) of the Offered Securities in
accordance with the terms of the Offer to the person or entity who
originally tendered such Offer (or to an affiliate thereof).
(d) As used in this Agreement, "Securities" shall mean the shares of
Preferred Stock, the shares of Class A Common Stock issuable upon
conversion of the Preferred Stock, the Warrants and the shares of Class A
Common Stock issuable upon exercise of the Warrants.
(e) The obligations of the Shareholders and the rights of the Company
under this Section 2 shall terminate upon the initial closing date under an
Initial Public Offering (as defined in Section 2(g)).
(f) The term "Permitted Transfer" shall mean each of the following
Transfers of Securities, which shall not be subject to the provisions of
Sections 2(a), (b) and (c) above:
(i) With respect to the Warrants and the underlying Class A
Common Stock, any Transfer to the lineal ancestors, lineal descendants
or spouse of Xxxxxxxx or XxXxxxxx (the "Individual Shareholders"), or
to trusts for the benefit of such persons or an Individual
Shareholder, or to the estate or personal representative of an
Individual Shareholder in the event of death;
(ii) With respect to the Preferred Stock and the underlying Class
A Common Stock, the pledge by Fort Washington of the Preferred Stock
to PIC as contemplated in the Purchase and Sale Agreement or a
Transfer by Fort Washington to PIC pursuant to the Pledge Agreement;
and
(iii) With respect to any of the Securities: (A) any Transfer to
the Company, (B) a Transfer pursuant to a registration statement filed
with, and declared effective by, the Securities and Exchange
Commission under the Securities Act of 1933, as amended (the
"Securities Act"), including transfers contemplated by Section 3,
below, (C) a Transfer to the Individual Shareholders or any
corporation, partnership, limited liability company or other entity
that the Individual Shareholders or either of them Controls. For
purposes of the foregoing, the term "Control" shall have the meaning
set forth in the Purchase Agreement.
(g) "Initial Public Offering" shall mean the first underwritten public
offering of Class A Common Stock by or for the account of the Company and
offered on a "firm commitment" or "best efforts" basis pursuant to an
offering registered under the Securities Act with the Commission on Form
S-1, Form SB-1 or their then equivalents.
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3. Certain Registration Rights. In connection with the consummation of the
transactions contemplated in the Purchase Agreement, the Company is issuing
approximately $12,700,000 of equity securities. As part of such transaction, the
Company has granted to the purchasers (the "Purchasers") certain rights to
require the Company to register for resale their securities with the Securities
and Exchange Commission under the Securities Act or to participate in any
registration of securities of the Company for itself or any other security
holder of the Company, pursuant to a registration rights agreement dated the
date hereof, a true and accurate copy of which will be promptly provided to the
Shareholders by the Company (the "Registration Rights Agreement"). The Company
and the Shareholders agree that the Shareholders shall be entitled with respect
to the Class A Common Stock included in Securities to the same rights and
benefits, subject to the same obligations and limitations, as the Purchasers
have with respect to their securities under the Registration Rights Agreement.
At the election of the Shareholders, the Shareholders shall become parties to
the Registration Rights Agreement or the Company shall enter into an agreement
with the Shareholders of the same tenor as the Registration Rights Agreement.
4. Certain Preemptive Rights. (a) Except as hereinafter provided in this
Section 5, if after the date hereof the Company proposes to issue additional
shares of common equity securities or securities convertible, exchangeable or
exercisable for common equity securities ("Additional Shares"), the Company
shall deliver to each holder of then outstanding shares of Preferred Stock
written notice thereof, which notice shall include a general description of the
terms of such proposed issuance of Additional Shares (including the number of
Additional Shares to be so issued), the purchase price per Additional Share to
be issued and the anticipated issuance date. Within ten (10) days of delivery of
such notice, each holder may by written notice (the "Additional Shares Offer")
offer to purchase in such proposed issuance up to a maximum number of the
Additional Shares such that immediately after the purchase of such Additional
Shares by such holder, the percentage of all shares of common equity securities
issued and outstanding on a fully diluted basis (assuming conversion of all
outstanding shares of Preferred Stock, warrants, options and other instruments
of the Company convertible into or exchangeable for common equity securities)
owned by such holder (assuming conversion in full of all shares of Preferred
Stock held by such holder immediately prior to the issuance of the Additional
Shares) shall be unchanged as a result of such issuance. Any holder who fails to
provide the Company with an Additional Shares Offer within such ten (10) day
period shall be deemed to have waived its right to buy any Additional Shares or
otherwise to participate in such proposed issuance. If the terms of the proposed
issuance of Additional Shares set forth in the notice provided by the Company
pursuant to this paragraph shall have materially changed from the date of such
notice, the Company shall deliver to each holder of then outstanding Preferred
Stock an additional notice and such holder shall again have the rights set forth
in this paragraph (and, if such holder shall have provided the Company with an
Additional Shares Offer, such holder shall be entitled to amend such offer) in
accordance with the time periods set forth in this paragraph.
(b) The rights and obligations set forth in this Section 4 shall not apply
to any issuances of Additional Shares in respect of (i) warrants or options to
acquire any common equity securities which are outstanding on the date hereof,
(ii) any stock option or employee benefit plan of the Company now existing or
hereafter adopted by the Board of Directors or shareholders of the Company,
(iii) any Initial Public Offering, (iv) securities of the Company issued or
issuable pursuant to the Purchase Agreement or in connection with the
transactions contemplated thereby, including equity securities issued or
issuable as part of obtaining the funding for such transactions, (v) any merger
or acquisition involving the Company which has been approved by the Board, (vi)
a stock
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split, stock dividend or recapitalization of the Company, or (vii) any other
transaction of the Company not intended primarily to raise capital.
(c) The provisions of this Section 4 shall terminate upon the initial
closing under an Initial Public Offering.
5. Legend. Each certificate, Warrant or other instrument representing the
Securities shall be stamped or otherwise imprinted with a legend in
substantially the following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A
SHAREHOLDER AND REGISTRATION RIGHTS AGREEMENT, DATED AS OF [THE
CLOSING DATE UNDER THE PURCHASE AGREEMENT]. A COPY OF SUCH
SHAREHOLDER AND REGISTRATION RIGHTS AGREEMENT IS ON FILE AT THE
PRINCIPAL OFFICE OF FRONT ROYAL, INC.
6. Certain Matters Relating to Conversion of Preferred Stock. Under the
terms of the Articles of Amendment to the Front Royal Articles of Incorporation
authorizing the issuance of the Preferred Stock, the Preferred Stock may not be
converted into Class A Common Stock unless certain regulatory approvals have
been obtained from the states of Virginia and Ohio. Front Royal agrees that if
at any time Fort Washington elects to convert all or any portion of the
Preferred Stock into Class A Common Stock, Front Royal will (i) reasonably
cooperate with Fort Washington in seeking to obtain the necessary approvals for
such conversion and for the ownership by Fort Washington of Class A Common
Stock, and (ii) not oppose or undermine any application made by Fort Washington
for approval of such conversion and for the ownership by Fort Washington of
Class A Common Stock. This Section 7 is for the sole benefit of Fort Washington
or any other entity Controlled by the Individual Shareholder and not for the
benefit of any other party, and shall terminate and be of no further force and
effect if at any time Fort Washington is not majority owned and Controlled by
Xxxxxxxx or XxXxxxxx.
7. Transfers. (a) Prior to any Transfer of Securities (i) the Shareholder
shall cause the transferee to execute and deliver to the Company and the other
Shareholders a counterpart of this Agreement if, prior to such Transfer, such
transferee was not a Shareholder; and (ii) if requested by the Company, the
transferring Shareholder shall provide to the Company a legal opinion of counsel
reasonably acceptable to the Company, in form reasonably acceptable to the
Company, to the effect that such Transfer is not subject to the registration
requirements of Federal or state securities laws. Any Transfer shall be subject
to any requirements for approval from regulatory authorities having jurisdiction
over the Company, its subsidiaries or any of the Shareholders.
(b) Any Transfer or attempted Transfer in violation of this Agreement shall
be voidable by the Company, and the Company may choose not to record such
Transfer on its books or treat any purported transferee of such Securities as
the owner of such Securities for any purpose.
8. Entire Agreement. This Agreement constitutes the entire agreement
between the parties pertaining to the subject matter hereof, and supersedes all
prior and contemporaneous agreements, understandings, negotiations and
discussions of the parties, whether oral or written.
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9. Governing Law. This Agreement shall be construed and interpreted
according to the laws of the State of North Carolina, without regard to the
conflicts of law rules thereof.
10. Notices. All communications, notices and disclosures required or
permitted by this Agreement shall be in writing and shall be deemed to have been
given (a) when delivered if delivered personally or by messenger or by overnight
delivery service, or (b) three days after mailing when mailed by registered or
certified United States mail, postage prepaid, return receipt requested, or (c)
when received if sent by telecopy (provided that a copy is mailed concurrently
therewith pursuant to the terms hereof), in all cases addressed to the person
for whom it is intended at its address set forth below or to such other address
as a party shall have designated by notice in writing to the other party in the
manner provided by paragraph:
If to the Company: Front Royal, Inc.
0000 Xxxxxxx Xxxx.
Xxxxx 000
Xxxxxxxxxxx, Xxxxx Xxxxxxxx 00000
Attention: J. Xxxx Xxxxx, Chief Executive Officer
and
Xxxxx X. Xxxxx, Chief Financial Officer
Telecopier No.: (000) 000-0000
With a copy to: Xxxxxxxx Xxxxxxxxx Xxxxxx
Aronsohn & Xxxxxx LLP
0000 Xxxxxx xx xxx Xxxxxxxx
Xxx Xxxx, Xxx Xxxx 00000
Attention: Xxxxxxx X. Xxxxxxxxx, Esq.
Telecopier No.: (000) 000-0000
If to Fort Washington: Fort Washington Holdings, Inc.
000 Xxxx Xxxxxx Xxxxxx Xxxxx
Xx. Xxxxxxxxxx, Xxxxxxxxxxxx 00000
With a copy to: Xxxxxxxx Xxxxxx Xxxxxx & Xxxxxxx LLP
3200 Mellon Bank Center
0000 Xxxxxx Xxxxxx
Xxxxxxxxxxxx, Xxxxxxxxxxxx 00000
Attention: Xxxxxxxx X. XxXxxxxxx, Esq.
Telecopier No.: (000) 000-0000
If to Xxxxxxx Xxxxxxxx: PIC Insurance Group, Inc.
000 Xxxx Xxxxxx Xxxxxx Xxxxx
Xx. Xxxxxxxxxx, Xxxxxxxxxxxx 00000
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With a copy to: Xxxxxxxx Xxxxxx Xxxxxx & Xxxxxxx LLP
3200 Mellon Bank Center
0000 Xxxxxx Xxxxxx
Xxxxxxxxxxxx, Xxxxxxxxxxxx 00000
Attention: Xxxxxxxx X. XxXxxxxxx, Esq.
Telecopier No.: (000) 000-0000
If to Xxxxxxx XxXxxxxx: PIC Insurance Group, Inc.
000 Xxxx Xxxxxx Xxxxxx Xxxxx
Xx. Xxxxxxxxxx, Xxxxxxxxxxxx 00000
With a copy to: Xxxxxxxx Xxxxxx Xxxxxx & Xxxxxxx LLP
3200 Mellon Bank Center
0000 Xxxxxx Xxxxxx
Xxxxxxxxxxxx, Xxxxxxxxxxxx 00000
Attention: Xxxxxxxx X. XxXxxxxxx, Esq.
Telecopier No.: (000) 000-0000
11. Counterparts; Headings. This Agreement may be executed in several
counterparts, each of which shall be deemed an original, but such counterparts
shall together constitute but one and the same Agreement. The paragraph headings
in this Agreement are inserted for convenience of reference only and shall not
constitute a part hereof.
12. Severability. If any provision, clause or part of this Agreement, or
the application thereof under certain circumstances, is held invalid, the
remainder of this Agreement, or the application of such provision, clause or
part under other circumstances, shall not be affected thereby.
13. Amendment; Waiver. Neither this Agreement nor any term hereof may be
amended, modified or waived except by an instrument in writing signed by the
Company and by the holders of at least two-thirds (2/3) of the Registrable
Securities, and any such amendment, modification or waiver so approved shall be
binding on all holders. The waiver by any party of a breach of any provision of
this Agreement shall not operate or be construed as a waiver of any subsequent
breach.
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IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of the day and year first above written.
FRONT ROYAL, INC.
By: _____________________________________
Name: J. Xxxx Xxxxx
Title: Chief Executive Officer
FORT WASHINGTON HOLDINGS, INC.
By: _____________________________________
Name:
Title
PIC INSURANCE GROUP, INC.
By: _____________________________________
Name:
Title
_________________________________________
Xxxxxxx X. Xxxxxxxx
_________________________________________
Xxxxxxx X. XxXxxxxx, Xx.
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